<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 /X/
Pre-Effective Amendment No. 2 /X/
----
Post-Effective Amendment No. ---- / /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 /X/
Amendment No. 3 /X/
------
BUILDERS PROLOAN FUND, INC.
222 South Central Avenue
Suite 300
St. Louis, Missouri 63105
Telephone: (314) 727-5454
(Registrant's Name, Address and Telephone Number)
JOHN W. STEWART, PRESIDENT
222 South Central Avenue
Suite 300
St. Louis, Missouri 63105
Telephone: (314) 727-5454
(Name and Address of Agent for Service)
Copies to:
JOHN R. SHORT, ESQ.
DEE ANNE SJOGREN, ESQ.
Peper, Martin, Jensen, Maichel and Hetlage
720 Olive Street, 24th Fl.
St. Louis, MO 63101
Approximate Date of Proposed Public Offering:
As soon as practicable after the effectiveness of the Registration Statement
---------------------
It is proposed that this filing will become effective:
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485
<PAGE> 2
If appropriate check this box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective
amendment
An indefinite number of shares of beneficial interest of the Registrant are
being registered by this Registration Statement pursuant to Rule 24f-2 under
the Investment Company Act of 1940. Registrant hereby undertakes to file a
Rule 24f-2 Notice within 60 days of its initial fiscal period ended December
31, 1997.
The Registrant hereby amends this Registration Statement under the Securities
Act of 1933 on such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become effective in
accordance with the provisions of Section 8(a) of the Securities Act of 1933
or until the Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
2
<PAGE> 3
<TABLE>
BUILDERS PROLOAN FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
<CAPTION>
N-1A Item No. Location
- ------------- ---------
PART A: PROSPECTUS
<S> <C> <C>
Item 1 Cover Page Cover Page
Item 2 Synopsis About the Fund; General Information
Item 3 Condensed Financial Information Not applicable
Item 4 General Description of Registrant About the Fund; Investment Objective and Policies; Risks;
Investment Restrictions and General Information
Item 5 Management of the Fund Management and Administration of the Fund; Investment
Subadviser
Item 5A Management's Discussion of Fund Performance Not Applicable
Item 6 Capital Stock and Other Securities General Information; Information Concerning Shares of the Fund
Item 7 Purchase of Securities Being Offered Purchase, Redemption and Valuation of Fund Shares
Item 8 Redemption or Repurchase Purchase, Redemption and Valuation of Fund Shares
<CAPTION>
PART B: STATEMENT OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10 Cover Page Cover Page
Item 11 Table of Contents Table of Contents
Item 12 General Information and History Description of the Fund; Tax Information; Directors and
Officers; Investment Policies
Item 13 Investment Objective and Policies Investment Policies; Investment Restrictions
Item 14 Management of the Registrant Management and Distribution Fees; Investment Subadvisory
Agreement
Item 15 Control Persons and Principal Holders Prospectus
of Securities
Item 16 Investment Advisory and Other Services Investment Subadvisory Agreement
Item 17 Brokerage Allocation and Other Services Portfolio Securities Transactions
Item 18 Capital Stock and Other Securities Net Asset Value; Yield and Total Return Quotations
Item 19 Purchase, Redemption and Pricing of Redeeming Shares; Net Asset Value
Securities Being Offered
Item 20 Tax Status Tax Information
Item 21 Underwriters Management and Distribution Fees
Item 22 Calculation of Performance Data Yield and Total Return Quotations
Item 23 Financial Statements Not Applicable
</TABLE>
PART C: STATEMENT OF OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
3
<PAGE> 4
SUBJECT TO COMPLETION, DATED OCTOBER 20, 1997
********************************************************************************
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE *
* SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY *
* OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT *
* BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR *
* THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE *
* SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE *
* UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS *
* OF ANY SUCH STATE. *
********************************************************************************
BUILDERS PROLOAN FUND, INC.
222 SOUTH CENTRAL AVENUE
SUITE 300
ST. LOUIS, MISSOURI 63105
(314) 727-5454
-------------
Builders ProLoan Fund, Inc. (the "Fund") is a newly organized, no-load,
non-diversified, open-end management investment company. The Fund's investment
objective is to provide current income. The Fund will seek to achieve its
objective through the active management of a portfolio composed primarily of
mortgage-related securities. The Fund normally will invest at least 65% of its
total assets in fixed income debt securities committed to or originated through
the ProLoan program and rated at the time of purchase A- or better by Standard
& Poor's Ratings Group or A3 by Moody's Investors Service, Inc. or, if unrated,
deemed by the Fund's subadviser to be comparable to rated securities. There is
no assurance, however, that the Fund will achieve its investment objective.
See "Risks."
The Fund typically invests in mortgage-related securities secured by home
mortgages originated by banks, mortgage lenders and other financial
institutions through the ProLoan program. The ProLoan program is a coordinated
effort involving real estate professionals, home builders, mortgage lenders
and organized building trade unions. To qualify for a ProLoan home mortgage, a
borrower's home must be: (1) substantially union-built, as determined by the
Manager, and (2) newly constructed or substantially renovated. Qualified
borrowers are given the opportunity to lock in interest rates on their Proloan
home mortgages, typically for 180 days to allow time for construction or
renovation of the borrower's home, instead of the 45- to 60-day standard
interest rate protection offered with respect to most ordinary mortgages. The
Fund enters into agreements with originating banks, mortgage lenders and other
financial institutions to purchase mortgage-backed securities that are secured
by ProLoan mortgages and guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"). The Fund does not intend to
commit more than 33 1/3% of its assets to these 180-day commitments to purchase
such mortgage-backed securities. The Fund is designed to provide institutional
investors with the opportunity to invest in ProLoan mortgage-backed securities
and thereby promote employment in the housing construction trade and related
industries. The minimum initial investment generally is $1,000,000 per account.
Capital Mortgage Management, Inc. (the "Manager") is responsible for the
management of the Fund and the ProLoan program. Commerce Bank, N.A. (the
"Subadviser") supervises and directs the Fund's investments. The Fund's
distributor is Huntleigh Fund Distributors, Inc.
This Prospectus sets forth concisely the information that a prospective
investor should know about the Fund before investing. Investors should read
and retain this Prospectus for future reference. A Statement of Additional
Information about the Fund has been filed with the Securities and Exchange
Commission ("SEC") and is available upon request without charge by calling or
writing the Fund at the telephone number or the address listed above. The
Statement of Additional Information is dated the same date as the Prospectus
and is incorporated herein by reference in its entirety. The SEC maintains a
Web site (http://www.sec.gov) that contains the Statement of Additional
Information. The Fund also maintains a Web site (http://www.proloan.com).
<PAGE> 5
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, COMMERCE BANK, N.A. AND THE SHARES ARE
NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
Prospectus dated October 23, 1997.
2
<PAGE> 6
<TABLE>
TABLE OF CONTENTS
<CAPTION>
<S> <C>
FUND EXPENSES 4
TOTAL RETURN 5
ABOUT THE FUND 6
INVESTMENT OBJECTIVE AND POLICIES 6
RISKS 12
INVESTMENT RESTRICTIONS 15
BROKERAGE PRACTICES 16
MANAGEMENT AND ADMINISTRATION OF THE FUND 16
INVESTMENT SUBADVISER 18
DISTRIBUTOR 19
PURCHASE, REDEMPTION AND VALUATION OF FUND SHARES 19
INFORMATION CONCERNING SHARES OF THE FUND 22
GENERAL INFORMATION 23
SHAREHOLDER COMMUNICATIONS 24
</TABLE>
3
<PAGE> 7
FUND EXPENSES
Set forth below is certain information regarding estimated Fund operating
expenses during the Fund's initial fiscal period ending December 31, 1997:
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Sales Load (as a percentage of offering price) NONE
Deferred Sales Load (as a percentage of original purchase price) NONE
Redemption Fee (as a percentage of redemption proceeds) <F1> 1.00%
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C>
(as a percentage of average net assets)
Management Fees (after waiver) <F2> 0.32%
12b-1 Fees 0.10%
Other Expenses (after waiver and reimbursement) <F3> 0.18%
-----
Total Fund Operating Expenses <F2><F3> 0.60%
<FN>
<F1> The Fund imposes a 1.00% redemption fee on Fund shares redeemed less than
one year after they are purchased.
<F2> The Subadviser has agreed to waive its subadvisory fees, such that they
do not exceed 0.17% per annum of the Fund's average daily net assets during
a period which will end on December 31, 1998. Otherwise, "Management Fees"
would be 0.37%.
<F3> "Other Expenses" are based on estimated amounts expected to be incurred in
the Fund's current fiscal year. The Distributor has agreed to bear the Fund's
expenses, subject to reimbursement by the Fund, such that "Other Expenses"
(exclusive of interest, taxes and extraordinary expenses) do not exceed 0.18%
per annum of the Fund's average daily net assets during a period which will
end on December 31, 2002. Otherwise, "Other Expenses" and "Total Fund
Operating Expenses" are estimated to be 0.21% and 0.68%, respectively. In
addition, the Distributor has agreed to pay the organizational expenses of the
Fund, subject to reimbursement by the Fund. Organizational expenses will be
amortized by the Fund over a five-year period and will be deemed to be "Other
Expenses."
</TABLE>
EXAMPLE 1 year 3 years
------ -------
An investor would pay the following expenses on a
$1,000 investment in the Fund, assuming (1) 5% annual
return and (2) redemption at the end of each time
period indicated: $17 $19
An investor would pay the following expenses on the
same investment, assuming no redemption: $6 $19
The purpose of the foregoing table is to assist the investor in understanding
the various costs and expenses that a shareholder of the Fund will bear
directly or indirectly. The 5% annual return used in the example is only for
illustration. For a more complete description of the various costs and
expenses listed above, see "Management and Administration of the Fund."
4
<PAGE> 8
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES OF THE FUND. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN.
TOTAL RETURN
The Fund may at times advertise its average annual total return and cumulative
total return and compare its performance to that of other mutual funds with
similar investment objectives. The Fund also may compare its performance to
that of the Lehman Brothers Aggregate Bond Index, which is a broad
market-weighted index that encompasses three major classes of investment-grade
fixed income securities with maturities greater than one year. Total return is
the sum of all of the investor's returns for a given period, assuming
reinvestment of distributions. It is calculated by taking the total value of
shares owned by an investor at the end of the period, less the price of shares
purchased by the investor at the beginning of the period. Average annual total
return is the annually compounded rate of return over a given time period
(usually two or more years). It is the total return for the period converted to
an equivalent annual figure. See the Statement of Additional Information for
more information about the calculation of total returns.
Prior Performance of Carpenters' District Council ProLoan Private
-----------------------------------------------------------------
Account. The table below presents performance returns for the ProLoan
- -------
private investment account of the Carpenters' District Council of Greater
St. Louis ("ProLoan Account") since the Subadviser began advising the
ProLoan Account on December 31, 1994, using substantially the same strategy
that it will use to advise the Fund. It is anticipated that the Carpenters'
District Council will invest the approximately $125.9 million ProLoan Account
in the Fund, and the Fund will continue the ProLoan program with substantially
the same investment objective, policies and restrictions. The returns shown
reflect reinvestment of dividends and are calculated net of advisory fees
and other expenses. The returns shown are calculated according to a total
return formula that is not the standard SEC formula for calculating mutual
fund performance information.
<TABLE>
<CAPTION>
Since
1 Year 12/31/94
------ --------
<S> <C> <C>
ANNUALIZED TOTAL RETURNS
As of August 31, 1997
Carpenters' District Council ProLoan Account 9.85% 10.10%
Lehman Brothers Aggregate Bond Index 10.02% 9.98%
<CAPTION>
Since
1 Year 12/31/94
------ --------
<S> <C> <C>
CUMULATIVE TOTAL RETURNS
As of August 31, 1997
Carpenters' District Council ProLoan Account 9.85% 29.26%
Lehman Brothers Aggregate Bond Index 10.02% 28.89%
</TABLE>
Returns are shown prior to deducting the expenses and fees associated
with operating a mutual fund, which will be higher than the ProLoan Account's
expenses and fees. The returns for the Fund will be lower due to these costs.
The ProLoan Account is a private account that is not subject to the same
diversification, tax restrictions and investment limitations imposed on the
Fund by the 1940 Act or Subchapter M of the Internal Revenue Code of 1986
which, if applicable, may have adversely afffected the performance results of
the ProLoan Account. Returns shown should not be considered a representation
of the Fund's future performance.
5
<PAGE> 9
ABOUT THE FUND
The Fund is a non-diversified, no-load, open-end management investment company
registered under the Investment Company Act of 1940, as amended. The Fund was
incorporated under the laws of the State of Maryland on June 13, 1997. Shares
of the Fund are sold continuously to the public and the Fund then uses the
proceeds to buy securities for its portfolio. Shares are sold at net asset
value without the deduction of any sales charge. The Fund offers to redeem
its shares from its shareholders at any time at the next determined net asset
value without the deduction of any sales charge, although the Fund will impose
a 1.00% redemption fee on Fund shares redeemed less than one year after they
are purchased. The redemption price may be paid either in cash or by a
distribution in kind of securities held by the Fund. See "Purchase,
Redemption and Valuation of Fund Shares."
The Fund's Board of Directors provides broad supervision over its affairs.
Capital Mortgage Management, Inc. is the Fund's investment adviser and is
responsible for the management of the Fund and the ProLoan program,
while the officers of the Fund are responsible for its operations. The
Subadviser is responsible for managing the Fund's day-to-day investment
operations.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is current income. The Fund will seek to
achieve its objective through the active management of a portfolio composed
primarily of mortgage-related securities. The Fund normally will invest at
least 65% of its total assets in fixed income debt securities committed to or
originated through the ProLoan program and rated at the time of purchase A- or
better by Standard & Poor's Ratings Group or A3 by Moody's Investors Service,
Inc. or, if unrated, deemed by the Subadviser to be comparable to rated
securities. There is no assurance, however, that the Fund will achieve its
investment objective.
The investment policies of the Fund may be changed at any time by the Board of
Directors to the extent that such changes are consistent with the Fund's
investment objective. The Fund's investment objective may not be changed
without a majority vote of the Fund's outstanding shares, which is the lesser
of (1) 67% of the shares of the Fund present or represented if the holders of
more than 50% of the shares are present or represented at the shareholders'
meeting; or (2) more than 50% of the shares of the Fund.
Mortgage-Backed Securities. The Fund primarily invests in
- --------------------------
mortgage-backed securities, which represent interests in "pools" of mortgages
in which payments of both interest and principal on the securities are made
monthly, in effect, "passing through" monthly payments made by the individual
borrowers on the mortgage loans which underlie the securities (net of fees paid
to the servicing agent and guarantor of the securities). Payment of principal
and interest on some mortgage pass-through securities (but not the market value
of the securities themselves) may be guaranteed by the full faith and credit of
the U.S. Government, such as
6
<PAGE> 10
securities guaranteed by GNMA. Others are guaranteed by agencies and
instrumentalities of the U.S. Government, such as securities guaranteed by FNMA
or FHLMC, which are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations. Mortgage pass-through
securities created by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers) may be supported by various credit
enhancements such as pool insurance, guarantees issued by governmental entities,
a letter of credit from a bank or senior/subordinated structures.
PROLOAN. The Fund typically invests in mortgage-backed securities which
represent interests in single- or multi-family home mortgages originated
through the ProLoan program. The ProLoan program is a coordinated effort
involving real estate professionals, home builders, mortgage originators and
organized building trade unions. To qualify for a ProLoan home mortgage, a
borrower's single- or multi-family home must be: (1) substantially
union-built, as determined by the Manager, and (2) newly constructed or
substantially renovated. In addition, the borrower's mortgage loan must be
eligible to be secured by a GNMA, FNMA or FHLMC guarantee. Each mortgage loan
meeting the above qualifications, as established by the Manager, is referred
to hereinafter as a "Qualified Mortgage Loan." The Fund also may purchase
whole loan mortgages originated through the ProLoan program and not eligible
to be secured by a GNMA, FNMA or FHLMC guarantee. See "Mortgages" and
"Risks-Mortgages" below.
The interest rate and points for each Qualified Mortgage Loan generally are
established by the Subadviser each week, based on its survey of local markets
and the ability of the Fund to invest in additional mortgage-backed
securities. ProLoan allows a borrower to reduce interest rate exposure by
locking in the interest rate on a Qualified Mortgage Loan, typically for 180
days prior to the closing of the Loan, to allow time for construction or
renovation of the borrower's home. This interest rate protection is offered in
exchange for a commitment fee from the borrower, which is refundable to the
borrower at closing. These commitment fees may not fully compensate the Fund
for the additional interest rate risk it will bear during the 180-day interest
rate lock-in period and thus, the Fund may incur a loss. In the event that the
borrower does not close a Qualified Mortgage Loan, the unrefunded commitment
fees are allocated between the Fund and the Originator in amounts agreed to by
the Fund and the Originator. A borrower may be offered the opportunity to
reduce the interest rate on a Qualified Mortgage Loan prior to closing if
market interest rates have declined from the interest rate set on the
commitment date in exchange for a stated fee, which typically is one-half of
one percent of the borrower's principal loan amount. This "float-down" fee is
retained by the Fund. A borrower also may be offered the opportunity to
purchase additional 30-day extensions of interest rate protection, at the
discretion of the Subadviser, if the borrower's home or renovations are not
completed by the date initially set for closing. This extended interest rate
protection is longer than the 45- to 60-day standard interest rate protection
offered with respect to most ordinary mortgages. The advantage to the borrower
is that interest rate risk is reduced for an effective period of time during the
construction or renovation of the borrower's home. The advantage to home
builders and real estate agents is that the
7
<PAGE> 11
ProLoan program may attract potential home buyers. The ProLoan program is
designed to encourage the use of union craftsmen and promote employment in the
home building trade and related industries. There is no assurance that the
ProLoan program will achieve these objectives.
To purchase mortgage-backed securities created from Qualified Mortgage Loans,
the Fund enters into a written agreement with a bank, mortgage lender, or
other financial institution that originates the underlying loans (each an
"Originator"). The Originator obtains the appropriate government agency's
guarantee on each Qualified Mortgage Loan and secures a certificate from that
agency evidencing the mortgage-backed securities created from pools of such
Loans. The Fund agrees to purchase the mortgage-backed securities guaranteed
by GNMA, FNMA or FHLMC at established prices based on the face value of such
Loans, as determined pursuant to an agreement between the Fund and the
Originator. The mortgage-backed securities typically are either delivered to
the Fund or its commitments to acquire these securities are sold, at the
discretion of the Subadviser, after the interest rate security period and after
the underlying Qualifying Mortgage Loans have closed, usually within 60 days
after closing.
The Fund expects that initially, there will be at least eight
Originators in the ProLoan program located in the St. Louis, Missouri
metropolitan area. Additional Originators may be added to the extent that the
ProLoan program expands in that area or to other cities. The continuation of
the ProLoan program depends upon the continued participation of the Originators.
There is no assurance that banks, mortgage lenders and other financial
institutions will continue to participate as Originators. To the extent that
the ProLoan program does not continue to generate mortgage-backed securities
secured by Qualified Mortgage Loans in which the Fund could invest, the Fund
would invest in non-ProLoan mortgage-backed securities and other fixed-income
securities as described in this Prospectus.
PROLOAN GEOGRAPHICAL LIMITATION. The ProLoan program is currently
operating in the St. Louis, Missouri metropolitan area. There can be no
assurance that the Manager will attempt to establish a ProLoan program in the
area in which an investor is located. If the Manager does attempt to
establish a ProLoan program in a particular metropolitan area, there can be no
assurance that its attempt will be successful and there may be a substantial
delay between an investor's purchase of Fund shares and the development of a
ProLoan program in the area in which the investor resides. In addition, the
terms of the ProLoan program may vary from city to city depending upon the
nature of the regional real estate, mortgage and banking industries.
When-Issued and Forward Commitments. The Fund's commitment to
- -----------------------------------
acquire mortgage-backed securities originated through the ProLoan program
constitute "when-issued" commitments. When the Fund agrees to acquire
securities on a when-issued basis, its Custodian will segregate cash or other
liquid assets equal to the amount of the commitment. The value of the
securities underlying the when-issued commitment, and any subsequent
8
<PAGE> 12
fluctuations in their value, will be taken into account when determining the
Fund's net asset value starting on the day that the Fund agrees to purchase the
securities. The Fund does not earn interest on the securities it has committed
to acquire until they are paid for and delivered on the settlement date. When
the Fund engages in when-issued transactions, it relies on the other party to
consummate the trade. Failure of that party to do so may result in the Fund's
incurring a loss or missing an opportunity to obtain a price considered to be
advantageous. The Fund will make commitments to acquire securities on a
when-issued basis only with the intention of completing the transaction and
actually purchasing the securities. If deemed advisable as a matter of
investment strategy, however, the Fund may dispose of or renegotiate a
commitment after it is entered into, and may sell securities it has committed
to purchase before those securities are delivered to the Fund on the
settlement date. In those cases, the Fund may realize a capital gain or loss.
Under normal circumstances, the Fund does not intend to commit more than
33 1/3% of its total assets to these commitments. See "Risks-When Issued and
Forward Commitments."
Collateralized Mortgage Obligations. The Fund may invest in
- -----------------------------------
collateralized mortgage obligations ("CMOs"), which are hybrid instruments
with characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a mortgage pass-through, interest and prepaid
principal on a CMO typically are paid monthly. CMOs may be collateralized by
whole mortgage loans but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA. CMOs are
structured in multiple classes, with each class bearing a different stated
maturity, coupon rate or interest rate sensitivity.
Asset-Backed Securities. The Fund may invest in asset-backed
- -----------------------
securities, subject to certain rating and quality requirements. Through the use
of trusts and special purpose subsidiaries, various types of assets, primarily
home equity loans, automobile and credit card receivables, and other types of
receivables or other assets as well as purchase contracts, financing leases
and sales agreements entered into by municipalities, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above. Consistent with the Fund's investment objective, policies,
and quality standards, the Fund may invest in these and other types of
asset-backed securities developed in the future.
Mortgages. The Fund may purchase mortgages in the form of whole loans or
- ---------
participations. Whole loan mortgages are the entire loans or installment
sales contracts on residential properties. Participation mortgages are
fractional interests in mortgages or installment sales contracts on
residential or commercial properties. In evaluating mortgages for purchase,
the Subadviser will consider and analyze the following factors: (1) interest
rates on the underlying mortgages or installment sales contracts; (2) the loan
to value ratio; (3) the length of time the underlying loans have been
outstanding; (4) payment history; (5) whether the loan is fixed or adjustable
rate; (6) prepayment expectations; (7) size and enforceability of the loans;
and (8) the geographic area in which the underlying real estate is located.
In addition to the above criteria, the Fund will invest only in residential
and multi-family
9
<PAGE> 13
mortgage loans and whole loan participations that have been underwritten and
originated to secondary market underwriting standards.
Mortgage Dollar Rolls. The Fund may enter into mortgage dollar rolls in
- ---------------------
which it sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar, but not identical,
securities on a specified future date. The Fund gives up the right to receive
principal and interest paid on the securities sold. However, the Fund would
benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits
exceed the income, capital appreciation, and gain or loss due to mortgage
prepayments that would have been realized on the securities sold as part of
the mortgage dollar roll, the use of this technique will diminish the
investment performance of the Fund. The Fund's Custodian will segregate cash
or liquid assets until the settlement date, in an amount equal to the forward
purchase price. The benefits derived from the use of mortgage dollar rolls
depends on the Subadviser's ability to correctly predict mortgage prepayments
and interest rates. There is no assurance that mortgage dollar rolls can be
employed successfully.
Repurchase Agreements. The Fund may enter into repurchase agreements
- ---------------------
under which it buys a security and obtains a simultaneous commitment from the
seller to repurchase the security at a specified time and price. The seller
must maintain with the Fund's Custodian collateral equal to at least 100% of
the repurchase price including accrued interest as monitored daily by the
Subadviser. If the seller under the repurchase agreement defaults, the Fund
may incur a loss if the value of the collateral securing the repurchase
agreement has declined and may incur disposition costs in connection with
liquidating the collateral. If bankruptcy proceedings are commenced with
respect to the seller, liquidation of the collateral by the Fund may be
delayed or limited.
Options and Futures Contracts. The Fund may purchase put and call
- -----------------------------
options with primary over-the-counter dealers for hedging purposes only. Such
options may relate to interest rates and other economic factors and would not
exceed 5% of the Fund's net assets. The Fund also may invest in futures
contracts and options on futures, index futures contracts or interest
10
<PAGE> 14
rate futures contracts, as applicable for hedging purposes. Purchasing options
is a specialized investment technique that may entail the risk of a complete
loss of the amounts paid as premiums to the writer of the option.
To enter into a futures contract, the Fund must make a deposit of initial
margin with its Custodian in a segregated account in the name of its futures
broker. Subsequent payments to or from the broker, called variation margin,
will be made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more
or less valuable.
Other Investments. The Fund also may invest in securities of the U.S.
- -----------------
Government and its agencies and instrumentalities, including separately traded
registered interest and principal securities ("STRIPS") and other zero coupon
obligations; corporate bonds, notes and debentures; domestic certificates of
deposit, bank deposit notes and bank notes; and cash or cash equivalents,
including commercial paper, loan participation interests, medium-term notes
and other promissory notes maturing in 397 days or less. Such obligations may
have a fixed, variable or floating rate of interest. For temporary defensive
purposes, the Fund may invest up to 100% of its total assets in cash or cash
equivalent short-term obligations, including money market instruments such as
bank obligations, commercial paper and notes, U.S. Government obligations and
repurchase agreements. See the Statement of Additional Information for
descriptions of the foregoing securities. Principal and/or interest payments
for obligations of the U.S. Government's agencies or instrumentalities may or
may not be backed by the full faith and credit of the U.S. Government.
Credit Quality. The Fund will invest, during normal market conditions,
- --------------
at least 65% of its total assets in fixed-income debt securities rated at the
time of purchase A- or better by Standard & Poor's Ratings Group ("S&P") or A3
by Moody's Investors Service, Inc. ("Moody's") or, if unrated, deemed by the
Subadviser to be comparable to instruments that are so rated. Except for
temporary defensive purposes, the Fund's market weighted average credit rating
will be at least AA-/Aa3 as rated by S&P or Moody's, respectively, or the
equivalent rating of another nationally recognized statistical rating
organization. All of the fixed income and floating rate securities acquired by
the Fund other than those subject to the 65% requirement will be rated
investment-grade at the time of purchase. For purposes of this investment
policy, investment-grade obligations are those rated at the time of purchase
AAA, AA, A or BBB by S&P, or Aaa, Aa, A or Baa by Moody's or which are
similarly rated by another nationally recognized statistical rating
organization or are unrated but deemed by the Subadviser to be comparable in
quality to rated obligations. Obligations rated BBB or Baa by S&P or Moody's,
respectively, are considered to have speculative characteristics and are
subject to greater credit and market risk than securities rated in the top
three investment-grade categories. Subsequent to their purchase by the Fund,
up to 5% of its portfolio securities may represent securities downgraded below
investment-grade or may be deemed by the Subadviser to no longer be comparable
to investment-grade securities. See the Statement of Additional Information for
a description of applicable debt ratings.
11
<PAGE> 15
Duration. Although the Fund has no restriction as to the maximum or
- --------
minimum duration of any individual security held by it, the Fund's average
effective duration will be within +/- 30% of the duration of the Lehman Brothers
Aggregate Bond Index. "Duration" is a term used to express the average time
to receipt of expected cash flows (discounted to their present value) on a
particular fixed income instrument or a portfolio of instruments. Duration
takes into account the pattern of a security cash flow over time, including
how cash flow is affected by prepayments and changes in interest rates.
Duration also generally defines the effect of interest rate changes on bond
prices. Generally, if interest rates increase by one percent, the value of a
security having an effective duration of five years would decrease in value by
five percent.
RISKS
Interest Rate Risk. The market value of fixed rate securities, and thus
- ------------------
the net asset value of the Fund's shares, is expected to vary inversely with
movements in interest rates. The market value of variable and floating rate
instruments will not vary as much due to the periodic adjustments in their
interest rates. An adjustment that increases the interest rate of such
securities should reduce or eliminate declines in market value resulting from
a prior upward movement in interest rates, and an adjustment which decreases
the interest rate of such securities should reduce or eliminate increases in
market value resulting from a prior downward movement in interest rates. The
market value of mortgage-backed securities and the resulting net asset value
of the Fund's portfolio will fluctuate with short-term changes in interest
rates. When interest rates rise, the net asset value of the Fund will
decline; shareholders who redeem Fund shares in such circumstances will suffer
the resulting loss in value of those shares. Conversely, in certain periods of
declining interest rates, mortgage-backed securities held by the Fund will
increase in market value but may be prepaid by the various mortgagors or other
obligors so that anticipated yields on such investments may not be realized.
The Fund may experience additional interest rate risk because of its
investment in mortgage-backed securities secured by Qualified Mortgage Loans,
since the Fund will be subject to a potential 180-day interest rate lock
period, exclusive of extensions, which is substantially longer than the 45-to
60-day interest rate lock period to which mortgage underwriters traditionally
commit.
CMOs involve risks in addition to those found in other types of mortgage-
related obligations, since they may exhibit more price volatility and interest
rate risk. During periods of rising interest rates, CMOs may lose their
liquidity as CMO market makers may choose not to repurchase, or may offer
prices based on current market conditions that are unacceptable to the Fund
based on the Fund's analysis of the market value of the security. Zero coupon
bonds also are subject to greater market fluctuations from changing interest
rates than debt obligations of comparable maturities that make current
distributions of interest.
Illiquid Securities. The Fund may invest up to 15% of its net assets
- -------------------
in illiquid securities, including securities having legal or contractual
restrictions on resale or no readily available market (including repurchase
agreements, variable and floating rate instruments and time deposits with
maturities of greater than 7 days and certain securities that are subject to
trading restrictions because they are not registered under the Securities Act
of 1933).
12
<PAGE> 16
The Fund values its commitments to acquire mortgage-backed securities secured
by Qualified Mortgage Loans at the price at which the Fund could sell these
commitments to a third party, as long as this price is considered by the Manager
to equal no more than the fair market value of the commitments. The formula for
determining this price is the value of the principal amount of the underlying
Qualified Mortgage Loans, multiplied by any positive difference between the
price at which the Fund committed to acquire the mortgage-backed securities
and the six-month forward price of FNMA mortgage-backed securities with the
one-half percent coupon rate increment nearest to, but not greater than, the
weighted average yield of all such loans, minus 0.625%, the amount that
would have been incurred in servicing the Loans and securing the appropriate
government guarantee had such Loans been securitized. The Fund's commitments to
acquire mortgage-backed securities secured by Qualified Mortgage Loans will not
be considered illiquid so long as the Fund has a valid contractual agreement
with a third party to purchase the commitments at the price set forth above, or
provided that the Manager determines, pursuant to guidelines established by the
Board, that an adequate trading market exists for the commitments. To the
extent that a secondary market source or an Originator becomes uninterested in
purchasing the Fund's mortgage commitments or refuses to honor its contractual
commitment to the Fund, the Fund's mortgage commitments would increase the
level of illiquidity in its portfolio. As a result of such illiquidity, the
Fund may not be able to sell these commitments when the Subadviser considers
it desirable to do so or may have to sell them at a lower price than could be
obtained if they were more liquid. These factors may have an adverse impact on
the Fund's net asset value. If, through a change in net asset value or other
circumstances, the Fund were in a position where more than 15% of its net
assets were invested in illiquid securities, the Subadviser would seek to take
steps to protect the liquidity of the Fund's portfolio. The sale of illiquid
securities may require more time and result in higher transaction costs and
other selling expenses than the sale of liquid securities.
When-Issued and Forward Commitments. The Fund's investment in mortgage-backed
- -----------------------------------
securities secured by Qualified Mortgage Loans originated through ProLoan
requires it to commit funds for future purchases of such securities at rates
that are set at the time of the commitment, with delivery of such securities
taking place at a future date, which may be up to eight months later. The
securities generally are delivered to the Fund within 60 days after the
underlying Qualified Mortgage Loans have closed. These securities involve the
risk that the yield obtained in the transaction (and thus the value of the
security) may be less favorable than the yield available in the market when the
security is delivered. At the time the Fund makes the commitment to acquire
mortgage-backed securities secured by Qualified Mortgage Loans, such
commitments will thereafter be valued for purposes of determining the Fund's
net asset value. At the time the Fund enters into a mortgage commitment, the
Fund's Custodian will segregate cash or liquid securities, such as U.S.
Government securities or other appropriate high grade debt obligations, equal
to the value of the mortgage commitments, which will be marked to market daily.
If the market value of the underlying commitment declines due to a rise in
interest rates or otherwise, the Fund will be required to segregate additional
assets. Because the Fund will segregate cash and liquid assets in this manner,
its liquidity and the Subadviser's ability to manage the Fund's portfolio might
be affected in the event its when-issued purchases or forward commitments ever
exceeded 33 1/3% of the value of its assets. In this event, the Fund would be
required to liquidate a portion of its mortgage commitments pursuant to a
contractual obligation with an Originator or on the open market. On the date
of securitization, the Fund will fulfill its obligations from securities that
are then maturing or sales of securities held in the segregated account and/or
from available cash flow. If the Fund disposes of the right to acquire a
mortgage commitment prior to its acquisition it can incur a gain or loss due to
market fluctuation. In the event that interest rates decline, it may be
difficult for the Fund to obtain delivery of the Qualified Mortgage Loans that
secure the Fund's investments and the Fund may incur a loss or will have lost
the opportunity to invest the amount set aside for such Loan in the segregated
asset account. The Fund does not intend to engage in mortgage commitments for
speculative purposes, but only in furtherance of its investment objective.
Mortgage-Backed Securities. Early repayment of principal on
- --------------------------
mortgage-backed securities (arising from prepayments of principal due to sale
of the underlying property, refinancing, or foreclosure, net of fees and costs
that may be incurred) may expose the Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment, the value of the premium
would be lost. Like other debt securities, when interest rates rise, the
value of mortgage-related securities generally will decline; and when interest
rates fall, the value of mortgage-related securities with prepayment features
may not increase as much as other debt securities.
13
<PAGE> 17
Asset-Backed Securities. These securities involve certain risks that do
- -----------------------
not exist with mortgage-related securities since they usually do not have the
benefit of a complete security interest in the related collateral. For
example, credit card receivables generally are unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, some of which may reduce the ability to obtain full payment. In the
case of automobile receivables, due to various legal and economic factors,
proceeds from repossessed collateral may not be sufficient to support payment
on the securities. The risks associated with asset-backed securities are
often reduced by the addition of credit enhancements such as a letter of
credit from a bank, excess collateral, or a third-party guarantee.
Mortgages. Although mortgages bear many of the same risks as
- ---------
mortgage-backed securities, there are additional risks to be considered.
Mortgages generally are not issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, nor is any type of credit enhancement typically
provided. Fixed-rate mortgages, like other fixed income securities, are
priced to reflect, among other things, current and perceived interest rate
conditions and, as conditions change, market values will fluctuate. Liquidity
for the underlying securities may change as a result of the demand for
mortgage products and a change in the general method of home financing in the
future. Mortgages also have unique characteristics in that they may generally
be prepaid in whole or in part at any time at the option of the individual
borrower as the result of refinancing or home sale or involuntarily as a
result of the borrower's death or default. This is commonly known as
prepayment risk. Prepayments of mortgages often result from refinancings that
are closely tied to changes in interest rates. Borrowers often refinance
existing mortgages with lower cost mortgages when it is profitable for them to
do so. Prepayments on mortgages are made at par value which will create a loss
if the mortgage was purchased at a premium price. Conversely, if the
mortgage was purchased at a discount, a prepayment can result in a gain. In
addition, if interest rates have declined, prepayments can only be reinvested by
the Fund at a lower interest rate. Residential whole loan mortgages carry
credit risk in addition to prepayment risks in that the borrower may become
delinquent in mortgage payments or default on the mortgage loan. In an effort
to avoid this risk, the Fund will maintain high underwriting standards, seek
out loans with low loan to value ratios, maintain strict servicing
requirements, and, where possible, insist on pool insurance, subordination or
other credit enhancements. Mortgages are considered illiquid in nature
and, as such, may be difficult to sell when the Subadviser considers it
desirable to do so or may have to be sold at a price lower than could be
obtained if they were more liquid. The Fund's investment in mortgages will be
subject to the limitation set forth under "Illiquid Securities" above.
Options and Futures Contracts. The risks related to the use of options
- -----------------------------
and futures contracts include: (i) the correlation between movements in the
market price of the portfolio investments (held or intended for purchase)
being hedged and movements in the price of the futures contract or option may
be imperfect; (ii) possible lack of a liquid secondary market for closing out
options or futures positions; (iii) the need for additional fund management
14
<PAGE> 18
skills and techniques; and (iv) losses due to unanticipated market movements.
Successful use of options and futures by the Fund is subject to the
Subadviser's ability to correctly predict movements in the direction of
interest rates and other economic factors. For example, if the Fund uses
futures contracts as a hedge against the possibility of a decline in the
market adversely affecting securities held by it and securities prices
increase instead, it will lose part or all of the benefit of the increased
value of its securities which it has hedged because it will have approximately
equal offsetting losses in its futures positions. The risk of loss in trading
futures contracts in some strategies can be substantial and is potentially
unlimited, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss or gain to the Fund. Thus, a purchase or sale of a
futures contract may result in losses or gains in excess of the amount
invested in the contract. See Appendix B to the Statement of Additional
Information for additional information and a description of the risks relating
to option and futures contract trading practices.
Concentration. The Fund will concentrate its investments in
- -------------
mortgage-related securities. As a result, an economic, business, political or
other change affecting one mortgage-related security (such as proposed
legislation affecting the financing of home mortgages, shortages or price
increases of needed home building materials, or declining markets for new homes)
also may affect other mortgage-related securities. This could increase market
risk and the potential for fluctuation in the net asset value of the Fund's
shares.
Non-Diversification. The Fund is classified as a non-diversified
- -------------------
investment company under the Investment Company Act of 1940. Investment
return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities relative to the number held in a
diversified portfolio. Consequently, the change in value of any one security
may affect the overall value of a non-diversified portfolio, such as the
Fund's, more than it would a diversified portfolio. In addition, the Fund may
be more susceptible to economic, political and regulatory developments than a
diversified investment portfolio with a similar objective.
INVESTMENT RESTRICTIONS
The following fundamental investment restriction may be changed only by
a majority vote of the Fund's outstanding shares. The Fund will not:
Invest more than 25% of its total assets in the securities of companies
primarily engaged in only one industry other than: (1) the U.S.
Government, its agencies and instrumentalities; and (2) mortgage-related
securities. See "Risks--Concentration." Finance companies as a group are
not considered a single industry for purposes of this policy.
The following non-fundamental investment restriction may be changed by a vote
of a majority of the Fund's Board of Directors. The Fund will not:
15
<PAGE> 19
Invest more than 15% of its net assets in securities that lack an
established secondary trading market or are otherwise considered
illiquid, including time deposits and repurchase agreements that mature
in more than seven days.
BROKERAGE PRACTICES
The Subadviser will place its own orders to execute securities transactions
that are designed to implement the Fund's investment objectives and policies.
In placing such orders, the Subadviser will seek the best available price and
most favorable execution. The full range and quality of services offered by
the executing broker or dealer is considered when making these determinations.
The Fund's portfolio turnover is estimated to be 75% for the Fund's initial
fiscal period ended December 31, 1997.
The Fund normally will not incur any brokerage commissions on its transactions
because debt instruments are generally traded on a "net" basis with dealers
acting as principal for their own accounts without a stated commission. The
price of the obligation, however, usually includes a profit to the dealer.
Obligations purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. No commissions or discounts are paid when securities
are purchased directly from an issuer.
MANAGEMENT AND ADMINISTRATION OF THE FUND
Fund Management Agreement. The Board of Directors has general
- -------------------------
supervisory responsibility over the Fund's affairs. The Manager provides or
oversees all administrative, investment advisory and portfolio management
services for the Fund pursuant to a Management Agreement dated October 17,
1997.
The Manager, located at 7700 Bonhomme, St. Louis, Missouri 63105, is a
Delaware corporation organized on May 5, 1997 to provide business management,
advisory and asset management consulting services. Although the Manager has no
previous experience acting as an investment adviser to an investment company,
John W. Stewart, President of the Manager, served as Controller/System
Administrator of the approximately $688 million pension fund for the
Carpenters' District Council of Greater St. Louis from August 1988 to September
1997. Mr. Stewart also had primary managerial responsibility for the
Carpenter's District Council ProLoan program since its inception in June 1991.
From June 1991 to August 1997, the Carpenter's District Council ProLoan program
generated approximately 4,241 Qualified Mortgage Loans with an initial market
value of approximately $491,256,539 and facilitated an average of approximately
2,544,600 man hours of work, assuming an average of 600 man hours per home, for
qualified craftsmen in the St. Louis, Missouri metropolitan area.
16
<PAGE> 20
The Manager provides the Fund with office space, office equipment and
personnel necessary to manage and administer the Fund's operations and the
ProLoan program. In addition, the Manager promotes and develops the ProLoan
program, negotiates agreements with Originators, monitors the Fund's mortgage
commitments, supervises the provision of services to the Fund by third
parties, and approves the construction criteria for homes to be eligible for
Qualified Mortgage Loans underlying the mortgage-backed securities in which
the Fund invests. The Manager also monitors the Subadviser's investment
program and results. The Manager bears the expense of providing these
services and also pays the fees of the Subadviser. As compensation for paying
the investment subadvisory fees and for providing the Fund with management
services, the Manager receives from the Fund an annualized advisory fee which
is calculated and accrued daily, equal to 0.15% of the net assets of the
Fund, plus all fees payable by the Manager to the Subadviser as described
below. The advisory fee is the only compensation the Manager receives for
managing the Fund, including the Manager's activities relating to the ProLoan
program.
The Management Agreement will continue in effect provided that annually such
continuance is specifically approved by a vote of the Fund's Board of
Directors, including the affirmative votes of a majority of the independent
Directors. The Management Agreement may be terminated at any time, without
penalty, by a majority vote of outstanding Fund shares on sixty (60) days'
written notice to the Manager, or by the Manager on sixty (60) days' written
notice to the Fund.
The Fund is responsible for the following expenses: transfer agency, custodian,
dividend disbursing agent, shareholder recordkeeping, administrative and fund
accounting services; taxes, if any, and the preparation of tax returns;
interest; costs of Board and shareholder meetings; printing and mailing
prospectuses and reports to existing shareholders; filing fees; legal fees;
auditors' fees; fees to federal and state regulatory authorities; insurance and
fidelity bond premiums; fees of independent Directors; and any extraordinary
expenses of a nonrecurring nature. The Distributor has agreed to bear the
Fund's operating expenses such that those expenses (exclusive of interest,
taxes and extraordinary expenses) do not exceed 0.18% of the Fund's average
daily net assets, during a period which will end on December 31, 2002. The
Fund will reimburse the Distributor for such expenses incurred in the
previous three years to the extent that the reimbursement does not cause the
Fund's operating expenses to exceed the 0.18% expense limitation.
Distribution Plan. Under this Plan, the Fund will pay to Huntleigh Fund
- -----------------
Distributors, Inc. a distribution fee to help defray the cost of distributing
the Fund's shares and servicing its shareholders. Services for which payments
will be made under the Plan include, but are not limited to: (1) promoting the
sale of shares of the Fund, including paying for the preparation of advertising
and sales literature and the printing and distribution of such promotional
materials and prospectuses to prospective investors and defraying Huntleigh's
costs incurred in connection with its marketing efforts with respect to shares
of the Fund; (2) responding to shareholder telephone inquiries; and (3)
compensating securities dealers and other organizations for providing
distribution assistance or administration, accounting and other shareholder
services with respect to the Fund's shareholders. Although Fund shares are sold
without a sales charge, Huntleigh also may pay from its own resources a sales
commission to its representatives who sell Fund shares. In addition, Huntleigh
may make quarterly payments of service fees to its representatives with respect
to Fund shares attributable to shareholders for whom the representatives are
designated of record. The annual fee payable under the Fund's Distribution Plan
is 0.10% of the Fund's net assets. Payments made to Huntleigh as underwriter
for the Fund will represent compensation for distribution and service
activities, not reimbursement for specific
17
<PAGE> 21
expenses incurred. The Plan was approved by the Fund's Board of Directors on
September 24, 1997. The Plan will be reviewed by the Board of Directors
annually.
Administrative Agreement. Investment Company Administration
- ------------------------
Corporation (the "Administrator"), pursuant to an administration agreement with
the Fund, supervises the overall administration of the Fund including, among
other responsibilities, the preparation and filing of all documents required for
compliance by the Fund with applicable laws and regulations, arranging for the
maintenance of books and records of the Fund, and supervision of other
organizations that provide services to the Fund. Certain officers of the Fund
are provided by the Administrator. Under the terms of the agreement, the Fund
will pay the Administrator an annual fee of 0.05% of average daily net assets,
payable monthly and subject to an annual minimum of $40,000.
Principal Underwriter. Huntleigh Fund Distributors, Inc., 222 South Central
- ---------------------
Avenue, St. Louis, Missouri, 63105 serves as the principal underwriter of the
Fund.
Custodian and Fund Accountant. UMB Bank, N.A., 928 Grand Boulevard,
- -----------------------------
Kansas City, Missouri 64106, serves as custodian and fund accountant for the
Fund.
Transfer Agent and Shareholder Servicing Agent. The Fund's transfer
- ----------------------------------------------
agent is National Financial Data Services, 1004 Baltimore, Kansas City,
Missouri 64105.
Fund Administrator. The Fund's administrator is Investment Company
- ------------------
Administration Corporation, 2025 E. Financial Way, Glendora, California
91741.
Independent Auditors. The independent auditors for the Fund are Deloitte &
- --------------------
Touche LLP, St. Louis, Missouri.
INVESTMENT SUBADVISER
Commerce Bank N.A., 8000 Forsyth Boulevard, St. Louis, Missouri 63105, is a
subsidiary of Commerce Bancshares, Inc., a registered multi-bank holding
company. The Subadviser has provided investment management services to The
Commerce Funds since 1994, to private and public pension funds, endowments and
foundations since 1946, and to individuals since 1906. As of June 30, 1997
the Subadviser had discretionary investment authority with respect to
approximately $3.4 billion of assets. Commerce Bank is a full-service lending
bank, and it makes loans in the ordinary course of its business to, among
others, home builders to finance the construction of homes which are subject
to sales contracts with home buyers. Some of these home buyers may participate
in the ProLoan program. However, such loans to home builders are based upon
normal lending policies of the Subadviser and would be unrelated to the ProLoan
program.
Subadvisory Agreement. The Subadviser has entered into an investment
- ---------------------
subadvisory agreement with the Manager to provide investment advisory services
to the Fund. The Subadviser has discretion to purchase and sell securities on
behalf of the Fund in accordance with the Fund's
18
<PAGE> 22
objectives, policies and restrictions. As compensation for its services, the
Manager pays the Subadviser an annual subadvisory fee as follows: 0.25% of the
first $50 million of the Fund's average daily net assets; 0.20% of the next
$50 million of average daily net assets; and 0.165% of average daily net assets
in excess of $100 million. The Subadviser's fees shall be accrued daily and
payable monthly. In no event shall the Fund be responsible for any fees due to
the Subadviser under this Agreement. The Subadviser has agreed to waive its
subadvisory fees such that the fees do not exceed 0.165% of the Fund's average
daily net assets during a period which will end on December 31, 1998.
Portfolio Manager. Mr. Scott M. Colbert, Chartered Financial Analyst,
- -----------------
serves as the Vice President and Director of Fixed Income Management of the
Subadviser. Mr. Colbert has primary responsibility for the day-to-day
investment operations of the Fund. Mr. Colbert joined the Investment
Management Group of the Subadviser in 1993. Prior to that, he served as
portfolio manager for Armco Investment Management, Inc. from 1987-1993 with
respect to fixed income investments for employee benefit, insurance and
endowment funds. Since December 31, 1994, Mr. Colbert has had primary
responsibility for the day-to-day investment operations of the Carpenter's
District Council of Greater St. Louis ProLoan program separate investment
account. He also serves as portfolio manager for the following portfolios
of The Commerce Funds, an open-end investment company: The Short-Term
Government Fund, The Bond Fund and The Balanced Fund. Mr. Colbert has primary
investment responsibility for approximately $3.5 billion in assets on behalf
of Commerce Bancshares, Inc., the Subadviser, and other affiliates of Commerce
Bancshares, Inc.
DISTRIBUTOR
Huntleigh Fund Distributors, Inc., 222 South Central Avenue, St. Louis, MO
63105, is a wholly owned subsidiary of Huntleigh Financial Services, Inc., St.
Louis, Missouri. Huntleigh has been providing institutional and individual
investment services primarily in the St. Louis region since 1977.
PURCHASE, REDEMPTION AND VALUATION OF FUND SHARES
Purchasing Shares of the Fund. Fund shares are offered without a
- -----------------------------
sales charge to institutional investors who make an initial investment of at
least $1 million. However, the Manager and the Distributor may agree to waive
this minimum investment requirement.
Fund shares are sold without a sales charge at the net asset value next
determined after the receipt of a request to purchase shares accompanied by
a check drawn on a U.S. bank or immediately available funds. Shares of the Fund
are offered and purchase orders accepted until 4:00 p.m. Eastern time on each
day on which the New York Stock Exchange (the "Exchange") is open for trading
and the Custodian and the Transfer Agent are open for business ("Business
Day"). The Fund reserves the right to reject any order for the purchase of
shares and to limit or suspend, without prior notice, the offering of shares.
Fund shares may be purchased and redeemed as follows:
BY WIRE -- Purchases may be made by wiring funds. To ensure prompt receipt
of a transmission by wire, the investor should: telephone National Financial
Data Services, ("NFDS" or the "Transfer Agent") at (800) 256-6575; identify the
Fund; provide the address, telephone number and account number of the investor;
and identify the amount being wired and by which bank. If the investor is
opening a new
19
<PAGE> 23
account, the investor should call NFDS at (800) 256-6575 and NFDS will provide
the investor with an account number. The investor should instruct its bank to
designate the account number which the Transfer Agent has assigned to the
investor and to transmit the federal funds to the following wire address:
State Street Bank & Trust Company
225 Franklin Street
Boston, MA 02110
ABA #011000028
DDA #9905-319-1
FCT: (Investor's Account Number)
Reference: Builders ProLoan Fund, Inc.
BY DEPOSITING SECURITIES -- Shares of the Fund may be purchased in
exchange for an investor's securities if the securities are acceptable to the
Fund and satisfy applicable investment objectives and policies. Investors
interested in exchanging securities must first telephone the Manager and
acquire instructions regarding submission of a written description of the
securities which the investor wishes to exchange. The investor must represent
that all such securities offered to the Fund are not subject to any sale
restrictions. Within five business days after receipt of the written
description, the Manager will advise the investor whether the securities to be
exchanged are acceptable. There is no charge for this review by the Manager.
Securities accepted by the Fund must have a readily ascertainable value as
determined by the Fund's Custodian. Securities are valued in the manner
described for valuing Fund assets in the section entitled "Valuation of
Shares." Acceptance of such orders may occur on any day during the five-day
period afforded the Manager to review the acceptability of the securities.
Upon acceptance of such orders, the securities must be delivered in fully
negotiable form within five days. The Manager will provide delivery
instructions at the time of acceptance. A gain or loss for federal income tax
purposes may be realized by the investor upon the exchange of securities,
depending upon the adjusted tax basis and value of the securities tendered.
The Fund will accept securities in this manner only for purposes of
investment, and not for resale.
BY MAIL -- Purchases of Fund shares may be made by mail by sending a check
or other negotiable bank draft payable to the Fund at the following address:
Builders ProLoan Fund, Inc.
c/o NFDS, Transfer Agent
P.O. Box 419140
Kansas City, MO 64141-9140
Overnight Express Address:
Builders ProLoan Fund, Inc.
c/o NFDS, Transfer Agent
1004 Baltimore, 5th Floor
Kansas City, MO 64105
An additional purchase of shares should be accompanied by the shareholder's
account number. Purchase checks are accepted subject to collection at full
face value in U.S. funds and must be drawn in U.S. dollars on a U.S. bank.
Third party checks will not be accepted by the Fund.
Redemption of Shares. Fund shares may be redeemed on any Business Day
- --------------------
by writing directly to NFDS at the address above under "Purchasing Shares of the
Fund -- By Mail." The redemption price will be the net asset value per share
next determined after receipt by the Transfer Agent of all required documents
in good order. "Good order" means that the request must include a letter of
instruction or stock assignment specifying the number of shares or dollar
amount to be redeemed, signed by an authorized signatory for the owners of the
shares in the exact names in which they appear on the account, and accompanied
by such other supporting legal documents, if required, in the case of estates,
trusts, guardianships, custodians, corporations, IRAs and welfare, pension and
profit-sharing plans. In addition, any share certificates being redeemed must
be returned duly endorsed or accompanied by a stock assignment with signatures
guaranteed by a bank, trust company or member of a recognized stock exchange.
20
<PAGE> 24
Payment for redeemed shares will be made in cash within seven days after the
receipt of a redemption request in good order. However, the Fund reserves the
right to suspend redemptions or postpone the date of payment (a) for any
periods during which the Exchange is closed (other than for customary weekend
and holiday closings), or when trading on the Exchange is restricted, (b) at
such time as an emergency exists as determined by the Securities and Exchange
Commission so that disposal of a Fund's investments or determination of its
net asset value is not reasonably practicable, or (c) for such other periods
as the Securities and Exchange Commission by order may permit for protection
of the Fund's shareholders. Payment of redemption proceeds will be made within
seven days. If the shares being redeemed were purchased by check, payment may
be delayed to verify that the check has been honored, normally not more than
fifteen days.
Redemption Fee. If shares of the Fund are purchased and then redeemed
- --------------
within twelve months from the date of purchase, a redemption fee of 1.00% will
be deducted from the redemption proceeds by the Fund. In determining whether
a redemption fee is payable, it will be assumed that the redemption is made
first of shares that have been held for more than one year, and, second of
shares that have been held the longest that are still subject to the
redemption fee.
Redemptions in Kind. Although the Fund intends to redeem shares in
- -------------------
cash, it reserves the right to pay the redemption price in whole or in part by a
distribution of readily marketable securities held by the Fund. However,
shareholders always will be entitled to redeem shares for cash up to the
lesser of $250,000 or 1% of the Fund's net asset value during any 90-day
period. Redemption in kind is not as liquid as a cash redemption. In
addition, if redemption is made in kind, shareholders who receive securities
and sell them could receive less than the redemption value of their securities
and could incur certain transaction costs.
Valuation of Shares. The net asset value of the Fund is determined as of 4:00
- -------------------
p.m. Eastern time on each day on which the New York Stock Exchange is open for
trading and the Fund's Custodian and Transfer Agent are open for business. The
net asset value of all outstanding shares of the Fund will be determined based
on a pro rata allocation of the value of the Fund's investment income and total
capital gains and losses and expenses based on comparative net asset value at
the beginning of the day.
Equity securities listed on securities exchanges are valued at the last quoted
sales price on a designated exchange prior to the close of trading on the
exchange or, lacking any sales, on the basis of the last current bid price
prior to the close of trading on the exchange. Over-the-counter equity
securities are valued on the basis of the last bid price on that date prior to
the close of trading. Debt securities (other than short-term securities) will
normally be valued on the basis of prices provided by a pricing service and
may take into account appropriate factors such as institution-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data. In some cases, the
prices of debt securities may be determined using quotes obtained from
brokers. Securities for which market quotations are not readily available are
valued at fair market value, as determined in good faith and pursuant to
procedures approved by the Fund's Board of Directors. Investment grade short-
21
<PAGE> 25
term obligations with 60 days less to maturity are valued using the amortized
cost method. See the Statement of Additional Information for additional
valuation methods, including the method for valuing the Fund's commitments
to acquire mortgage-backed securities generated through the ProLoan program.
INFORMATION CONCERNING SHARES OF THE FUND
Dividends and Capital Gain Distributions. Dividends and other
- ----------------------------------------
distributions paid on the Fund's shares are calculated at the same time and in
the same manner. Dividends consisting of substantially all of the net
investment income of the Fund normally are declared on each Business Day
immediately prior to the determination of the net asset value, are payable to
shareholders of record as of the opening of business on the day on which
declared, and are paid monthly. The Fund's net investment income will consist
of dividends and interest (including discount) accrued on the securities held
by the Fund less applicable expenses of the Fund. Distributions of the Fund's
realized net short-term capital gain and net capital gain (the excess of net
long-term capital gain over net short-term capital loss) normally will be made
annually.
Unless a shareholder elects otherwise by so notifying the Fund in writing, all
dividends and other distributions on the Fund's shares will be automatically
declared and paid in additional shares of the Fund. However, a shareholder
may choose to have distributions of net capital gain paid in shares and
dividends paid in cash or to have all such distributions and dividends paid in
cash. An election may be changed at any time by delivering written notice
that is received by the Transfer Agent at least ten days prior to the payment
date for a dividend or other distribution.
TAX INFORMATION -- The Fund is treated as a corporation for federal income
tax purposes and intends to qualify for treatment as a regulated investment
company under the Code. In each taxable year that the Fund so qualifies, the
Fund (but not its shareholders) will be relieved of federal income tax on that
part of its investment company taxable income (generally, net investment income
plus any net short-term capital gain) and net capital gain that it distributes
to its shareholders. However, the Fund will be subject to a nondeductible 4%
excise tax to the extent that it fails to distribute by the end of any calendar
year substantially all of its ordinary income for that calendar year and its
capital gain net income for the one-year period ending on October 31 of that
year, plus certain other amounts. For these and other purposes, dividends and
other distributions declared by the Fund in October, November or December of
any year and payable to shareholders of record on a date in one of those months
will be deemed to have been paid by the Fund and received by the shareholders
on December 31 of that year if they are paid by the Fund during the following
January.
Dividends from the Fund's investment company taxable income will be taxable to
its shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether received in cash or paid in additional Fund shares.
Distributions of the Fund's net capital gain (whether received in cash or paid
in additional Fund shares), when designated as such, generally will be taxable
to its shareholders as long-term capital gain, regardless of how long they
have
22
<PAGE> 26
held their Fund shares. A capital gain distribution from the Fund also may be
offset by capital losses from other sources.
Redemption of Fund shares may result in taxable gain or loss to the redeeming
shareholder, depending upon whether the fair market value of the redemption
proceeds exceeds or is less than the shareholder's adjusted basis for the
redeemed shares. If shares of the Fund are redeemed at a loss after being
held for six months or less, the loss will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received on those shares. If shares are purchased shortly before the record
date for a dividend or other distribution, the investor will pay full price
for the shares and receive some portion of the price back as a taxable
distribution. The Fund will notify its shareholders following the end of each
calendar year of the amounts of dividends and capital gain distributions paid
(or deemed paid) and of any portion of those dividends that qualifies for the
corporate dividends-received deduction. The Fund is required to withhold 31%
of all taxable dividends, capital gain distributions and redemption proceeds
payable to any individuals and certain other non-corporate shareholders who do
not provide the Fund with a correct taxpayer identification number or (except
with respect to redemption proceeds) who otherwise are subject to back-up
withholding.
The foregoing is only a summary of the important tax considerations generally
affecting the Fund and its shareholders. Prospective investors are urged to
consult their own tax advisers regarding specific questions as to the effect
of federal, state or local income taxes on any investment in the Fund. For
further tax information, see the Statement of Additional Information.
GENERAL INFORMATION
The Fund currently is comprised of one investment portfolio with one class of
common stock, par value $0.01, although it has the authority to issue multiple
series and classes of shares. Each share of common stock is entitled to one
vote on matters affecting the Fund. Share voting rights are not cumulative,
and shares have no preemptive or conversion rights. Shares of the Fund are not
transferable.
The Fund is incorporated under the laws of the State of Maryland. The Fund is
not required to hold annual shareholders meetings. However, the Fund will
hold special shareholder meetings whenever required to do so under the federal
securities laws or the Fund's Articles of Incorporation or by-laws. Directors
can be removed by a shareholder vote at special shareholder meetings.
5% Shareholders and Control Persons. Initially, it is expected that the
- -----------------------------------
Carpenter's District Council of Greater St. Louis pension fund, 1401 Hampton
Avenue, St. Louis, Missouri 63139 will own in excess of 99% of the Fund's
shares and thus may be deemed to control the Fund.
23
<PAGE> 27
SHAREHOLDER COMMUNICATIONS
Shareholders will receive periodic reports, including annual and semi-annual
reports that will include financial statements showing the results of the
Fund's operations and other information. The financial statements of the Fund
will be audited by Deloitte & Touche LLP, independent auditors, at least
annually. Shareholder inquiries and requests for information regarding the
Fund should be made in writing to the Fund at 222 South Central Avenue, Suite
300, St. Louis, Missouri 63105, or by calling (314) 727-5454.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
AND IN SALES LITERATURE SPECIFICALLY APPROVED BY OFFICERS OF THE
FUND FOR USE IN CONNECTION WITH THE OFFER OF FUND SHARES, AND IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
24
<PAGE> 28
STATEMENT OF ADDITIONAL INFORMATION
BUILDERS PROLOAN FUND, INC.
October 23, 1997
Builders ProLoan Fund, Inc. (the "Fund") is an open-end, non-diversified
management investment company.
This Statement of Additional Information should be read in conjunction
with the Prospectus for the Fund dated October 23, 1997 ("Prospectus"), a
copy of which may be obtained without charge by calling (314) 727-5454. This
Statement of Additional Information is not a prospectus and is authorized for
distribution to prospective investors only if preceded or accompanied by a
current Prospectus.
<TABLE>
TABLE OF CONTENTS
-----------------
<CAPTION>
<S> <C>
INVESTMENT POLICIES 2
INVESTMENT RESTRICTIONS 16
DIRECTORS AND OFFICERS 18
MANAGEMENT AND DISTRIBUTION FEES 20
INVESTMENT SUBADVISORY AGREEMENT 20
PLAN AND AGREEMENT OF DISTRIBUTION 21
PORTFOLIO SECURITIES TRANSACTIONS 21
NET ASSET VALUE 22
REDEEMING SHARES 24
TAX INFORMATION 24
YIELD AND TOTAL RETURN QUOTATIONS 26
DESCRIPTION OF THE FUND 27
PROSPECTUS 28
APPENDIX A: Description of Bond Ratings A-1
APPENDIX B: Options and Futures Contracts B-1
APPENDIX C: Statement of Assets and Liabilities C-1
</TABLE>
1
<PAGE> 29
INVESTMENT POLICIES
The Fund may invest in the following types of instruments:
Asset-Backed Securities - These securities do not have the benefit
------------------------
of the same security interest in the underlying collateral. Payment on
asset-backed securities of private issuers is typically supported by some form
of credit enhancement, such as a letter of credit, surety bond, limited guaranty
or subordination. Assets generating such payments will consist of such
instruments as motor vehicle installment purchase obligations, credit card
receivables and home equity loans. The Fund may also invest in other types of
asset-backed securities available in the future. The yield characteristics of
asset-backed securities differ from traditional debt securities. A major
difference is that the principal amount of the obligation may be prepaid at
any time because the underlying assets (i.e., loans) generally may be prepaid
at any time. As a result, if an asset-backed security is purchased at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if an
asset-backed security is purchased at a discount, faster than expected
payments will increase, while slower than expected prepayments will decrease
yield to maturity. In calculating the average weighted maturity of the Fund,
the maturity of asset-backed securities will be based on estimates of average
life.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates. Furthermore,
prepayment rates are influenced by a variety of economic and social factors.
In general, the collateral supporting non-mortgage asset-backed securities is
of a shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Like other fixed income securities, when interest
rates rise the value of an asset-backed security generally will decline;
however, when interest rates decline, the value of an asset-backed security
with prepayment features may not increase as much as that of other fixed
income securities.
Asset-backed securities may involve certain risks that are not presented
by mortgate-backed securities arising primarily from the nature of the
underlying assets (e.g., credit card and automobile loan receivables as
opposed to real estate mortgages). Ultimately, asset-backed securities are
dependent upon payment of the consumer loans or receivables by individuals,
and the certificate holder frequently has no recourse against the entity that
originated the loans or receivables. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which have given debtors the right
to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, default may require repossession of the personal
property of the debtor which may be difficult or impossible in some cases.
Most issuers of automobile receivables permit the servicers to return
possession of the underlying obligations. If the servicers were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related automobile
receivables. In addition, because of the number of vehicles involved in a
typical issuance and technical requirements under state law, the trustee for
the automobile receivables may not have an effective security interest in all
of the obligations backing such receivables. Therefore, there is a
possibility that recoveries of
2
<PAGE> 30
repossessed collateral may not, in some cases, be able to support payment on
these securities.
Asset-backed securities may be subject to greater risk of default during
periods of economic downturn than other instruments. Also, the secondary
market for certain asset-backed securities may not be as liquid as the market
for other types of securities, which could result in the Fund's experiencing
difficulty in valuing or liquidating such securities. In certain
circumstances, asset-backed securities may be considered illiquid securities
subject to the percentage limitation described under "Illiquid Securities"
below.
Bank Deposit Notes-Bank deposit notes are obligations of a bank,
------------------
rather than bank holding company corporate debt. The only structural difference
between bank deposit notes and certificates of deposit is that interest on
bank deposit notes is calculated on a 30/360 basis as are corporate
notes/bonds. Similar to certificates of deposit, deposit notes represent
bank level investments and, therefore, are senior to all holding company
corporate debt.
Bankers' Acceptances-Bankers' acceptances are short-term credit
--------------------
instruments used to finance the import, export, transfer or storage of goods.
They are termed "accepted" when a bank guarantees their payment at maturity.
Bank Obligations - For purposes of the Fund's investment policies
----------------
with respect to bank obligations, the assets of a bank or savings institution
will be deemed to include the assets of its domestic and foreign branches.
Investments in obligations issued by foreign banks and foreign branches of
U.S. banks may involve risks that are different from investments in
obligations of domestic branches of U.S. banks. These risks may include
future unfavorable political and economic developments, possible withholding
taxes on interest income, seizure or nationalization of foreign deposits,
currency controls, interest limitations, or other governmental restrictions
which might affect the payment of principal or interest on the securities held
by the Fund. Additionally, these institutions may be subject to less
stringent reserve requirements and to different accounting, auditing,
reporting and recordkeeping requirements than those applicable to domestic
branches of U.S. banks.
Certificates of deposit issued by domestic branches of domestic banks do
not benefit materially, and certificates of deposit issued by foreign branches
of domestic banks do not benefit at all, from insurance from the Federal
Deposit Insurance Corporation.
Both domestic banks and foreign branches of domestic banks are subject
to extensive governmental regulations, which may limit both the amount and
types of loans which may be made and interest rates which may be charged. In
addition, the profitability of the banking industry is dependent largely upon
the availability and costs of funds for the purpose of financing and lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operations
of this industry.
3
<PAGE> 31
Cash Equivalents-Cash equivalents include certificates of deposit,
----------------
bearer deposit notes, bankers' acceptances, government obligations, commercial
paper, short-term corporate debt securities and repurchase agreements.
Certificates of Deposit-Certificates of deposit are issued against
-----------------------
funds deposited in an eligible bank (including its domestic and foreign
branches, subsidiaries and agencies), are for a definite period of time, earn a
specified rate of return and are normally negotiable.
Commercial Paper and other Short-Term Corporate Obligations-Commercial
-----------------------------------------------------------
paper refers to promissory notes representing an unsecured debt of a corporation
or finance company with a fixed maturity of no more than 270 days. The other
corporate obligations in which the Fund may invest consist of high quality,
U.S. dollar denominated short-term bonds and notes (including variable
amount master demand notes) issued by domestic corporations bearing fixed,
floating or variable interest rates.
Debentures - The Fund may invest in debt obligations, such as bonds
----------
and debentures, issued by corporations and other business organizations that are
rated at the time of purchase within the three highest ratings categories of
Standard & Poor's Rating Group ("S&P") or Moody's Investors Service, Inc.
("Moody's") or, if unrated, are determined to be of comparable quality by the
Subadviser. Unrated securities will be determined to be of comparable quality
to rated debt obligations if, among other things, other outstanding
obligations of the issuers of such securities are rated A or better.
Debentures are unsecured debt securities. The holder of a debenture is
protected only by the general creditworthiness of the issuer.
Illiquid Securities. The Fund may invest up to 15% of its net
-------------------
assets in illiquid securities, including securities having legal or contractual
restrictions on resale or no readily available market. The Fund has contracted
with a secondary market source to purchase, at any time, the Fund's commitments
to acquire mortgage-backed securities secured by Qualified Mortgage Loans
generated through the ProLoan program. Upon exercise of this right, the Fund
will pay the purchaser to assume certain of the commitments at an amount
equal to the principal amount of the underlying Qualified Mortgage Loans
multiplied by any positive difference between the price at which the Fund
committed to acquire the mortgage-backed securities and the six-month forward
to-be-announced ("TBA") price of Federal National Mortgage Association
("FNMA") mortgage-backed securities with the one-half percent (1/2%) coupon
rate increment nearest to, but not greater than, the weighted average yield for
all such Loans subject to this right, minus 0.625% (the approximate amount that
would be spent by the Fund for servicing, guarantee fees and securitization
costs had such Loans been securitized). The Fund's commitments to acquire
mortgage-backed securities generated through the ProLoan program will not be
considered to be illiquid so long as the Manager determines, pursuant to
guidelines established by the Board of Directors, that an adequate trading
market exists for these commitments. To the extent that a secondary market
source or an Originator becomes uninterested in purchasing the Fund's mortgage
commitments or refuses to honor its contractual commitment to the Fund, the
Fund's mortgage commitments could increase the level of illiquidity in its
portfolio. As a result of such illiquidity, the Fund may not be able to sell
these instruments when the Subadviser considers it desirable to do so or may
have to sell them at a lower price than could be obtained if they
4
<PAGE> 32
were more liquid. These factors may have an adverse impact on net asset
value. The sale of illiquid securities may require more time and result in
higher transaction costs and other selling expenses than the sale of liquid
securities.
Loan Participation Interests-Loan participation interests represent
----------------------------
interests in bank loans made to corporations. The contractual arrangement
with the bank transfers the cash stream of the underlying bank loan to the
participating investor. Because the issuing bank does not guarantee the
participations, they are subject to the credit risks generally associated with
the underlying corporate borrower. In addition, because it may be necessary
under the terms of the loan participation for the investor to assert through
the issuing bank such rights as may exist against the underlying corporate
borrower, in the event the underlying corporate borrower fails to pay
principal and interest when due, the investor may be subject to delays,
expenses and risks that are greater than those that would have been involved
if the investor had purchased a direct obligation (such as commercial paper)
of such borrower. Moreover, under the terms of the loan participation, the
investor may be regarded as a creditor of the issuing bank (rather than of the
underlying corporate borrower), so that the issuer may also be subject to the
risk that the issuing bank may become insolvent. Further, in the event of the
bankruptcy or insolvency of the corporate borrower, the loan participation may
be subject to certain defenses that can be asserted by such borrower as a
result of improper conduct by the issuing bank. The secondary market, if any,
for these loan participations is extremely limited and any such participations
purchased by the investor are regarded as illiquid.
Mortgage-Backed Securities-Mortgage-backed securities, which are
--------------------------
derivatives, consist of both collateralized mortgage obligations and mortgage
pass-through certificates .
Collateralized Mortgage Obligations-("CMOs")-CMOs and real estate
mortgage investment conduits ("REMICs") are debt securities collateralized by
mortgages, or mortgage pass-through securities (the "Mortgage Assets"). CMOs
divide the cash flow generated from the underlying mortgages or mortgage
pass-through securities into different groups referred to as "tranches," which
are then retired sequentially over time in order of priority. The principal
governmental issuers of such securities are FNMA, a government sponsored
corporation owned entirely by private stockholders and the Federal Home Loan
Mortgage Corporation ("FHLMC"), a corporate instrumentality of the United
States created pursuant to an act of Congress which is owned entirely by
Federal Home Loan Banks. CMOs are structured as trusts or corporations
established for the purpose of issuing such CMOs and often have no assets
other than those underlying the securities and any credit support provided.
REMICs are a mortgage securities vehicle, authorized by the Tax Reform Act of
1986, that hold residential or commercial mortgages and issues securities
representing interests in those mortgages. A REMIC may be formed as a
corporation, partnership, or segregated pool of assets. The REMIC itself is
generally exempt from federal income tax, but the income from the mortgages is
reported by investors. For investment purposes, REMIC securities are
virtually indistinguishable from CMOs.
5
<PAGE> 33
CMOs may involve additional risks other than those found in other types
of mortgage-related obligations. CMOs may exhibit more price volatility and
interest rate risks than other types of mortgage-related obligations. During
periods of rising interest rates, CMOs may lose their liquidity as CMO market
makers may choose not to repurchase, or may offer prices, based on current
market conditions, that are unacceptable to the Fund based on the Fund's
analysis of the market value of the security.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must
be fully retired no later than its final distribution date. Principal
prepayments on the Mortgage Assets underlying the CMOs or REMIC Certificates
may cause some or all of the classes of CMOs or REMIC Certificates to be
retired substantially earlier than their final distribution dates. Generally,
interest is paid or accrues on all classes of CMOs or REMIC Certificates on a
monthly basis.
The principal of an interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payment of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in
the order of their respective final distribution dates. Thus, no payment of
principal will be made on any class of sequential pay CMOs or REMIC
Certificates until all other classes having an earlier final distribution date
have been paid in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or
REMIC Certificates are those that are structured to apply principal payments
and prepayments of the Mortgage Assets to two or more classes concurrently on
a proportionate or disproportionate basis. These simultaneous payments are
taken into account in calculating the final distribution date of each class.
Mortgage Pass-Through Certificates-Mortgage pass-through
certificates are issued by governmental, government-related and private
organizations which are backed by pools of mortgage loans.
(1) Government National Mortgage Association ("GNMA") Mortgage
----------------------------------------------------------
Pass-Through Certificates ("Ginnie Maes")-GNMA is a wholly-owned U.S.
- -----------------------------------------
Government corporation within the Department of Housing and Urban Development.
Ginnie Maes represent an undivided interest in a pool of mortgages that are
insured by the Federal Housing Administration or the Farmers Home Administration
or guaranteed by the Veterans Administration. Ginnie Maes entitle the holder to
receive all payments (including prepayments) of principal and interest owed by
the individual mortgagors, net of fees paid to GNMA and to the issuer which
assembles the mortgage pool and passes through the monthly mortgage payments
to the certificate holders (typically, a mortgage banking firm), regardless of
whether the individual mortgagor actually makes the payment. Because payments
are made to certificate holders regardless of whether payments are actually
received on the underlying mortgages, Ginnie Maes are of the "modified
pass-through" mortgage certificate type. GNMA is authorized to guarantee the
timely payment
6
<PAGE> 34
of principal and interest on the Ginnie Maes. The GNMA guarantee is backed by
the full faith and credit of the United States, and GNMA has unlimited
authority to borrow funds from the U.S. Treasury to make payments under the
guarantee. The market for Ginnie Maes is highly liquid because of the size of
the market and the active participation in the secondary market of security
dealers and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie
---------------------------------------------------
Macs")-Freddie Macs represent interests in groups of specified first lien
- ------
residential conventional mortgages underwritten and owned by FHLMC. Freddie
Macs entitle the holder to timely payment of interest, which is guaranteed by
FHLMC. FHLMC guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. In cases where FHLMC has
not guaranteed timely payment of principal, the FHLMC may remit the amount due
because of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after
it becomes payable. Freddie Macs are not guaranteed by the United States or
by any of the Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. The
secondary market for Freddie Macs is highly liquid because of the size of the
market and the active participation in the secondary market of FHLMC, security
dealers and a variety of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie
-----------------------------------------------------------
Maes")-Fannie Maes represent an undivided interest in a pool of conventional
- ------
mortgage loans secured by first mortgages or deeds of trust, on one family or
two to four family, residential properties. FNMA is obligated to distribute
scheduled monthly installments of principal and interest on the mortgages in
the pool, whether or not received, plus full principal of any foreclosed or
otherwise liquidated mortgages. The obligation of FNMA under its guarantee is
solely its obligation and is not backed by, nor entitled to, the full faith
and credit of the United States.
(4) Mortgage-Related Securities Issued by Private
---------------------------------------------
Organizations-Pools created by non-governmental issuers generally offer a higher
- -------------
rate of interest than government and government-related pools because there are
no direct or indirect government guarantees of payments in such pools. However,
timely payment of interest and principal of these pools is often partially
supported by various enhancements such as over-collateralization and
senior/subordination structures and by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance. The
insurance and guarantees are issued by government entities, private insurers
or the mortgage poolers. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may
not be readily marketable.
Mortgages. Privately-issued mortgage-related securities typically
---------
are not guaranteed by the U.S. Government, its agencies, instrumentalities or
sponsored enterprises but such securities are generally structured with one or
more types of credit enhancement such as a guarantee, subordination, insurance
policies or letters of credit obtained by the issuer or sponsor from third
parities, through various means of structuring the transaction or through a
combination of such
7
<PAGE> 35
approaches. In addition, although the Fund treats each mortgage-related
portfolio as a separate issuer, concentration in issues of mortgage-related
securities within the Fund, sponsored by the same sponsor or serviced by the
same servicer, may involve certain risks. Servicers of mortgage-related pools
collect payments on the underlying mortgage assets for pass-through to the
securityholders on a periodic basis. Upon insolvency of the servicer, the
securityholders may be at risk with respect to collections received by the
servicer but not yet delivered to the securityholders. In addition, a
sponsors' transfer of assets to a trust or other pooling vehicles may not
represent a true sale and, upon insolvency of the sponsor, the securityholders
of the trust or other pool may be at risk with respect to the assets
transferred to the trust or pool by the sponsor.
Foreclosure Risk. In cases in which the Fund invests directly in
mortgage loans, it is anticipated that the mortgage loan will be secured by a
deed of trust or mortgage, depending upon the prevailing practice in the state
in which the subject property is located. Foreclosure of a deed of trust may
be accomplished by a non-judicial trustee's sale under a specific provision in
the deed of trust which authorizes the trustee to sell the property upon any
default by the borrower under the terms of the note or deed of trust.
Foreclosure of a mortgage generally is accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having
an interest in the real property. Delays in completion of the foreclosure
occasionally may result from difficulties in locating necessary party
defendants. The borrower may seek bankruptcy protection in an attempt to
delay or avert a foreclosure and/or assert other defenses to the proceedings.
Any bankruptcy filing will, and the assertion of other defenses may,
significantly delay the proceedings and increase the expenses incurred by the
lender in prosecuting the proceedings, and could result in a reduction of the
secured debt in the event of a "cramdown" by a bankruptcy court. Depending
upon market conditions, the net proceeds of the sale of the property after
foreclosure, fix-up, and selling expenses may be less than the Fund's
investment.
In some states, after foreclosure and sale, the borrower and foreclosed
junior lienholders are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a
statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. Consequently, the practical effect of the redemption
right is often to force the lender to retain the property and pay the expenses
of ownership until the redemption period has run.
Options and Futures Contracts - The Fund may purchase put and call
-----------------------------
options and may invest in futures contracts for hedging purposes only. See
Appendix B - Options and Futures Contracts.
Ratings of Long-Term Obligations-The Fund utilizes ratings provided
--------------------------------
by the following nationally recognized statistical rating organizations ("Rating
Organizations") in order to determine eligibility of long-term obligations.
8
<PAGE> 36
The four highest Moody's ratings for long-term obligations (or issuers
thereof) are Aaa, Aa, A and Baa. Obligations rated Aaa are judged by Moody's to
be of the best quality. Obligations rated Aa are judged to be of high quality
by all standards. Together with the Aaa group, such debt comprises what is
generally known as high-grade debt. Moody's states that debt rated Aa is rated
lower than Aaa debt because margins of protection or other elements make
long-term risks appear somewhat larger than for Aaa debt. Obligations which
are rated A by Moody's possess many favorable investment attributes and are
considered "upper medium-grade obligations". Obligations which are rated Baa
by Moody's are considered to be medium grade obligations, i.e., they are
neither highly protected or 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.
Moody's also supplies numerical indicators 1, 2, and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3
indicates a ranking toward the lower end of the category.
The four highest S&P's ratings for long-term obligations are AAA, AA, A
and BBB. Obligations rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
Obligations rated AA have a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
Obligations rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions. Obligations rated BBB by Standard &
Poor's are regarded as having adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Duff & Phelps' four highest ratings for long-term obligations are AAA,
AA, A and BBB. Obligations rated AAA have the highest credit quality with
risk factors being negligible. Obligations rated AA are of high credit
quality and strong protection factors. Risk is modest but may vary slightly
from time to time because of economic conditions. Obligations rated A have
average but adequate protection factors. However, risk factors are more
variable and greater in periods of economic stress. Obligations rated BBB
have below average protection factors with considerable variability in risk
during economic cycles, but are still considered sufficient for prudent
investment.
Thomson BankWatch ("Bankwatch") long-term debt ratings apply to specific
issues of long-term debt and preferred stock. They specifically assess the
likelihood of an untimely repayment of principal or interest over the term to
maturity of the rated instrument. BankWatch's four highest ratings for
long-term obligations are AAA, AA, A and BBB. Obligations rated AAA indicate
that the ability to repay principal and interest on a timely basis is very high.
Obligations rated AA indicate a superior ability to repay principal and
interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
9
<PAGE> 37
Obligations rated A indicate the ability to repay principal and interest is
strong. Issues rated A could be more vulnerable to adverse developments (both
internal and external) than obligations with higher ratings. BBB is the
lowest investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated BBB are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
Fitch Investors Service, Inc. ("Fitch") investment grade bond ratings
provide a guide to investors in determining the credit risk associated with a
particular security. The ratings represent Fitch's assessment of the issuer's
ability to meet the obligations of a specific debt issue or class of debt in a
timely manner. Obligations rated AAA are considered to be investment grade
and of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be affected
by reasonable foreseeable events. Bonds rated AA are considered to be
investment grade and of very high credit quality. The obligor's ability to
pay interest and repay principal is very strong, although not quite as strong
as bonds rated AAA. Bonds rated A are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher
ratings. Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse impact
on these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
Standard & Poor's, Duff & Phelps and Fitch apply indicators "+","-," and
no character to indicate relative standing within the major rating categories.
Ratings of Short-Term Obligations-The rating P-1 is the highest
-----------------------------------
short-term rating assigned by Moody's. Among the factors considered by
Moody's in assigning ratings are the following: (1) evaluations of the
management of the issuer; (2) economic evaluation of the
10
<PAGE> 38
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 the 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.
Short-term obligations (or issuers thereof) rated A-1 by Standard &
Poor's have the following characteristics. Liquidity ratios are adequate to
meet cash requirements. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry.
The reliability and quality of management are unquestioned. Relative strength
or weakness of the above factors determines whether the issuer's short-term
obligation is rated A-1, A-2, or A-3.
The distinguishing feature of the Duff & Phelps Credit Ratings'
short-term rating is the refinement of the traditional 1 category. The
majority of short-term debt issuers carry the highest rating, yet quality
differences exist within that tier. Obligations rated D-1+ indicate the highest
certainty of timely payment. Safety is just below risk-free U.S. Treasury
obligations. Obligations rated D-1 have a very high certainty of timely payment.
Risk factors are minor. Obligations rated D-1- have a high certainty of timely
payment. Risk factors are very small. Obligations rated D-2 have good
certainty of timely payment. Liquidity factors and company fundamentals are
sound. Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors are small.
Thomson BankWatch short-term ratings are intended to assess the
likelihood of an untimely or incomplete payment of principal or interest.
Obligations rated TBW-1 indicate a very high likelihood that principal and
interest will be paid on a timely basis. While the degree of safety regarding
timely payment of principal and interest is strong for an obligation rated
TBW-2, the relative degree of safety is not as high as for issues rated TBW-1.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes. A rating of F-1+ indicates exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment. Obligations rated F-1 have very
strong credit quality. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than issues rated F-1+. Issues
assigned a rating of F-2 indicate good credit quality.
11
<PAGE> 39
Issues assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues assigned F-1+
and F-1 ratings.
Repurchase Agreements-A repurchase agreement, which provides a
----------------------
means to earn income on funds for periods as short as overnight, is an
arrangement under which the purchaser (i.e., the Fund) purchases securities and
the seller agrees, at the time of sale, to repurchase the securities at a
specified time and price. The repurchase price may be higher than the purchase
price, the difference being income to the purchaser, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
purchaser together with the repurchase price on repurchase. In either case, the
income to the purchaser is unrelated to the interest rate on the securities
subject to the repurchase agreement. Repurchase agreements are considered to be
loans under the 1940 Act.
The Fund may enter into repurchase agreements with any bank or
registered broker-dealer who, in the opinion of the Board, presents a minimum
risk of bankruptcy during the term of the agreement based upon guidelines
which periodically are reviewed by the Board. The Fund may enter into
repurchase agreements as a short-term investment of its idle cash in order to
earn income. The securities will be held by a custodian (or subcustodian) or
in the Federal Reserve/U.S. Treasury book entry system. If the market value
of the securities subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of the
securities to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price.
In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before the repurchase of the
securities under a repurchase agreement, the Fund may encounter a delay and
incur costs before being able to sell the security being held as collateral.
Delays may involve loss of interest or decline in price of the securities.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the securities, in which case the
Fund may incur a loss if the proceeds to the Fund from the sale of the
securities to a third party are less than the repurchase price.
Reverse Repurchase Agreements-The Fund may borrow funds for
-----------------------------
temporary purposes by entering into reverse repurchase agreements. Pursuant to
such agreements, the Fund would sell portfolio securities to financial
institutions such as banks and broker/dealers and agree to repurchase them at a
mutually agreed-upon date and price. The Fund intends to enter into reverse
repurchase agreements only to avoid selling securities to meet redemptions
during market conditions deemed unfavorable by the Subadviser. At the time the
Fund enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets such as liquid high quality debt securities having a
value not less than 100% of the repurchase price (including accrued interest),
and will subsequently monitor the account to ensure that such required value is
maintained. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is obligated to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings by an investment company under the
1940 Act.
12
<PAGE> 40
Securities Lending- The Fund may lend its securities in accordance
------------------
with the following conditions: (1) the Fund must receive at least 100%
collateral in the form of cash or cash equivalents, securities of the U.S.
Government and its agencies and instrumentalities, and approved bank letters of
credit; (2) the borrower must increase the collateral whenever the market value
of the loaned securities (determined on a daily basis) rises above the level of
collateral; (3) the Fund must be able to terminate the loan after notice, at
any time; (4) the Fund must receive reasonable interest on the loan or a flat
fee from the borrower, as well as amounts equivalent to any dividends,
interest or other distributions on the securities loaned, and any increase in
market value of the loaned securities; (5) the Fund may pay only reasonable
custodian fees in connection with the loan; and (6) voting rights on the
securities loaned may pass to the borrower, provided, however, that if a
material event affecting the investment occurs, the Board must be able to
terminate the loan and vote proxies or enter into an alternative arrangement
with the borrower to enable the Board to vote proxies. While there may be
delays in recovery of loaned securities or even a loss of rights in collateral
supplied should the borrower fail financially, loans will be made only to
firms deemed by the Board to be of good financial standing and will not be
made unless the consideration to be earned from such loans would justify the
risk. The Fund currently does not intend to engage in securities lending
absent prior Board approval.
Separately Traded Registered Interest and Principal Securities and
------------------------------------------------------------------
Zero Coupon Obligations - The Fund may invest in instruments known as "stripped"
- -----------------------
securities. These instruments include U.S. Treasury bonds and notes and
federal agency obligations on which the unmatured interest coupons have been
separated from the underlying obligation. Such obligations are usually issued
at a discount to their "face value," and because of the manner in which
principal and interest are returned may exhibit greater price volatility than
more conventional debt securities. The Fund may invest in "interest only"
stripped securities that have been issued by a federal instrumentality known
as the Resolution Funding Corporation and other stripped securities issued or
guaranteed by the U.S. Government, where the principal and interest components
are traded independently under the Separate Trading of Registered Interest and
Principal Securities program ("STRIPS"). Under STRIPS, the principal and
interest components are individually numbered and separately issued by the
U.S. Treasury at the request of depository financial institutions, which then
trade the component parts independently. The Fund may also invest in
instruments that have been stripped by their holder, typically a custodian
bank or investment brokerage firm, and then resold in a custodian receipt
program under names such as TIGRs and CATS.
Although stripped securities do not pay interest to their holders before
they mature, federal income tax rules require the Fund each year to recognize
a part of the discount attributable to a security as interest income. This
income must be distributed along with the other income the Fund earns. To the
extent shareholders request that they receive their dividends in cash rather
than reinvesting them, the money necessary to pay those dividends must come
from the assets of the Fund or from other sources such as proceeds from sales
of Fund shares and/or sales of portfolio securities. The cash so used would
not be available to purchase additional income-producing securities, and the
Fund's current income could ultimately be reduced as result.
13
<PAGE> 41
The Fund may acquire zero coupon bonds. Such obligations will not
result in the payment of interest until maturity and typically have greater
price volatility than coupon obligations. The Fund will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations. These actions may occur under
disadvantageous circumstances and may reduce the Fund's assets, thereby
increasing its expense ratio and decreasing its rate of return. Zero coupon
bonds are subject to greater market fluctuations from changing interest rates
than debt obligations of comparable maturities that make current distributions
of interest.
U.S. Government Securities-U.S. Government securities are issued or
--------------------------
guaranteed by the U.S. Government and include U.S. Treasury obligations (see
definition below) and securities issued by U.S. agencies and
instrumentalities.
U. S. Government agencies or instrumentalities which issue or guarantee
securities include, but are not limited to, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, GNMA, General Services Administration,
Central Bank for Cooperatives, Federal Home Loan Banks, FHLMC, Federal
Intermediate Credit Banks, Federal Land Banks, Maritime Administration,
Tennessee Valley Authority, District of Columbia Armory Board, Inter-American
Development Bank, Asian-American Development Bank, Agency for International
Development, Student Loan Marketing Association and International Bank of
Reconstruction and Development.
Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some are
backed by the right of the issuer to borrow from the Treasury; others by
discretionary authority of the U.S. Government to purchase the agencies'
obligations; while still others, such as the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. In the
case of securities not
14
<PAGE> 42
backed by the full faith and credit of the United States, the investor must
look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment, and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include bills,
--------------------------
notes and bonds issued by the U.S. Treasury and STRIPS (described above).
Variable or Floating Rate Obligations-A variable rate obligation is
--------------------------------------
one whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate obligation is one whose
terms provide for the adjustment of its interest rate whenever a specified
interest rate changes and which, at any time, can reasonably be expected to
have a market value that approximates its par value. Variable or floating
rate obligations may be secured by bank letters of credit.
Variable and floating rate instruments are not frequently rated by
credit rating agencies. However, in determining the creditworthiness of
unrated variable and floating rate instruments and their eligibility for
purchase by the Fund, the Subadviser will consider the earning power, cash
flows and other liquidity ratios of the issuers and guarantors of such
obligations and, if the obligation is subject to a demand feature, will
monitor their financial status to meet payment on demand. In determining
average weighted portfolio maturity, an instrument will usually be deemed to
have a maturity equal to the longer of the period remaining to the next
interest rate adjustment or the time the Fund can recover payment of
principal as specified in the instrument. Participation interests provide the
Fund with a specified undivided interest (up to 100%) in the underlying
obligation and the right to demand payment of the unpaid principal balance
plus accrued interest on the participation interest from the institution upon
a specified number of days' notice, not to exceed thirty days. Each
participation interest is backed by an irrevocable letter of credit or
guarantee of a bank that the Subadviser has determined meets the prescribed
quality standards for the Fund. The bank typically retains fees out of the
interest paid on the obligation for servicing the obligation, providing the
letter of credit and issuing the repurchase commitment.
When-Issued and Forward Commitments. The Fund may purchase U.S.
-----------------------------------
Government and other securities that are permissible investments of the Fund
on a when-issued basis and may purchase or sell such securities on a "forward
commitment" basis in order to hedge against anticipated changes in interest
rates and prices. When such transactions are negotiated, the price, which is
generally expressed in terms of yield, is fixed at the time the commitment is
made, but delivery and payment for the securities takes place on a later date.
When-issued and forward commitment securities may be sold prior to the
settlement date. At the time the Fund makes the commitment to purchase
securities on a when-issued or forward commitment basis, it will record the
transaction and thereafter reflect the value of such securities in determining
its net asset value. At the time the Fund enters into a transaction on a
when-issued or forward commitment basis, cash or liquid securities such as
U.S. Government securities or other
15
<PAGE> 43
appropriate high grade debt obligations equal to the value of the when-issued or
forward commitment securities will be segregated and maintained by the Fund's
custodian and will be marked to market daily. On the delivery date, the Fund
will meet its obligations from securities that are then maturing or sales of
securities held in the segregated asset account and/or from available cash flow.
If the Fund disposes of the right to acquire a when-issued or forward
commitment security prior to its acquisition or disposes of its right deliver
against a forward commitment, it can incur a gain or loss due to market
fluctuation. In some instances, the third-party seller of when-issued or
forward commitment securities may determine prior to the settlement date that it
will be unable to meet its existing transaction commitments without borrowing
securities. If advantageous from a yield perspective, the Fund may, in that
event, agree to resell its purchase commitment to the third-party seller at the
current market price on the date of sale and concurrently enter into another
purchase commitment for such securities at a later date. As an inducement for
the Fund to "roll-over" its purchase commitment, the Fund may receive a
negotiated fee.
There is always a risk that the securities may not be delivered and that
the Fund may incur a loss or will have lost the opportunity to invest the
amount set aside for such transaction in the segregated asset account.
Settlements in the ordinary course, which may take substantially more than
five business days for mortgage-relates securities, are not treated by the
Fund as when-issued or forward commitment transactions.
INVESTMENT RESTRICTIONS
In addition to the investment limitations noted in the Prospectus, the
following restrictions have been adopted by the Fund and may be changed only
by the majority vote of the Fund's outstanding shares, which as used herein
means the lesser of (a) 67% of the shares of the Fund present at the meeting
if the holders of more than 50% of the shares are present and represented at
the shareholders' meeting or (b) more than 50% of the shares of the Fund.
The Fund may not:
1. Act as an underwriter (sell securities for others), except to the
extent that the Fund may be deemed to be an underwriter in connection
with the disposition of portfolio securities or the sale of its own
shares under federal securities laws.
2. Borrow money or property in excess of 33 1/3% of its total assets
(including the amount borrowed and through reverse repurchase
agreements and mortgage dollar rolls) less all liabilities and
indebtedness other than the bank or other borrowings, except that the
Fund may borrow up to an additional 5% of its total assets for temporary
defensive purposes.
3. Buy or sell real estate, unless acquired as a result of ownership
of securities or other instruments, except this shall not prevent the
Fund from investing in mortgages, mortgage-related securities,
derivative mortgage-backed securities and other instruments
16
<PAGE> 44
backed by real estate or securities of companies engaged in the real
estate business or real estate investment trusts.
4. Buy or sell physical commodities unless acquired as a result of
ownership of securities or other instruments, except this shall not
prevent the Fund from buying or selling financial instruments (such as
options and futures contracts) or from investing in securities or other
instruments backed by, or whose value is derived from, physical
commodities.
5. Lend Fund securities in excess of 20% of its net assets. In
making loans the Fund receives the market price in cash, U.S. government
securities, letters of credit or such other collateral as may be
permitted by regulatory agencies and approved by the board. If the
market price of the loaned securities goes up, the Fund will get
additional collateral on a daily basis. The risks are that the borrower
may not provide additional collateral when required or return the
securities when due. During the existence of the loan, the Fund
receives cash payments equivalent to all interest or other distributions
paid on the loaned securities. A loan will not be made unless Commerce
Bank, N.A. (St. Louis) (the "Subadviser") believes the opportunity for
additional income outweighs the risks.
6. Make loans to any person or firm, except that the Fund may enter
into repurchase agreements, lend its investment securities to broker-
dealers or other institutional investors and acquire whole loan or
participation mortgages for investment purposes in accordance with the
guidelines stated in the Prospectus; provided, however, that the making
of a loan shall not be construed to include the acquisition for
investment of bonds, debentures, notes or other evidences of indebtedness
of any corporation or government which are publicly distributed.
7. Purchase from or sell portfolio securities to its officers,
Directors or other "interested persons" of the Fund, as defined in the
Investment Company Act of 1940, including its investment adviser, its
investment subadviser and their affiliates, except as permitted by the
1940 Act and exemptive rules or orders thereunder.
8. Issue senior securities (including borrowing money from banks and
other entities and through reverse repurchase agreements) in excess of
33 1/3% of its total assets (including the proceeds of senior securities
issued).
The following non-fundamental investment restrictions apply to the Fund
and may be changed with respect to the Fund by a majority vote of the Fund's
Board of Directors (the "Board").
1. The Fund may not purchase securities on margin, effect short sales
(except that the Fund may obtain such short-term credits as may be
necessary for the clearance of purchases or sales of securities) or
engage in the writing of call options.
17
<PAGE> 45
2. The Fund may invest up to 10% of its total assets in the
securities of other investment companies to the extent permitted by law.
The Fund may incur duplicate advisory or management fees when investing
in another mutual fund.
3. The Fund may not invest in warrants.
4. The Fund may make contracts to purchase securities for a fixed
price at a future date beyond normal settlement time (when-issued
securities or forward commitments). Under normal market conditions, the
Fund does not intend to commit more than 33 1/3% of its total assets to
these practices. The Fund does not pay for the securities or receive
dividends or interest on them until the contractual settlement date.
The Fund will designate cash or liquid high-grade debt securities at
least equal in value to its forward commitments to purchase the
securities. When-issued securities or forward commitments are subject
to market fluctuations and they may affect the Fund's total assets the
same as securities it owns.
5. In determining the liquidity of commercial paper issued in
transactions not involving a public offering under Section 4(2) of the
Securities Act of 1933, Capital Mortgage Management, Inc. (the
"Manager"), under guidelines established by the Board, will evaluate
relevant factors such as the issuer and the size and nature of its
commercial paper programs, the willingness and ability of the issuer or
dealer to repurchase the paper, and the nature of the clearance and
settlement procedures for the paper.
6. The Fund may maintain a portion of its assets in cash and cash-
equivalent investments. The cash-equivalent investments the Fund may
use are short-term U.S. government securities and negotiable
certificates of deposit, non-negotiable fixed-time deposits, bankers'
acceptances and letters of credit of banks or savings and loan
associations having capital, surplus and undivided profits (as of the
date of its most recently published annual financial statements) in
excess of $100 million (or the equivalent in the instance of a foreign
branch of a U.S. bank) at the date of investment. The Fund also may
purchase short-term corporate notes and obligations rated in the top two
classifications by Moody's or S&P or the equivalent and may use
repurchase agreements with broker-dealers registered under the
Securities Exchange Act of 1934 and with commercial banks.
DIRECTORS AND OFFICERS
The Board provides broad supervision over the Fund's affairs. Capital
Mortgage Management, Inc. is responsible for the management of the Fund and the
ProLoan program, and the Fund's officers are responsible for the Fund's
operations. The Directors and officers of the Fund are listed below, together
with their principal occupations during the past five years.
18
<PAGE> 46
<TABLE>
<CAPTION>
Name, Address and Date Position with
- ----------------------- -------------
of Birth the Fund Principal Occupation During Past 5 Years
- -------- -------- ----------------------------------------
<S> <C> <C>
John W. Stewart<F*> Director, President, Capital Mortgage Management, Inc.
222 South Central Avenue President and (July 1997-Present); Controller/System
Suite 300 Secretary Administrator, Carpenters' District Council of
St. Louis, MO 63105 Greater St. Louis (August 1988-July 1997)
(11/21/58)
Terry Nelson<F*> Director Executive Secretary and Treasurer, Carpenters'
1401 Hampton Avenue District Council of Greater St. Louis (Aug.
St. Louis, MO 63139 1993-present); Managing Trustee, Carpenters'
(12/01/40) District Council of Greater St. Louis pension
fund, health and welfare fund and vacation fund
(Aug. 1993-present); Business Representative,
Carpenters' District Council of Greater St. Louis
(1981-Aug. 1993); Director, United Way (Aug.
1993-present).
John P. Mulligan<F*> Director Chairman, Carpenters' District Council of
1401 Hampton Avenue Greater St. Louis pension fund, health and
St. Louis, MO 63139 welfare fund and vacation fund (Nov. 1984 -
(12/21/35) present); National Director, Associated General
Contractors of America (March 1989-present);
President, Mulligan Construction, Inc.
(March 1983-present); Trustee, Construction
Labor Pension Fund (1990-present); Trustee,
Construction Training Advancement Fund
(1986-present).
Fred Carter Director Sixth District General Executive Board Member,
6969 Boulder Drive #160 United Brotherhood of Carpenters (Feb. 1988-present).
Dallas, TX 75237
(05/23/44)
Joseph A. Montanaro Director Executive Director, TWA Pilots Directed
3221 McKelvey Account Plan 401K (July 1993 - present) and
Suite 105 Chairman of Investment Committee (Oct. 1991 -
Bridgeton, MO 63044 July 1993); Co-Trustee, TWA Flight Engineers Trust
(12/14/38) Plan (1976 - Oct. 1991).
Leonard Terbrock Director Retired (1993-present); Former Executive
5 Mary Rose Secretary and Treasurer, Carpenters' District
Hazelwood, MO 63042 Council of Greater St. Louis (1986-1993) and
(07/27/33) Assistant Executive Secretary and Treasurer
(1981-1986); Director, Catholic Charities
(1992-present); Director, St. Louis Regional
Commerce and Growth Association (1990-1993);
Director, Sold on St. Louis (1988-1993);
Committee Chairman, United Way (1970-1993).
Douglas J. McCarron Director General President, United Brotherhood of Carpenters
101 Constitution Avenue, N.W. and Joiners of America (Nov. 1995-present) and
Washington, D.C. 20001 General Second Vice President (1992-1995); President,
(09/23/50) Southern California Conference of Carpenters (1995-
present) and Secretary Treasurer (1987-1995); President
and Chairman, 999 Office Builder Corporation; Chairman,
Carpenters Health and Welfare Trust for Southern
California; Chairman, 13 County Carpenters Vacation,
Savings and Holiday plan; Co-Chairman, Carpenters'
Trusts for Southern California; President and Chairman,
Inland Empire Hotel Corporation, President, RPS Resort
Corporation; President and Chairman, Santa Nella Hotel
Corporation; President, THMI Motel Corporation;
Chairman, Carpenters Southern California Administrative
Corporation; Co-Chairman, Carpenters Joint Apprenticeship
and Training Committee Fund for Southern California;
Chairman, Carpenters Pension Trust for Southern California;
Chairman, Carpenters National Health and Welfare Fund;
Chairman, Carpenter Canadian Local Unions and Councils
Pension Fund and the General Officers and Representatives
Pension Fund; Chairman, UBC Pension Fund, General Office
Employees Retirement Plan, Retirees Health and Welfare
Fund and Apprenticeship and Training Fund; Director,
Works Partnership.
James A. Winkelmann<F*> Treasurer President, Huntleigh Fund Distributors, Inc. (Feb.
222 S. Central Avenue 1986-present); President, Huntleigh Financial
St. Louis, MO 63105 Services, Inc. (Jan. 1997 - present); Vice
(6/2/58) President, Huntleigh Capital Management, Inc.
(1988-present); Vice President, Longrow
Insurance Agency (June 1996-present); Vice
President, Longrow Holdings, Inc. (Oct. 1996-
present); Principal, Huntleigh Securities Corp.
(Oct. 1996-present).
19
<PAGE> 47
<FN>
<F*> Messrs. Stewart, Nelson, Mulligan and Winkelmann, by virtue of
their positions, are deemed to be "interested persons" of the Fund as defined
by the 1940 Act.
</TABLE>
All Directors and officers as a group own less than 1% of the outstanding
shares of the Fund. Messrs. Nelson and Mulligan are managing trustee and
chairman, respectively, of the pension fund of the Carpenters' District
Council of Greater St. Louis, which initially will own in excess of 99% of the
shares of the Fund.
The Fund compensates each Independent Director by an annual fee of
$2,000. Directors also are reimbursed for any expenses incurred in attending
meetings. For its initial year of operations ending December 31, 1998, the Fund
estimates that it will pay the following compensation to its independent
directors:
<TABLE>
<CAPTION>
Total
Compensation
Pension or from
Retirement Fund and
Benefits Fund
Aggregate accrued as Estimated annual Complex
Compensation part of Fund benefits paid to
Name of person and position from Fund expenses upon retirement Directors
- --------------------------- ------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C>
John W. Stewart, President and Director $0 $0 $0 $0
Terry Nelson, Director $0 $0 $0 $0
John P. Mulligan, Director $0 $0 $0 $0
Fred Carter, Director $2,000 $0 $0 $2,000
Joseph A. Montanaro, Director $2,000 $0 $0 $2,000
Leonard Terbrock, Director $2,000 $0 $0 $2,000
Douglas J. McCarron, Director $2,000 $0 $0 $2,000
</TABLE>
MANAGEMENT AND DISTRIBUTION FEES
As described more fully in the Prospectus, the Manager is paid a
management fee by the Fund as compensation for its management services with
respect to the ProLoan program and for paying the investment subadviser's
fees. The Management Agreement between the Manager and the Fund initially
was approved by the Board and the initial shareholder of the Fund effective
as of September 24, 1997.
Also as described more fully in the Prospectus, Huntleigh Fund
Distributors, Inc. (the "Distributor") (or another entity approved by the Fund
Board) under a distribution plan adopted pursuant to Rule 12b-1 under the 1940
Act, is paid by the Fund 0.10% per annum of the average daily net assets of the
Fund for distribution-related services.
INVESTMENT SUBADVISORY AGREEMENT
The Investment Subadvisory Agreement between Commerce Bank, N.A. (St.
Louis) and the Fund, as described in the Prospectus, initially was approved by
the Board and the initial shareholder of the Fund effective as of September 24,
1997.
Under the terms of the Subadvisory Agreement, the Subadviser agrees to
provide investment advisory services to the Fund, with discretion to purchase
and sell securities on behalf of the Fund in accordance with its investment
objective, policies and restrictions. The Subadvisory Agreement will
automatically terminate if assigned and may be terminated without penalty at
any time by the Manager, by a vote of a majority of the Board or by a vote of
20
<PAGE> 48
a majority of the outstanding voting securities of the Fund on no less than
thirty (30) days' nor more than sixty (60) days' written notice to the
Subadviser, or by the Subadviser upon sixty (60) days' written notice to the
Fund. The Subadvisory Agreement will continue in effect provided that
annually such continuance is specifically approved by a vote of the Board,
including the affirmative votes of a majority of the Directors who are not
parties to the Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of
considering such approval, or by the vote of shareholders.
PLAN AND AGREEMENT OF DISTRIBUTION
To help Huntleigh Fund Distributors, Inc. (the "Distributor") defray the
cost of distribution and servicing, the Fund and the Distributor entered into a
Plan and Agreement of Distribution (Plan). Under the Plan, the Distributor is
paid a fee at an annual rate of 0.10% of the Fund's average daily net assets.
The Plan must be approved annually by the Board, including a majority of
the Independent Directors, if it is to continue for more than a year. At
least quarterly, the Board must review written reports concerning the amounts
expended under the Plan and the purposes for which such expenditures were
made. The Plan and any agreement related to it may be terminated at any time
by vote of a majority of Board members who are not interested persons of the
Company and have no direct or indirect financial interest in the operation of
the Plan or in any agreement related to the Plan, or by vote of a majority of
the outstanding voting securities of the Fund's shares or by the Distributor.
The Plan (or any agreement related to it) will terminate in the event of its
assignment, as that term is defined in the 1940 Act. The Plan may not be
amended to increase the amount to be spent for distribution without
shareholder approval, and all material amendments to the Plan must be approved
by a majority of the Board members, including a majority of the Board members
who are not interested persons of the Fund and who do not have a financial
interest in the operation of the Plan or any agreement related to it. The
selection and nomination of disinterested Board members is the responsibility
of the other disinterested Board members. No Board member who is not an
interested person, has any direct or indirect financial interest in the
operation of the Plan or any related agreement.
PORTFOLIO SECURITIES TRANSACTIONS
The Subadvisory Agreement provides, in substance, that in executing
portfolio transactions and selecting brokers or dealers, the principal
objective of the Subadviser is to seek the best net price and execution
available. It is expected that securities ordinarily will be purchased in
customary public markets, and that in assessing the best net price and
execution available, the Subadviser shall consider all factors it deems
relevant, including the breadth of the market in the security, the price of
the security, the financial condition and execution capability of the broker
or dealer and the reasonableness of the commission, if any, for the specific
transaction and on a continuing basis.
21
<PAGE> 49
In selecting brokers or dealers to execute particular transactions, the
Subadviser is authorized to consider the "brokerage and research services"
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934), provision of statistical quotations (including the quotations necessary
to determine the Fund's net asset value), the sale of Fund shares by such
broker or the servicing of Fund shareholders by such broker, and other
information provided to the Fund, to the Manager and/or to the Subadviser (or
their affiliates), provided, however, that the Subadviser determines that it
has received the best net price and execution available. The Subadviser also
is authorized to cause the Fund to pay a commission to a broker or dealer who
provides such brokerage and research services for executing a portfolio
transaction that exceeds the amount of the commission another broker or dealer
would have charged for effecting that transaction. The Board, the Manager or
the Subadviser, as appropriate, must determine in good faith, however, that
such commission was reasonable in relation to the value of the brokerage and
research services provided viewed in terms of that particular transaction or
in terms of all the accounts over which the Manager or the Subadviser
exercises investment discretion.
The fees of the Subadviser are not reduced by reason of receipt of such
brokerage and research services. The Subadviser does not provide any services
to the Fund except portfolio investment management and related recordkeeping
services. However, with disclosure to and pursuant to written guidelines
approved by the Board, the Subadviser may execute portfolio transactions
through an affiliated broker-dealer or the Distributor, who may receive usual
and customary brokerage commissions (within the meaning of Rule 17e-1 under
the 1940 Act) for doing so.
NET ASSET VALUE
The net asset value of a share of the Fund is computed by dividing the
value of the Fund's total assets, less the Fund's liabilities, by the number
of outstanding shares of the Fund. The net asset value is computed each
Business Day on which shares are offered and orders accepted or upon receipt
of a redemption request in accordance with procedures outlined in the
Prospectus.
In determining net assets before shareholder transactions, the
securities held by the Fund are valued as follows as of the close of business
of the New York Stock Exchange (the Exchange):
- Securities, except bonds other than convertibles, traded on a
securities exchange for which a last-quoted sales price is readily
available are valued at the last-quoted sales price on the
exchange where such security is primarily traded.
- Securities traded on a securities exchange for which a last-quoted
sales price is not readily available are valued at the mean of the
closing bid and asked prices, looking first to the bid and asked
prices on the exchange where the security is primarily traded and,
if none exist, to the over-the-counter market.
22
<PAGE> 50
- Securities included in the Nasdaq National Market System (Nasdaq)
are valued at the last-quoted sales price in this market.
- Securities included in Nasdaq for which a last-quoted sales price
is not readily available, and other securities traded over-the-
counter but not included in the Nasdaq are valued at the mean of
the closing bid and asked prices.
- Futures and options traded on major exchanges are valued at the
last-quoted sales price on their primary exchange.
- Short-term securities maturing more than 60 days from the
valuation date are valued at the readily available market price or
approximate market value based on current interest rates. Short-
term securities maturing in 60 days or less that originally had
maturities of more than 60 days at acquisition date are valued at
amortized cost using the market value on the 61st day before
maturity. Short-term securities maturing in 60 days or less at
acquisition date are valued at amortized cost. Amortized cost is
an approximation of market value determined by systematically
increasing the carrying value of a security if acquired at a
discount, or reducing the carrying value if acquired at a premium,
so that the carrying value is equal to maturity value on the
maturity date.
- Securities without a readily available market price, bonds other
than convertibles and other assets are valued at fair value as
determined in good faith by the Board. The Board is responsible
for selecting methods it believes provide fair value. When
possible, bonds are valued by a pricing service independent from
the Fund. If a valuation of a bond is not available from a
pricing service, the bond will be valued by a dealer knowledgeable
about the bond if such a dealer is available.
- The Fund's commitments to acquire mortgage-backed securities
secured by Qualified Mortgage Loan generated through the ProLoan
program will be valued at an amount equal to the principal amount
of the underlying Qualified Mortgage Loans multiplied by any
positive difference between the price at which the Fund committed
to acquire the mortgage-backed securities and the six-month
forward to-be-announced ("TBA") price of FNMA mortgage-backed
securities with a one-half percent coupon rate increment nearest
to, but not greater than, the weighted average yield for all such
Loans, minus 0.625% (the approximate amount that would be spent by
the Fund for servicing, guarantee fees and securitization costs had
such Loans been securitized). The Fund's commitments to acquire
mortgage-backed securities generated through the ProLoan program
will not be considered to be illiquid so long as the Manager
determines, pursuant to guidelines established by the Board of
Directors, that an adequate trading market exists for these
commitments. The Custodian will value the Fund's commitments to
acquire ProLoan mortgage-backed securities at the above price,
as long as this price is considered by the Fund's Manager, to be
no more than the fair market value of the commitments.
The Exchange, the Manager, the Subadviser and the Fund will be closed on
the following holidays: New Year's Day, Presidents' Day, Martin Luther King,
Jr. Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
23
<PAGE> 51
REDEEMING SHARES
Investors have a right to redeem their shares at any time. For an
explanation of redemption procedures, please see the Prospectus.
During an emergency, the Board can suspend the computation of net asset
value, stop accepting payments for purchase of shares or suspend the duty of
the Fund to redeem shares for more than seven days. Such emergency situations
would occur if:
- The Exchange closes for reasons other than the usual weekend and
holiday closings or trading on the Exchange is restricted, or
- Disposal of the Fund's securities is not reasonably practicable or
it is not reasonably practicable for the Fund to determine the
fair value of its net assets, or
- The SEC, under the provisions of the 1940 Act, declares a period
of emergency to exist.
Should the Fund stop selling shares, the Board may make a deduction from
the value of the assets held by the Fund to cover the cost of future
liquidations of the assets so as to distribute fairly these costs among all
shareholders.
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act,
which obligates the Fund to redeem shares in cash, with respect to any one
shareholder during any 90-day period, up to the lesser of $250,000 or 1% of
the net assets of the Fund at the beginning of the period. Although
redemptions in excess of this limitation would normally be paid in cash, the
Fund reserves the right to make these payments in whole or in part in
securities or other assets in case of an emergency, or if the payment of a
redemption in cash would be detrimental to the existing shareholders of the
Fund as determined by the Board. In these circumstances, the securities
distributed would be valued as set forth in the prospectus. Should the Fund
distribute securities, a shareholder may incur brokerage fees or other
transaction costs in converting the securities to cash.
TAX INFORMATION
To qualify for treatment as a regulated investment company ("RIC") under
the Internal Revenue Code of 1986, as amended (the "Code"), the Fund must,
among other requirements:
- Derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities or certain
other income, including gains from futures or forward contracts
("Income Requirement");
24
<PAGE> 52
- Derive less than 30% of its gross income each taxable year from
the sale or other disposition of securities that are not directly
related to the Fund's principal business of investing in
securities, that are held for less than three months (the "Short-
Short Limitation") (the Short-Short limitation is applicable to the
Fund only for its initial fiscal period ended December 31, 1997);
- Diversify its investments in securities within certain statutory
limits; and
- Distribute annually to its shareholders at least 90% of its
investment company taxable income (generally, taxable net
investment income plus net short-term capital gain) (the
"Distribution Requirement").
The Fund may acquire zero coupon or other securities issued with
original issue discount. The Fund would have to include in its income its
share of the original issue discount that accrues on the securities during the
taxable year, even if the Fund receives no corresponding payment on the
securities during the year. Because the Fund annually must distribute
substantially all of its investment company taxable income, including any
original issue discount, to satisfy the Distribution Requirement and avoid
imposition of a 4% excise tax, the Fund may be required in a particular year to
distribute as a dividend an amount that is greater than the total amount of
cash it actually receives. Those distributions would be made from the Fund's
cash assets, if any, or from the sales of portfolio securities, if necessary.
The Fund might realize capital gains or losses from any such sales, which would
increase or decrease the Fund's investment company taxable income and/or net
capital gain (the excess of net long-term capital gain over net short-term
capital loss). In addition, any such gains might be realized on the disposition
of securities held for less than three months. Because of the Short-Short
Limitation applicable to the Fund only for its initial fiscal period ended
December 31, 1997, any such gains would reduce the Fund's ability to sell
other securities held for less than three months that it might wish to sell in
the ordinary course of its portfolio management.
Hedging strategies, such as selling and purchasing futures contracts,
involve complex rules that will determine for federal income tax purposes the
character and timing of recognition of gains and losses the Fund realizes in
connection therewith. The Fund's income from transactions in futures
contracts derived with respect to its business of investing in securities will
qualify as allowable income for the Fund under the Income Requirement. For
purposes of determining whether the Fund satisfies the Short-Short Limitation,
which is applicable to the Fund only for its initial fiscal period ended
December 31, 1997, if the Fund satisfies certain requirements, an increase in
value of a position that is part of a designated hedge will be offset by any
decrease in value (whether realized or not) of the contra hedging position
during the period of the hedge. Thus, only the net gain (if any) will be
included in gross income for purposes of that limitation.
The foregoing is only a summary of some of the important federal tax
considerations affecting the Fund and its shareholders and is not intended as
a substitute for careful tax planning. Accordingly, prospective investors are
advised to consult their own tax advisers for more detailed information
regarding the above and for information regarding federal, state, local and
foreign taxes.
25
<PAGE> 53
YIELD AND TOTAL RETURN QUOTATIONS
The Fund is expected to commence operations on or about October 31, 1997,
and, thus, has no past performance. However, for purposes of advertising
performance, and in accordance with Securities and Exchange Commission staff
interpretations, the Fund will advertise the performance of the Carpenters'
District Council of Greater St. Louis ProLoan program separate investment
account ("ProLoan Account"), which has an identical investment objective to
the Fund and which has been advised by the Subadviser since December 31, 1994
in the same manner in which it will advise the Fund. Returns shown should not
be considered a representation of the Fund's future performance.
Prior Performance of the Carpenters' District Council ProLoan Account.
---------------------------------------------------------------------
The table below presents performance returns for the ProLoan Account since the
Subadviser began advising the ProLoan Account using substantially the same
strategy that it will use to advise the Fund. It is anticipated that the
Carpenters' District Council will invest the approximately $125.9 million
ProLoan Account in the Fund, and the Fund will continue the ProLoan program
with substantially the same investment objective, policies and restrictions.
The returns shown reflect reinvestment of dividends and are calculated net of
advisory fees and the other expenses. The returns are shown below are
calculated according to the following formula:
EMV-BMV-CF
--------------
[BMV + (CF/2)]
where EMV is the ending market value for the ProLoan Account; BMV is the
beginning market value; and CF is the actual cash flow. This is a return
formula that is not the standard SEC formula for calculating mutual fund
returns. The ProLoan Account's mortgage commitments were valued in the same
manner as the Fund's mortgage commitments will be valued, according to the
formula set forth above under "Net Asset Value."
<TABLE>
<CAPTION>
Since
1 Year 12/31/94
------ --------
<S> <C> <C>
ANNUALIZED TOTAL RETURNS
As of August 31, 1997
Carpenters' District Council ProLoan Account 9.85% 10.10%
Lehman Brothers Aggregate Bond Index<F*> 10.02% 9.98%
<CAPTION>
Since
1 Year 12/31/94
------ --------
<S> <C> <C>
CUMULATIVE TOTAL RETURNS
As of August 31, 1997
Carpenters' District Council ProLoan Account 9.85% 29.26%
Lehman Brothers Aggregate Bond Index<F*> 10.02% 28.89%
<FN>
<F*> Returns for the ProLoan Account are compared to those of the Lehman
Brothers Aggregate Bond Index for the same period. The Index is a broad
market-weighted index which encompasses three major classes of
investment-grade fixed income securities with maturities greater than
one year, including: U.S. Treasury security, corporate bonds and
mortgage-backed securities.
</TABLE>
RETURNS ARE SHOWN PRIOR TO DEDUCTING THE EXPENSES AND FEES ASSOCIATED
WITH OPERATING A MUTUAL FUND, WHICH WILL BE HIGHER THAN THE PROLOAN ACCOUNT'S
EXPENSES AND FEES. THE RETURNS FOR THE FUND WILL BE LOWER DUE TO THESE COSTS.
THE PROLOAN ACCOUNT IS A PRIVATE ACCOUNT THAT IS NOT SUBJECT TO THE SAME
DIVERSIFICATION, TAX RESTRICTIONS AND INVESTMENT LIMITATIONS IMPOSED BY THE
1940 ACT OR SUBCHAPTER M OF THE INTERNAL REVENUE CODE OF 1986 WHICH, IF
APPLICABLE, MAY HAVE ADVERSELY AFFECTED THE PERFORMANCE RESULTS OF THE PROLOAN
ACCOUNT. RETURNS SHOWN SHOULD NOT BE CONSIDERED A REPRESENTATION OF THE FUND'S
FUTURE PERFORMANCE.
After the Fund's initial year of operations ended October 31, 1998,
the advertised total return for the Fund would be calculated by equating an
initial amount invested in the Fund to the ending redeemable value, according
to the following formula:
P(1 + T)[N]- ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average
annual total return for the Fund; "n" is the number of years involved; and
"ERV" is the ending redeemable value of a hypothetical $1,000 payment made in
the Fund at the beginning of the investment period covered.
26
<PAGE> 54
The Fund also may use "aggregate" total return figures for various
periods which represent the cumulative change in value of an investment in the
Fund for the specific period. Such total returns reflect changes in share
prices in the Fund and assume reinvestment of dividends and distributions.
In reports or other communications to shareholders or in advertising
material, the Fund may from time to time compare its performance with that of
other mutual funds in rankings prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc., IBC/Donoghue, Inc. and other similar independent services
which monitor the performance of mutual funds or publications such as the "New
York Times" and the "Wall Street Journal." The Fund also may compare its
performance with various other indices prepared by independent services such
as Standard & Poor's or Morgan Stanley.
Advertisements for the Fund may compare the Fund to federally insured
investments such as bank certificates of deposit and credit union deposits,
including the long-term effects of inflation on these types of investments.
Advertisements may also compare the historical rate of return of different
types of investments.
DESCRIPTION OF THE FUND
The Fund was incorporated on June 13, 1997 under the laws of the State
of Maryland.
TRANSFER AGENT
The Fund has a Transfer Agency Agreement with National Financial Data
Services. This agreement governs the transfer agent's responsibility for
administering and/or performing transfer agent functions, for acting as service
agent in connection with dividend and distribution functions and for performing
shareholder account administration agent functions in connection with the
issuance, exchange and redemption or repurchase of the Fund's shares. Under
the agreement, the transfer agent will earn a fee from the Fund determined by
multiplying the number of shareholder accounts at the end of the day by a stated
rate and dividing by the number of days in the year. The rate is $14 per open
account and $2.40 per closed account, with a minimum fee of $22,000 per year.
The Fund also pays the Transfer Agent stated activity fees, a one-time fund
implementation fee, and the Transfer Agent's out-of-pocket expenses. The fees
paid to the transfer agent
27
<PAGE> 55
may be changed from time to time upon agreement of the parties without
shareholder approval.
ADMINISTRATOR
The Fund pays a fee for administrative services provided to the Fund by
Investment Company Administration Corporation (the "Administrator"). Pursuant
to the terms of an Administration Agreement with the Fund, the Administrator
supervises the overall supervision of the Fund, including, among other
responsibilities, the preparation and filing of all documents required for
compliance by the Fund with applicable laws and regulations, arranging for the
maintenance of books and records of the Fund, and supervision of other
organizations that provide services to the Fund. The Administrator's fee paid
by the Fund is calculated at a rate of 0.05% of the Fund's average daily
net assets, subject to a minimum fee of $40,000 per annum.
CUSTODIAN AND FUND ACCOUNTANT
The Fund's securities and cash are held by UMB Bank, N.A., Kansas City,
Missouri, through a custodian agreement. The Custodian is permitted to
deposit some or all of its securities in central depository systems as allowed
by federal law. The Fund pays the Custodian a fee for serving as custodian of
its assets according to the following fee schedule: 1 basis point on the first
$100,000,000 of the Fund's net assets; plus 0.75 basis point on the next
$100,000,000 of net assets; plus 0.50 basis point of the Fund's net assets in
excess of $200,000,000; subject to a $250 per month minimum. The Fund also pays
the Custodian stated portfolio transaction fees and the Custodian's
out-of-pocket expenses. The Custodian also receives a fee of: 3.0 basis points
of the first $100,000,000 of average net assets; 2.0 basis points of the next
$250,000,000; 1.0 basis points of the next $650,000,000 and 0.5 basis points on
average net assets in excess of $1,000,000,000; subject to an annual minimum of
$24,000; plus out-of-pocket expenses for serving as Fund accountant.
INDEPENDENT AUDITORS
The Fund's financial statements to be contained in its Annual Report to
shareholders at the end of the fiscal year will be audited by independent
auditors which are Deloitte & Touche LLP, One City Centre, St. Louis, MO
63101. The independent auditors also provide other accounting and tax-related
services as requested by the Fund.
PROSPECTUS
The prospectus for the Builders ProLoan Fund, Inc., dated October 23,
1997, is hereby incorporated in this SAI by reference. Attached hereto as
Exhibit C and incorporated herein by reference is the Statement of Assets and
Liabilities of the Fund as of September 17, 1997 and the independent auditors'
report dated October 13, 1997 as prepared by Deloitte & Touche LLP. Audited
financial statements of the Fund also will be prepared by its independent
auditors, Deloitte & Touche LLP, for the Fund's initial fiscal period ending
December 31, 1997.
28
<PAGE> 56
APPENDIX A: DESCRIPTION OF BOND RATINGS
These ratings concern the quality of the issuing corporation. They are not an
opinion of the market value of the security. Such ratings are opinions on
whether the principal and interest will be repaid when due. A security's
rating may change which could affect its price.
Ratings by Moody's Investors Service, Inc. are Aaa, Aa, A, Baa, Ba, B, Caa,
Ca, and C.
Bonds rated:
- -----------
Aaa are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa are judged to be of high quality by all standards. Together with the Aaa
group they comprise what are generally known as high grade bonds. They are
rated lower than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than the Aaa securities.
A possess many favorable investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa 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 are judged to have speculative elements; their future cannot be considered
as well-assured. Often the protection of interest and principal payments may
be very moderate, and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds in this
class.
B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
A-1
<PAGE> 57
Ca represent obligations which are speculative in a high degree. Such issues
are often in default or have other marked shortcomings.
C are the lowest rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Ratings by Standard & Poor's Ratings Group are AAA, AA, A, BBB, BB, B, CCC,
CC, C and D.
AAA has the highest rating assigned by S&P. Capacity to pay interest and
repay principal is extremely strong.
AA has a very strong capacity to pay interest and repay principal and differs
from the highest rated issues only in small degree.
A has a strong capacity to pay interest and repay principal, although it is
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher-rated categories.
BBB is regarded as having adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher-rated categories.
BB has less near-term vulnerability to default than other speculative issues.
However, it faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating category is also
used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B has a greater vulnerability to default but currently has the capacity to
meet interest payments and principal repayments. Adverse business, financial,
or economic conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC has a currently identifiable vulnerability to default, and is dependent
upon favorable business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC typically is applied to debt subordinated to senior debt that is assigned
an actual or implied CC rating.
A-2
<PAGE> 58
C typically is applied to debt subordinated to senior debt that is assigned an
actual or implied CCC- rating. The C rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service payments are
continued.
D is in payment default. The D rating category is used when interest payments
or principal payments are not made on the due date, even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating also will be used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
Non-rated securities will be considered for investment when they possess a
risk comparable to that of rated securities consistent with the Fund's
objectives and policies. When assessing the risk involved in each non-rated
security, the Fund will consider the financial condition of the issuer or the
protection afforded by the terms of the security.
A-3
<PAGE> 59
APPENDIX B: OPTIONS AND FUTURES CONTRACTS
The Fund may buy options traded on any U.S. exchange or in the over-the-counter
market. The Fund also may buy put and call options on futures.
Options in the over-the-counter market will be purchased only when the
Subadviser believes a liquid secondary market exists for the options and only
from dealers and institutions the Subadviser believes present a minimal credit
risk. Some options are exercisable only on a specific date. In that case, or
if a liquid secondary market does not exist, the Fund could be required to buy
or sell securities at disadvantageous prices, thereby incurring losses.
OPTIONS. An option is a contract. A person who buys a call option for a
security has the right to buy the security at a set price for the length of
the contract. A person who buys a put option has the right to sell a security
at a set price for the length of the contract. An option is covered if the
writer owns the security (in the case of a call) or sets aside the cash or
securities of equivalent value (in the case of a put) that would be required
upon exercise.
The price paid by the buyer for an option is called a premium. In addition
the buyer generally pays a broker a commission. The writer receives a
premium, less another commission, at the time the option is written. The cash
received is retained by the writer whether or not the option is exercised. A
writer of a call option may have to sell the security for a below-market price
if the market price rises above the exercise price. A writer of a put option
may have to pay an above-market price for the security if its market price
decreases below the exercise price. The risk of the writer is potentially
unlimited, unless the option is covered.
Options can be used to produce incremental earnings, protect gains and
facilitate buying and selling securities for investment purposes. The use of
options may benefit the Fund and its shareholder by improving the Fund's
liquidity and by helping to stabilize the value of its net assets.
BUYING OPTIONS. Put and call options may be used as a trading technique to
facilitate buying and selling securities for investment reasons. They also
may be used for investment. Options are used as a trading technique to take
advantage of any disparity between the price of the underlying security in the
securities market and its price on the options market. It is anticipated the
trading technique will be utilized only to effect a transaction when the price
of the security plus the option price will be as good or better than the price
at which the security could be bought or sold directly. When the option is
purchased, the Fund pays a premium and a commission. It then pays a second
commission on the purchase or sale of the underlying security when the option
is exercised. For recordkeeping and tax purposes, the price obtained on the
purchase of the underlying security will be the combination of the exercise
price, the premium and both commissions. When using options as a trading
technique, commissions on the option will be set as if only the underlying
securities were traded.
B-1
<PAGE> 60
The risk the Fund assumes when it buys an option is the loss of the premium.
To be beneficial to the Fund, the price of the underlying security must change
within the time set by the option contract. Furthermore, the change must be
sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of
the option and sale (in the case of a call) or purchase (in the case of a put)
of the underlying security. Even then the price change in the underlying
security does not ensure a profit since prices in the option market may not
reflect such a change.
Net premiums on call options closed or premiums on expired call options
are treated as short-term capital gains. Since the Fund is taxed as a
regulated investment company under the Internal Revenue Code, any gains on
options and other securities held less than three months must be limited to
less than 30% of its annual gross income only for the Fund's initial fiscal
period ended December 31, 1997.
If a covered call option is exercised, the security is sold by the Fund. The
premium received upon writing the option is added to the proceeds received
from the sale of the security. The Fund will recognize a capital gain or loss
based upon the difference between the proceeds and the security's basis.
Premiums received from writing outstanding call options will be included as a
deferred credit in the Statement of Assets and Liabilities and adjusted daily
to the current market value.
Options are valued at the close of the New York Stock Exchange. An option
listed on a national exchange, Chicago Board of Exchange or Nasdaq will be
valued at the last-quoted sales price or, if such a price is not readily
available, at the mean of the last bid and asked prices.
INTEREST RATE FUTURES CONTRACTS. As stated in its Prospectus, the Fund
may enter into futures contracts and options for hedging purposes. Such
transactions are described in this Appendix.
Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Fund may use interest rate
futures contracts as a defense, or hedge, against anticipated interest rate
changes and not for speculation. As described below, this would include the
use of futures contract sales to protect against expected increases in
interest rates and futures contract purchases to offset the impact of interest
rate declines.
The Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with
long maturities and investing in bonds with short maturities when interest
rates are expected to increase, or conversely, selling short-term bonds and
investing in long-term bonds when interest rates are expected to decline.
However, because of the liquidity that is often available in the futures
market, the protection is
B-2
<PAGE> 61
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by the Fund, as seller, to
deliver the specific type of financial instrument called for in the contract
at a specific future time for a specified price. A futures contract purchase
would create an obligation by the Fund, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchanges on which
the futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Fund
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the
price of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Fund entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the Fund realizes a gain, and if the
purchase price exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges -- principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. The Fund
would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, which is a nonprofit organization managed by the exchange
membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes,
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities, three-month U.S. Treasury Bills and ninety-day commercial
paper. The Fund may trade in any interest rate futures contracts for which
there exists a public market, including, without limitation, the foregoing
instruments.
Index Futures Contracts
- ------------------------
General. A stock or bond index assigns relative values to the
-------
stocks or bonds included in the index, which fluctuates with changes in the
market values of the stocks or bonds included.
The Fund may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. The Fund may do
B-3
<PAGE> 62
so either to hedge the value of its portfolio as a whole, or to protect
against declines, occurring prior to sales of securities, in the value of the
securities to be sold. Conversely, the Fund will purchase index futures
contracts in anticipation of purchases of securities. A long futures position
may be terminated without a corresponding purchase of securities.
In addition, the Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Fund expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a ling futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Fund may also sell futures contracts in connection with
this strategy, in order to protect against the possibility that the value of
the securities to be sold as part of the restructuring of the portfolio will
decline prior to the time of sale.
Unlike the purchase or sale of an equity security, no price would be paid or
received by the Fund upon entering into futures contracts. However, the Fund
would be required to deposit with its custodian, in a segregated account in
the name of the futures broker, an amount of cash or U.S. Treasury bills equal
to approximately 5% of the contract value. This amount is known as initial
margin. The nature of initial margin in futures transactions is different
from that of margin in security transactions in that futures contract margin
does not involve borrowing funds by the Fund to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or
good-faith deposit on the contract that is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied.
Subsequent payments, called variation margin, to and from the broker would be
made on a daily basis as the price of the underlying interest rate fluctuates,
making the long and short position in the contract more or less valuable, a
process known as marking to market. For example, when the Fund enters into a
contract in which it benefits from a rise in the value of an interest rate and
the underlying interest rate has risen, the Fund will receive from the broker
a variation margin payment equal to that increase in value. Conversely, if
the price of the underlying interest rate declines, the Fund would be required
to make a variation margin payment to the broker equal to the decline in
value.
SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS.
- --------------------------------------------------
1. Liquidity. The Fund may elect to close some or all of its contracts
---------
prior to expiration. The purpose of making such a move would be to reduce or
eliminate the hedge opposition held by the Fund. The Fund may close its
positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund,
and the Fund realizes a gain or a loss.
2. Hedging risks. There are several risks in using interest rate futures
-------------
contracts as a hedging device. One risk arises because the prices of futures
contracts may not correlate perfectly with movements in the underlying
interest rate due to certain market distortions. First, all
B-4
<PAGE> 63
participants in the futures market are subject to initial margin and variation
margin requirements. Rather than making additional variation margin payments,
investors may close the contracts through offsetting transactions which could
distort the normal relationship between the interest rate and futures markets.
Second, the margin requirements in the futures market are lower than margin
requirements in the securities market, and as a result the futures market may
attract more speculators than does the securities market. Increased
participation by speculators in the futures market also may cause temporary
price distortions. Because of price distortion in the futures market and
because of imperfect correlation between movements in interest rates and
movements in prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a short
period.
Another risk arises because of imperfect correlation between movements in the
value of the futures contracts and movements in the value of securities
subject to the hedge. If this occurred, the Fund could lose money on the
contracts and also experience a decline in the value of its portfolio
securities. It also is possible that if the Fund has hedged against a decline
in the value of the stocks held in its portfolio and stock prices increase
instead, the Fund will lose part or all of the benefit of the increased value
of its stock which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
Tax Treatment. As permitted under federal income tax laws, the Fund
- -------------
intends to identify futures contracts as mixed straddles and not mark them to
market, that is, not treat them as having been sold at the end of the year at
market value, unless such future contract is an appreciated financial position
which, for purposes of determining taxable gain, must be treated as sold as of
the end of the Fund's taxable year. Such an election may result in the Fund
being required to defer recognizing losses incurred by entering into futures
contracts and losses on underlying securities identified as being hedged
against.
Federal income tax treatment of gains or losses from transactions in options
on futures contracts and interest rates will depend on whether such option is
a section 1256 contract or is otherwise an appreciated financial position
under Code Section 1259. If the option is a nonequity option, the Fund will
either make a 1256(d) election and treat the option as a mixed straddle or
mark to market the option at fiscal year end and treat the gain/loss as 40%
short-term and 60% long-term. Notwithstanding the foregoing rules, certain
positions in debt and equity investments are treated as appreciated financial
positions and, for purposes of determining taxable gain, must be treated as
sold at the end of the taxable year unless an exception applies. Certain
provisions of the Internal Revenue Code may also limit the Fund's ability to
engage in futures contracts and related options transactions. For example, at
the close of each quarter of the Fund's taxable year, at least 50% of the value
of its assets must consist of cash, government securities and other
securities, subject to certain diversification requirements. For taxable
years beginning before August 5, 1997, less than 30% of its gross income must
be derived from sales of securities held less than three months.
The IRS has ruled publicly that an exchange-traded call option is a security
for purposes of the 50%-of-assets test and that its issuer is the issuer of
the underlying security, not the writer of the option, for purposes of the
diversification requirements. In order to avoid realizing a gain within the
three-month period, the Fund may be required to defer closing out a contract
beyond
B-5
<PAGE> 64
the time when it might otherwise be advantageous to do so. The Fund also may
be restricted in purchasing put options for the purpose of hedging underlying
securities because of applying the short sale holding period rules with
respect to such underlying securities.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets
due from a broker (the Fund's agent in acquiring the futures position).
During the period the futures contract is open, changes in value of the
contract will be recognized as unrealized gains or losses by marking to market
on a daily basis to reflect the market value of the contract at the end of
each day's trading. Variation margin payments will be made or received
depending upon whether gains or losses are incurred. All contracts and
options will be valued at the last-quoted sales price on their primary
exchange.
B-6
<PAGE> 65
APPENDIX C
----------
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors
Builders ProLoan Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Builders ProLoan Fund, Inc. (the "Fund") as of September 17, 1997. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, such statement of assets and liabilities presents fairly,
in all material respects, the financial position of the Fund at September 17,
1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
St. Louis, Missouri
October 13, 1997
<PAGE> 66
<TABLE>
BUILDERS PROLOAN FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
September 17, 1997
<S> <C>
ASSETS:
Cash $100,000
Deferred organization expense (Note 3) 112,630
--------
Total Assets 212,630
LIABILITIES:
Payable to Distributor for organization
expenses (Note 3) 112,630
--------
NET ASSETS $100,000
========
NET ASSETS CONSIST OF:
Shares of common stock, $.01 par value,
100,000,000 shares authorized 67
Additional paid-in capital 99,933
--------
Total - applicable to 6,667 shares of
beneficial interest issued and outstanding $100,000
========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE ($100,000/6,667 shares outstanding) $ 15.00
========
See Notes to Financial Statement.
</TABLE>
<PAGE> 67
BUILDERS PROLOAN FUND, INC.
NOTES TO FINANCIAL STATEMENT
September 17, 1997
Note 1. Organization
------------
Builders ProLoan Fund, Inc. (the "Fund") was organized on June 13,
1997, as a Maryland corporation and is authorized to issue
100,000,000 shares of common stock, $.01 par value. The Fund
is registered under the Investment Company Act of 1940 as an
open-end management investment company. The Fund has had no
operations to date other than those relating to its organization
and the sale of 6,667 shares of common stock in the Fund currently
offered at $15.00 per share to Huntleigh Fund Distributors, Inc.
Note 2. Investment Management and Other Agreements
------------------------------------------
The Fund has entered into an investment management agreement with
Capital Mortgage Management, Inc., (the "Manager"). Under the terms
of the agreement, the Fund will pay the Manager an annual fee of
0.15% of the Fund's average net assets, plus all fees payable to
the Fund's Subadviser, Commerce Bank, N.A.
Investment Company Administration Corporation is the Administrator
to the Fund pursuant to an administration agreement. The Fund will
pay the Administrator an annual fee equal to 0.05% of its average
daily net assets, payable monthly and subject to a minimum annual
fee of $40,000.
Huntleigh Fund Distributors, Inc. serves as the Distributor to the
Fund pursuant to a Distribution Agreement. The Fund will pay the
Distributor 0.10% of the Fund's average daily net assets under the
terms and conditions of the Fund's 12b-1 plan.
Although not required to do so, the Fund's Distributor has agreed
to cap the Fund's expenses to the extent necessary so that its ratio
of operating expenses to average net assets will not exceed 0.18% for
the period ended December 31, 2002. Any reimbursements are subject
to repayment by the Fund in subsequent years.
<PAGE> 68
Note 3. Organizational Expenses
-----------------------
Organizational expenses of the Fund aggregating $112,630 have been
incurred by the Fund and will be amortized by the straight line
method over a five year period from commencement of operations.
During the amortization period the proceeds of any redemption of
initial shares by any holder thereof will be reduced by a pro rata
portion of any then unamortized organization expense, based on the
ratio of shares redeemed to the total initial shares outstanding
immediately prior to the redemption.
The Distributor has agreed to advance the organization costs
incurred by the Fund and will be reimbursed for them after
commencement of the Funds' operations. The Fund will amortize
its organizational expenses over a five-year period, which expenses
will be included as "Other Expenses" subject to the expense cap
set forth in Note 2.
Note 4. Related Parties
---------------
Certain officers of the Manager, Administrator and Distributor
are also officers and/or Directors of the Funds.
<PAGE> 69
BUILDERS PROLOAN FUND, INC.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements included as a part of this Registration
Statement:
Part A: None
Part B: Statement of Assets and Liabilities as of September 17, 1997
and Report of the Independent Auditors dated October 13, 1997.
(b) Exhibits
1. a. Articles of Incorporation - filed with the Fund's initial
registration statement on Form N-1A dated June 27, 1997
b. Amendment to Articles of Incorporation - filed herewith
2. By-Laws - filed with the Fund's initial registration statement
on Form N-1A dated June 27, 1997
3. Voting Trust Agreement - none
4. Specimen Security - filed herewith
5. a. Management Agreement - filed with the Fund's Pre-Effective
Amendment No. 1 to its registration statement on Form N-1A
dated September 12, 1997
b. Subadvisory Agreement - filed with the Fund's Pre-Effective
Amendment No. 1 to its registration statement on Form N-1A
dated September 12, 1997
c. Administration Agreement - filed with the Fund's
Pre-Effective Amendment No. 1 to its registration statement
on Form N-1A dated September 12, 1997
6. Distribution Agreement - filed herewith
7. Bonus, Profit-Sharing or Pension Plan - none
8. a. Custodian Agreement - filed herewith
b. Fund Accounting Agreement - filed herewith
9. a. Transfer Agency Agreement - filed with the Fund's
Pre-Effective Amendment No. 1 to its registration statement
on Form N-1A dated September 12, 1997
b. ProLoan Master Agreement - filed herewith
c. ProLoan Liquidity Agreement - filed herewith
10. Opinion and Consent of Counsel - filed herewith
11. Consent of Independent Auditors - filed herewith
12. Financial Statements Omitted from Prospectus - none
13. Letter of Investment Intent - filed herewith
14. Retirement Plan - none
15. Plan Pursuant to Rule 12b-1 - filed with the Fund's
Pre-Effective Amendment No. 1 to its registration statement on
Form N-1A dated September 12, 1997
16. Schedule for Computation of Performance Computations - filed
herewith
17. Electronic Filers - none
18. Plan Pursuant to Rule 18f-3 - none
C-1
<PAGE> 70
Item 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
See "Information About Shares of the Fund - Control Persons and 5%
Shareholders" in the Prospectus dated October 23, 1997.
Item 26. Number of Holders of Securities
-------------------------------
As of October 17, 1997, there was one shareholder of the
Builders ProLoan Fund, Inc. (the "Fund").
Item 27. Indemnification
---------------
Article Seventh, Section (j) of the Articles of Incorporation of
the Fund provides that:
The Corporation shall indemnify: (a) its directors to the full
extent provided by the general laws of the State of Maryland now
or hereafter in force, including the advance of expenses under the
procedures provided by such laws; (b) its officers to the same
extent it shall indemnify its directors; and (c) its officers who
are not directors to such further extent as shall be authorized by
the Board of Directors and be consistent with law; provided,
however, that nothing herein shall be construed to protect any
director or officer of the Corporation against any liability to
which such director or officer would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his or
her office. The foregoing shall not limit the authority of the
Corporation to indemnify other employees and agents consistent
with the law.
A director or officer of the Corporation shall not be liable to
the Corporation or its stockholders for monetary damages as a
director or officer, except to the extent such exemption from
liability or limitation thereof is not permitted by statutory or
decisional law (including the 1940 Act) as currently in effect or
as the same may hereafter be amended or judicially interpreted;
provided, however, that nothing herein shall be construed to
protect any director or officer of the Corporation against any
liability to which such director or officer would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his or her office. No amendment, modification or
repeal of this Article SEVENTH shall adversely affect any right or
protection of a director or officer that exists at the time of
such amendment, modification or repeal.
Item 28. Business and Other Connections of the Investment Manager
--------------------------------------------------------
Capital Mortgage Management, Inc. (the "Manager"), 222 South
Central Avenue, Suite 300, St. Louis, Missouri 63105, offers investment
management services to the Fund. Information as to the officers and directors
of the Manager is included in the Manager's current Form ADV filed with the SEC
and is incorporated herein by reference. Commerce Bank, N.A. (the
"Subadviser"), 8000 Forsyth Blvd., St. Louis, Missouri 63105, offers investment
advisory services to the Fund. The officers and directors of the Subadviser
are as follows:
<TABLE>
<CAPTION>
Name Title Position with Fund
- ---- ----- ------------------
<S> <C> <C>
David W. Kemper Chairman None
Seth M. Leadbeater President None
William A. Sullins Vice Chairman None
C-2
<PAGE> 71
Thomas M. Noonan Vice Chairman None
James L. Swarts Secretary None
Douglas A. Albrecht Director None
Adrian N. Baker II Director None
James K. Berthold Director None
John R. Capps Director None
Thomas P. Danis Director None
Ken J. Elkins Director None
James G. Forsyth III Director None
Harold F. Helmkampf Director None
Paul F. Hummer Director None
Karen Jennings Director None
David W. Kemper Director None
Hal A. Kroeger Director None
Ronald K. Lohr Director None
John B. Morgan Director None
Edward J. Nusrala Director None
Benjamin F. Rassieur Director None
Jerome M. Rubenstein Director None
James E. Schiele Director None
Jack O. Snyder Director None
Timothy K. Swank Director None
Gregory B. Vatterot Director None
Earl E. Walker Director None
Mahlon B. Wallace III Director None
</TABLE>
Item 29. Principal Underwriter
---------------------
(a) Huntleigh Fund Distributors, Inc., 222 South Central Avenue,
St. Louis, MO 63105, is the principal underwriter for the Fund.
(b) The directors and officers of the principal underwriter are
as follows:
<TABLE>
<CAPTION>
Name Title Position with Fund
- ---- ----- ------------------
<S> <C> <C>
James A. Winkelmann President Treasurer
Don C. Weir, Jr. Vice President None
Thomas Davidson Secretary/Treasurer None
John Kane Director None
James McClellan Director None
Lowell Bourne Director None
</TABLE>
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by Rule 31a-1 under the
Investment Company Act of 1940 are maintained in the physical possession of
the Fund's custodian, Manager, administrator, transfer agent or Subadviser.
Item 31. Management Services
-------------------
All substantive provisions of any management-related service
contract are discussed in Parts A and B of this Registration Statement.
C-3
<PAGE> 72
Item 32. Undertakings
------------
Registrant hereby undertakes to file a post-effective amendment,
using financial statements which need not be certified, within four to six
months from the effective date of the Registrant's 1933 Act Registration
Statement or the date the Registrant commences operations, whichever is
latest.
Registrant hereby undertakes, if requested 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(s) and to assist in communications with other shareholders in
accordance with Section 16(c) of the 1940 Act, as though Section 16(c)
applied.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to
shareholders, upon request and without charge.
Registrant hereby undertakes to carry out all indemnification
provisions of its Articles of Incorporation in accordance with Investment
Company Act Release No. 11330 (Sept. 4, 1980) and successor releases.
Insofar as indemnifications for liability arising under the
Securities Act of 1933, as amended ("1933 Act"), may be permitted to
directors, officers and controlling person of the Registrant pursuant to the
provision under Item 27 herein, or otherwise, the Registrant has been advised
that in the opinion of the SEC such indemnification is against public policy
as expressed in the 1933 Act and is, therefor, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication.
C-4
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Pre-Effective Amendment No. 2 to its Registration Statement on Form
N-1A to be signed on its behalf by the undersigned, thereunto duly authorized,
in the city of St. Louis and the state of Missouri on October 20, 1997.
BUILDERS PROLOAN FUND, INC.
By: /s/ John W. Stewart
------------------------------------
John W. Stewart
President
Attest:
/s/ James A. Winkelmann
- --------------------------------------
James A. Winkelmann, Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No. 2 to the Registration Statement has been
signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John W. Stewart President, Secretary, October 20, 1997
- -------------------------- and Director
John W. Stewart
/s/ John Mulligan<F*> Director October 20, 1997
- --------------------------
John Mulligan
/s/ Terry Nelson<F*> Director October 20, 1997
- --------------------------
Terry Nelson
/s/ Fred Carter<F*> Director October 20, 1997
- --------------------------
Fred Carter
/s/ Joseph A. Montanaro Director October 20, 1997
- --------------------------
Joseph A. Montanaro
/s/ Leonard Terbrock<F*> Director October 20, 1997
- --------------------------
Leonard Terbrock
/s/ Douglas J. McCarron<F*> Director October 20, 1997
- --------------------------
Douglas J. McCarron
<FN>
<F*>/s/ John W. Stewart
- --------------------------
John W. Stewart, Attorney-in-Fact
</TABLE>
<PAGE> 74
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
1. a. Articles of Incorporation - filed with the Fund's initial
registration statement on Form N-1A dated June 27, 1997
b. Amendment to Articles of Incorporation - filed herewith
2. By-Laws - filed with the Fund's initial registration statement
on Form N-1A dated June 27, 1997
3. Voting Trust Agreement - none
4. Specimen Security - filed herewith
5. a. Management Agreement - Filed with Pre-Effective
Amendment No. 1 to the Fund's registration
statement on Form N-1A dated September 12, 1997
b. Subadvisory Agreement - Filed with Pre-Effective
Amendment No. 1 to the Fund's registration
statement on Form N-1A dated September 12, 1997
c. Administration Agreement - Filed with Pre-Effective
Amendment No. 1 to the Fund's registration
statement on Form N-1A dated September 12, 1997
6. Distribution Agreement - filed herewith
7. Bonus, Profit-Sharing or Pension Plan - none
8. a. Custodian Agreement - filed herewith
b. Fund Accounting Agreement - filed herewith
9. a. Transfer Agency Agreement - Filed with Pre-Effective
Amendment No. 1 to the Fund's registration
statement on Form N-1A dated September 12, 1997
b. ProLoan Master Agreement - filed herewith
c. ProLoan Liquidity Agreement - filed herewith
10. Opinion and Consent of Counsel - filed herewith
11. Consent of Independent Auditors - filed herewith
12. Financial Statements Omitted from Prospectus - none
13. Letter of Investment Intent - filed herewith
14. Retirement Plan - none
15. Plan Pursuant to Rule 12b-1 - Filed with Pre-Effective
Amendment No. 1 to the Fund's registration
statement on Form N-1A dated September 12, 1997
16. Schedule for Computation of Performance Computations -
filed herewith
17. Electronic Filers - none
18. Plan Pursuant to Rule 18f-3 - none
</TABLE>
<PAGE> 1
PROLOAN FUND, INC.
ARTICLES OF AMENDMENT
ProLoan Fund, Inc., a Maryland Corporation having its principal office
at c/o The Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202 (hereinafter called the "Corporation"), hereby certifies to
the State Department of Assessments and Taxation of Maryland, that:
FIRST: The charter of the Corporation is hereby amended by
striking out Article SECOND of the Articles of Incorporation and inserting in
lieu thereof the following:
SECOND: The name of the Corporation is Builders ProLoan Fund, Inc.
SECOND: By unanimous written consent pursuant to Section 2-408 of
Corporations and Associations Article of the Annotated Code of Maryland, the
board of directors of the Corporation on July 17, 1997, duly adopted a
resolution in which was set forth the foregoing amendment to the charter,
declaring that said amendment of the charter as proposed was in the best
interests of the Corporation.
THIRD: The Corporation currently has no stockholders.
FOURTH: The amendment of the charter of the Corporation as
hereinabove set forth has been duly advised and approved by the board of
directors of the Corporation.
FIFTH: The articles of amendment shall become effective on the
20th day of September, 1997.
<PAGE> 2
IN WITNESS WHEREOF, ProLoan Fund, Inc. has caused these presents to be
signed in its name and on its behalf by its President and attested by its
Secretary on September 16, 1997.
PROLOAN FUND, INC.
By: /s/ John W. Stewart
-------------------------
John W. Stewart
President
ATTEST:
/s/ John W. Stewart
- -----------------------------
John W. Stewart
Secretary
THE UNDERSIGNED, President of PROLOAN FUND, INC., who executed on behalf
of said Corporation the foregoing Articles of Amendment, of which this
certificate is made a part, hereby acknowledges, in the name and on behalf of
said Corporation, the foregoing Articles of Amendment to be the corporate act
of said Corporation and further certifies that, to the best of his knowledge,
information and belief, the matters and facts set forth therein with respect
to the approval thereof are true in all material respects, under the
penalties of perjury.
/s/ John W. Stewart
--------------------------
John W. Stewart
-2-
<PAGE> 1
Exhibit 4
BUILDERS PROLOAN FUND, INC. (THE "CORPORATION")
(A MARYLAND CORPORATION)
COMMON STOCK
THIS CERTIFIES THAT-----------------------------------------, CUSIP-----------
is the owner of----------------------------------fully paid and non-assessable
shares, par value ($-----------) per share, of common stock of
BUILDERS PROLOAN FUND, INC.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are issued and
shall be held subject to all the provisions of the Articles of Incorporation
and the By-laws of the Corporation, and all amendments thereto. This
certificate is not valid unless countersigned by the Transfer Agent.
Dated:------------------------------ Countersigned:-------------------------
By Transfer Agent
President Secretary Authorized Signature
<PAGE> 2
A full statement of the designations and any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the
shares of each series and class of stock thereof which the Corporation is
authorized to issue and the differences in the relative rights and
preferences between the shares of each series and class thereof to the extent
that they have been set, and the authority of the Board of Directors to set
the relative rights and preferences of subsequent series and classes thereof,
will be furnished by the Corporation to any shareholder, without charge, upon
request to the Secretary of the Corporation at its principal office.
The following abbreviations, when used in the inscription on the
face of this Certificate, shall be construed as though they were written out
in full according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
-------------- -------------
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gift to Minors Act
-------------------------------------------------------
(State)
JT TEN - as joint tenants with right
of survivorship and not as
tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received hereby sell,
--------------------------------------
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE---------------------------------------------
- ------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip of assignee
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- -----------------------------------------------------------------------shares
represented by the within Certificate and do hereby irrevocably
constitute and appoint
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Date:
----------------------------
-------------------------------------
Signatures must be guaranteed by an "eligible guarantor institution" as such
term is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934.
<PAGE> 1
BUILDERS PROLOAN FUND, INC
DISTRIBUTION AGREEMENT
This Distribution Agreement is made this 21st day of October, 1997, by
and between Builders ProLoan Fund, Inc., a Maryland corporation (the "Fund"),
and Huntleigh Fund Distributors, Inc., a Missouri corporation (the
"Distributor").
WHEREAS, the Fund is registered as an openend, nondiversified
management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and has registered and intends to register or qualify its shares
of common stock (the "Shares") for sale to the public under the Securities
Act of 1933, as amended (the "1933 Act"), and various state securities laws;
and
WHEREAS, the Fund intends to offer for public sale one or more distinct
series of Shares, each corresponding to a distinct portfolio ("Portfolio");
and
WHEREAS, the Fund wishes to retain the Distributor as the Fund's
distributor in connection with the offering and sale of the Shares of each
Portfolio and to furnish certain other services to the Fund as specified in
this Agreement; and
WHEREAS, this Agreement has been approved by a vote of the Board of
Directors of the Fund and disinterested Directors in conformity with
Paragraph (b)(2) of Rule l2b1 under the 1940 Act; and
WHEREAS, the Distributor is willing to act as distributor of the Shares
and to furnish such services on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment of Distributor. The Fund hereby appoints the
--------------------------
Distributor as distributor in connection with the offering and sale of the
Shares. The Fund authorizes the Distributor as exclusive agent for the Fund,
subject to applicable federal and state law and the Articles of
Incorporation, By-Laws and current Prospectus and Statement of Additional
Information of the Fund to: (a) promote the Portfolios; (b) solicit orders
for the purchase of the Shares of the Portfolios subject to such terms and
conditions as the Fund may specify; (c) hold itself available to receive
orders for the purchase of the Shares of the Portfolios and to accept such
orders on behalf of the Fund as of the time of receipt of such orders and
promptly transmit such orders as are accepted to the Fund and its transfer
agent; and (d) provide a telephone number and hold itself available to answer
telephone inquiries from shareholders regarding their investments in the
Fund. Purchase orders shall be deemed effective at the time and in the
manner set forth in the Registration Statement (defined below). The
Distributor shall offer the Shares of each Portfolio on an agency or "best
efforts" basis under which the Fund shall only
<PAGE> 2
issue such Shares as are actually sold. In connection with such sales and
offers of sales, the Distributor shall give only such information as is
permitted by applicable law, and the Fund shall not be responsible in any way
for any other information, statements or representations given or made by the
Distributor or its representatives or agents. The Fund reserves the right at
any time to withdraw all offerings of the Shares of any or all Portfolios by
written notice to the Distributor at its principal office.
2. Fund Obligations. The Fund shall keep the Distributor fully
----------------
informed of its affairs and shall make available to Distributor copies of all
information, financial statements, and other papers which Distributor may
reasonably request for use in connection with the distribution of Shares,
including, without limitation, certified copies of any financial statements
prepared for the Fund by its independent public accountant and such
reasonable number of copies of the most current prospectus, statement of
additional information, and annual and interim reports of a Portfolio as the
Distributor may request, and the Fund shall cooperate fully in the efforts of
the Distributor to sell and arrange for the sale of the Shares and in the
performance of the Distributor under this Agreement.
3. Sales to Dealers. With the consent of the Fund, the
----------------
Distributor may enter into agreements to sell Shares to registered and
qualified retail dealers.
4. Public Offering Price. The public offering price of the
---------------------
Shares of each Portfolio shall be the net asset value per Share (as
determined by the Fund) of the outstanding Shares of the Portfolio plus any
applicable sales charge as set forth in the then effective Registration
Statement of the Fund. The Fund shall furnish (or arrange for another person
to furnish) the Distributor with a quotation of public offering price on each
business day.
5. Compensation. As compensation for providing services under
------------
this contract the Distributor shall retain the sales charge, if any, on
purchases of Shares as set forth in the Registration Statement. The
Distributor is authorized to collect the gross proceeds derived from the sale
of the Shares, remit the net asset value thereof to the Fund upon receipt of
the proceeds and retain the sales charge, if any. The Distributor may
reallow any or all of such sales charges to dealers who have entered into
agreements with the Distributor as it may from time to time determine.
Whether a sales charge shall be retained by the Distributor shall be
determined in accordance with the Registration Statement. The Distributor
also shall receive from each Portfolio distribution and/or service fees at
the rate and under the terms and conditions of the Distribution Plan ("Plan")
adopted by the Fund with respect to such Portfolio, as such Plan is in effect
from time to time, and subject to any further limitations on such fee as the
Board of Directors may impose.
6. Distributor's Expenses. The Distributor shall finance
----------------------
activity which is intended to result in the sale and retention of Shares of
each Portfolio including, but not limited to, compensation paid to registered
representatives of the Distributor and to participating dealers, if any,
which have entered into sales agreements with the Distributor, advertising,
salaries and other expenses of the Distributor relating to selling or
servicing efforts, expenses of organizing and conducting sales seminars,
printing of Prospectuses, Statements of Additional Information
2
<PAGE> 3
and reports for other than existing shareholders, preparation and
distribution of advertising material and sales literature and other sales
promotion expenses. Except as specifically provided in this Agreement, the
Fund and the Portfolios shall bear none of the expenses of the Distributor in
connection with its offer and sale of the Shares.
7. Fund Expenses; Reimbursement.
----------------------------
(a) Subject to the provisions of this Paragraph 7, the Fund
agrees, at its own expense, to register the Shares with the
Securities and Exchange Commission, to make notification
filings and pay fees as required by the various states and
other regulatory bodies, and to prepare and file from time to
time such Prospectuses, Statements of Additional Information,
amendments, reports and other documents as may be necessary
to maintain the Registration Statement. Each Portfolio shall
bear all expenses related to preparing and typesetting such
Prospectuses, Statements of Additional Information and other
materials required by law and such other expenses, including
printing and mailing expenses, related to the Portfolio's
communications with persons who are shareholders of that
Portfolio.
(b) There have been certain necessary organizational and other
expenses incurred by the Fund, which are properly expenses of
the Fund, that have been and will in the future be paid by the
Distributor or affiliated companies of the Distributor by
reason of the fact that the Fund was not capitalized when such
expenses were or will be incurred, including, but not limited
to: expenses of organizing the Fund; filing fees and expenses
relating to the registration and qualification of the Fund's
shares and the Fund under federal securities laws; fees
payable to any state or jurisdiction in which the Fund's
shares will be offered for sale; costs of any insurance or
fidelity bonds; legal, accounting and auditing expenses; costs
of preparing share certificates; (such expenses hereinafter
referred to as "Organizational Expenses").
(c) Upon the effective date (the "Effective Date") of the Fund's
Form N-1A Registration Statement filed with the Securities and
Exchange Commission, the Fund shall be obligated to reimburse
and pay to the Distributor, or such affiliated companies of
the Distributor as the Distributor may designate, the amounts
expended and to be expended by the Distributor and its
affiliates for the Organizational Expenses. The Distributor
shall provide to the Fund copies of invoices or receipts,
copies of cancelled checks or other evidence of payment of the
Organizational Expenses for which reimbursement from the Fund
is due hereunder. Subject to (d) below, reimbursement to the
Distributor hereunder shall be made as the Organizational
Expenses are amortized over five (5) years by the Fund,
without interest, with each such reimbursement payable not later
than 30 days after the Effective Date and each anniversary date
thereafter.
3
<PAGE> 4
(d) In the event the ratio of the Fund's total operating
expenses, including Organizational Expenses payable in a
fiscal year, to average net assets for the fiscal years
commencing on the effective date and ending December 31, 1998
through December 31, 2002 exceeds .18%, the Distributor shall
waive its 12b-1 distribution fee attributable to such period
and pay to The Fund any additional amount of such excess;
provided, however, there shall be excluded from such expenses
the amount of any management fees and expenses payable to the
Fund's investment adviser or subadviser, any interest, taxes,
brokerage fees and commissions, 12b-1 distribution fees and
expenses and extraordinary expenses (including but not limited
to legal claims and liabilities and litigation costs and any
indemnification related thereto) paid or payable by the Fund.
Any fee returned or waived or payments made by the Distributor
pursuant hereto shall be reimbursed by the Fund in subsequent
fiscal years to the extent operating expenses are less than
the percentage limitation set forth herein; provided, however,
that for so long as the Distributor continues to be the
exclusive distributor of the Fund, no such reimbursement shall
be made in any fiscal year which is more than three full
fiscal years after the period in which the fee was returned or
waived or such payment was made, and all reimbursements will
be credited on a first-in, first-out basis.
(e) Anything to the contrary herein notwithstanding, in the
event of the termination or non-renewal of this Distribution
Agreement, the Distributor's obligations under (c) and (d)
above shall immediately cease, and the Fund shall continue to
be obligated to reimburse the Distributor as provided in (c)
and (d) above.
(f) Not later than November 15 in each year, the Fund shall
consult with the Distributor regarding the budget of operating
expenses for the next fiscal year, which budget shall be
designed to be reasonable in light of the history and the
prospective operations of the Fund. If in any year an expense
will cause the relevant line item in the budget to be
exceeded, the Fund will give the Distributor notice and an
opportunity to consult with the Fund with respect to such
expense prior to such incurrence.
8. Indemnification By the Fund. The Fund agrees to indemnify,
---------------------------
defend and hold harmless the Distributor, its several officers and directors,
and any person who controls the Distributor within the meaning of Section 15
of the 1933 Act from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection therewith)
which the Distributor, its officers or trustees, or any such controlling
person may incur under the 1933 Act or under common law or otherwise arising
out of or based upon any alleged untrue statement of a material fact
contained in the Registration Statement, Prospectus or Statement of
Additional Information or arising out of or based upon any alleged omission
to state a material fact required to be stated in either thereof or necessary
to make the statements in either thereof not misleading, provided that in no
event shall anything contained in this Agreement be construed so as to protect
4
<PAGE> 5
the Distributor against any liability to the Fund or its shareholders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties,
or by reason of its reckless disregard of its obligations and duties under
this Agreement.
9. Indemnification by the Distributor. The Distributor agrees
----------------------------------
to indemnify, defend and hold harmless the Fund and its Portfolios, its
several officers and trustees, and any person who controls the Fund within
the meaning of Section 15 of the 1933 Act from and against any and all
claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its officers
or trustees, or any such controlling person may incur under the 1933 Act or
under common law or otherwise arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
the Distributor to the Fund for use in the Registration Statement, Prospectus
or Statement of Additional Information or arising out of or based upon any
alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus
or necessary to make such information not misleading.
10. Share Certificates. The Fund shall not issue certificates
------------------
representing Shares unless requested by a shareholder. If such request is
transmitted through the Distributor, the Fund will cause certificates
evidencing the Shares owned to be issued in such names and denominations as
the Distributor shall from time to time direct.
11. Repurchase of Shares. The Distributor at its sole discretion
--------------------
may repurchase Shares offered for sale by the shareholders. Repurchase of
Shares of any Portfolio by the Distributor shall be at the net asset value of
the applicable Portfolio next determined after a repurchase order has been
received, less any applicable redemption fee. the Distributor will receive
no commission or other remuneration for repurchasing Shares. On each
business day, the Distributor shall notify by telex or in writing the Fund
and the Fund's transfer agent of the orders for repurchase of shares received
by the Distributor since the last such report, the amount to be paid for such
Shares, and the identity of shareholders offering Shares for repurchase.
Upon such notice, the Fund shall pay the Distributor such amounts as are
required by the Distributor for the repurchase of such shares in cash or in
the form of a credit against moneys due the Fund from the Distributor as
proceeds from the sale of Shares. The Fund reserves the right to suspend
such purchases with respect to any or all Portfolios upon written notice to
the Distributor. the Distributor further agrees to act as agent for the Fund
to receive and transmit promptly to the Fund's transfer agent shareholder
requests for redemption of Shares.
12. Status of Distributor. The Distributor is an independent
---------------------
contractor and shall be an agent for the Fund only with respect to the sale
and repurchase of the Shares.
13. Non-Exclusive Services. The services of the Distributor to
----------------------
the Fund under this Agreement are not to be deemed exclusive, and the
Distributor shall be free to render similar services or other services to
others so long as its services hereunder are not impaired thereby.
5
<PAGE> 6
14. Reports of the Distributor. The Distributor shall provide to
--------------------------
the Board of Directors and the Board shall review, at least quarterly, or at
such other intervals as reasonably requested by the Board, a written report
of the amounts expended under the Fund's Distribution Plan and the purposes
for which such expenditures were made. The Distributor shall prepare such
other reports and provide such other information for the Board of Directors
upon request concerning expenditures related to this Agreement as from time
to time shall be reasonably requested by the Board.
15. Definitions. As used in this Agreement, the term "Registration
-----------
Statement" shall mean the Registration Statement most recently filed by the
Fund with the Securities and Exchange Commission and effective under the 1933
Act, as such Registration Statement is amended by any amendments thereto at
the time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean the current form of Prospectus(es) and Statement(s)
of Additional Information filed by the Fund as part of the Registration
Statement. Additionally, the term "net asset value" shall have the meaning
ascribed to it in the Fund's Articles of Incorporation; and the terms
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have the meanings given to them by Section 2(a) of the 1940
Act, subject to such exemptions as may be granted by the Securities and
Exchange Commission by any rule, regulation or order.
16. Effectiveness of Agreement. This Agreement shall become
--------------------------
effective upon the date hereabove written, provided that, with respect to a
Portfolio, this Agreement shall not take effect unless such action has first
been approved by vote of a majority of the Board of Directors and by vote of
a majority of those trustees who are not interested persons of the Fund and
have no direct or indirect financial interest in the operation of the Plan or
in any agreements related thereto (all such trustees collectively being
referred to herein as the "Independent Directors"), cast in person at a
meeting called for the purpose of voting on such action.
17. Termination of Agreement. Unless sooner terminated as
------------------------
provided herein, this Agreement shall continue in effect for one year from
the above written date. Thereafter, if not terminated, this Agreement shall
continue automatically for successive periods of twelve months each, provided
that such continuance is specifically approved at least annually (a) by a
vote of a majority of the Independent Directors, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Board of
Directors or with respect to any given series by vote of a majority of the
outstanding voting securities of such Portfolio. Notwithstanding the
foregoing, with respect to any Portfolio, this Agreement may be terminated at
any time, without the payment of any penalty, by vote of the Board of
Directors, by vote of a majority of the Independent Directors or by vote of a
majority of the outstanding voting securities of such Portfolio on 60 days'
written notice to the Distributor or by the Distributor at any time, without
the payment of any penalty, on 60 days' written notice to the Fund or such
Portfolio. Termination of this Agreement with respect to any given Portfolio
shall in no way affect the continued validity of this Agreement or the
performance thereunder with respect to any other Portfolio. This Agreement
automatically will terminate in the event of its assignment.
6
<PAGE> 7
18. Amendments. No provision of this Agreement may be changed,
----------
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
19. Governing Law. This Agreement shall be construed in accordance
-------------
with the laws of the State of Missouri, without giving effect to the
conflicts of laws principles thereof, and the 1940 Act. To the extent that
the applicable laws of the State of Missouri conflict with the applicable
provisions of the 1940 Act, however, the latter shall control.
20. Notice. Any notice required or permitted to be given by either
------
party to the other shall be deemed sufficient upon receipt in writing at the
other party's principal offices.
21. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
BUILDERS PROLOAN FUND, INC.
By: /s/ John W. Stewart
------------------------------
John W. Stewart
President and Chairman
HUNTLEIGH FUND DISTRIBUTORS, INC.
By: /s/ James A. Winkelmann
------------------------------
James A. Winkelmann
President
7
<PAGE> 1
Exhibit 8(a)
CUSTODY AGREEMENT
DATED OCTOBER 21ST, 1997
BETWEEN
UMB BANK, N. A.
AND
BUILDERS PROLOAN FUND, INC.
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
1. APPOINTMENT OF CUSTODIAN. 1
-------------------------
2. DEFINITIONS 1
-----------
(a) Securities 1
----------
(b) Assets 1
------
(c)(1) Instructions and Special Instructions 1
-------------------------------------
3. DELIVERY OF CORPORATE DOCUMENTS 2
-------------------------------
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN 3
--------------------------------------------------------
(a) Safekeeping 3
-----------
(b) Manner of Holding Securities 4
----------------------------
(c) Free Delivery of Assets 6
-----------------------
(d) Exchange of Securities 6
----------------------
(e) Purchases of Assets 6
-------------------
(f) Sales of Assets 7
---------------
(g) Options 7
-------
(h) Futures Contracts 8
-----------------
<PAGE> 3
(i) Segregated Accounts 9
-------------------
(j) Depositary Receipts 9
-------------------
(k) Corporate Actions, Put Bonds, Called Bonds, Etc 9
-----------------------------------------------
(l) Interest Bearing Deposits 10
-------------------------
(m) Pledges or Loans of Securities 11
------------------------------
(n) Stock Dividends, Rights, Etc 12
----------------------------
(o) Routine Dealings 12
----------------
(p) Collections 12
-----------
(q) Bank Accounts 13
-------------
(r) Dividends, Distributions and Redemptions 13
----------------------------------------
(s) Proceeds from Shares Sold 13
-------------------------
(t) Proxies and Notices; Compliance with the
----------------------------------------
Shareholders Communication Act of 1985 13
--------------------------------------
(u) Books and Records 14
-----------------
(v) Opinion of Fund's Independent Certified Public
----------------------------------------------
Accountants 14
-----------
(w) Reports by Independent Certified Public Accountants 14
---------------------------------------------------
(x) Bills and Other Disbursements 14
-----------------------------
(y) Valuation of Commitments to Acquire Mortgage-
---------------------------------------------
Backed Securities 15
-----------------
5. SUBCUSTODIANS 15
-------------
(a) Domestic Subcustodians 15
----------------------
(b) Special Subcustodians 16
---------------------
ii
<PAGE> 4
(c) Termination of a Subcustodian 17
-----------------------------
(d) Certification Regarding Foreign Subcustodians 17
---------------------------------------------
6. STANDARD OF CARE 17
----------------
(a) General Standard of Care 17
------------------------
(b) Actions Prohibited by Applicable Law, Events Beyond
---------------------------------------------------
Custodian's Control, Sovereign Risk, Etc. 17
-----------------------------------------
(c) Liability for Past Records 18
--------------------------
(d) Advice of Counsel 18
-----------------
(e) Advice of the Fund and Others 18
-----------------------------
(f) Instructions Appearing to be Genuine 18
------------------------------------
(g) Exceptions from Liability 19
-------------------------
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS 19
------------------------------------------------
(a) Domestic Subcustodians 19
----------------------
(b) Securities Systems, Special Subcustodians,
------------------------------------------
Securities Depositories and Clearing Agencies 20
---------------------------------------------
(c) Defaults or Insolvencies of Brokers, Banks, Etc 20
-----------------------------------------------
(d) Reimbursement of Expenses 20
-------------------------
8. INDEMNIFICATION 20
---------------
(a) Indemnification by Fund 20
-----------------------
iii
<PAGE> 5
(b) Indemnification by Custodian 21
----------------------------
9. ADVANCE 21
-------
10. LIENS 21
-----
11. COMPENSATION 22
------------
12. POWERS OF ATTORNEY 22
------------------
13. TERMINATION AND ASSIGNMENT 22
--------------------------
14. NOTICES 23
-------
15. MISCELLANEOUS 23
-------------
</TABLE>
iv
<PAGE> 6
CUSTODY AGREEMENT
-----------------
This agreement made as of this ----- day of October, 1997,
between Builders ProLoan Fund, Inc., a Maryland corporation with its
principal place of business located at 222 South Central Avenue, Suite 300,
Clayton, Missouri 63105 and UMB Bank, N.A., a national banking association
with its principal place of business located at Kansas City, Missouri
(hereinafter "Custodian").
WITNESSETH:
WHEREAS, The Fund is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended; and
WHEREAS, The Fund desires to appoint Custodian as its custodian
for the custody of Assets (as hereinafter defined) owned by the Fund which
Assets are to be held in such accounts as the Fund may establish from time to
time; and
WHEREAS, Custodian is willing to accept such appointment on the
terms and conditions hereof.
NOW, THEREFORE, In consideration of the mutual promises
contained herein, the parties hereto, intending to be legally bound, mutually
covenant and agree as follows:
1. APPOINTMENT OF CUSTODIAN.
-------------------------
The Fund hereby constitutes and appoints the Custodian as
custodian of Assets belonging to the Fund which have been or may be from time
to time deposited with the Custodian. Custodian accepts such appointment as
a custodian and agrees to perform the duties and responsibilities of
Custodian as set forth herein on the conditions set forth herein.
2. DEFINITIONS.
------------
For purposes of this Agreement, the following terms shall have the
meanings so indicated:
(a) "Fund" as used herein shall mean each and all series
in existence as of the date hereof and, if mutually agreed by the Fund and
the Custodian at such time, each such series hereafter designated by the
Fund.
(a) "Security" or "Securities" shall mean stocks, bonds,
bills, rights, scrip, warrants, interim certificates and all negotiable or
nonnegotiable paper commonly known as Securities and other instruments or
obligations.
<PAGE> 7
(b) "Assets" shall mean Securities, monies and other
property held by the Custodian for the benefit of the Fund.
(c)(1) "Instructions," as used herein, shall mean: (i)
a tested telex, a written (including, without limitation, facsimile
transmission) request, direction, instruction or certification signed or
initialed by or on behalf of the Fund by an Authorized Person; (ii) a
telephonic or other oral communication from a person the Custodian reasonably
believes to be an Authorized Person; or (iii) a communication effected
directly between an electro-mechanical or electronic device or system
(including, without limitation, computers) on behalf of the Fund.
Instructions in the form of oral communications shall be confirmed by the
Fund by tested telex or in writing in the manner set forth in clause (i)
above, but the lack of such confirmation shall in no way affect any action
taken by the Custodian in reliance upon such oral Instructions prior to the
Custodian's receipt of such confirmation. The Fund authorizes the Custodian
to record any and all telephonic or other oral Instructions communicated to
the Custodian.
(c)(2) "Special Instructions", as used herein, shall mean
Instructions countersigned or confirmed in writing by the Secretary or any
Assistant Treasurer of the Fund or any other person designated by the
Secretary of the Fund in writing, which countersignature or confirmation
shall be included on the same instrument containing the Instructions or on a
separate instrument relating thereto.
(c)(3) Instructions and Special Instructions shall be
delivered to the Custodian at the address and/or telephone, facsimile
transmission or telex number agreed upon from time to time by the Custodian
and the Fund.
(c)(4) Where appropriate, Instructions and Special
Instructions shall be continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
--------------------------------
Each of the parties to this Agreement represents that its
execution does not violate any of the provisions of its respective charter,
articles of incorporation, articles of association or bylaws and all required
corporate action to authorize the execution and delivery of this Agreement
has been taken.
The Fund has furnished the Custodian with copies, properly
certified or authenticated, with all amendments or supplements thereto, of
the following documents:
(a) Certificate of Incorporation (or equivalent document)
of the Fund as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
2
<PAGE> 8
(c) Resolutions of the Board of Directors of the Fund
appointing the Custodian and approving the form of this
Agreement; and
(d) The Fund's current prospectus and statement of
additional information.
The Fund shall promptly furnish the Custodian with copies of any updates,
amendments or supplements to the foregoing documents.
In addition, the Fund has delivered or will promptly deliver to
the Custodian, copies of the Resolution(s) of its Board of Directors and all
amendments or supplements thereto, properly certified or authenticated,
designating certain officers or employees of the Fund who will have
continuing authority to certify to the Custodian: (a) the names, titles,
signatures and scope of authority of all persons authorized to give
Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of the Fund, and (b) the names, titles
and signatures of those persons authorized to countersign or confirm Special
Instructions on behalf of the Fund (in both cases collectively, the
"Authorized Persons" and individually, an "Authorized Person"). Such
Resolutions and certificates may be accepted and relied upon by the Custodian
as conclusive evidence of the facts set forth therein and shall be considered
to be in full force and effect until delivery to the Custodian of a similar
Resolution or certificate to the contrary. Upon delivery of a certificate
which deletes or does not include the name(s) of a person previously
authorized to give Instructions or to countersign or confirm Special
Instructions, such persons shall no longer be considered an Authorized Person
authorized to give Instructions or to countersign or confirm Special
Instructions. Unless the certificate specifically requires that the approval
of anyone else will first have been obtained, the Custodian will be under no
obligation to inquire into the right of the person giving such Instructions
or Special Instructions to do so. Notwithstanding any of the foregoing, no
Instructions or Special Instructions received by the Custodian from the Fund
will be deemed to authorize or permit any director, trustee, officer,
employee, or agent of the Fund to withdraw any of the Assets of the Fund upon
the mere receipt of such authorization, Special Instructions or Instructions
from such director, trustee, officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
---------------------------------------------------------
Except for Assets held by any Subcustodian appointed pursuant to
Sections 5(b), (c), or (d) of this Agreement, the Custodian shall have and
perform the powers and duties hereinafter set forth in this Section 4. For
purposes of this Section 4 all references to powers and duties of the
"Custodian" shall also refer to any Domestic Subcustodian appointed pursuant
to Section 5(a).
(a) Safekeeping.
-----------
3
<PAGE> 9
The Custodian will keep safely the Assets of the Fund which
are delivered to it from time to time. The Custodian shall not be responsible
for any property of the Fund held or received by the Fund and not delivered to
the Custodian.
(b) Manner of Holding Securities.
----------------------------
(1) The Custodian shall at all times hold Securities
of the Fund either: (i) by physical possession of the share certificates or
other instruments representing such Securities in registered or bearer form;
or (ii) in book-entry form by a Securities System (as hereinafter defined) in
accordance with the provisions of sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio
Securities which have been delivered to it in physical form, by registering
the same in the name of the Fund or its nominee, or in the name of the
Custodian or its nominee, for whose actions the Fund and Custodian,
respectively, shall be fully responsible. Upon the receipt of Instructions,
the Custodian shall hold such Securities in street certificate form, so
called, with or without any indication of fiduciary capacity. However,
unless it receives Instructions to the contrary, the Custodian will register
all such portfolio Securities in the name of the Custodian's authorized
nominee. All such Securities shall be held in an account of the Custodian
containing only assets of the Fund or only assets held by the Custodian as a
fiduciary, provided that the records of the Custodian shall indicate at all
times the Fund or other customer for which such Securities are held in such
accounts and the respective interests therein.
(3) The Custodian may deposit and/or maintain
domestic Securities owned by the Fund in, and the Fund hereby approves use
of: (a) The Depository Trust Company; (b) The Participants Trust Company; and
(c) any book-entry system as provided in (i) Subpart 0 of Treasury Circular
No. 300, 31 CFR 306.115, (ii) Subpart B of Treasury Circular Public Debt
Series No. 27-76, 31 CFR 350.2, or (iii) the book-entry regulations of
federal agencies substantially in the form of 31 CFR 306.115. Upon the
receipt of Special Instructions, the Custodian may deposit and/or maintain
domestic Securities owned by the Fund in any other domestic clearing agency
registered with the Securities and Exchange Commission ("SEC") under Section
17A of the Securities Exchange Act of 1934 (or as may otherwise be authorized
by the SEC to serve in the capacity of depository or clearing agent for the
Securities or other assets of investment companies) which acts as a
Securities depository. Each of the foregoing shall be referred to in this
Agreement as a "Securities System," and all such Securities Systems shall be
listed on the attached Appendix A. Use of a Securities System shall be in
accordance with applicable Federal Reserve Board and SEC rules and
regulations, if any, and subject to the following provisions:
(i) The Custodian may deposit the Securities
directly or through one or more agents or
Subcustodians which are also qualified to act as
custodians for investment companies.
4
<PAGE> 10
(ii) The Custodian shall deposit and/or maintain the
Securities in a Securities System, provided that
such Securities are represented in an account
("Account") of the Custodian in the Securities
System that includes only assets held by the
Custodian as a fiduciary, custodian or otherwise
for customers.
(iii) The books and records of the Custodian shall at
all times identify those Securities belonging to
the Fund which are maintained in a Securities
System.
(iv) The Custodian shall pay for Securities purchased
for the account of the Fund only upon (a) receipt
of advice from the Securities System that such
Securities have been transferred to the Account
of the Custodian in accordance with the rules of
the Securities System, and (b) the making of an
entry on the records of the Custodian to reflect
such payment and transfer for the account of the
Fund. The Custodian shall transfer Securities sold
for the account of the Fund only upon (a) receipt of
advice from the Securities System that payment for
such Securities has been transferred to the Account
of the Custodian in accordance with the rules of
the Securities System, and (b) the making of an
entry on the records of the Custodian to reflect
such transfer and payment for the account of the
Fund. Copies of all advices from the Securities
System relating to transfers of Securities for the
account of the Fund shall be maintained for the Fund
by the Custodian. The Custodian shall deliver to
the Fund on the next succeeding business day daily
transaction reports which shall include each day's
transactions in the Securities System for the
account of the Fund. Such transaction reports shall
be delivered to the Fund or any agent designated by
the Fund pursuant to Instructions, by computer or
in such other manner as the Fund and Custodian may
agree.
(v) The Custodian shall, if requested by the Fund
pursuant to Instructions, provide the Fund with
reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's
accounting system, internal accounting control and
procedures for safeguarding Securities deposited in
the Securities System.
(vi) Upon receipt of Special Instructions, the Custodian
shall terminate the use of any Securities System on
behalf of the Fund as promptly as practicable and
shall take all actions reasonably
5
<PAGE> 11
practicable to safeguard the Securities of the Fund
maintained with such Securities System.
(c) Free Delivery of Assets.
-----------------------
Notwithstanding any other provision of this Agreement and
except as provided in Section 3 hereof, the Custodian, upon receipt of
Special Instructions, will undertake to make free delivery of Assets,
provided such Assets are on hand and available, in connection with the Fund's
transactions and to transfer such Assets to such broker, dealer,
Subcustodian, bank, agent, Securities System or otherwise as specified in
such Special Instructions.
(d) Exchange of Securities.
----------------------
Upon receipt of Instructions, the Custodian will exchange
portfolio Securities held by it for the Fund for other Securities or cash
paid in connection with any reorganization, recapitalization, merger,
consolidation, or conversion of convertible Securities, and will deposit any
such Securities in accordance with the terms of any reorganization or
protective plan.
Without Instructions, the Custodian is authorized to
exchange Securities held by it in temporary form for Securities in definitive
form, to surrender Securities for transfer into a name or nominee name as
permitted in Section 4(b)(2), to effect an exchange of shares in a stock
split or when the par value of the stock is changed, to sell any fractional
shares, and, upon receiving payment therefor, to surrender bonds or other
Securities held by it at maturity or call.
(e) Purchases of Assets.
-------------------
(1) Securities Purchases. In accordance with
--------------------
Instructions, the Custodian shall, with respect to a purchase of Securities,
pay for such Securities out of monies held for the Fund's account for which
the purchase was made, but only insofar as monies are available therein for
such purpose, and receive the portfolio Securities so purchased. Unless the
Custodian has received Special Instructions to the contrary, such payment
will be made only upon receipt of Securities by the Custodian, a clearing
corporation of a national Securities exchange of which the Custodian is a
member, or a Securities System in accordance with the provisions of Section
4(b)(3) hereof. Notwithstanding the foregoing, upon receipt of Instructions:
(i) in connection with a repurchase agreement, the Custodian may release
funds to a Securities System prior to the receipt of advice from the
Securities System that the Securities underlying such repurchase agreement
have been transferred by book-entry into the Account maintained with such
Securities System by the Custodian, provided that the Custodian's
instructions to the Securities System require that the Securities System may
make payment of such funds to the other party to the repurchase agreement
only upon transfer by book-entry of the Securities underlying the repurchase
agreement into such Account; (ii) in the case of Interest Bearing
6
<PAGE> 12
Deposits, currency deposits, and other deposits, foreign exchange transactions,
futures contracts or options, pursuant to Sections 4(g), 4(h), 4(l), and 4(m)
hereof, the Custodian may make payment therefor before receipt of an advice of
transaction; and (iii) in the case of Securities as to which payment for the
Security and receipt of the instrument evidencing the Security are under
generally accepted trade practice or the terms of the instrument representing
the Security expected to take place in different locations or through
separate parties, such as commercial paper which is indexed to foreign
currency exchange rates, derivatives and similar Securities, the Custodian
may make payment for such Securities prior to delivery thereof in accordance
with such generally accepted trade practice or the terms of the instrument
representing such Security.
(2) Other Assets Purchased. Upon receipt of
----------------------
Instructions and except as otherwise provided herein, the Custodian shall pay
for and receive other Assets for the account of the Fund as provided in
Instructions.
(f) Sales of Assets.
---------------
(1) Securities Sold. In accordance with
---------------
Instructions, the Custodian will, with respect to a sale, deliver or cause to
be delivered the Securities thus designated as sold to the broker or other
person specified in the Instructions relating to such sale. Unless the
Custodian has received Special Instructions to the contrary, such delivery
shall be made only upon receipt of payment therefor in the form of: (a) cash,
certified check, bank cashier's check, bank credit, or bank wire transfer;
(b) credit to the account of the Custodian with a clearing corporation of a
national Securities exchange of which the Custodian is a member; or (c)
credit to the Account of the Custodian with a Securities System, in
accordance with the provisions of Section 4(b)(3) hereof. Notwithstanding
the foregoing, Securities held in physical form may be delivered and paid for
in accordance with "street delivery custom" to a broker or its clearing
agent, against delivery to the Custodian of a receipt for such Securities,
provided that the Custodian shall have taken reasonable steps to ensure
prompt collection of the payment for, or return of, such Securities by the
broker or its clearing agent, and provided further that the Custodian shall
not be responsible for the selection of or the failure or inability to
perform of such broker or its clearing agent or for any related loss arising
from delivery or custody of such Securities prior to receiving payment
therefor.
(2) Other Assets Sold. Upon receipt of Instructions
-----------------
and except as otherwise provided herein, the Custodian shall receive payment
for and deliver other Assets for the account of the Fund as provided in
Instructions.
(g) Options.
-------
(1) Upon receipt of Instructions relating to the
purchase of an option or sale of a covered call option, the Custodian shall:
(a) receive and retain confirmations or other documents, if any, evidencing
the purchase or writing of the option by the Fund; (b) if
7
<PAGE> 13
the transaction involves the sale of a covered call option, deposit and
maintain in a segregated account the Securities (either physically or by
book-entry in a Securities System) subject to the covered call option written
on behalf of the Fund; and (c) pay, release and/or transfer such Securities,
cash or other Assets in accordance with any notices or other communications
evidencing the expiration, termination or exercise of such options which are
furnished to the Custodian by the Options Clearing Corporation (the "OCC"), the
securities or options exchanges on which such options were traded, or such
other organization as may be responsible for handling such option transactions.
(2) Upon receipt of Instructions relating to the
sale of a naked option (including stock index and commodity options), the
Custodian, the Fund and the broker-dealer shall enter into an agreement to
comply with the rules of the OCC or of any registered national securities
exchange or similar organizations(s). Pursuant to that agreement and the
Fund's Instructions, the Custodian shall: (a) receive and retain
confirmations or other documents, if any, evidencing the writing of the
option; (b) deposit and maintain in a segregated account, Securities (either
physically or by book-entry in a Securities System), cash and/or other
Assets; and (c) pay, release and/or transfer such Securities, cash or other
Assets in accordance with any such agreement and with any notices or other
communications evidencing the expiration, termination or exercise of such
option which are furnished to the Custodian by the OCC, the securities or
options exchanges on which such options were traded, or such other
organization as may be responsible for handling such option transactions.
The Fund and the broker-dealer shall be responsible for determining the
quality and quantity of assets held in any segregated account established in
compliance with applicable margin maintenance requirements and the
performance of other terms of any option contract.
(h) Futures Contracts.
-----------------
Upon receipt of Instructions, the Custodian shall enter into
a futures margin procedural agreement among the Fund, the Custodian and the
designated futures commission merchant (a "Procedural Agreement"). Under the
Procedural Agreement the Custodian shall: (a) receive and retain confirmations,
if any, evidencing the purchase or sale of a futures contract or an option on a
futures contract by the Fund; (b) deposit and maintain in a segregated account
cash, Securities and/or other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure the Fund's performance of its
obligations under any futures contracts purchased or sold, or any options on
futures contracts written by the Fund, in accordance with the provisions of any
Procedural Agreement designed to comply with the provisions of the Commodity
Futures Trading Commission and/or any commodity exchange or contract market
(such as the Chicago Board of Trade), or any similar organizations), regarding
such margin deposits; and (c) release Assets from and/or transfer Assets into
such margin accounts only in accordance with any such Procedural Agreements.
The Fund and such futures commission merchant shall be responsible for
determining the type and amount of Assets held in the segregated account or
paid to the broker-dealer in compliance with applicable margin maintenance
requirements and the
8
<PAGE> 14
performance of any futures contract or option on a futures contract in
accordance with its terms.
(i) Segregated Accounts.
-------------------
Upon receipt of Instructions, the Custodian shall establish
and maintain on its books a segregated account or accounts for and on behalf
of the Fund, into which account or accounts may be transferred Assets of the
Fund, including Securities maintained by the Custodian in a Securities System
pursuant to Paragraph (b)(3) of this Section 4, said account or accounts to
be maintained (i) for the purposes set forth in Sections 4(g), 4(h) and 4(n)
and (ii) for the purpose of compliance by the Fund with the procedures
required by the SEC Investment Company Act Release Number 10666 or any
subsequent release or releases relating to the maintenance of segregated
accounts by registered investment companies, or (iii) for such other purposes
as may be set forth, from time to time, in Special Instructions. The
Custodian shall not be responsible for the determination of the type or
amount of Assets to be held in any segregated account referred to in this
paragraph, or for compliance by the Fund with required procedures noted in
(ii) above.
(j) Depositary Receipts.
-------------------
Upon receipt of Instructions, the Custodian shall surrender
or cause to be surrendered Securities to the depositary used for such
Securities by an issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter referred to, collectively, as "ADRs"),
against a written receipt therefor adequately describing such Securities and
written evidence satisfactory to the organization surrendering the same that
the depositary has acknowledged receipt of instructions to issue ADRs with
respect to such Securities in the name of the Custodian or a nominee of the
Custodian, for delivery in accordance with such instructions.
Upon receipt of Instructions, the Custodian shall surrender
or cause to be surrendered ADRs to the issuer thereof, against a written
receipt therefor adequately describing the ADRs surrendered and written
evidence satisfactory to the organization surrendering the same that the
issuer of the ADRs has acknowledged receipt of instructions to cause its
depository to deliver the Securities underlying such ADRs in accordance with
such instructions.
(k) Corporate Actions, Put Bonds, Called Bonds, Etc.
-----------------------------------------------
Upon receipt of Instructions, the Custodian shall: (a)
deliver warrants, puts, calls, rights or similar Securities to the issuer or
trustee thereof (or to the agent of such issuer or trustee) for the purpose
of exercise or sale, provided that the new Securities, cash or other Assets,
if any, acquired as a result of such actions are to be delivered to the
Custodian; and (b) deposit Securities upon invitations for tenders thereof,
provided that the
9
<PAGE> 15
consideration for such Securities is to be paid or delivered to the Custodian,
or the tendered Securities are to be returned to the Custodian.
Notwithstanding any provision of this Agreement to the
contrary, the Custodian shall take all necessary action, unless otherwise
directed to the contrary in Instructions, to comply with the terms of all
mandatory or compulsory exchanges, calls, tenders, redemptions, or similar
rights of security ownership, and shall notify the Fund of such action in
writing by facsimile transmission or in such other manner as the Fund and
Custodian may agree in writing.
The Fund agrees that if it gives an Instruction for the
performance of an act on the last permissible date of a period established by
any optional offer or on the last permissible date for the performance of
such act, the Fund shall hold the Bank harmless from any adverse consequences
in connection with acting upon or failing to act upon such Instructions.
(l) Interest Bearing Deposits.
-------------------------
Upon receipt of Instructions directing the Custodian to
purchase interest bearing fixed term and call deposits (hereinafter referred
to, collectively, as "Interest Bearing Deposits") for the account of the
Fund, the Custodian shall purchase such Interest Bearing Deposits in the name
of the Fund with such banks or trust companies, including the Custodian, any
Subcustodian or any subsidiary or affiliate of the Custodian (hereinafter
referred to as "Banking Institutions"), and in such amounts as the Fund may
direct pursuant to Instructions. Such Interest Bearing Deposits may be
denominated in U.S. Dollars or other currencies, as the Fund may determine
and direct pursuant to Instructions. The responsibilities of the Custodian to
the Fund for Interest Bearing Deposits issued by the Custodian shall be that
of a U.S. bank for a similar deposit. With respect to Interest Bearing
Deposits other than those issued by the Custodian, (a) the Custodian shall be
responsible for the collection of income and the transmission of cash to and
from such accounts; and (b) the Custodian shall have no duty with respect to
the selection of the Banking Institution or for the failure of such Banking
Institution to pay upon demand.
(m) Pledges or Loans of Securities.
------------------------------
(1) Upon receipt of Instructions from the Fund, the
Custodian will release or cause to be released Securities held in custody to
the pledgees designated in such Instructions by way of pledge or
hypothecation to secure loans incurred by the Fund with various lenders
including but not limited to UMB Bank, N.A.; provided, however, that the
Securities shall be released only upon payment to the Custodian of the monies
borrowed, except that in cases where additional collateral is required to
secure existing borrowings, further Securities may be released or delivered,
or caused to be released or delivered for that purpose upon receipt of
Instructions. Upon receipt of Instructions, the Custodian will pay, but only
from funds available for such purpose, any such loan upon re-delivery to it
of the
10
<PAGE> 16
Securities pledged or hypothecated therefor and upon surrender of the
note or notes evidencing such loan. In lieu of delivering collateral to a
pledgee, the Custodian, on the receipt of Instructions, shall transfer the
pledged Securities to a segregated account for the benefit of the pledgee.
(2) Upon receipt of Special Instructions, and
execution of a separate Securities Lending Agreement, the Custodian will
release Securities held in custody to the borrower designated in such
Instructions and may, except as otherwise provided below, deliver such
Securities prior to the receipt of collateral, if any, for such borrowing,
provided that, in case of loans of Securities held by a Securities System
that are secured by cash collateral, the Custodian's instructions to the
Securities System shall require that the Securities System deliver the
Securities of the Fund to the borrower thereof only upon receipt of the
collateral for such borrowing. The Custodian shall have no responsibility or
liability for any loss arising from the delivery of Securities prior to the
receipt of collateral. Upon receipt of Instructions and the loaned
Securities, the Custodian will release the collateral to the borrower.
(n) Stock Dividends, Rights, Etc.
----------------------------
The Custodian shall receive and collect all stock dividends,
rights, and other items of like nature and, upon receipt of Instructions,
take action with respect to the same as directed in such Instructions.
(o) Routine Dealings.
----------------
The Custodian will, in general, attend to all routine and
mechanical matters in accordance with industry standards in connection with
the sale, exchange, substitution, purchase, transfer, or other dealings with
Securities or other property of the Fund except as may be otherwise provided
in this Agreement or directed from time to time by Instructions from the
Fund. The Custodian may also make payments to itself or others from the
Assets for disbursements and out-of-pocket expenses incidental to handling
Securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the
Fund.
(p) Collections.
-----------
The Custodian shall (a) collect amounts due and payable to
the Fund with respect to portfolio Securities and other Assets; (b) promptly
credit to the account of the Fund all income and other payments relating to
portfolio Securities and other Assets held by the Custodian hereunder upon
Custodian's receipt of such income or payments or as otherwise agreed in
writing by the Custodian and the Fund; (c) promptly endorse and deliver any
instruments required to effect such collection; and (d) promptly execute
ownership and other certificates and affidavits for all federal, state, local
and foreign tax purposes in connection with receipt of income or other
payments with respect to portfolio Securities and
11
<PAGE> 17
other Assets, or in connection with the transfer of such Securities or other
Assets; provided, however, that with respect to portfolio Securities registered
in so-called street name, or physical Securities with variable interest rates,
the Custodian shall use its best efforts to collect amounts due and payable to
the Fund. The Custodian shall notify the Fund in writing by facsimile
transmission or in such other manner as the Fund and Custodian may agree in
writing if any amount payable with respect to portfolio Securities or other
Assets is not received by the Custodian when due. The Custodian shall not be
responsible for the collection of amounts due and payable with respect to
portfolio Securities or other Assets that are in default.
(q) Bank Accounts.
-------------
Upon Instructions, the Custodian shall open and operate a
bank account or accounts on the books of the Custodian; provided that such
bank account(s) shall be in the name of the Custodian or a nominee thereof,
for the account of the Fund, and shall be subject only to draft or order of
the Custodian. The responsibilities of the Custodian to the Fund for
deposits accepted on the Custodian's books shall be that of a U.S. bank for a
similar deposit.
(r) Dividends, Distributions and Redemptions.
----------------------------------------
To enable the Fund to pay dividends or other distributions
to shareholders of the Fund and to make payment to shareholders who have
requested repurchase or redemption of their shares of the Fund (collectively,
the "Shares"), the Custodian shall release cash or Securities insofar as
available. In the case of cash, the Custodian shall, upon the receipt of
Instructions, transfer such funds by check or wire transfer to any account at
any bank or trust company designated by the Fund in such Instructions. In
the case of Securities, the Custodian shall, upon the receipt of Special
Instructions, make such transfer to any entity or account designated by the
Fund in such Special Instructions.
(s) Proceeds from Shares Sold.
-------------------------
The Custodian shall receive funds representing cash payments
received for shares issued or sold from time to time by the Fund, and shall
credit such funds to the account of the Fund. The Custodian shall notify the
Fund of Custodian's receipt of cash in payment for shares issued by the Fund
by facsimile transmission or in such other manner as the Fund and the
Custodian shall agree. Upon receipt of Instructions, the Custodian shall:
(a) deliver all federal funds received by the Custodian in payment for shares
as may be set forth in such Instructions and at a time agreed upon between
the Custodian and the Fund; and (b) make federal funds available to the Fund
as of specified times agreed upon from time to time by the Fund and the
Custodian, in the amount of checks received in payment for shares which are
deposited to the accounts of the Fund.
12
<PAGE> 18
(t) Proxies and Notices; Compliance with the Shareholders
-----------------------------------------------------
Communication Act of 1985.
- -------------------------
The Custodian shall deliver or cause to be delivered to the
Fund all forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to Securities owned by the Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of
them, and, upon receipt of Instructions, the Custodian shall execute and
deliver, or cause such Subcustodian or nominee to execute and deliver, such
proxies or other authorizations as may be required. Except as directed
pursuant to Instructions, neither the Custodian nor any Subcustodian or
nominee shall vote upon any such Securities, or execute any proxy to vote
thereon, or give any consent or take any other action with respect thereto.
The Custodian will not release the identity of the Fund to an
issuer which requests such information pursuant to the Shareholder
Communications Act of 1985 for the specific purpose of direct communications
between such issuer and the Fund unless the Fund directs the Custodian
otherwise in writing.
(u) Books and Records.
-----------------
The Custodian shall maintain such records relating to its
activities under this Agreement as are required to be maintained by Rule
31a-1 under the Investment Company Act of 1940 ("the 1940 Act") and to
preserve them for the periods prescribed in Rule 31a-2 under the 1940 Act.
These records shall be open for inspection by duly authorized officers,
employees or agents (including independent public accountants) of the Fund
during normal business hours of the Custodian.
The Custodian shall provide accountings relating to its
activities under this Agreement as shall be agreed upon by the Fund and the
Custodian.
(v) Opinion of Fund's Independent Certified Public
----------------------------------------------
Accountants.
- -----------
The Custodian shall take all reasonable action as the Fund
may request to obtain from year to year favorable opinions from the Fund's
independent certified public accountants with respect to the Custodian's
activities hereunder and in connection with the preparation of the Fund's
periodic reports to the SEC and with respect to any other requirements of the
SEC.
(w) Reports by Independent Certified Public Accountants.
---------------------------------------------------
At the request of the Fund, the Custodian shall deliver to
the Fund a written report prepared by the Custodian's independent certified
public accountants with respect to the services provided by the Custodian
under this Agreement, including, without limitation, the Custodian's
accounting system, internal accounting control and procedures for
13
<PAGE> 19
safeguarding cash, Securities and other Assets, including cash, Securities
and other Assets deposited and/or maintained in a Securities System or with a
Subcustodian. Such report shall be of sufficient scope and in sufficient
detail as may reasonably be required by the Fund and as may reasonably be
obtained by the Custodian.
(x) Bills and Other Disbursements.
-----------------------------
Upon receipt of Instructions, the Custodian shall pay, or
cause to be paid, all bills, statements, or other obligations of the Fund.
(y) Valuation of Commitments to Acquire Mortgage-
---------------------------------------------
Backed Securities
-----------------
The Custodian shall be responsible for valuing the Fund's
commitments to acquire mortgage-backed securities secured by Qualified
Mortgage Loans ("QMLs") (as defined in the Fund's current prospectus and
statement of additional information) in accordance with the formula set forth
in Appendix B attached hereto, which Appendix may be amended from time to time
by the Fund as it deems necessary. The Custodian shall value each commitment
on each day on which the Custodian and the New York Stock Exchange are open
for business ("Business Day") by no later than 4:00 p.m. Eastern Standard
Time. The Fund's manager, Capital Mortgage Management, Inc. (the "Manager"),
will provide to the Custodian the price at which the Fund committed to
acquire the outstanding mortgage-backed securities, the dollar amount of
outstanding commitments and the weighted average coupon rate of those
commitments by no later than 3:00 p.m. Eastern Standard Time each Business Day.
The Custodian also shall transmit on each Business Day, via facsimile or via
computer modem, to the Fund's investment manager, Capital Mortgage Management,
Inc. of St. Louis, Missouri, and its investment subadviser, Commerce Bank, N.A.
of St. Louis, Missouri, the Custodian's valuation of the Fund's portfolio
securities and net asset value for that Business Day.
5. SUBCUSTODIANS.
-------------
From time to time, in accordance with the relevant provisions of
this Agreement, the Custodian may appoint one or more Domestic Subcustodians,
Foreign Subcustodians, Special Subcustodians, or Interim Subcustodians (as
each are hereinafter defined) to act on behalf of the Fund. A Domestic
Subcustodian, in accordance with the provisions of this Agreement, may also
appoint a Foreign Subcustodian, Special Subcustodian, or Interim Subcustodian
to act on behalf of the Fund. For purposes of this Agreement, all Domestic
Subcustodians, Foreign Subcustodians, Special Subcustodians and Interim
Subcustodians shall be referred to collectively as "Subcustodians."
(a) Domestic Subcustodians.
----------------------
The Custodian may, at any time and from time to time,
appoint any bank as defined in Section 2(a)(5) of the 1940 Act or any trust
company or other entity, any of which meet the requirements of a custodian
under Section 17(f) of the 1940 Act and the rules and regulations thereunder,
to act for the Custodian on behalf of the Fund as a subcustodian for
14
<PAGE> 20
purposes of holding Assets of the Fund and performing other functions of the
Custodian within the United States (a "Domestic Subcustodian"). The Fund shall
approve in writing the appointment of the proposed Domestic Subcustodian; and
the Custodian's appointment of any such Domestic Subcustodian shall not be
effective without such prior written approval of the Fund. Each such duly
approved Domestic Subcustodian shall be listed on Exhibit B attached hereto,
as it may be amended, from time to time.
(b) Special Subcustodians.
---------------------
Upon receipt of Special Instructions, the Custodian shall,
on behalf of the Fund, appoint one or more banks, trust companies or other
entities designated in such Special Instructions to act for the Custodian on
behalf of the Fund as a subcustodian for purposes of: (i) effecting
third-party repurchase transactions with banks, brokers, dealers or other
entities through the use of a common custodian or subcustodian; (ii)
providing depository and clearing agency services with respect to certain
variable rate demand note Securities, (iii) providing depository and clearing
agency services with respect to dollar denominated Securities, and (iv)
effecting any other transactions designated by the Fund in such Special
Instructions. Each such designated subcustodian (hereinafter referred to as
a "Special Subcustodian") shall be listed on Appendix A attached hereto, as
it may be amended from time to time. In connection with the appointment of
any Special Subcustodian, the Custodian shall enter into a subcustodian
agreement with the Special Subcustodian in form and substance approved by the
Fund in Special Instructions. The Custodian shall not amend any subcustodian
agreement entered into with a Special Subcustodian, or waive any rights under
such agreement, except upon prior approval pursuant to Special Instructions.
(c) Termination of a Subcustodian.
-----------------------------
The Custodian may, at any time in its discretion upon
notification to the Fund, terminate any Subcustodian of the Fund in
accordance with the termination provisions under the applicable subcustodian
agreement, and upon the receipt of Special Instructions, the Custodian will
terminate any Subcustodian in accordance with the termination provisions
under the applicable subcustodian agreement.
6. STANDARD OF CARE.
----------------
(a) General Standard of Care.
------------------------
The Custodian shall be liable to the Fund for all losses,
damages and reasonable costs and expenses suffered or incurred by the Fund
resulting from the negligence or willful misfeasance of the Custodian;
provided, however, in no event shall the Custodian be liable for special,
indirect or consequential damages arising under or in connection with this
Agreement.
15
<PAGE> 21
(b) Actions Prohibited by Applicable Law, Events Beyond
---------------------------------------------------
Custodian's Control, Sovereign Risk, Etc.
- ----------------------------------------
In no event shall the Custodian or any Domestic Subcustodian
incur liability hereunder (i) if the Custodian or any Subcustodian or
Securities System, or any subcustodian, Securities System, Securities
Depository or Clearing Agency utilized by the Custodian or any such
Subcustodian, or any nominee of the Custodian or any Subcustodian
(individually, a "Person") is prevented, forbidden or delayed from
performing, or omits to perform, any act or thing which this Agreement
provides shall be performed or omitted to be performed, by reason of: (a) any
provision of any present or future law or regulation or order of the United
States of America, or any state thereof, or of any foreign country, or
political subdivision thereof or of any court of competent jurisdiction (and
neither the Custodian nor any other Person shall be obligated to take any
action contrary thereto); or (b) any event beyond the control of the
Custodian or other Person such as armed conflict, riots, strikes, lockouts,
labor disputes, equipment or transmission failures, natural disasters, or
failure of the mails, transportation, communications or power supply; or (ii)
for any loss, damage, cost or expense resulting from "Sovereign Risk." A
"Sovereign Risk" shall mean nationalization, expropriation, currency
devaluation, revaluation or fluctuation, confiscation, seizure, cancellation,
destruction or similar action by any governmental authority, de facto or de
jure; or enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting the Fund's Assets; or acts of armed
conflict, terrorism, insurrection or revolution; or any other act or event
beyond the Custodian's or such other Person's control.
(c) Liability for Past Records.
--------------------------
Neither the Custodian nor any Domestic Subcustodian shall
have any liability in respect of any loss, damage or expense suffered by the
Fund, insofar as such loss, damage or expense arises from the performance of
the custodian or any Domestic Subcustodian in reliance upon records that were
maintained for the Fund by entities other than the Custodian or any Domestic
Subcustodian prior to the Custodian's employment hereunder.
(d) Advice of Counsel.
-----------------
The Custodian and all Domestic Subcustodians shall be
entitled to receive and act upon advice of counsel of its own choosing on all
matters. The Custodian and all Domestic Subcustodians shall be without
liability for any actions taken or omitted in good faith pursuant to the
advice of counsel.
(e) Advice of the Fund and Others.
-----------------------------
The Custodian and any Domestic Subcustodian may rely upon
the advice of the Fund and upon statements of the Fund's accountants and
other persons believed by it in good faith to be expert in matters upon which
they are consulted, and neither the Custodian
16
<PAGE> 22
nor any Domestic Subcustodian shall be liable for any actions taken or omitted,
in good faith, pursuant to such advice or statements.
(f) Instructions Appearing to be Genuine.
------------------------------------
The Custodian and all Domestic Subcustodians shall be fully
protected and indemnified in acting as a custodian hereunder upon any
Resolutions of the Board of Directors or Trustees, Instructions, Special
Instructions, advice, notice, request, consent, certificate, instrument or
paper appearing to it to be genuine and to have been properly executed and
shall, unless otherwise specifically provided herein, be entitled to receive
as conclusive proof of any fact or matter required to be ascertained from the
Fund hereunder a certificate signed by any officer of the Fund authorized to
countersign or confirm Special Instructions.
(g) Exceptions from Liability.
-------------------------
Without limiting the generality of any other provisions
hereof, neither the Custodian nor any Domestic Subcustodian shall be under
any duty or obligation to inquire into, nor be liable for:
(i) the validity of the issue of any Securities
purchased by or for the Fund, the legality of the purchase thereof or
evidence of ownership required to be received by the Fund, or the propriety
of the decision to purchase or amount paid therefor;
(ii) the legality of the sale of any Securities by or
for the Fund, or the propriety of the amount for which the same were sold; or
(iii) any other expenditures, encumbrances of
Securities, borrowings or similar actions with respect to the Fund's Assets;
and may, until notified to the contrary, presume that all Instructions or
Special Instructions received by it are not in conflict with or in any way
contrary to any provisions of the Fund's Declaration of Trust, Partnership
Agreement, Articles of Incorporation or By-Laws or votes or proceedings of
the shareholders, trustees, partners or directors of the Fund, or the Fund's
currently effective Registration Statement on file with the SEC.
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
------------------------------------------------
(a) Domestic Subcustodians.
----------------------
The Custodian shall be liable for the acts or omissions of
any Domestic Subcustodian to the same extent as if such actions or omissions
were performed by the Custodian itself.
17
<PAGE> 23
(b) Securities Systems, Special Subcustodians, Securities
-----------------------------------------------------
Depositories and Clearing Agencies.
- ----------------------------------
The Custodian shall not be liable to the Fund for any loss,
damage or expense suffered or incurred by the Fund resulting from or
occasioned by the actions or omissions of a Securities System, Special
Subcustodian, or Securities Depository and Clearing Agency unless such loss,
damage or expense is caused by, or results from, the negligence or willful
misfeasance of the Custodian.
(c) Defaults or Insolvencies of Brokers, Banks, Etc.
-----------------------------------------------
The Custodian shall not be liable for any loss, damage or
expense suffered or incurred by the Fund resulting from or occasioned by the
actions, omissions, neglects, defaults or insolvency of any broker, bank,
trust company or any other person with whom the Custodian may deal (other
than any of such entities acting as a Subcustodian, Securities System or
Securities Depository and Clearing Agency, for whose actions the liability of
the Custodian is set out elsewhere in this Agreement) unless such loss,
damage or expense is caused by, or results from, the negligence or willful
misfeasance of the Custodian.
(d) Reimbursement of Expenses.
-------------------------
The Fund agrees to reimburse the Custodian for all
out-of-pocket expenses incurred by the Custodian in connection with this
Agreement, but excluding salaries and usual overhead expenses.
8. INDEMNIFICATION.
---------------
(a) Indemnification by Fund.
-----------------------
Subject to the limitations set forth in this Agreement, the
Fund agrees to indemnify and hold harmless the Custodian and its nominees
from all losses, damages and expenses (including attorneys' fees) suffered or
incurred by the Custodian or its nominee caused by or arising from actions
taken by the Custodian, its employees or agents in the performance of its
duties and obligations under this Agreement, including, but not limited to,
any indemnification obligations undertaken by the Custodian under any
relevant subcustodian agreement; provided, however, that such indemnity shall
not apply to the extent the Custodian is liable under Sections 6 or 7 hereof.
If the Fund requires the Custodian to take any action with
respect to Securities, which action involves the payment of money or which
may, in the opinion of the Custodian, result in the Custodian or its nominee
assigned to the Fund being liable for the payment of money or incurring
liability of some other form, the Fund, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the Custodian in an
amount and form satisfactory to it.
18
<PAGE> 24
(b) Indemnification by Custodian.
----------------------------
Subject to the limitations set forth in this Agreement and
in addition to the obligations provided in Sections 6 and 7, the Custodian
agrees to indemnify and hold harmless the Fund from all losses, damages and
expenses suffered or incurred by the Fund caused by the negligence or willful
misfeasance of the Custodian.
9. ADVANCES.
---------
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing Agency
acting either directly or indirectly under agreement with the Custodian (each
of which for purposes of this Section 9 shall be referred to as "Custodian"),
makes any payment or transfer of funds on behalf of the Fund as to which
there would be, at the close of business on the date of such payment or
transfer, insufficient funds held by the Custodian on behalf of the Fund, the
Custodian may, in its discretion without further Instructions, provide an
advance ("Advance") to the Fund in an amount sufficient to allow the
completion of the transaction by reason of which such payment or transfer of
funds is to be made. In addition, in the event the Custodian is directed by
Instructions to make any payment or transfer of funds on behalf of the Fund
as to which it is subsequently determined that the Fund has overdrawn its
cash account with the Custodian as of the close of business on the date of
such payment or transfer, said overdraft shall constitute an Advance. Any
Advance shall be payable by the Fund on demand by Custodian, unless otherwise
agreed by the Fund and the Custodian, and shall accrue interest from the date
of the Advance to the date of payment by the Fund to the Custodian at a rate
agreed upon in writing from time to time by the Custodian and the Fund. It
is understood that any transaction in respect of which the Custodian shall
have made an Advance, including but not limited to a foreign exchange
contract or transaction in respect of which the Custodian is not acting as a
principal, is for the account of and at the risk of the Fund, and not, by
reason of such Advance, deemed to be a transaction undertaken by the
Custodian for its own account and risk. The Custodian and the Fund
acknowledge that the purpose of Advances is to finance temporarily the
purchase or sale of Securities for prompt delivery in accordance with the
settlement terms of such transactions or to meet emergency expenses not
reasonably foreseeable by the Fund. The Custodian shall promptly notify the
Fund of any Advance. Such notification shall be sent by facsimile
transmission or in such other manner as the Fund and the Custodian may agree.
10. LIENS.
-----
The Bank shall have a lien on the Property in the Custody Account
to secure payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any
purpose or in the event that the Bank or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of its duties hereunder, except such as may
arise from its or its nominee's negligent action, negligent failure to act or
willful misconduct, any Property at
19
<PAGE> 25
any time held for the Custody Account shall be security therefor and the Fund
hereby grants a security interest therein to the Bank. The Fund shall promptly
reimburse the Bank for any such advance of cash or securities or any such
taxes, charges, expenses, assessments, claims or liabilities upon request for
payment, but should the Fund fail to so reimburse the Bank, the Bank shall be
entitled to dispose of such Property to the extent necessary to obtain
reimbursement. The Bank shall be entitled to debit any account of the Fund
with the Bank including, without limitation, the Custody Account, in connection
with any such advance and any interest on such advance as the Bank deems
reasonable.
11. COMPENSATION.
-------------
The Fund will pay to the Custodian such compensation as is agreed
to in writing by the Custodian and the Fund from time to time. Such
compensation, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 7(e), shall be billed to the Fund and
paid in cash to the Custodian.
12. POWERS OF ATTORNEY.
-------------------
Upon request, the Fund shall deliver to the Custodian such
proxies, powers of attorney or other instruments as may be reasonable and
necessary or desirable in connection with the performance by the Custodian or
any Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
---------------------------
The Fund or the Custodian may terminate this Agreement by notice
in writing, delivered or mailed, postage prepaid (certified mail, return
receipt requested) to the other not less than 90 days prior to the date upon
which such termination shall take effect. Upon termination of this
Agreement, the Fund shall pay to the Custodian such fees as may be due the
Custodian hereunder as well as its reimbursable disbursements, costs and
expenses paid or incurred. Upon termination of this Agreement, the Custodian
shall deliver, at the terminating party's expense, all Assets held by it
hereunder to the Fund or as otherwise designated by the Fund by Special
Instructions. Upon such delivery, the Custodian shall have no further
obligations or liabilities under this Agreement except as to the final
resolution of matters relating to activity occurring prior to the effective
date of termination.
This Agreement may not be assigned by the Custodian or the Fund
without the respective consent of the other, duly authorized by a resolution
by its Board of Directors or Trustees.
20
<PAGE> 26
14. NOTICES.
--------
All notices, requests, instructions or other writings which may be
or are required to be given by either the Fund or Custodian under this
Agreement shall be properly given only if made in writing (except as
expressly provided to the contrary in this Agreement) and sent by: (a) hand
delivery, (b) electronic transfer device with telephone or other confirmation
or receipt (confirmed in writing by sender within one (1) business day), or
(c) a nationally recognized overnight delivery service (such as Federal
Express, UPS Next Day Air, Purolator Courier or Airborne Express), with all
delivery charges paid by the sender and addressed to the recipient as
follows, or at such other address as each may request in writing. Such
notices shall be deemed received (1) if delivered by hand or overnight
delivery service on the date of delivery or (2) if sent by electronic
transfer on the date of transmission. The refusal to accept delivery shall
constitute acceptance and, in such event, the date of delivery shall be the
date on which delivery was refused. Said addresses for notices are to be as
follows:
IF TO THE FUND:
Builders ProLoan Fund, Inc.
222 South Central Avenue
Suite 300
Clayton, Missouri 63105
Attn: John W. Stewart, President
IF TO THE CUSTODIAN:
UMB Bank, N.A., Attn: Securities Administration Department
928 Grand Blvd.
Tenth Floor
Kansas City, Missouri 64106
Attn: Ralph R. Santoro
15. MISCELLANEOUS.
--------------
(a) This Agreement is executed and delivered in the State
of Missouri and shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement
shall be binding upon, and inure to the benefit of, and be enforceable by the
respective successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended,
modified or waived, in any manner except in writing, properly executed by
both parties hereto; provided, however, Appendix A may be amended from time
to time as Domestic Subcustodians,
21
<PAGE> 27
Special Subcustodians, and Securities Depositories and Clearing Agencies are
approved or terminated according to the terms of this Agreement.
(d) The captions in this Agreement are included for
convenience of reference only, and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of
execution hereof.
(f) This Agreement may be executed simultaneously in two
or more counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
(g) The following terms are defined terms within the
meaning of this Agreement, and the definitions thereof are found in the
following sections of the Agreement:
<TABLE>
<CAPTION>
Term Section
<S> <C>
Account 4(b)(3)(ii)
ADRs 4(j)
Advance 9
Assets 2
Authorized Person 3
Banking Institution 4(1)
Domestic Subcustodian 5(a)
Instruction 2(c)(1)
Interest Bearing Deposit 4(1)
Liens 10
OCC 4(g)(1)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2(a)
Securities Depositories 5(b)
and Clearing Agencies
Securities System 4(b)(3)
Shares 4(5)
Sovereign Risk 6(b)
Special Instruction 2(c)(2)
Special Subcustodian 5(d)
Subcustodian 5
1940 Act 4(v)
</TABLE>
22
<PAGE> 28
(h) If any part, term or provision of this Agreement is
held to be illegal, in conflict with any law or otherwise invalid by any
court of competent jurisdiction, the remaining portion or portions shall be
considered severable and shall not be affected, and the rights and
obligations of the parties shall be construed and enforced as if this
Agreement did not contain the particular part, term or provision held to be
illegal or invalid.
(i) This Agreement constitutes the entire understanding
and agreement of the parties hereto with respect to the subject matter
hereof, and accordingly supersedes, as of the effective date of this
Agreement, any custodian agreement heretofore in effect between the Fund and
the Custodian.
IN WITNESS WHEREOF, The parties hereto have caused this
Custody Agreement to be executed by their duly respective authorized
officers.
Builders ProLoan Fund, Inc.
ATTEST:
By: /s/ John W. Stewart
/s/ James A. Winkelmann
- ----------------------------- ----------------------------------
James A. Winkelmann, Name: John W. Stewart
Treasurer --------------------------------
Title: President
-------------------------------
Date: October 21, 1997
--------------------------------
UMB Bank, N.A.
ATTEST:
By: /s/ Ralph R. Santoro
- ------------------------------ ----------------------------------
Name: Ralph R. Santoro
--------------------------------
Title: Senior Vice President
-------------------------------
Date: October 21, 1997
--------------------------------
23
<PAGE> 29
UMB BANK, N.A.
DOMESTIC CUSTODY FEE SCHEDULE
-----------------------------
NET ASSET VALUE FEES
- -------------------------------------------------------------------------------
To be computed as of month-end on the average net asset value of each
portfolio at the annual rate of:
1.00 basis point on the first $100,000,000 of each portfolio's
net assets; plus
.75 basis points on the next $100,000,000 of each portfolio's net
assets; plus
.50 basis points on each portfolio's net assets in excess of
$200,000,000; subject to a $250.00 per month minimum per
portfolio.
<TABLE>
PORTFOLIO TRANSACTION FEES
- -------------------------------------------------------------------------------
<S> <C>
DTC<F*> $ 6.00
PTC<F*> 12.00
Fed Book Entry<F*> 8.00
Physical<F*> 20.00
Principal & Interest Payments 5.00
Options/Futures 25.00
Corporate Actions/Calls/Reorgs 25.00
Third-Party VRDN (Bank Book Entry)<F*> 15.00
UMB Repurchase Agreements 5.00
Tri-Party Repurchase Agreements 15.00
Checks Issued (Non-Settlement Related) 8.00
Wires In/Out (Non-Settlement Related 8.00
<FN>
<F*>A transaction includes buys, sells, maturities, or free security movements.
</TABLE>
OUT-OF-POCKET EXPENSES
- -------------------------------------------------------------------------------
Includes, but is not limited to, security transfer fees, certificate fees,
shipping/courier fees or charges, FDIC insurance premiums, specialized
programming charges, and system access/connect charges.
This fee schedule pertains to custody of U.S. Domestic assets only. Fees for
services not contemplated by this schedule are negotiated on a case-by-case
basis.
24
<PAGE> 30
APPENDIX A
DOMESTIC SUBCUSTODIANS:
United Missouri Bank Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant's Trust Company
Builders ProLoan Fund, Inc. UMB Bank, N.A.
By: /s/ John W. Stewart By:
-------------------------------- -------------------------------------
Name: John W. Stewart Name:
------------------------------ -----------------------------------
Title: President Title:
----------------------------- ----------------------------------
Date: October __, 1997 Date:
------------------------------- -----------------------------------
25
<PAGE> 31
APPENDIX B
VALUATION METHOD
FOR
COMMITMENTS TO ACQUIRE MORTGAGE-BACKED SECURITIES
Commitments to acquire mortgage-backed securities secured by
Qualified Mortgage Loans ("QMLs") generated through the ProLoan program and
entered into by the Builders ProLoan Fund, Inc. ("Fund") shall be valued at an
amount equal to the principal amount of the underlying QMLs multiplied by any
positive difference between the price at which the Fund committed to acquire
the mortgage-backed securities and the six-month forward to-be-announced
("TBA") price of Fannie Mae mortgage-backed securities with the one-half
percent (1/2%) coupon rate increment nearest to, but not greater than, the
weighted average yield for all such QMLs, minus 0.625% (the approximate amount
that would be spent by the Fund for servicing, guarantee fees and
securitization costs had such QMLs been securitized).
The Custodian will value the Fund's commitments to acquire ProLoan
mortgage-backed securities at the above price, as long as this price is
considered by the Fund's Manager, Capital Mortgage Management, Inc., to be no
more than the fair market value of the commitments. The Manager will notify the
Custodian promptly if it considers the above price to represent more than the
fair market value of the commitments.
26
<PAGE> 1
Exhibit 8(b)
FUND ACCOUNTING AGREEMENT
THIS AGREEMENT is made as of the 21st day of October, 1997, by and
between UMB BANK, N.A., a national banking association with its principal
place of business located at Kansas City, Missouri ("UMB") and each of the
Funds which have executed the signature page hereof together with such
additional Funds which shall be made parties to this Agreement by the
execution of a separate signature page hereto (individually, a "Fund" and
collectively, the "Funds").
W I T N E S S E T H :
WHEREAS, each Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, each Fund wishes to retain UMB to provide certain accounting
services, and UMB is willing to furnish such services;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Funds hereby appoint UMB to provide certain
-----------
accounting services to the Funds for the period and on the terms set forth in
this Agreement. UMB accepts such appointment and agrees to furnish the
services herein set forth in return for the compensation as provided in
Paragraph 13 of this Agreement.
2. Delivery of Documents. Each Fund has furnished UMB with copies,
---------------------
properly certified or authenticated, with all amendments or supplements
thereto, of the following documents:
(a) Certificate of Incorporation (or equivalent document) of
the Fund as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund
appointing UMB and approving the form of this Agreement; and
(d) The Fund's current prospectus and statement of additional
information. In addition, each Fund shall promptly furnish UMB with copies of
any updates, amendments or supplements to the foregoing documents.
3. Authorized Persons. Concurrently with the execution of this
------------------
Agreement, each Fund shall deliver to UMB copies of a Resolution of its Board
of Directors and all amendments or supplements thereto, properly certified or
authenticated, designating certain officers or employees of each such Fund
who will have continuing authority to certify to UMB the names, titles,
signatures and scope of authority of all persons authorized to give Proper
Instructions or any other notice, instruction, certificate, instrument or
other communication on behalf of each such Fund (collectively, the
"Authorized Persons" and individually, an "Authorized Person"). Such
Resolutions and certificates may be accepted and relied upon by UMB as
conclusive evidence of the facts set forth therein and shall be considered to
be in full force and effect until delivery to UMB of a similar Resolution or
certificate to the contrary. Upon delivery of a certificate which deletes or
does not include the name(s) of a person previously authorized to give Proper
Instructions, such person(s) shall no longer be considered an Authorized
Person authorized to give Proper Instructions. Unless the certificate
specifically requires that the approval of another Authorized Person must
first have been obtained, UMB will be under no obligation to inquire into the
right of the person giving such Proper Instructions to do so.
<PAGE> 2
4. Proper Instructions.
-------------------
(a) Unless otherwise provided in this Agreement, UMB shall act
only upon Proper Instructions. Proper Instructions shall mean: (i) a tested
telex, a written (including, without limitation, facsimile transmission)
request, direction, instruction or certification signed or initialed by or on
behalf of a Fund by two or more Authorized Persons; (ii) a telephonic or
other oral communication from a person UMB reasonably believes to be an
Authorized Person; or (iii) a communication effected directly between an
electro-mechanical or electronic device or system (including, without
limitation, computers) on behalf of a Fund. Instructions given by facsimile
transmission will be considered Proper Instructions if UMB reasonably
believes them to have been given by Authorized Persons. Instructions in the
form of oral communications shall be confirmed by the Fund by tested telex or
in writing in the manner set forth in clause (i) above, but the lack of such
confirmation shall in no way affect any action taken by UMB in reliance upon
such oral instructions prior to UMB's receipt of such confirmation. Each Fund
authorizes UMB to tape record any and all telephonic or other oral
instructions given to UMB by or on behalf of a Fund (including any of its
respective officers, directors, employees or agents or any investment manager
or subadviser of a Fund or person or entity with similar responsibilities
which is authorized to give Proper Instructions on behalf of a Fund to UMB).
Proper Instructions may be in the form of standing instructions.
(b) Although UMB may know of the provisions of the Certificates
of Incorporation (or equivalent document) and By-Laws of the Funds, UMB may
assume that any Proper Instructions received hereunder are not in any way
inconsistent with any provisions of such Certificates of Incorporation (or
equivalent document) or By-Laws or any vote, resolution or proceeding of the
Funds' shareholders, or of the Boards of Directors or of any committees
thereof. UMB shall be entitled to rely upon any Proper Instructions actually
received by it pursuant to this Agreement.
5. Services on a Continuing Basis.
-------------------------------
(a) With respect to each Fund, UMB will perform the following
accounting functions on a daily basis:
(1) Journalize the Fund's investment, capital share and
income and expense activities;
(2) Verify investment buy/sell trade tickets received
from the Fund's investment subadviser or from the Fund, as the case might be,
and transmit trades to the Fund's custodian for proper settlement;
(3) Maintain individual ledgers for investment
securities;
(4) Maintain historical tax lots for each security;
(5) Reconcile cash and investment balances of the Fund
with the Fund's custodian, and provide the Fund's investment subadviser with
the beginning cash balance available for investment purposes;
(6) Update the cash availability throughout the day as
required by the Fund's investment subadviser;
(7) Post to and prepare the Fund's Statement of Assets
and Liabilities and the Statement of Operations;
<PAGE> 3
(8) Calculate various contractual expenses (e.g.,
advisory, subadvisory, administrative, transfer agency and custody fees);
(9) Calculate capital gains and losses;
(10) Determine the Fund's net income;
(11) Obtain security market quotes from services approved
by the Fund's investment subadviser, or if such quotes are unavailable, then
obtain such prices from the Fund's investment subadviser, and in either case
calculate the market value of the Fund's investments;
(12) Value the assets of the Fund, including the valuation
of the Fund's commitments to acquire mortgage-backed securities secured by
Qualified Mortgage Loans (as defined in the Fund's current registration
statement) and originated through the ProLoan program according to the formula
set forth on Appendix C attached hereto, and compute the net asset value per
share of the Fund at such times and dates and in the manner specified in the
Fund's then currently effective prospectus and statement of additional
information. The Fund's Manager, Capital Mortgage Management, Inc., will
provide UMB with the price at which the Fund committed to acquire the
outstanding mortgage-backed securities, the dollar amount of the outstanding
commitments and the weighted average coupon rate of those commitments by no
later than 3:00 p.m. Eastern standard each business day.
(13) Monitor the expense accruals and notify Fund
management of any proposed adjustments; and
(14) Receive and act on notices, instructions,
certificates, instruments or other communication from a Fund's shareholder
servicing agent and/or transfer agents.
(b) In addition to the accounting services described in the
foregoing Paragraph 5(a), UMB will:
(1) Prepare monthly financial statements, which will
include the following items:
Statement of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Cash Statement
Schedule of Capital Gains and Losses; and
(2) At the reasonable request of the Fund, assist in the
preparation of various reports or other financial documents required by
federal, state and other appropriate laws and regulations.
6. Records. With respect to each Fund, UMB shall keep all books and
-------
records with respect to the Fund's books of account as requested to be
maintained under this Agreement. The books and records pertaining to the
Funds which are in the possession of UMB shall be the property of the Funds.
The Funds, or the Funds' authorized representatives, shall have access to
such books and records at all times during UMB's normal business hours. Upon
the reasonable request of a Fund, copies of any such books and records shall
be provided by UMB to the Fund or the Fund's authorized representative at the
Fund's expense.
<PAGE> 4
7. Liaison with Accountants. UMB shall act as liaison with the
------------------------
Funds' independent public accountants and shall provide account analyses,
fiscal year summaries, and other audit related schedules.
8. Confidentiality. UMB agrees on behalf of itself and its employees
---------------
to treat confidentially and as proprietary information of the Funds all
records and other information relative to the Funds and their prior, present
or potential shareholders, and not to use such records and information for
any purpose other then performance of its responsibilities and duties
hereunder, except, (1) after notification to and approval by a Fund, which
approval shall not be unreasonably withheld and may not be withheld where UMB
may be exposed to civil or criminal contempt proceedings for failure to comply
when requested to divulge such information by duly constituted authorities; (2)
when so requested by a Fund; or (3) where otherwise permitted by law.
9. Equipment Failures. In the event of equipment failures, UMB
------------------
shall, at no additional expense to the Funds, take reasonable steps to
minimize service interruptions.
10. Right to Receive Advice.
-----------------------
(a) Advice of Funds. If UMB shall be in doubt as to any action
---------------
to be taken or omitted by it, it may request, and shall promptly receive,
from the relevant Fund or Funds directions or advice, including Proper
Instructions where appropriate.
(b) Advice of Counsel. If UMB shall be in doubt as to any
-----------------
question of law involved in any action to be taken or omitted by UMB, it may
request advice from counsel of its own choosing but subject to approval by
the Funds (such approval shall not unreasonably be withheld).
(c) Conflicting Advice. In case of conflict between directions,
-------------------
advice or Proper Instructions received by UMB pursuant to subsection (a) of
this paragraph and advice received by UMB pursuant to subsection (b) of this
paragraph, UMB shall be entitled to rely on and follow the advice received
pursuant to the latter provision alone.
(d) Protection of UMB. UMB shall be protected in any action or
-----------------
inaction which it takes in reliance on any directions, advice or Proper
Instructions received pursuant to subsections (a) or (b) of this paragraph
which UMB, after receipt of any such directions, advice or Proper
Instructions, believes to be consistent with such directions, advice or
Proper Instructions, as the case may be. However, nothing in this paragraph
shall be construed as imposing upon UMB any obligation (i) to seek such
directions, advice or Proper Instructions, or (ii) to act in accordance with
such directions, advice or Proper Instructions when received, unless, under
the terms of another provision of this Agreement, the same is a condition to
UMB's properly taking or omitting to take such action. Nothing in this
subsection shall excuse UMB when an action or omission on the part of UMB
constitutes willful misfeasance, bad faith, negligence or reckless disregard
by UMB of its duties under this Agreement.
11. Compliance with Governmental Rules and Regulations. Each Fund
--------------------------------------------------
assumes full responsibility for ensuring that the Fund complies with its
investment objectives, policies and limitations. Each Fund further assumes
full responsibility for ensuring that the Fund complies with all applicable
requirements of the Securities Act of 1933 ("1933 Act"), the Securities
Exchange Act of 1934 ("1934 Act"), the 1940 Act, the Commodities Exchange
Act, Subchapter M of the Internal Revenue Code of 1986, as amended, and all
regulations thereunder, and any laws, rules and regulations of governmental
authorities having jurisdiction.
<PAGE> 5
12. Notices. Instructions, Certificates, Instruments or other
---------------------------------------------------------
Communications. With respect to any notices, instructions, certificates,
instruments or other communications from a Fund's custodian, UMB shall be
authorized to rely and act upon its own internal sources of communication for
so long as UMB is also serving as custodian for such Fund. With respect to
any notices, instructions, certificates, instruments or other communications
from a Fund, any investment manager, subadviser, shareholder servicing agent
or transfer agent for a Fund, any custodian other than UMB, or any other
source, UMB shall be entitled to rely and act upon any such notices,
instructions, certificates, instruments or other communications it reasonably
believes to be genuine.
13. Fees and Expenses.
-----------------
(a) As compensation for the services rendered by UMB during the
term of this Agreement, each of the Funds will pay to UMB a fee, as specified
in the Fee Schedule, attached hereto as Appendix A to this Agreement, as may
be revised from time to time in writing by the Funds and UMB.
(b) In addition to the fees paid pursuant to the Fee Schedule,
the Funds agree to reimburse UMB for its cash disbursements, expenses or
charges in connection with the Agreement as previously authorized by the
Fund(s) (excluding salaries and usual overhead expenses).
(c) UMB will, on a timely basis, bill each Fund separately with
respect to fees and all amounts for which UMB is to be reimbursed. Each Fund
will promptly pay to UMB the amount of such billing.
(d) UMB in its sole discretion may from time to time employ or
associate with itself such person or persons as UMB may believe to be
particularly suited to assist it in performing services under this Agreement.
The compensation of such person or persons shall be paid by UMB and no
obligation shall be incurred on behalf of any Fund.
14. Responsibility of UMB. UMB shall be under no duty to take any
---------------------
action on behalf of the Funds except as specifically set forth herein or as
may be specifically agreed to by UMB in writing. UMB shall not be liable for
any error in judgment or mistake at law for any loss suffered by the Funds in
connection with any matters to which this Agreement relates, but nothing
herein contained shall be construed to protect UMB against any liability by
reason of willful misfeasance, bad faith or negligence in the performance of
its duties or by reason of its reckless disregard of its obligations and
duties under this Agreement. Without limiting the generality of the foregoing
or of any other provision of this Agreement, UMB, in connection with its
duties under this Agreement, shall not be under any duty or obligation to
inquire into and shall not be liable for or in respect of (a) the validity or
invalidity or authority or lack thereof of any Proper Instruction, notice,
certificate, instrument or other communication from either a Fund or other
source which conforms to the applicable requirements of this Agreement, and
which UMB reasonably believes to be genuine; (b) prices obtained in the
manner set forth in paragraphs 5(a)(11); or (c) delays or errors or loss of
data occurring by reason of circumstances beyond UMB's control, including,
without limitation, acts of civil or military authority, national
emergencies, labor difficulties, fire, earthquakes, mechanical breakdowns
(except as provided in paragraph 9), flood or catastrophe, act of God,
insurrection, war, riots or failure of the mails, transportation,
communication or power supply.
15. Responsibility of UMB in Computing Net Asset Value. In computing
--------------------------------------------------
the net asset value per share of the Fund, UMB may rely upon any information
furnished to it including, without limitation, information as to (a) accrual
of liabilities of the Fund and
<PAGE> 6
liabilities of the Fund not appearing on the books of account kept by UMB, (b)
the existence, status and proper treatment of reserves, if any, authorized by
the Fund, (c) the sources of quotations to be used in computing the net asset
value, (d) the fair value to be assigned to any securities or other property for
which price quotations are not readily available, and (e) the sources of
information with respect to "corporate actions" affecting portfolio securities
of the Fund. (Information as to "corporate actions" shall include information as
to dividends, distributions, interest payments, prepayments, stock splits, stock
dividends, rights offerings, conversions, exchanges, recapitalizations, mergers,
redemptions, calls, maturity dates and similar actions, including the
tax-dividend and record dates and the amounts or other terms thereof.)
Notwithstanding any other provisions of this Agreement, including
Section 14, the following provisions shall apply with respect to UMB's
computation of the Fund's net asset value: UMB shall be held to the exercise
of reasonable care in computing and determining net asset value as provided
in paragraph 5(a)(12), but shall not be held accountable or liable for any
losses, damages or expenses the Fund or any shareholder or former shareholder
of the Fund may suffer or incur arising from or based upon errors or delays
in the determination of such net asset value unless such error or delay was
due to UMB's negligence or willful misfeasance in the computation and
determine of such net asset value. (The parties hereto acknowledge, however,
that UMB's causing an error or delay in determination of net asset value may,
but does not in and of itself, constitute negligence or willful misfeasance.)
Without limiting the foregoing, UMB shall not be held accountable or
liable to the Fund, any shareholder or former shareholder thereof or any
other person for any delays or losses, damages or expenses any of them may
suffer or incur resulting from (1) UMB's failure to receive timely and
suitable notification concerning quotations, corporate actions or similar
matters relating to or affecting portfolio securities of the Fund or (2) any
errors in the computation of the net asset value based upon or arising out of
quotations or information as to corporate actions if received by UMB from a
source which UMB was authorized to rely upon. Nevertheless, UMB will use its
best judgment in determining whether to verify through other sources any
information it has received as to quotations or corporate actions if UMB has
reason to believe that any such information is incorrect.
16. Indemnification. The Funds agree to indemnify and hold harmless
---------------
UMB and its nominees from all taxes, charges, expenses, assessments, claims
and liabilities (including, without limitation, liabilities arising under the
1933 Act, the 1934 Act, the 1940 Act, the CEA, Subchapter M of the Internal
Revenue Code and any regulations thereunder, and any state securities and
blue sky laws, all as or to be amended from time to time) and expenses,
including (without limitation) attorneys' fees and disbursements, arising
directly or indirectly from any action or thing which UMB takes or does or
omits to take or do in reliance upon any Proper Instruction, notice,
certificate, instrument or other communication from a Fund, or from a Fund's
custodian, investment manager, subadviser, shareholder servicing agent or
transfer agent, which conforms to the applicable requirements of this
Agreement provided that neither UMB nor any of its nominees shall be
indemnified against any liability to the Funds or to their shareholders (or
any expenses incident to such liability) arising out of UMB's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations specifically described in the Agreement.
17. Liability for Past Records. UMB shall not have any liability in
--------------------------
respect of any loss, damage or expense suffered by any Fund, insofar as such
loss, damage or expense arises from the performance of UMB in reliance upon
records that were maintained for any Fund by entities other than UMB.
<PAGE> 7
18. Duration and Termination. This Agreement shall continue until
------------------------
termination by either UMB or a Fund or Funds on sixty days' written notice.
19. Notices. Written notices (including but not limited to written
-------
Proper Instructions) shall be addressed: (a) if hand-delivered to UMB, to the
Securities Administration Department of UMB at its office at 928 Grand
Boulevard, Kansas City, Missouri 64106; (b) if to a Fund, at the address of
the Fund as listed on Appendix B; or (c) at such other address as shall have
been notified to the other party in writing. Notices may be sent by first
class mail, in which case it shall be deemed to have been given two days after
it is sent, or if sent by messenger, it shall be deemed to have been given on
the day it is delivered, or if sent by certified or registered mail, it shall
be deemed to have been given on the day it is received. All postage, cable,
telex or facsimile sending device charges arising from the sending of a notice
hereunder shall be paid by the sender.
20. Further Actions. Each party agrees to perform such further acts
---------------
and execute such further documents as are necessary to effectuate the
purposes hereof.
21. Amendments; Waiver. This Agreement or any part hereof may be
------------------
amended, modified or waived only by an instrument in writing signed by both
parties hereto.
22. Additional Funds. An additional Fund or Funds may become a party
----------------
to this Agreement after the date hereof by an instrument in writing to such
effect signed by such Fund or Funds and UMB. If this Agreement is terminated
as to one or more of the Funds (but less than all of the Funds) or if an
additional Fund or Funds shall become a party to this Agreement, there shall
be delivered to each party an Appendix B or an amended Appendix B signed by
each of the additional Funds (if any) and each of the remaining Funds as well
as the Custodian, deleting or adding such Fund or Funds, as the case may be.
The termination of this Agreement as to less than all of the Funds shall not
affect the obligations of UMB and the remaining Funds hereunder as set forth
on the signature page hereto and in Appendix B as revised from time to time.
23. Assignment. Neither this Agreement nor any rights or obligations
----------
hereunder may be assigned by either party without the written consent of the
other party.
24. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered
by each of the parties.
25. Miscellaneous. This Agreement embodies the entire agreement and
-------------
understanding between the parties thereto, and supersedes all prior
agreements and understandings, relating to the subject matter hereof,
provided that the parties hereto may embody in one or more separate documents
their agreement, if any, with respect to Proper Instructions. The captions in
this Agreement are included for convenience of reference only and in no way
define or delimit any of the provisions hereof or otherwise affect their
construction or effect. This Agreement shall be deemed to be a contract made
in Missouri and governed by Missouri law. If any provision of this Agreement
shall be held or made invalid by a court decision, statute, rule, regulation
or otherwise, the remainder of this Agreement shall not be affected thereby.
This Agreement shall be binding and shall inure to the benefit of the parties
hereto and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
<PAGE> 8
ATTEST: UMB BANK, N.A.
/s/ James A. Winkelmann By: /s/ Ralph R. Santoro
- ---------------------------------- ---------------------------
Treasurer Ralph R. Santoro
Title: Senior Vice President
BUILDERS PROLOAN FUND, INC.
ATTEST:
By: /s/ John W. Stewart
---------------------------
John W. Stewart
Title: Director, President
and Secretary
<PAGE> 9
APPENDIX A
FUND ACCOUNTING AGREEMENT
FEE SCHEDULE
Asset-based Fees - US Domestic Portfolios
To be computed as of month-end on the average monthly net asset value
of each portfolio at the annual rate of:
3.0 basis points on the first $100,000,000 of average net assets;
plus
2.0 basis points on the next $250,000,000 of average net assets;
plus
1.0 basis point on the next $650,000,000 of average net assets;
plus
0.5 basis point on average net assets in excess of
$1,000,000,000;
subject to an annual minimum of $24,000.
Out-of-Pocket Expenses
Includes, but is not limited to, security pricing charges,
telecommunication line and equipment charges, portfolio recalculations, and
special programming requests.
Fees for services not contemplated by this schedule shall be negotiated
on a case-by-case basis.
<PAGE> 10
APPENDIX B
FUND ACCOUNTING AGREEMENT
The following open-end management investment companies ("Funds") are
hereby made parties to the Fund Accounting Agreement dated -----------------,
1997, with UMB Bank, N.A. ("UMB"), and agree to be bound by all the terms and
conditions contained in said Agreement:
ATTEST: Builders Proloan Fund, Inc.
(Name of Fund)
By:
John W. Stewart
Title: President
Address: 222 S. Central Ave., Suite 300
St. Louis, Missouri 63105
ATTEST: UMB BANK, N.A.
By:
Title:
<PAGE> 11
APPENDIX C
VALUATION METHOD
FOR
PROLOAN QUALIFIED MORTGAGE LOAN COMMITMENTS
Commitments to acquire mortgage-backed securities secured by ProLoan
Qualified Mortgage Loans ("QMLs") entered into by the Builders ProLoan Fund,
Inc. ("Fund") shall be valued at an amount equal to the principal amount of
the underlying QMLs multiplied by any positive difference between the price
at which the Fund committed to acquire the mortgage-backed securities and the
six-month forward to-be-announced ("TBA") price of Fannie Mae mortgage-backed
securities with a one-half percent (1/2%) coupon rate increment nearest to, but
not greater than, the weighted average yield for all such QMLs, minus 0.625%
(the approximate amount that would be spent by the Fund for servicing,
guarantee fees and securitization costs had such QMLs been securitized).
The Custodian will value the Fund's commitments to acquire ProLoan
mortgage-backed securities at the above price, as long as this price is
considered by the Fund's Manager, Capital Mortgage Management, Inc., to be no
more than the fair market value of the commitments. The Manager will notify the
Custodian promptly if it considers the above price to represent more than the
fair market value of the commitments.
<PAGE> 1
PROLOAN MASTER AGREEMENT
THIS PROLOAN MASTER AGREEMENT (the "Agreement") entered into this
- ---------- day of ------------, 1997, by and between Builders ProLoan Fund,
Inc., a Maryland corporation (the "Fund") with its principal place of
business at 222 South Central Avenue, Suite 300, St. Louis, MO 63105, and
- ----------------, a bank with its principal place of business at
- ---------------- (the "Originator").
WHEREAS, the Fund desires to acquire mortgage-backed securities secured
by home mortgages originated through the ProLoan program, as described in the
Fund's most currently effective registration statement filed with the
Securities and Exchange Commission (the "ProLoan Program"), pursuant to which
borrowers of homes that are substantially union-built and newly constructed
or substantially renovated may qualify for home mortgage loans with an
extended interest rate protection period ("Qualified Mortgage Loans");
WHEREAS, the Originator desires to originate Qualified Mortgage Loans
under the ProLoan Program and to submit pools of such Loans to the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
as appropriate, to be securitized; and
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties to this Agreement agree as follows:
I. ORIGINATION OF QUALIFIED MORTGAGE LOANS
A. Qualified Mortgage Loans. As described in the Fund's current
------------------------
prospectus, a copy of which has been delivered to the Originator, a Qualified
Mortgage Loan is defined as a home mortgage loan originated with respect to a
single- or multi-family home that will be newly constructed or substantially
renovated by a contractor and subcontractors who have been approved by
Capital Mortgage Management, Inc., the Fund's manager (the "Manager"), and
that is located in a subdivision or other site approved by the Manager.
Single family homes shall include PUD units or condominiums which have
received all applicable project approvals from GNMA, FNMA and/or FHLMC. To
the extent the above description of a Qualified Mortgage Loan differs from
the description contained in the Fund's current registration statement, such
registration statement shall govern the terms of this Agreement.
B. Rate Schedule. The Fund's subadviser, Commerce Bank, N.A. (the
-------------
"Subadviser") shall establish and transmit via facsimile to the Originator no
less than weekly a schedule of the interest rate and the discount points
("Rate Schedule") at which the Originator shall offer Qualified Mortgage
Loans for the time period specified in the Rate Schedule. The Rate Schedule
shall be transmitted on the day of the week set forth in the "Current Terms
of the ProLoan Program," as amended from time to time, as attached hereto as
Exhibit A (the "Terms Sheet"). A Rate Schedule shall remain in effect for a
period of seven (7) calendar days, unless
<PAGE> 2
the Originator receives via facsimile a new Rate Schedule from the Subadviser
prior to that time. The Subadviser may change a Rate Schedule at any time
while it is in effect by facsimile notice to the Originator, which notice
shall be effective upon receipt by the Originator.
As used herein, "interest rate" shall mean the loan interest rate payable by
the borrower on his or her Qualified Mortgage Loan and "discount points"
shall mean the percentage of the principal amount (if any) of a Qualified
Mortgage Loan charged to the borrower by the Originator at loan closing and
taken into account in calculating the Bid Price pursuant to Section I.(J)
below.
C. PROLOAN APPLICATIONS. Originator hereby agrees to offer
--------------------
Qualified Mortgage Loans to borrowers at the interest rate and discount
points specified in the current Rate Schedule in effect on the "Rate
Determination Date," which shall be the date on which the Originator accepts
the borrower's ProLoan application or, if the Originator permits the borrower
to select a later date, on the date selected by the borrower. Originator
shall accept and process ProLoan applications for Qualified Mortgage Loans
according to its usual and customary procedures for applications for mortgage
loans with similar characteristics.
Each week, on the day of the week set forth in the Terms Sheet, Originator
shall prepare and deliver via facsimile to the Fund a Disclosure Statement
signed by an officer of the Originator that lists, for the week ended on the
immediately preceding day, the following information: (i) with respect to
each ProLoan application received by the Originator during such week, the
applicant's name and principal loan amount, the identity of the builder and
the location of the subdivision in which the borrower's home is to be
constructed or substantially renovated; (ii) the name of each borrower whose
Rate Determination Date fell within such week; and (iii) the Rate
Determination Date for each such borrower.
D. PROLOAN COMMITMENT FEE. On the date that a borrower submits a
----------------------
ProLoan application for a Qualified Mortgage Loan, the borrower shall pay to
the Originator a commitment fee as specified in the Terms Sheet. Originator
shall remit the aggregate amount of all commitment fees received by the
Originator during the previous week to the Fund weekly, on the day of the
week set forth in the Terms Sheet. The Fund shall not be committed to
acquire an issue of mortgage-backed securities secured by a particular
Qualified Mortgage Loan until the Originator has received a commitment fee in
good funds for that Loan. On each day that the Originator is open for
business, the Originator shall transmit via facsimile to the Manager and the
Subadviser a report signed by an officer of the Originator that lists: (1)
the name and principal loan amount of each borrower who has submitted a
ProLoan application that day; (2) the amount of such ProLoan applicant's
commitment fee; and (3) the terms of the borrower's Qualified Mortgage Loan,
including the interest rate if the borrower has chosen to lock in an interest
rate on that day.
The commitment fee shall be credited by the Fund to the borrower at the
closing of the Qualified Mortgage Loan as required by its terms. If a
Qualified Mortgage Loan is not closed within the one hundred eighty (180) day
period (plus any extensions thereof approved in advance by the
2
<PAGE> 3
Subadviser), the Fund shall retain for its own account the commitment fee
received for such Loan.
E. FEES AND EXPENSES: Originator shall not charge a borrower any
-----------------
amount in connection with the origination of a Qualified Mortgage Loan other
than the following: (1) the discount points set forth on the most current
Rate Schedule; (2) the ProLoan application processing fee set forth in the
Terms Sheet; (3) the ProLoan commitment fee set forth in the Terms Sheet; (4)
such other fees as may, from time to time, be set forth in the Terms Sheet;
and (5) customary closing expenses.
F. Loan Underwriting. Each Qualified Mortgage Loan shall be
-----------------
underwritten by the Originator in accordance with all applicable published
underwriting guidelines of GNMA, FNMA and FHLMC, as applicable, and shall be
guaranteed by the Originator to be in conformance with all state and federal
laws, rules and regulations governing mortgage loans of such type. All
Qualified Mortgage Loans will be originated, processed, underwritten and
closed by loan officers of the Originator.
G. CLOSING QUALIFIED MORTGAGE LOANS. Each Qualified Mortgage
--------------------------------
Loan that is closed within one hundred eighty (180) days after the Rate
Determination Date for such Loan shall remain a Qualified Mortgage Loan and
shall be submitted by the Originator to GNMA, FNMA or FHLMC, as appropriate,
for the government agency's guarantee and to be securitized. In the event
that a Qualified Mortgage Loan is not closed within the one hundred eighty
(180) day period, the interest rate and discount points applicable to such
Qualified Mortgage Loan must be approved at the time of the Loan closing by
the Fund's Subadviser in its discretion, failing which the Loan will cease to
be a Qualified Mortgage Loan. The Subadviser, in its discretion, may grant
the borrower an extended interest rate protection period as described in the
Terms Sheet.
Originator shall keep the Manager and the Subadviser informed daily via
facsimile of the number, principal loan amount and terms of all Qualified
Mortgage Loans closed by the Originator. The Originator shall give its best
advice and recommendations to the Subadviser as to the most advantageous
packaging and/or sale of Qualified Mortgage Loans and timing of submission
for securitization or sale of such Loans to GNMA, FNMA or FHLMC, and shall
act in accordance with the decision of the Subadviser as to all such matters.
H. Float-Down Fee. In the event that the interest rate specified
--------------
in the Rate Schedule in effect fifteen (15) days (or such other time period
as specified in the Terms Sheet) prior to the closing of a Qualified Mortgage
Loan would be more favorable to the borrower than the interest rate set on
the Rate Determination Date, the Subadviser may, in its discretion, approve
terms and conditions upon which the borrower's interest rate may be lowered
for an additional fee from the borrower as described in the Terms Sheet. The
Originator must receive prior approval from the Subadviser before allowing
any float-down.
3
<PAGE> 4
I. FUND'S OPTION TO PURCHASE OR SELL. At the direction of the
---------------------------------
Subadviser, the Originator shall: (1) deliver all or a portion of the
closed Qualified Mortgage Loans to the Fund in an approved, securitized
format within 60 days after the closing date of such Loans (the "Delivery
Date"); and/or (2) sell any closed Qualified Mortgage Loan which the Fund has
committed to acquire in the form of an issue of mortgage-backed securities
secured by such Loan to a third party and deliver to the Fund within the time
period specified in the Terms Sheet an amount equal to the positive
difference, if any, between the market price for such Loan and the price at
which the Fund has committed to acquire such Loan; provided, however, that if
the market price of such Loan is less than the Fund's committed purchase
price, the Fund shall remit to the Originator the difference between the
market price and the commitment purchase price.
J. Bid Price. The Bid Price with respect to each Qualified Mortgage
---------
Loan shall be that percentage which is equal to one hundred percent (100%) of
the face value of such Loan, less the Discount Points applicable with respect
to such Qualified Mortgage Loan. By way of example only, in the event that
two (2) Discount Points are applicable with respect to a Qualified Mortgage
Loan, the Bid Price for such Qualified Mortgage Loan would be ninety-eight
percent (98%), calculated as follows: 100% - 2 - 98%.
II. PURCHASE AND DELIVERY OF SECURITIES
A. OBLIGATIONS OF ORIGINATOR. Originator hereby agrees to
-------------------------
procure for the Fund, on a best efforts basis, mortgage-backed securities
issued by GNMA, FNMA or FHLMC in the form of GNMA or FNMA Certificates or
FHLMC Gold Participation Certificates, respectively (collectively referred to
herein as "Securities"), in such quantities as the Subadviser may in its
absolute discretion request from time to time in the form of a Certificate
attached hereto as Exhibit B. The terms and conditions set forth in this
Agreement shall be applicable to, and incorporated in, each request for
Securities submitted by the Subadviser on behalf of the Fund as provided
herein.
B. PERMISSIBLE SECURITIES. GNMA or FNMA Certificates or FHLMC
----------------------
Gold Participation Certificates delivered to the Fund hereunder shall be
guaranteed as to the timely payment of interest and principal by GNMA, FNMA
or FHLMC, respectively, and shall be backed exclusively by Qualified Mortgage
Loans. Such Securities must be issued according to the GNMA, FNMA or FHLMC
Sellers' and Servicers' Guide, as appropriate.
C. Fund's Requests for Origination. The Fund may submit to the
-------------------------------
Originator requests for origination of Qualified Mortgage Loans at such
times, and in such amounts, as the Fund may specify in its discretion. Each
request for origination shall be given on a Certificate in substantially the
form of Exhibit B attached hereto, which shall specify a total aggregate
principal face amount of Qualified Mortgage Loans to be originated pursuant
to that Certificate. The Originator shall signify its acceptance of each
Certificate by countersigning and returning a copy of the Certificate. Upon
acceptance, each such request shall constitute a binding agreement between
the Fund and the Originator for the purchase and sale of Securities
4
<PAGE> 5
secured by the Qualified Mortgage Loans originated by Originator in accordance
with the terms of the Certificate and the terms of this Agreement. The Fund
may withdraw a Certificate by written notice to the Originator.
D. ACCEPTANCE OF REQUEST. Upon acceptance of a request by the
---------------------
Fund for origination of Qualified Mortgage Loans, the Originator will employ
its best efforts, skill and expertise in compliance with all terms and
conditions of the Certificate and this Agreement, to market, originate,
package and sell sufficient Qualified Mortgage Loans to GNMA, FNMA and FHLMC
to procure issuance by the appropriate government agency of Securities in the
dollar amount specified in the Certificate. Each order may be filled within
a certain tolerance of the principal amount as specified by the Subadviser in
the Certificate. The principal face amount of each issue of Securities shall
not be less than $1,000,000, unless the Subadviser agrees, in its discretion,
to accept a smaller denomination because of market conditions.
E. DELIVERY OF SECURITIES. Delivery of Securities shall mean
----------------------
delivery in book-entry form to the Fund's custodian, UMB Bank, N.A. in Kansas
City, Missouri (the "Custodian") on the Delivery Date. The time of delivery
shall be the time when the Custodian receives confirmation from the Federal
Reserve Bank that the Fund's account has been credited with an issue of
Securities. Each issue of Securities delivered to the Fund hereunder must be
accompanied by a schedule of the Qualified Mortgage Loans backing such
Securities.
F. DELIVERY PRICE. For each issue of Securities delivered to the
--------------
Fund hereunder, the Delivery Price of such Securities shall be equal to the
weighted average of the Bid Prices of all Qualified Mortgage Loans backing
such Securities multiplied by the principal face amount of the Securities.
By way of example only, the Delivery Price of two Qualified Mortgage Loans
would be calculated as set forth below, assuming one such Loan has a
principal amount of $100,000 and a Bid Price of 99%, and the second Loan has
a principal amount of $150,000 and a Bid Price of 98%:
(100,000 x 99) + (150,000 x 98) - 24,600,000 - 98.4%
------------------------------- ---------- =====
100,000 + 150,000 250,000
G. PAYMENT FOR SECURITIES. Payment for all Securities delivered
----------------------
hereunder shall be due and payable by the Fund upon delivery of such
Securities in the manner specified above. Payment shall be in the amount of
the Delivery Price, subject to any adjustments agreed upon by the Originator
and the Subadviser, together with an amount equal to the interest accrued on
such Securities and unpaid at the date of delivery, less the amount of any
principal paid on account of such Securities prior to the date of delivery.
The Fund may refuse to accept delivery of, or to purchase, any Securities
which are not delivered prior to the time of the first payment of principal
or interest thereon by the issuing agency.
H. FAILURE TO DELIVER. In the event that a Security is not
delivered to the Fund on the Delivery Date, the Originator shall be liable to
the Fund for an amount equal to all interest that would have been due and
payable on the Loans after the closing date, had timely delivery
5
<PAGE> 6
been made. The Fund shall not be obligated to accept a Security after the
Delivery Date and, instead, may retain for its own account the commitment
fees received for the Qualified Mortgage Loans which back that issue of
Securities.
III. TERMINATION AND NOTIFICATION
A. TERMINATION. This Agreement shall terminate upon the occurrence
-----------
of any of the following events:
(1) The Fund ceases to be a registered investment company under the
Investment Company Act of 1940;
(2) The bankruptcy of the Originator; or
(3) The mutual agreement of all of the parties to terminate this
Agreement.
B. MODIFICATION AND WAIVERS. This Agreement may be amended,
------------------------
modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance.
IV. MISCELLANEOUS
A. DISPUTE RESOLUTION. Any controversy or claim arising out of or
------------------
relating to this Agreement, its interpretation or its enforcement shall be
submitted to arbitration in St. Louis County, Missouri. Such arbitration
shall be governed in accordance with the commercial arbitration rules of the
American Arbitration Association then in effect in that area. The parties
hereto consent to the jurisdiction and venue of the Circuit Court of St.
Louis County, Missouri and the United States District Court for the Eastern
District of Missouri for the entry of judgment relating to any award of the
arbitrator or for the issuance of any injunction or compulsion of specific
performance pursuant to this Section IV.A. Notwithstanding the foregoing,
the parties recognize that irreparable injury will result to their business
and property in the event of the breach of this Agreement. Therefore, the
parties agree that in the event any party actually or anticipatorily breaches
this Agreement, the other parties shall be entitled, in addition to any other
remedies and damages available, (i) to an injunction to restrain any such
violation, and (ii) to compel specific performance of the terms and
conditions of this Agreement, which injunction or compulsion shall be
terminated at such time as a final and binding determination is made by the
arbitrator(s), to the extent that such determination is in conflict with such
injunction or compulsion. The court granting such relief shall retain
jurisdiction to enforce such injunction, compulsion and arbitration
determination to the extent that there is no conflict. Any party shall be
entitled to receive his costs and expenses incurred in bringing or defending
any claim arising under this Agreement in which he prevails, including
reasonable attorneys' fees.
6
<PAGE> 7
B. Notice. Any notice required or permitted to be given under this
------
Agreement shall be in writing and shall be effective upon delivery by
personal delivery, facsimile telecopy, or registered mail to the following
addresses:
The Fund: 222 South Central Avenue
Suite 300
St. Louis, Missouri 63105
Attn: John W. Stewart
Facsimile: (314) 725-5819
The Subadviser: 8000 Forsyth Blvd.
St. Louis, Missouri 63105
Attn: Scott M. Colbert
Facsimile: (314) 746-3728
The Originator:
or at such other address as is set forth in a notice to all of the parties.
C. SEVERABILITY. The invalidity or unenforceability of any
------------
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
D. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on
----------------------
and inure to the benefit of each party's successors and assigns. The Fund
may assign its commitments to acquire mortgage-backed securities secured by
Qualified Mortgage Loans and the related servicing rights to such Loans under
this Agreement without notice to the Originator; provided that, however,
neither party to this Agreement, or any Person bound by its terms, may assign
any other of his or her rights or delegate any of his or her duties under the
Agreement.
E. ENTIRE AGREEMENT AND REVOCATION OF PRIOR AGREEMENTS.
---------------------------------------------------
This Agreement contains the entire agreement between the parties with respect
to the subject matter hereof and supersedes any and all prior understandings
with respect thereto.
F. GOVERNING LAW. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Missouri applicable to
agreements made and to be performed entirely within such State.
G. HEADINGS. The headings in this Agreement are for reference
--------
purposes only and shall not in any way affect the meaning or construction of
this Agreement.
7
<PAGE> 8
H. COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION
THAT MAY BE ENFORCED BY THE PARTIES.
ORIGINATOR BUILDERS PROLOAN FUND, INC.
By:--------------------------------------- By:----------------------------
John W. Stewart
Name:------------------------------------- President
Title:------------------------------------
8
<PAGE> 9
EXHIBIT A
CURRENT TERMS OF THE PROLOAN PROGRAM
1. Rate Schedule. The Rate Schedule will be transmitted by the Subadviser
-------------
to the Originator via facsimile on ------ of each week at ------ p.m. The
Rate Schedule will remain in effect until ------ at ---- p.m., unless the
Originator receives a new Rate Schedule from the Subadviser prior to that
time.
2. Disclosure Statement. The Originator will transmit to the Manager on
--------------------
- -------- of each week at ------- p.m. a Disclosure Statement, signed by an
officer of the Originator, that lists the following information from the
previous week: (1) a list of ProLoan applications, including the borrower's
name and principal loan amount, the identity of the builder and the location
of the subdivision in which the borrower's home is to be built or
substantially renovated; (2) the name of each borrower whose Rate
Determination Date fell within such week; and (3) the Rate Determination Date
for each such borrower.
3. ProLoan Application Processing Fee. $------ per application.
----------------------------------
4. ProLoan Commitment Fee. ----% of the principal amount of borrower's
----------------------
ProLoan home mortgage loan.
5. Remittance of Commitment Fees. The Originator will remit to the Fund's
-----------------------------
custodian, UMB Bank, N.A. via check or wire transfer on -------- of each week
at ----- p.m. the ProLoan commitment fees received for the previous week and
notify the Manager of such remittance.
6. Extensions of Interest Rate Protection. Subadviser, at its discretion,
--------------------------------------
may grant a borrower one or more thirty (30) day extensions of interest rate
protection for a fee of ---% from the borrower.
7. Float-Down Fee. In the event that the interest rate specified in the
--------------
Rate Schedule in effect fifteen (15) days prior to the closing of a Qualified
Mortgage Loan is more favorable to the borrower than the interest rate set
on the Rate Determination Date, the borrower may pay a fee of -----% of his
or her principal loan amount to reduce the interest rate on his or her
Qualified Mortgage Loan. This "float-down fee" will be retained by the Fund.
8. Sales of Qualified Mortgage Loans Prior to Securitization. If so
---------------------------------------------------------
requested by the Subadviser pursuant to Section I(I), the Originator shall
sell any Qualified Mortgage Loan which the Fund has committed to acquire in
the form of an issue of mortgage-backed securities secured by such Loan to a
third party and shall remit to the Fund within ten (10) calendar days the
positive difference, if any, between the market price of the Loan and the
price at which the Fund has committed to acquire the Loan; provided that,
however, if the market price is less than the Fund's committed purchase
price, the Fund shall remit to the Originator the difference between the
market price and the commitment price.
Dated: October ---, 1997
A-1
<PAGE> 10
EXHIBIT B
CERTIFICATE
CERTIFICATE DATE:-----------------------------CERTIFICATE NO.-----------------
This Certificate is issued pursuant to the terms of the ProLoan Master
Agreement dated October ---, 1997, by and between Builders ProLoan Fund, Inc.
(the "Fund") and ----------------- (the "Originator").
The Fund hereby requests that the Originator originate Qualified Mortgage
Loans in the total aggregate principal face amount of $--------------------,
under the terms and conditions set forth in the ProLoan Master Agreement
by and between the Fund and the Originator. This Certificate may be filled
within a tolerance of plus or minus ----% of the principal amount.
BUILDERS PROLOAN FUND, INC.
By:-----------------------------------------
John W. Stewart
President
ACCEPTED:
By:------------------------------------------
Title:---------------------------------------
Date:----------------------------------------
B-1
<PAGE> 1
AGREEMENT
THIS LIQUIDITY AGREEMENT (the "Agreement") is made and entered
into this 20th day of October 1997, by and between Builders ProLoan Fund,
Inc., a Maryland corporation (the "Fund"), and Mercantile Bank N.A. (the
"Bank").
WHEREAS, the Fund has entered into ProLoan Master Agreements with
various financial institutions pursuant to which the Fund has agreed to
acquire mortgage-backed securities in the form of Ginnie Mae Certificates,
Fannie Mae Certificates or Freddie Mac Gold Participation Certificates that
are secured by home mortgages originated by such financial institutions and
qualified under the terms of the ProLoan program ("Qualified Mortgage
Loans"), as such ProLoan program is described in the Fund's currently
effective registration statement as filed with the Securities and Exchange
Commission, and the Fund may in the future agree to acquire whole Qualified
Mortgage Loans that have not yet closed according to their terms ("unclosed
Loans");
WHEREAS, from time to time, the Fund may desire to sell its
commitments to acquire mortgage-backed securities secured by Qualified
Mortgage Loans or unclosed Loans and the Bank may desire to purchase these
commitments to acquire mortgage-backed securities secured by Qualified
Mortgage Loans or unclosed Loans;
NOW, THEREFORE, in consideration of the mutual promises contained
herein and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties to this Agreement agree as
follows:
ARTICLE ONE
1.1 Fund's Option to Require Purchase on Demand. The
Fund may, upon two business days' prior notice to the Bank, require the Bank
to purchase all or a portion of its commitments to acquire mortgage-backed
securities secured by Qualified Mortgage Loans. The Fund also may, upon two
business days' prior notice to the Bank, require the Bank to purchase any
unclosed Loan and the related servicing rights to such Loan. As used herein,
the term "Qualified Mortgage Loan" shall mean any mortgage loan originated by
a bank, mortgage lender or other financial institution according to the terms
of the ProLoan program, as described in the Fund's registration statement,
that is underwritten according to standards established by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
and that is eligible to be guaranteed by GNMA, FNMA or FHLMC.
1.2 Obligations to Purchase and Sell.
(a) Upon receipt of the Fund's written notice provided for
in Section 1.1 above, the Bank shall purchase all or a portion
of the Fund's commitments to acquire mortgage-backed
securities secured by Qualified Mortgage Loans or any unclosed
Loan described in such Notice for a purchase price based upon
the bid price of the weighted average interest rate of the
respective Qualified Mortgage Loans securing an issue of
mortgage-backed securities or the value of the unclosed Loan,
respectively. Upon exercise of the Fund's right, the Fund
will pay the Bank an amount equal to the principal amount of
the underlying Qualified Mortgage Loan(s) or the unclosed
Loan, as the case may be, multiplied by any positive
difference between par and the six-month forward
to-be-announced ("TBA") price of Fannie Mae mortgage-backed
securities with a coupon rate nearest to, but not greater
than, the one-half percent (1/2%) coupon rate increment for such
securities that have a coupon rate equal to the weighted average
yield for all such Qualified Mortgage Loans, or the yield of an
unclosed Loan, as the case may be, minus 0.625%.
(b) The written notice given by the Fund to the Bank
shall create a binding and enforceable contract for the sale
of all of the Fund's commitments to acquire mortgage-backed
securities or any unclosed Loans which are the subject of such
notice, at the price specified above, such sale to be closed
upon the terms and conditions set forth above.
(c) In the event that the Bank shall fail to meet its
obligation to purchase the Fund's commitments to acquire
mortgage-backed securities or unclosed Loans as specified in
the Fund's written notice, at the expiration of the notice
period, the Fund shall have the right, without further consent
or acquiescence of the Bank, to either: (i) sell to a third
party purchaser, at any price, all of commitments to purchase
the mortgage-backed securities or any unclosed Loans which are
the subject of the notice; or (ii) seek declaratory injunctive
relief in the appropriate court. The Fund may exercise either
option by written notice given to
<PAGE> 2
the Bank within the time specified above. The Fund's written notice,
if given, shall create a binding and enforceable contract between
the Fund and the Bank whereby each is obligated to execute and
deliver all documents, and to take such further action as may
be reasonably required, to carry out the specified election, and
each shall be liable for actual, monetary damages for its own
failure to perform.
1.3 Terms of Sale. The following terms and provisions shall
apply with respect to any contract created hereunder for the sale to the Bank
of the Fund's commitments to acquire mortgage-backed securities or unclosed
Loans.
(a) The sale shall be closed at the close of business
on the second business day following the creation of the
contract of sale, at the offices of the Fund, or at such other
location as is agreed to by both purchaser and seller.
(b) At the closing, the Bank shall deliver to the
Fund's custodian cash or a cashier's check for the total
purchase price due, and the Bank shall receive Ginnie Mae
Certificates, Fannie Mae Certificates or Freddie Mac Gold
Participation Certificates, as agreed upon, or the documents
evidencing the commitments to acquire the unclosed loans as the
case may be. The Fund and the Bank hereby irrevocably appoint
UMB Bank, N.A., Kansas City, Missouri as its respective agent
to receive tender of such delivery from the other party.
1.4 Indemnification. The Bank at any sale hereunder agrees
hereby that at all times after creation of the contract for such sale, the
Bank shall defend and indemnify the Fund from and against any and all
liability of the Fund as a guarantor or surety of any indebtedness of the
Bank.
ARTICLE TWO
TERMINATION AND MODIFICATION
2.1 Termination. This Agreement shall terminate upon the
occurrence of any of the following events:
(a) The Fund ceases to be an investment company registered
under the Investment Company Act of 1940, as amended;
(b) The bankruptcy of the Bank;
(c) The mutual agreement of the Fund and the Bank to
terminate this Agreement; or
(d) The giving of written notice of termination by one
party to the other party, in which event this Agreement shall
terminate ninety (90) days after receipt by the other party of
such written notice.
2.2 Modification and Waivers. This Agreement may be
amended, modified, superseded, canceled, renewed or extended, and the terms
and conditions hereof may be waived, only by a written instrument signed by
the parties or, in the case of a waiver, by the party waiving compliance.
ARTICLE THREE
MISCELLANEOUS
3.1 Dispute Resolution. Any controversy or claim arising out
of or relating to this Agreement, its interpretation or its enforcement shall
be submitted to arbitration in the City or County of St. Louis, Missouri, as
determined by the Fund. Such arbitration shall be governed in accordance
with the commercial arbitration rules of the American Arbitration Association
then in effect in that area. The parties hereto consent to the jurisdiction
of the
<PAGE> 3
Circuit Court of the City of St. Louis, State of Missouri and the United
States District Court for the Eastern District of Missouri for the entry of
judgment relating to any award of the arbitrator or for the issuance of any
injunction or compulsion of specific performance pursuant to this Section
3.1. Notwithstanding the foregoing, the parties recognize that irreparable
injury will result to their business and property in the event of the breach
of this Agreement. Therefore, the parties agree that in the event any party
actually or anticipatorily breaches this Agreement, the other parties shall
be entitled, in addition to any other remedies and damages available, (i) to
an injunction to restrain any such violation, and (ii) to compel specific
performance of the terms and conditions of this Agreement, which injunction
or compulsion shall be terminated at such time as a final and binding
determination is made by the arbitrator(s), to the extent that such
determination is in conflict with such injunction or compulsion. The court
granting such relief shall retain jurisdiction to enforce such injunction,
compulsion and arbitration determination to the extent that there is no
conflict. Any party shall be entitled to receive his costs and expenses
incurred in bringing or defending any claim arising under this Agreement in
which he prevails, including reasonable attorneys' fees.
3.2 Notice. Any notice required or permitted to be given under
this Agreement shall be in writing and shall be effective upon delivery by
personal delivery, facsimile telecopy, or registered mail to the following
addresses:
The Fund: Builders ProLoan Fund, Inc.
Attn: John W. Stewart
222 South Central Avenue
Suite 300
St. Louis, MO 63105
The Bank: Mercantile Bank, N.A.
Attn: Christopher B. Lissner
One Mercantile Center
St. Louis, MO 63101
or at such other address as is set forth in a notice to all of the parties.
3.3 Severability. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
3.4 Successors and Assigns. This Agreement shall be binding
on and inure to the benefit of each party's successors and assigns. No party
to this Agreement may assign any of its rights or delegate any of his duties
under the Agreement.
3.5 Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes any and all prior understandings with respect thereto.
3.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Missouri applicable to
agreements made and to be performed entirely within such State.
3.7 Headings. The headings in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
construction of this Agreement.
3.8 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
<PAGE> 4
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED
BY THE PARTIES.
BUILDERS PROLOAN FUND, INC.
By: /s/ John W. Stewart
------------------------------
John W. Stewart
Its: President
MERCANTILE BANK, N.A.
By: /s/ Christopher B. Lissner
------------------------------
Christopher B. Lissner
Its:
<PAGE> 1
Exhibit 10
Peper, Martin, Jensen, Maichel and Hetlage
720 Olive Street
24th Floor
St. Louis, Missouri 63101
(314) 421-3850
October 17, 1997
Builders ProLoan Fund, Inc.
222 South Central Avenue
Suite 300
St. Louis, Missouri 63105
Dear Gentlemen/Ladies:
Builders ProLoan Fund, Inc. (the "Fund") was established as a Maryland
corporation under Articles of Incorporation dated June 13, 1997. The Fund is
an open-end, non-diversified management investment company. The Fund has
filed a Registration Statement on Form N-1A with the Securities and Exchange
Commission to register up to 100,000,000 shares of common stock, par value
$0.01 per share (the "Shares"). You have requested our opinion regarding
certain matters in connection with the issuance by the Fund of the Shares.
We have, as counsel, examined the Fund's Articles of Incorporation and
amendments thereto, By-laws, minutes of meetings of its Board of Directors, and
such other proceedings, documents and records and considered such questions of
law as we deemed necessary to enable us to render the opinion hereinafter
expressed.
Based upon the foregoing, we are of the opinion that the Shares
registered may be legally and validly issued in accordance with the Fund's
Articles of Incorporation and By-laws; and, when so issued and paid for in
accordance with the terms of the Fund's Registration Statement, the Shares
will be legally issued, fully paid and non-assessable by the Fund. We express
no opinion as to compliance with the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and applicable state laws
regulating the offer and sale of securities.
We hereby consent to the filing of this opinion in connection with
Pre-Effective Amendment No. 2 to the Fund's Registration Statement on Form N-1A
(SEC File No. 333-30221) to be filed with the Securities and Exchange
Commission.
Sincerely Yours,
/s/ John R. Short
----------------------------
John R. Short
JRS/DAS/CAA
<PAGE> 1
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in the Registration Statement (Form N-1A) of the
Builders ProLoan Fund, Inc. filed with the Securities and Exchange Commission
in the Pre-Effective Amendment No. 2 to the Registration Statement under the
Securities Act of 1933 (File No. 333-30221) and in this Amendment No. 3 to the
Registration Statement under the Investment Company Act of 1940 (File No.
811-8273) of our report dated October 13, 1997 on the Statement of Assets
and Liabilities of Builders ProLoan Fund, Inc. and to the reference to
us under the caption "Management and Administration of the Fund--Independent
Auditors" in the prospectus, and to the reference to us under the captions
"Independent Auditors" in the Statement of Additional Information.
St. Louis, Missouri /s/ Deloitte & Touche LLP
October 13, 1997 -------------------------
DELOITTE & TOUCHE LLP
<PAGE> 1
Exhibit 13
Huntleigh Securities Corp.
222 South Central Avenue
St. Louis, Missouri 63105
September 24, 1997
Builders ProLoan Fund, Inc.
222 South Central Avenue
Suite 300
St. Louis, Missouri 63105
Gentlemen:
We are writing in connection with the 66,666.67 shares of common stock
of the Builders ProLoan Fund, Inc. that we have purchased from you at a price
of $15 per share. This is to advise you that the shares we have purchased
were purchased for investment only with no present intention of selling such
shares, and we do not now have any intention of selling such shares.
Very truly yours,
/s/ James A. Winkelmann
------------------------------
James A. Winkelmann
President
<PAGE> 1
<TABLE>
SCHEDULE OF PERFORMANCE COMPUTATIONS
Carpenters' District Council of Greater St. Louis
ProLoan Program Separate Investment Account
Past Performance Calculation
Monthly Returns
Since Inception
<CAPTION>
Monthly
Date (Ending Mkt. Value - Beg Mkt. Value - Cash Flow = Numerator) /
<C> <C> <C> <C> <C>
Jan-95 $ 125,852,699.54 - $ 123,934,404.93 - $ 170,609.28 = $ 1,747,685.33 /
Feb-95 $ 128,671,987.35 - $ 125,852,699.54 - $ 124,448.66 = $ 2,694,839.15 /
Mar-95 $ 127,219,048.62 - $ 128,671,987.35 - $ (1,681,340.87) = $ 228,402.14 /
Apr-95 $ 124,566,101.58 - $ 127,219,048.62 - $ (4,535,656.57) = $ 1,882,709.53 /
May-95 $ 128,809,291.71 - $ 124,566,101.58 - $ 74,718.81 = $ 4,168,471.32 /
Jun-95 $ 129,219,957.61 - $ 128,809,291.71 - $ (250,170.87) = $ 660,836.77 /
Jul-95 $ 129,327,695.92 - $ 129,219,957.61 - $ 282,573.07 = $ (174,834.76) /
Aug-95 $ 129,818,670.42 - $ 129,327,695.92 - $ (854,036.37) = $ 1,345,010.87 /
Sep-95 $ 128,532,250.56 - $ 129,818,670.42 - $ (2,409,515.69) = $ 1,123,095.83 /
Oct-95 $ 121,177,824.60 - $ 128,532,250.56 - $ (8,765,100.39) = $ 1,410,674.43 /
Nov-95 $ 123,401,199.59 - $ 121,177,824.60 - $ 536,479.00 = $ 1,686,895.99 /
Dec-95 $ 125,046,288.48 - $ 123,401,199.59 - $ 95,789.90 = $ 1,549,298.99 /
Jan-96 $ 125,869,365.00 - $ 125,046,288.48 - $ (64,089.70) = $ 887,166.22 /
Feb-96 $ 122,140,306.46 - $ 125,869,365.00 - $ (1,731,089.34) = $ (1,997,969.20) /
Mar-96 $ 120,518,745.86 - $ 122,140,306.46 - $ (795,366.53) = $ (826,194.07) /
Apr-96 $ 121,813,276.69 - $ 120,518,745.86 - $ 2,037,881.66 = $ (743,350.83) /
May-96 $ 119,860,057.22 - $ 121,813,276.69 - $ (1,489,780.77) = $ (463,438.70) /
Jun-96 $ 121,721,626.56 - $ 119,860,057.22 - $ 142,669.92 = $ 1,718,899.42 /
Jul-96 $ 118,067,074.10 - $ 121,721,626.56 - $ (3,905,750.00) = $ 251,197.54 /
Aug-96 $ 118,061,074.48 - $ 118,067,074.10 - $ 223,080.37 = $ (229,079.99) /
Sep-96 $ 120,487,950.55 - $ 118,061,074.48 - $ 399,222.16 = $ 2,027,653.91 /
Oct-96 $ 123,022,289.95 - $ 120,487,950.55 - $ 103,275.41 = $ 2,431,063.99 /
Nov-96 $ 122,735,249.37 - $ 123,022,289.95 - $ (2,394,263.31) = $ 2,107,222.73 /
Dec-96 $ 123,937,202.23 - $ 122,735,249.37 - $ 2,210,605.76 = $ (1,008,652.90) /
Jan-97 $ 122,672,644.11 - $ 123,937,202.23 - $ (1,720,463.57) = $ 455,905.45 /
Feb-97 $ 123,101,236.88 - $ 122,672,644.11 - $ 132,703.90 = $ 295,888.87 /
Mar-97 $ 119,382,351.95 - $ 123,101,236.88 - $ (2,692,003.14) = $ (1,026,881.79) /
Apr-97 $ 133,993,049.43 - $ 119,382,351.95 - $ 12,673,260.04 = $ 1,937,437.44 /
May-97 $ 132,412,793.02 - $ 133,993,049.43 - $ (1,818,664.76) = $ 238,408.35 /
Jun-97 $ 130,437,619.77 - $ 132,412,793.02 - $ (4,003,217.44) = $ 2,028,044.19 /
Jul-97 $ 128,355,519.39 - $ 130,437,619.77 - $ (5,000,000.00) = $ 2,917,899.62 /
Aug-97 $ 125,871,371.89 - $ 128,355,519.39 - $ (1,650,000.00) = $ (834,147.50) /
<CAPTION>
MTHLY
(BEG MKT. VALUE + (CASH FLOW/2) = DENOMINATOR) = RETURN
<C> <C> <C> <C>
$ 123,934,404.93 + 85304.64 = $ 124,019,709.57 = 1.41%
$ 125,852,699.54 + 62224.33 = $ 125,914,923.87 = 2.14%
$ 128,671,987.35 + -840670.435 = $ 127,831,316.92 = 0.18%
$ 127,219,048.62 + -2267828.285 = $ 124,951,220.34 = 1.51%
$ 124,566,101.58 + 37359.405 = $ 124,603,460.99 = 3.35%
$ 128,809,291.71 + -125085.435 = $ 128,684,206.28 = 0.51%
$ 129,219,957.61 + 141286.535 = $ 129,361,244.15 = -0.14%
$ 129,327,695.92 + -427018.185 = $ 128,900,677.74 = 1.04%
$ 129,818,670.42 + -1204757.85 = $ 128,613,912.58 = 0.87%
$ 128,532,250.56 + -4382550.2 = $ 124,149,700.37 = 1.14%
$ 121,177,824.60 + 268239.5 = $ 121,446,064.10 = 1.39%
$ 123,401,199.59 + 47894.95 = $ 123,449,094.54 = 1.26%
$ 125,046,288.48 + -32044.85 = $ 125,014,243.63 = 0.71%
$ 125,869,365.00 + -865544.67 = $ 125,003,820.33 = -1.60%
$ 122,140,306.46 + -397683.265 = $ 121,742,623.20 = -0.68%
$ 120,518,745.86 + 1018940.83 = $ 121,537,686.69 = -0.61%
$ 121,813,276.69 + -744890.385 = $ 121,068,386.31 = -0.38%
$ 119,860,057.22 + 71334.96 = $ 119,931,392.18 = 1.43%
$ 121,721,626.56 + -1952875 = $ 119,768,751.56 = 0.21%
$ 118,067,074.10 + 111540.185 = $ 118,178,614.29 = -0.19%
$ 118,061,074.48 + 199611.08 = $ 118,260,685.56 = 1.71%
$ 120,487,950.55 + 51637.705 = $ 120,539,588.26 = 2.02%
$ 123,022,289.95 + -1197131.66 = $ 121,825,158.30 = 1.73%
$ 122,735,249.37 + 1105302.88 = $ 123,840,552.25 = -0.81%
$ 123,937,202.23 + -860231.785 = $ 123,076,970.45 = 0.37%
$ 122,672,644.11 + 66351.95 = $ 122,738,996.06 = 0.24%
$ 123,101,236.88 + -1346001.57 = $ 121,755,235.31 = -0.84%
$ 119,382,351.95 + 6336630.02 = $ 125,718,981.97 = 1.54%
$ 133,993,049.43 + -909332.38 = $ 133,083,717.05 = 0.18%
$ 132,412,793.02 + -2001608.72 = $ 130,411,184.30 = 1.56%
$ 130,437,619.77 + -2500000 = $ 127,937,619.77 = 2.28%
$ 128,355,519.39 + -825000 = $ 127,530,519.39 = -0.65%
10/16/97 Page 1 Fiduciary Consultants, Inc.
</TABLE>
<PAGE> 2
<TABLE>
Carpenters' District Council of Greater St. Louis
ProLoan Program Separate Investment Account
Past Performance Calculation
Cumulative and Annualized Returns
Since Inception
<CAPTION>
Multiply
Mthly Wealth Each Growth of Cumulative
1 + (% Return / 100) = Ratio Mnth = ( a Dollar -1)/100 = Return
<C> <C> <C> <C> <C> <C> <C> <C>
1 + 1.41% / 100 = 1.014091997 Jan = ( 1.014092 -1)/100 = 1.4092
1 + 2.14% / 100 = 1.021402063 X Feb = ( 1.035796 -1)/100 = 3.5796
1 + 0.18% / 100 = 1.001786746 X Mar = ( 1.037646 -1)/100 = 3.7646
1 + 1.51% / 100 = 1.015067556 X Apr = ( 1.053281 -1)/100 = 5.3281
1 + 3.35% / 100 = 1.033453897 X May = ( 1.088518 -1)/100 = 8.8518
1 + 0.51% / 100 = 1.005135337 X Jun = ( 1.094107 -1)/100 = 9.4107
1 + -0.14% / 100 = 0.998648477 X Jul = ( 1.092629 -1)/100 = 9.2629
1 + 1.04% / 100 = 1.010434475 X Aug = ( 1.104030 -1)/100 = 10.4030
1 + 0.87% / 100 = 1.008732304 X Sep = ( 1.113670 -1)/100 = 11.3670
1 + 1.14% / 100 = 1.011362689 X Oct = ( 1.126325 -1)/100 = 12.6325
1 + 1.39% / 100 = 1.013890084 X Nov = ( 1.141969 -1)/100 = 14.1969
1 + 1.26% / 100 = 1.012550104 X Dec = ( 1.156301 -1)/100 = 15.6301
1 + 0.71% / 100 = 1.007096521 X Jan = ( 1.164507 -1)/100 = 16.4507
1 + -1.60% / 100 = 0.984016735 X Feb = ( 1.145894 -1)/100 = 14.5894
1 + -0.68% / 100 = 0.993213601 X Mar = ( 1.138118 -1)/100 = 13.8118
1 + -0.61% / 100 = 0.993883783 X Apr = ( 1.131157 -1)/100 = 13.1157
1 + -0.38% / 100 = 0.996172092 X May = ( 1.126827 -1)/100 = 12.6827
1 + 1.43% / 100 = 1.014332356 X Jun = ( 1.142977 -1)/100 = 14.2977
1 + 0.21% / 100 = 1.002097355 X Jul = ( 1.145374 -1)/100 = 14.5374
1 + -0.19% / 100 = 0.998061578 X Aug = ( 1.143154 -1)/100 = 14.3154
1 + 1.71% / 100 = 1.01714563 X Sep = ( 1.162754 -1)/100 = 16.2754
1 + 2.02% / 100 = 1.020168179 X Oct = ( 1.186205 -1)/100 = 18.6205
1 + 1.73% / 100 = 1.017297106 X Nov = ( 1.206723 -1)/100 = 20.6723
1 + -0.81% / 100 = 0.991855229 X Dec = ( 1.196894 -1)/100 = 19.6894
1 + 0.37% / 100 = 1.00370423 X Jan = ( 1.201328 -1)/100 = 20.1328
1 + 0.24% / 100 = 1.002410716 X Feb = ( 1.204224 -1)/100 = 20.4224
1 + -0.84% / 100 = 0.991566015 X Mar = ( 1.194067 -1)/100 = 19.4067
1 + 1.54% / 100 = 1.015410858 X Apr = ( 1.212469 -1)/100 = 21.2469
1 + 0.18% / 100 = 1.001791416 X May = ( 1.214641 -1)/100 = 21.4641
1 + 1.56% / 100 = 1.015551152 X Jun = ( 1.233530 -1)/100 = 23.3530
1 + 2.28% / 100 = 1.022807206 X Jul = ( 1.261664 -1)/100 = 26.1664
1 + -0.65% / 100 = 0.993459232 X Aug = ( 1.253411 -1)/100 = 25.3411
<CAPTION>
Periods No. of Annualized
CR(j/n) Per Year Periods Return Date
<C> <C> <C> <C> <C>
1.4092(12/1) 12 1 18.28% Jan-95
3.5796(12/2) 12 2 23.49% Feb-95
3.7646(12/3) 12 3 15.93% Mar-95
5.3281(12/4) 12 4 16.85% Apr-95
8.8518(12/5) 12 5 22.58% May-95
9.4107(12/6) 12 6 19.71% Jun-95
9.2629(12/7) 12 7 16.40% Jul-95
10.403(12/8) 12 8 16.00% Aug-95
11.367(12/9) 12 9 15.44% Sep-95
12.6325(12/10) 12 10 15.34% Oct-95
14.1969(12/11) 12 11 15.58% Nov-95
15.6301(12/12) 12 12 15.63% Dec-95
16.4507(12/13) 12 13 15.09% Jan-96
14.5894(12/14) 12 14 12.38% Feb-96
13.8118(12/15) 12 15 10.90% Mar-96
13.1157(12/16) 12 16 9.68% Apr-96
12.6827(12/17) 12 17 8.79% May-96
14.2977(12/18) 12 18 9.32% Jun-96
14.5374(12/19) 12 19 8.95% Jul-96
14.3154(12/20) 12 20 8.36% Aug-96
16.2754(12/21) 12 21 9.00% Sep-96
18.6205(12/22) 12 22 9.76% Oct-96
20.6723(12/23) 12 23 10.30% Nov-96
19.6894(12/24) 12 24 9.40% Dec-96
20.1328(12/25) 12 25 9.20% Jan-97
20.4224(12/26) 12 26 8.96% Feb-97
19.4067(12/27) 12 27 8.20% Mar-97
21.2469(12/28) 12 28 8.61% Apr-97
21.4641(12/29) 12 29 8.38% May-97
23.353(12/30) 12 30 8.76% Jun-97
26.1664(12/31) 12 31 9.41% Jul-97
25.3411(12/32) 12 32 8.84% Aug-97
10/16/97 Page 2 Fiduciary Consultants, Inc.
</TABLE>
<PAGE> 3
<TABLE>
Carpenters' District Council of Greater St. Louis
ProLoan Program Separate Investment Account
Past Performance Calculation
Monthly Returns for One Year
<CAPTION>
Monthly
Date (Ending Mkt. Value - Beg Mkt. Value - Cash Flow = Numerator) /
<C> <C> <C> <C> <C>
Sep-96 $ 120,487,950.55 - $ 118,061,074.48 - $ 399,222.16 = $ 2,027,653.91 /
Oct-96 $ 123,022,289.95 - $ 120,487,950.55 - $ 103,275.41 = $ 2,431,063.99 /
Nov-96 $ 122,735,249.37 - $ 123,022,289.95 - $ (2,394,263.31) = $ 2,107,222.73 /
Dec-96 $ 123,937,202.23 - $ 122,735,249.37 - $ 2,210,605.76 = $ (1,008,652.90) /
Jan-97 $ 122,672,644.11 - $ 123,937,202.23 - $ (1,720,463.57) = $ 455,905.45 /
Feb-97 $ 123,101,236.88 - $ 122,672,644.11 - $ 132,703.90 = $ 295,888.87 /
Mar-97 $ 119,382,351.95 - $ 123,101,236.88 - $ (2,692,003.14) = $ (1,026,881.79) /
Apr-97 $ 133,993,049.43 - $ 119,382,351.95 - $ 12,673,260.04 = $ 1,937,437.44 /
May-97 $ 132,412,793.02 - $ 133,993,049.43 - $ (1,818,664.76) = $ 238,408.35 /
Jun-97 $ 130,437,619.77 - $ 132,412,793.02 - $ (4,003,217.44) = $ 2,028,044.19 /
Jul-97 $ 128,355,519.39 - $ 130,437,619.77 - $ (5,000,000.00) = $ 2,917,899.62 /
Aug-97 $ 125,871,371.89 - $ 128,355,519.39 - $ (1,650,000.00) = $ (834,147.50) /
<CAPTION>
Mthly
(Beg Mkt. Value + (Cash Flow/2) = Denominator) = Return
<C> <C> <C> <C>
$ 118,061,074.48 + 199611.08 = $ 118,260,685.56 = 1.71%
$ 120,487,950.55 + 51637.705 = $ 120,539,588.26 = 2.02%
$ 123,022,289.95 + -1197131.66 = $ 121,825,158.30 = 1.73%
$ 122,735,249.37 + 1105302.88 = $ 123,840,552.25 = -0.81%
$ 123,937,202.23 + -860231.785 = $ 123,076,970.45 = 0.37%
$ 122,672,644.11 + 66351.95 = $ 122,738,996.06 = 0.24%
$ 123,101,236.88 + -1346001.57 = $ 121,755,235.31 = -0.84%
$ 119,382,351.95 + 6336630.02 = $ 125,718,981.97 = 1.54%
$ 133,993,049.43 + -909332.38 = $ 133,083,717.05 = 0.18%
$ 132,412,793.02 + -2001608.72 = $ 130,411,184.30 = 1.56%
$ 130,437,619.77 + -2500000 = $ 127,937,619.77 = 2.28%
$ 128,355,519.39 + -825000 = $ 127,530,519.39 = -0.65%
10/16/97 Page 3 Fiduciary Consultants, Inc.
</TABLE>
<PAGE> 4
<TABLE>
Carpenters' District Council of Greater St. Louis
ProLoan Program Separate Investment Account
Past Performance Calculation
Cumulative and Annualized Returns
One Year
<CAPTION>
Multiply
Mthly Wealth Each Growth of Cumulative
1 + (% Return / 100) = Ratio Mnth = ( a Dollar -1)/100 = Return
<C> <C> <C> <C> <C> <C> <C> <C>
1 + 1.71% / 100 = 1.01714563 X Sep = ( 1.017146 -1)/100 = 1.7146
1 + 2.02% / 100 = 1.020168179 X Oct = ( 1.037660 -1)/100 = 3.7660
1 + 1.73% / 100 = 1.017297106 X Nov = ( 1.055608 -1)/100 = 5.5608
1 + -0.81% / 100 = 0.991855229 X Dec = ( 1.047010 -1)/100 = 4.7010
1 + 0.37% / 100 = 1.00370423 X Jan = ( 1.050889 -1)/100 = 5.0889
1 + 0.24% / 100 = 1.002410716 X Feb = ( 1.053422 -1)/100 = 5.3422
1 + -0.84% / 100 = 0.991566015 X Mar = ( 1.044538 -1)/100 = 4.4538
1 + 1.54% / 100 = 1.015410858 X Apr = ( 1.060635 -1)/100 = 6.0635
1 + 0.18% / 100 = 1.001791416 X May = ( 1.062535 -1)/100 = 6.2535
1 + 1.56% / 100 = 1.015551152 X Jun = ( 1.079059 -1)/100 = 7.9059
1 + 2.28% / 100 = 1.022807206 X Jul = ( 1.103669 -1)/100 = 10.3669
1 + -0.65% / 100 = 0.993459232 X Aug = ( 1.096450 -1)/100 = 9.6450
<CAPTION>
Periods No. of Annualized
CR(j/n) Per Year Periods Return Date
<C> <C> <C> <C> <C>
1.7146(12/1) 12 1 22.63% Sep-96
3.7660(12/2) 12 2 24.83% Oct-96
5.5608(12/3) 12 3 24.17% Nov-96
4.7010(12/4) 12 4 14.78% Dec-96
5.0889(12/5) 12 5 12.65% Jan-97
5.3422(12/6) 12 6 10.97% Feb-97
4.4538(12/7) 12 7 7.76% Mar-97
6.0635(12/8) 12 8 9.23% Apr-97
6.2535(12/9) 12 9 8.42% May-97
7.9059(12/10) 12 10 9.56% Jun-97
10.3669(12/11) 12 11 11.36% Jul-97
9.6450(12/12) 12 12 9.65% Aug-97
10/16/97 Page 4 Fiduciary Consultants, Inc.
</TABLE>
<PAGE> 5
<TABLE>
Carpenters' District Council of Greater St. Louis
ProLoan Program Separate Investment Account
Past Performance Calculation
Mortgage Pipeline
One Year and Since Inception
<CAPTION>
12/31/94 - 8/31/96
------------------
Date Portfolio Value Pipeline Value
- ---- --------------- --------------
<C> <C> <C> <C>
Dec-94 $ 123,934,404.93 $ (5,454,535.61) Beginning Balance
Jan-95 $ 125,852,699.54
Feb-95 $ 128,671,987.35
Mar-95 $ 127,219,048.62
Apr-95 $ 124,566,101.58
May-95 $ 128,809,291.71
Jun-95 $ 129,219,957.61
Jul-95 $ 129,327,695.92
Aug-95 $ 129,818,670.42
Sep-95 $ 128,532,250.56
Oct-95 $ 121,177,824.60
Nov-95 $ 123,401,199.59
Dec-95 $ 125,046,288.48
Jan-96 $ 125,869,365.00
Feb-96 $ 122,140,306.46
Mar-96 $ 120,518,745.86
Apr-96 $ 121,813,276.69
May-96 $ 119,860,057.22
Jun-96 $ 121,721,626.56
Jul-96 $ 118,067,074.10
Aug-96 $ 118,061,074.48 $ (813,637.97) Ending Balance
----------------- -----------------
Avg. Value $ 124,458,521.30 $ 4,640,897.64 Gain
$ (813,637.97) Beginning Balance
<CAPTION>
8/31/96 - 8/31/97
<C> <C> <C> <C>
Sep-96 $ 120,487,950.55
Oct-96 $ 123,022,289.95
Nov-96 $ 122,735,249.37
Dec-96 $ 123,937,202.23
Jan-97 $ 122,672,644.11
Feb-97 $ 123,101,236.88
Mar-97 $ 119,382,351.95
Apr-97 $ 133,993,049.43
May-97 $ 132,412,793.02
Jun-97 $ 130,437,619.77
Jul-97 $ 128,355,519.39
Aug-97 $ 125,871,371.89 $ (578,493.13) Ending Balance
----------------- -----------------
Avg. Value $ 125,534,106.55 $ 235,144.84 Gain
</TABLE>
<TABLE>
<CAPTION>
Periods
Cumulative Per No. of Annualized
Pipeline Gain / Average Port Value = Return CR(j/n) Year Periods Return
<C> <C> <C> <C> <C> <C> <C> <C>
1/95 - 8/96 $ 4,640,897.64 / $ 124,458,521.30 = 3.7289% 3.7289(12/20) 12 20 2.22%
9/96 - 8/97 $ 235,144.84 / $ 125,534,106.55 = 0.1873% 0.1873(12/12) 12 12 0.19%
-------
3.9162% 3.9162(12/32) 12 32 1.45%
1/95 - 12/97 $ 4,876,042.48 / $ 124,849,643.21 = 3.9055% 3.9055(12/32) 12 32 1.45%
10/16/97 Page 5 Fiduciary Consultants, Inc.
</TABLE>
