<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 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. ---- / /
Post-Effective Amendment No. ---- / /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 /X/
Amendment No. ------ / /
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.
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 Statemen 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.
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<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.
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<PAGE> 4
SUBJECT TO COMPLETION, DATED JUNE 27, 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,
nondiversified, 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 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 "Risk Factors."
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. Under the ProLoan program,
borrowers whose homes are built or substantially renovated by qualified
craftsmen are given the opportunity to lock in interest rates, typically for
180 days to allow time for construction or renovation, 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 Securities Corp.
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 --------- ---, 1997.
2
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<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 21
GENERAL INFORMATION 23
SHAREHOLDER COMMUNICATIONS 24
</TABLE>
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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 shares redeemed) <F1> 1.00%
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
<S> <C>
(as a percentage of average net assets)
Management Fees 0.315%
12b-1 Fees 0.100%
Other Expenses (after reimbursement) <F2> 0.185%
------
Total Fund Operating Expenses <F2> 0.600%
<FN>
<F1> The Fund imposes a 1.00% redemption fee on Fund shares redeemed less than
one year after they are purchased.
<F2> "Other Expenses" is 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" do
not exceed 0.185% per annum of the Fund's average daily net assets during a
period which will end on ---------, 199--. Otherwise, "Other Expenses" and
"Total Fund Operating Expenses" are estimated to be 0.285% and 0.700%,
respectively. In addition, the Distributor has agreed to pay the
organizational and certain other expenses of the Fund, subject to reimbursement
by the Fund, which are estimated to be $--------. Such expenses 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:
An investor would pay the following expenses on the
same investment, assuming no redemption:
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."
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<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.
The table below presents performance returns for the ProLoan portion of
the Carpenters' District Council of Greater St. Louis retirement fund since
Commerce Bank, N.A. began advising the ProLoan program on December 31, 1994
using the same strategy that it will use to advise the Fund. The performance
reflects reinvestment of dividends and is calculated prior to deducting
brokerage commissions and management fees. At March 31, 1997, the ProLoan
portion of the Carpenters' retirement fund consisted of approximately $118.3
million in assets. Returns shown reflect actual, recognized returns and do
not reflect the valuation of the mortgage commitments entered into as of
12/31/94 or 3/31/97. Returns also are shown prior to deducting the expenses
and fees associated with registering a mutual fund. The returns for the Fund
will be lower due to these costs. Returns shown should not be considered a
representation of the Fund's future performance.
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
As of March 31, 1997
<CAPTION>
1 Year Since 12/31/94
------ --------------
<S> <C> <C>
ProLoan Program 4.93% 10.07%
Lehman Brothers Aggregate Bond Index 4.91% 9.27%
<CAPTION>
CUMULATIVE TOTAL RETURNS
As of March 31, 1997
1 Year Since 12/31/94
----- --------------
<S> <C> <C>
ProLoan Program 4.93% 24.11%
Lehman Brothers Aggregate Bond Index 4.91% 22.08%
</TABLE>
5
<PAGE> 9
ABOUT THE FUND
The Fund is a nondiversified, 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, 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 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 the Government National Mortgage Association ("GNMA").
Others are guaranteed by agencies and instrumentalities of the U.S. Government,
such as securities guaranteed by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("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 ProLoan, the borrower's
single- or multi-family home will be: (1) built by qualified craftsmen, 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 the 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. The 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 commitment date in exchange for
an additional fee. The 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. Thus, 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
the home builder 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 by establishing certain construction
standards as part of the ProLoan qualification process, such as requiring
craftsmen to complete approved training programs. 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 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 -----
Originators in the ProLoan program located in the St. Louis, Missouri
metropolitan area. Additional Originators are expected to 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 attempts 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
- -----------------------------------
purchase mortgage-backed securities originated through the ProLoan program
constitute "when-issued" commitments. When the Fund agrees to purchase
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
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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 purchase 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 purchase 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 property. Participation mortgages are
fractional interests in mortgages or installment sales contracts on
residential or commercial property. 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.
Securities Lending. To increase return on portfolio securities, the
- ------------------
Fund may lend its securities to broker-dealers and other institutional investors
pursuant to agreements that will require the loans to be continuously secured
by collateral equal in value at all times to the market value of the
securities loaned. Such loans will not be made if, as a result, the aggregate
of all outstanding loans exceeds 20% of the value of the Fund's total assets.
There may be risks of delay in receiving additional collateral or in
recovering the securities loaned, or even a loss of rights in the collateral,
should the borrower of the securities fail financially. However, loans will
be made only to borrowers deemed by the Subadviser to be of good standing and
when, in its judgment, the income to be earned from the loan justifies the
risks involved.
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; non-convertible preferred
stocks; 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 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 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.
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). The Fund will enter into agreements with certain secondary market
sources to purchase its commitments to fund Qualified Mortgage Loans generated
under the ProLoan program at established prices. The Fund's commitments to
purchase mortgage-backed securities created from Qualified Mortgage Loans will
not be considered illiquid so long as the Manager determines, pursuant to
guidelines established by the Board of Directors, that an adequate
12
<PAGE> 16
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 illiquidity or such restrictions, 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 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.
When-Issued and Forward Commitments. The Fund's investment in
- -----------------------------------
mortgage-backed securities 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 fund 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
back 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 objectives.
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
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 often 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 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 similar objectives.
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 the U.S. Government,
its agencies and instrumentalities. 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 90% for the Fund's initial
fiscal period ended December 31, 1997. High portfolio activity increases the
Fund's transaction costs and may result in a greater number of taxable
transactions and the realization of short-term capital gains that are taxable
to shareholders as ordinary income.
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 -------- ----,
1997.
The Manager, located at 222 South Central Avenue, Suite 300, 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 retirement
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 June 1997, the Carpenter's District Council ProLoan
program has generated approximately --- Qualified Mortgage Loans with an
initial market value of approximately $------ and has facilitated
approximately ---- man hours of work 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 the 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 and shareholder recordkeeping 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.
Distribution Plan. Under this Plan, the Fund will pay to Huntleigh
- -----------------
Securities Corp. a distribution fee. 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 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 and
its sole initial shareholder on ----- --, 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
may be provided by the Administrator. Under the terms of the agreement, the
Fund will pay the Administrator an annual fee of 0.--% of average daily net
assets, payable monthly and subject to an annual minimum of $40,000.
Principal Underwriter. Huntleigh Securities Corp., 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 ------------.
Fund Administrator. The Fund's administrator is Investment Company
- ------------------
Administration Corporation, 2025 E. Financial Way, Glendora, California
91741.
Independent Auditor. The independent auditor for the Fund is 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 March 31, 1997
the Subadviser had discretionary investment authority with respect to
approximately $6.2 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 the buyers may participate in the
ProLoan program. 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 a fee equal to an annual rate of 0.165% of the
Fund's net assets.
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 ProLoan portion
of the Carpenter's District Council of Greater St. Louis retirement fund. 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 the
Subadviser.
DISTRIBUTOR
Huntleigh Securities Corporation, 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 acceptance of a purchase order. 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 the Transfer Agent
at ( ) - ; 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 Manager will provide the investor with an account number. The
investor should instruct its bank to designate the account number which the
Manager has assigned to the investor and to transmit the federal funds to the
Transfer Agent, ABA Routing , Corporate Trust Suspense Account
-----------
No. , reference Builders ProLoan Fund, Inc.; attention: Fund
-----------
Account Services.
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 to the Transfer Agent,
[address], Attn: Builders ProLoan Fund, Inc. 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.
Redemption of Shares. Fund shares may be redeemed on any Business Day
- --------------------
by writing directly to the Transfer Agent at the address above under "Purchase
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. Shares purchased by check may not be redeemed
until the funds have cleared, which may take up to 15 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.
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 that 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. The Fund's initial investor,
- -----------------------------------
who will own in excess of 99% of the Fund's shares, will be the Carpenter's
District Council of Greater St. Louis retirement fund, 1401 Hampton Avenue,
St. Louis, Missouri 63139.
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.
--------- --, 1997
Builders ProLoan Fund, Inc. (the "Fund") is an open-end, nondiversified
management investment company.
This Statement of Additional Information should be read in conjunction
with the Prospectus for the Fund dated ------- ---, 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 3
INVESTMENT RESTRICTIONS 17
DIRECTORS AND OFFICERS 19
MANAGEMENT AND DISTRIBUTION FEES 21
INVESTMENT SUBADVISORY AGREEMENT 21
PLAN AND AGREEMENT OF DISTRIBUTION 22
PORTFOLIO SECURITIES TRANSACTIONS 22
NET ASSET VALUE 23
REDEEMING SHARES 25
TAX INFORMATION 25
YIELD AND TOTAL RETURN QUOTATIONS 27
DESCRIPTION OF THE FUND 28
PROSPECTUS 28
APPENDIX A: Description of Bond Ratings A-1
APPENDIX B: Options and Futures Contracts B-1
2
<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
3
<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.
4
<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-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.
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 certain secondary market sources, which may include
Originators, to purchase, at any time, the Fund's commitments to purchase
Qualified Mortgage Loans generated by the ProLoan program. Under the terms of
these agreements, the purchase price for these commitments will be based on
bid price of the weighted average interest rate of the respective Qualified
Mortgage Loans. Upon exercise of this right, the Fund will pay the purchaser
to assume certain of the Qualified Mortgage Loan commitments at an amount
equal to the principal amount of the underlying mortgage commitments
multiplied by any positive difference between par and the six-month forward
to-be-announced ("TBA") price of Federal National Mortgage Association
("FNMA") mortgage-backed securities with a coupon nearest to, but not greater
than, the rate for such securities that have a coupon equal to 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 purchase 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 illiquidity or such
restrictions, 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
5
<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.
6
<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
7
<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
8
<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.
9
<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.
10
<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.
IBCA's four highest long term obligation ratings are AAA, AA, A and BBB.
Obligations rated AAA are those for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially. AA
obligations have a very low expectation of investment risk. Capacity for
timely repayment of principal and interest is substantial. Adverse changes in
business, economic, or financial conditions may increase investment risk
albeit not very significantly. Obligations rated A have a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic, or financial
conditions may lead to increased investment risk. Obligations rated BBB have
a low expectation of investment risk. Capacity for timely repayment of
principal and interest is adequate, although adverse changes in business,
economic, or financial conditions are more likely to lead to increased
investment risk than for obligations in other categories.
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
11
<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.
IBCA's short-term rating of A1 indicates obligations supported by the
highest capacity for timely repayment. Where issues possess particularly
strong credit features, a rating of A1+ is assigned. Obligations rated A2 are
supported by a good capacity for timely repayment.
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.
12
<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.
13
<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.
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.
14
<PAGE> 41
In addition, the Fund may purchase stripped mortgage-backed securities
("SMBS") issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private issuers such as banks and other institutions.
SMBS, in particular, may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors. If the underlying obligations experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment. The market value of the class consisting entirely of
principal payments can be extremely volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of
the interest are generally higher than prevailing market yields on other
mortgage-backed obligations because their cash flow patterns are also volatile
and there is a grater risk that the initial investment will not be fully
recouped. SMBS issued by the U.S. Government (or a U.S. Government agency or
instrumentality) may be considered liquid under guidelines established by the
Board of Trustees if they can be disposed of promptly in the ordinary course
of business at a value reasonably close to that used in the calculation of a
fund's per share net asset value.
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 than 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
15
<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
16
<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 interests, 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) 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
17
<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, provided, however, that the
making of a loan shall not be construed to include: (i) the acquisition
for investment of bonds, debentures, notes or other evidences of
indebtedness of any corporation or government which are publicly
distributed; or (ii) the entry into repurchase agreements and further
provided, however, that the Fund may lend its investment securities to
broker-dealers or other institutional investors in accordance with the
guidelines stated in the Prospectus.
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.
18
<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 Fund assets,
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.
19
<PAGE> 46
</TABLE>
<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 and President, Capital Mortgage Management, Inc.
222 South Central Avenue President (July 1997-Present); Controller/System
St. Louis, MO 63105 Administrator, Carpenters' District Council of
(11/21/58) Greater St. Louis (August 1988-July 1997)
Terry Nelson<F*> Director Managing Director, Carpenters' District
1401 Hampton Avenue Council of Greater St. Louis retirement fund
St. Louis, MO 63139 (Aug. 1993 - present);
(12/01/40)
John P. Mulligan<F*> Director Chairman, Carpenters' District Council of
1401 Hampton Avenue Greater St. Louis ([date] - present);
St. Louis, MO 63139
(12/21/35)
[Name and address] Director
(--/--/--)
[Name and address] Director
(--/--/--)
[Name and address] Director
(--/--/--)
[Name and address] Director
(--/--/--)
James A. Winkelmann<F*> Treasurer Principal, Huntleigh Securities Corp. (Oct.
222 S. Central Avenue 1996 - present); Chairman, Huntleigh Financial
St. Louis, MO 63105 Services, Inc. (Jan. 1997 - present); President,
(6/2/58) Longrow Securities, Inc. (Feb. 1986 - present);
Vice President, Longrow Capital Management,
Inc. ([date] - present); Vice President, Longrow
Insurance Agency ([date] - present); and
President, Longrow Holdings, Inc. ([date] - present).
20
<PAGE> 47
<CAPTION>
Name, Address and Date Position with
- ----------------------- -------------
of Birth the Fund Principal Occupation During Past 5 Years
- -------- -------- ----------------------------------------
<S> <C> <C>
Scott M. Colbert* Secretary Vice President and Director of Fixed Income
8000 Forsyth Blvd. Management, Commerce Bank, N.A. (April
St. Louis, MO 63105 1993 to present); Portfolio Manager, Armco
(5/17/61) Investment Management, Inc. (1987-1993).
<FN>
<F*> Messrs. Stewart, Nelson, Mulligan, Winkelmann and Colbert, 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, with the exception of Messrs. Nelson and
Mulligan. Messrs. Nelson and Mulligan are trustees of the retirement fund of
the Carpenter's District Council of Greater St. Louis, which currently owns in
excess of 99% of the shares of the Fund.
The Fund compensates each Independent Director by an annual fee of
$------. Directors also are reimbursed for any expenses incurred in attending
meetings. The Fund did not commence operations until -------------------,
1997, and, as a result, did not pay any board members' fees for the previous
fiscal year.
MANAGEMENT AND DISTRIBUTION FEES
As described more fully in the Prospectus, the Manager is paid a
management fee by the Funds as compensation for its management services with
respect to the ProLoan program and for paying the investment subadviser's
fees.
Also as described more fully in the Prospectus, Huntleigh Securities
Corp. (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 shareholders of the Fund effective as of ------- --,
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
21
<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 Securities Corp. (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.
22
<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 the Distributor and 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.
23
<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 Qualified Mortgage Loan commitments will be valued at
an amount equal to the principal amount of the underlying mortgage
commitments multiplied by any positive difference between par and
the six-month forward to-be-announced ("TBA") price of FNMA
mortgage-backed securities with a coupon nearest to, but not
greater than, the rate for such securities that have a coupon
equal to 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
purchase 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 Exchange, the Manager, the Subadviser and the Fund will be closed on
the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
24
<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 Company 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");
25
<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");
- 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, 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,
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.
26
<PAGE> 53
YIELD AND TOTAL RETURN QUOTATIONS
The Fund is expected to commence operations on or about ------- ---,
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 ProLoan
portion of the Carpenters' District Council of St. Louis retirement plan,
which has an identical investment objective to the Fund and that 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.
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.
Based on this formula, annualized total returns were as follows for the
periods indicated:
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS*
As of March 31, 1997
<CAPTION>
Since
1 Year 12/31/94
------ --------
<S> <C> <C>
ProLoan Program 6.74% 10.73%
Lehman Brothers Aggregate Bond Index<F**> 4.91% 9.27%
<CAPTION>
CUMULATIVE TOTAL RETURNS<F*>
As of March 31, 1997
Since
1 Year 12/31/94
----- --------
<S> <C> <C>
ProLoan Program 6.74% 25.77%
Lehman Brothers Aggregate Bond Index** 4.91% 22.08%
<FN>
<F*> The examples show performance returns for the ProLoan portion of the
Carpenters' District Council of Greater St. Louis retirement fund
managed by Commerce Bank, N.A. using the same strategy that it will use
to manage the Fund. The performance reflects reinvestment of dividends
and is calculated prior to deducting brokerage commissions and
management fees. At March 31, 1997, the ProLoan program consisted of
approximately $118.3 million. Returns shown reflect actual, recognized
returns and do not reflect the valuation of the ProLoan commitments
entered into as of 12/31/94 or 3/31/97. Returns also are shown prior to
deducting the expenses and fees associated with registering a
27
<PAGE> 54
mutual fund. The returns for the Fund will be lower due to these costs.
Returns shown should not be considered a representation of the Fund's
future performance.
<F**> Returns for the ProLoan program 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>
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.
The Fund may give total returns from inception using the date when the
current portfolio manager began active management as the inception date.
However, returns using the actual inception date of the Fund also will be
provided.
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 . 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 rate
determined for each class per year and dividing by the number of days in the
year. The rate is $-- per account. The fees paid to the transfer agent
28
<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.--% of the Fund's average daily
net assets.
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 at the rate of ----% for
serving as custodian of its assets and 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 -------------
- -----, 1997, is hereby incorporated in this SAI by reference. Audited
financial statements of the Fund will be prepared by its independent auditors,
Deloitte & Touche LLP, for the Fund's initial fiscal period ending December 31,
1997.
29
<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.
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 contrat 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. 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. 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. 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. 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
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: None
(b) Exhibits
1. Articles of Incorporation - filed herewith
2. By-Laws - filed herewith
3. Voting Trust Agreement - none
4. Specimen Security - to be filed
5. a. Management Agreement - to be filed
b. Subadvisory Agreement - to be filed
c. Administration Agreement - to be filed
6. Distribution Agreement - to be filed
7. Bonus, Profit-Sharing or Pension Plan - none
8. Custodian Agreement - to be filed
9. Transfer Agency Agreement - to be filed
10. Opinion and Consent of Counsel - to be filed
11. Consent of Independent Auditors - none
12. Financial Statements Omitted from Prospectus - none
13. Letter of Investment Intent - to be filed
14. Retirement Plan - none
15. Plan Pursuant to Rule 12b-1 - to be filed
16. Schedule for Computation of Performance Computations - to be
filed
17. Electronic Filers - none
18. Plan Pursuant to Rule 18f-3 - none
C-1
<PAGE> 66
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 ----- --, 1997.
Item 26. Number of Holders of Securities
-------------------------------
As of ------- ---, 1997, there were two security holders of
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> 67
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 Securities Corp., 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 Principal/Chairman Director
Don C. Weir, Jr. Principal/Vice Chairman None
Thomas Davidson Secretary/Treasurer None
John Kane Director None
James McClellan Director None
Lowell Bourne Director None
James M. Snowden 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, 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> 68
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> 69
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 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 June 27, 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 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 and Director June 27, 1997
- --------------------------
John W. Stewart
/s/ John Mulligan Director June 27, 1997
- --------------------------
John Mulligan<F*>
/s/ Terry Nelson Director June 27, 1997
- --------------------------
Terry Nelson<F*>
<FN>
<F*> Powers of Attorney for Messrs. Mulligan and Nelson are filed herewith.
</TABLE>
<PAGE> 70
POWER OF ATTORNEY
The person signing below makes, constitutes and appoints John W.
Stewart his true and lawful attorney-in-fact, with full power of substitution
and resubstitution, in his name, place and stead to execute and cause to be
filed with the Securities and Exchange Commission any and all documents on
behalf of the Builders ProLoan Fund, Inc.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John Mulligan Director June 17, 1997
- ------------------------------
John Mulligan
</TABLE>
<PAGE> 71
POWER OF ATTORNEY
The person signing below makes, constitutes and appoints John W.
Stewart his true and lawful attorney-in-fact, with full power of substitution
and resubstitution, in his name, place and stead to execute and cause to be
filed with the Securities and Exchange Commission any and all documents on
behalf of the Builders ProLoan Fund, Inc.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Terry Nelson Director June 17, 1997
- -----------------------------
Terry Nelson
</TABLE>
<PAGE> 72
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit Number Description Page
- -------------- ----------- ----
<S> <C> <C>
1. Articles of Incorporation - filed herewith 73
2. By-Laws - filed herewith 87
3. Voting Trust Agreement - none
4. Specimen Security - to be filed
A. Management Agreement - to be filed
B. Subadvisory Agreement - to be filed
C. Administrative Services Agreement - to be filed
5. Distribution Agreement - to be filed
6. Bonus, Profit-Sharing or Pension Plan - none
7. Custodian Agreement - to be filed
8. Transfer Agency Agreement - to be filed
9. Opinion and Consent of Counsel - to be filed
10. Consent of Independent Auditors - none
11. Financial Statements Omitted from Prospectus - none
12. Letter of Investment Intent - to be filed
13. Retirement Plan - none
14. Plan Pursuant to Rule 12b-1 - to be filed
15. Schedule for Computation of Performance Computations - to be filed
16. Electronic Filers - none
17. Plan Pursuant to Rule 18f-3 - none
</TABLE>
<PAGE> 1
EXHIBIT 1
ARTICLES OF INCORPORATION
OF
PROLOAN FUND, INC.
FIRST: The undersigned, John R. Short, whose address is c/o Peper,
Martin, Jensen, Maichel and Hetlage, 720 Olive Street, 24th Floor, St. Louis,
Missouri 63101, being at least eighteen years of age, acting as incorporator,
does hereby form a corporation under the general laws of the State of
Maryland.
SECOND: The name of the Corporation (which is hereinafter called the
"Corporation") is ProLoan Fund, Inc.
THIRD: The Corporation's principal office in the State of Maryland
is presently located at c/o The Corporation Trust Incorporated, 32 South
Street, Baltimore, Maryland 21202. The name and post office address of its
resident agent is The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. Said resident agent is a Maryland Corporation.
FOURTH: The nature of the business or objects or purposes to be
conducted, transacted, promoted or carried on by the Corporation are as
follows:
To operate and carry on the business of an open-end investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act"),
and to exercise all powers necessary and appropriate to the conduct of such
business.
<PAGE> 2
To subscribe for, invest in, purchase or otherwise acquire, own, hold,
sell, exchange, pledge or otherwise dispose of, securities of every nature and
kind, including, without limitation, all types of stocks, bonds, debentures,
notes, mortgages, mortgage-backed securities, asset-backed securities,
collateralized mortgage obligations, repurchase agreements, cash or other
securities or obligations or evidences of indebtedness or ownership issued or
created by any and all persons, associations, agencies, trusts or
corporations, public or private, whether created, established or organized
under the laws of the United States, any of the States, or any territory or
district or colony or possession thereof, or under the laws of any foreign
country, and also foreign and domestic government and municipal obligations,
bank acceptances, and commercial paper; and any options, certificates,
receipts, warrants, futures contracts or other instruments representing rights
to receive, purchase or subscribe for the same, or evidencing or representing
any other rights or interest therein or in any property or assets; to pay for
the same in cash or by the issue of stock, bonds or notes of this Corporation
or otherwise; and while owning and holding any such securities, to exercise
all the rights, powers and privileges of a stockholder or owner, including,
and without limitation, the right to delegate and assign to one or more
persons, firms, associations or corporations the power to exercise any of said
rights, powers and privileges in respect of any such securities; to borrow
money or otherwise obtain credit and, if required, to secure the same by
mortgaging, pledging or otherwise encumbering as security the assets of this
Corporation;
To apply for, obtain, purchase or otherwise acquire, any patents,
copyrights, licenses, trademarks, trade names and the like, which may seem
capable of being used for any of the
2
<PAGE> 3
purposes of the Corporation; and to use, exercise, develop, grant licenses in
respect of, sell and otherwise turn to account, the same.
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Maryland; and to have all the
powers of a corporation under the applicable Corporation laws, as in effect
from time to time, of the State of Maryland.
FIFTH: (a) The total number of shares of capital stock which the
Corporation is authorized to issue is one hundred million (100,000,000) shares
of common stock of the par value of one cent ($.01) per share and having an
aggregate par value of one million dollars ($1,000,000). All of such shares
are initially classified as "Common Stock." The Board of Directors may
classify and reclassify any unissued shares of capital stock by setting or
changing in any one or more respects the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of stock.
(b) The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the Common Stock of
the Corporation.
(1) Each share of Common Stock shall entitle the holder thereof
to one vote, and, except as otherwise provided in respect of any class
of stock hereafter classified or reclassified, the exclusive voting
power for all purposes shall be vested in the holders of the Common
Stock.
3
<PAGE> 4
(2) Subject to the provisions of law and any preferences of any
class of stock hereafter classified or reclassified, dividends may be
paid on the Common Stock of the Corporation at such time and in such
amounts as the Board of Directors may deem advisable.
(3) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of the
Common Stock shall be entitled, after payment or provision for payment
of the debts and other liabilities of the corporation and the amount to
which the holders of any class of stock hereafter classified or
reclassified having a preference on distributions in the liquidation,
dissolution or winding up of the Corporation shall be entitled, together
with the holders of any other class of stock hereafter classified or
reclassified not having a preference on distributions in the
liquidation, dissolution or winding up of the Corporation, to share
ratable in the remaining net assets of the Corporation.
(c) Subject to the foregoing and to the provisions of the 1940 Act,
the power of the Board of Directors to classify and reclassify any of the
shares of capital stock shall include, without limitation, subject to the
provisions of the charter, authority to classify or reclassify any unissued
shares of such stock into a class or classes of preferred stock, preference
stock, special stock or other stock, and to divide and classify shares of any
class into one or more series of such class, by determining, fixing, or
altering one or more of the following:
4
<PAGE> 5
(1) The distinctive designation of such class or series and the
number of shares to constitute such class or series; provided that,
unless otherwise prohibited by the terms of such or any other class or
series, the number of shares of any class or series may be decreased by
the Board of Directors in connection with any classification or
reclassification of unissued shares and the number of shares of such
class or series may be increased by the Board of Directors in connection
with any such classification or reclassification, and any shares of any
class or series which have been redeemed, purchased, otherwise acquired
or converted into shares of Common Stock or any other class or series
shall become part of the authorized capital stock and be subject to
classification and reclassification as provided in this Section.
(2) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on
shares of such class or series, whether any such dividends shall rank
senior or junior to or on a parity with the dividends payable on any
other class or series of stock, and the status of any such dividends as
cumulative, cumulative to a limited extent or non-cumulative and as
participating or non-participating.
(3) Whether or not shares of such class or series shall have
voting rights, in addition to any voting rights provided by law and, if
so, the terms of such voting rights.
5
<PAGE> 6
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions
thereof, including provision for adjustment of the conversion or
exchange rate in such events or at such times as the Board of Directors
shall determine.
(5) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall
be redeemable and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates; and whether or not there shall be any sinking fund or
purchase account in respect thereof, and if so, the terms thereof.
(6) The rights of the holders of shares of such class or series
upon the liquidation, dissolution or winding up of the affairs of, or
upon any distribution of the assets of, the Corporation, which rights
may vary depending upon whether such liquidation, dissolution or winding
up is voluntary or involuntary and, if voluntary, may vary at different
dates, and whether such rights shall rank senior or junior to or on a
parity with such rights of any other class or series of stock.
(7) Whether or not there shall be any limitations applicable,
while shares of such class or series are outstanding, upon the payment
of dividends or making of distributions on, or the acquisition of, or
the use of moneys for
6
<PAGE> 7
purchase or redemption of, any stock of the Corporation, or upon any
other action of the Corporation, including action under this Section,
and, if so, the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with law and the charter of the
Corporation.
(d) For the purposes hereof and of any articles supplementary to the
charter providing for the classification or reclassification of any shares of
capital stock or of any other charter document of the Corporation (unless
otherwise provided in any such articles or document), any class or series of
stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on
liquidation, dissolution or winding up, as the case may be, in
preference or priority to holders of such other class or series;
(2) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different from those of such others, if the holders of such
class or series of stock shall be entitled to receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend
7
<PAGE> 8
rates or redemption or liquidation prices, without preference or
priority over the holders of such other class or series; and
(3) junior to another class or series either as to dividends or
upon liquidation, if the rights of the holders of such class or series
shall abe subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the
amounts distributable upon liquidation, dissolution or winding up, as
the case may be.
SIXTH: The initial number of directors of the Corporation shall be
three (3), which number may be increased or decreased pursuant to the by-laws
of the Corporation, but shall never be less than three (3); and the names of
the directors who shall act until the first annual meeting or until their
successors are duly chosen and qualified are John W. Stewart, Terry Nelson and
John P. Mulligan.
SEVENTH: The following provisions are inserted for the purpose of
defining, limiting and regulating the powers of the Corporation and of its
Board of Directors and stockholders:
(a) Majority Vote
-------------
Notwithstanding any provision of the General Corporation Law of the
State of Maryland requiring a greater proportion than a majority of the votes
entitled to be cast in order to take or authorize action, any such action may
be taken or authorized on any matter upon the concurrence of a majority of the
aggregate number of votes entitled to be cast
8
<PAGE> 9
thereon, subject to any applicable requirements of the 1940 Act, or rules or
orders of the Securities and Exchange Commission.
(b) Custody of Assets
-----------------
Assets of this Corporation may be held by or deposited with a bank or
trust company or other organization as custodian, pursuant to such
requirements as may be prescribed from time to time by the Board of Directors
or the by-laws.
(c) Issuance and Sale of Stock
--------------------------
Authorized but unissued stock and treasury stock of the Corporation may
be sold for cash or for securities, from time to time, by authority of the
Board of Directors; provided, that, if the Board of Directors increases the
number of shares of stock the Corporation has the authority to issue, the
Board of Directors shall file articles supplementary in accordance with the
Maryland General Corporation Law prior to the issuance of such increased
number of shares of stock. Such stock or treasury stock may be sold without
first being offered to stockholders in proportion to their holdings or
otherwise. In all such sales the Corporation shall receive not less than the
net asset value per share determined as provided by these articles of
incorporation, the by-laws and the Board of Directors, but in no event less
than the par value per share. In the case of stock sold for other securities,
the judgment of the Board of Directors with respect to the value of such other
securities shall be conclusive. The Board of Directors may from time to time
declare dividends payable in authorized buy unissued stock and treasury stock.
9
<PAGE> 10
(d) Limitation on Borrowing
------------------------
The by-laws of the Corporation, as from time to time amended, may
prescribe limitations upon the borrowing of money and pledging of assets by
the Corporation.
(e) Redemption of Shares
--------------------
Any stockholder may redeem the stockholder's shares of the Corporation
for the net asset value thereof determined as provided by these articles of
incorporation, the by-laws and the Board of Directors, by presentation of a
written request, duly executed by the record owner, together with the
certificates, if any, for such shares, duly endorsed, at the office or agency
designated by the Corporation. If after giving effect to a request for
redemption by a stockholder the aggregate net asset value of his remaining
shares shall be less than five hundred dollars ($500), or such other amount,
not to exceed two thousand dollars ($2,000), as the Board of Directors shall
determine, the Corporation shall be entitled upon notice to require the
redemption of the remaining shares of such stockholder to the extent that the
Corporation lawfully may effect such redemption under the laws of the State of
Maryland. The notice shall be in writing personally delivered or deposited in
the mail, at least thirty days prior to such redemption. If mailed, the
notice shall be addressed to the stockholder at his post office address as
shown on the books of the Corporation, and sent by certified or registered
mail, postage prepaid. The price for shares redeemed by the Corporation
pursuant to this paragraph shall be paid in cash in an amount equal to the net
asset value of such shares, less any applicable redemption fee.
(f) Payment upon Redemption and Suspension Thereof
----------------------------------------------
10
<PAGE> 11
Payment by the Corporation for shares of stock of the Corporation
surrendered to it in proper form for redemption shall be made by the
Corporation within seven business days, or such other period as may be
required by applicable law, of such surrender out of funds legally available
therefor, provided that the Corporation may suspend the right of the holders
of stock of the Corporation to redeem shares of stock and may postpone the
right of such holders to receive payment for any shares: (i) for any period
during which the New York Stock Exchange is closed other than customary
week-end and holiday closings or during which trading on the New York Stock
Exchange is restricted, as determined by the Securities and Exchange
Commission; (ii) for any period during which an emergency, as determined by
the Securities and Exchange Commission, exists as a result of which disposal
by the Corporation of securities owned by it is not reasonably practicable or
as a result of which it is not reasonably practicable for the Corporation to
fairly determine the value of its net assets; or (iii) for such other periods
as the Securities and Exchange Commission may by order permit for the
protection of stockholders of the Corporation.
(g) Net Asset Value
---------------
The net asset value of a share of common stock of the Corporation shall
be the quotient obtained by dividing the value of the net assets of the
Corporation (i.e., the value of the total assets of the Corporation less its
liabilities) at the time of the determination by the number of shares
outstanding at such time. In determining the value of the Corporation's
assets, securities for which market quotations are readily available shall be
valued at market value and other securities and assets shall be valued at fair
value as determined in good faith by the Board of Directors, all as prescribed
by the by-laws or the Board of Directors.
11
<PAGE> 12
(h) Issuing Shares
--------------
The Board of Directors shall have the power to authorize the issuance
from time to time of shares of its stock of any class, whether now or
hereafter authorized, or securities convertible into shares of its stock of
any class or classes, whether now or hereafter authorized, for such
consideration as may be advisable by the Board of Directors and without any
action by the stockholders.
(i) Name Change
-----------
The Board of Directors shall have the power to change the name of the
Corporation and to change the name or other designation of any class or series
of the Corporation's stock, all without any action by the stockholders.
(k) Fractional Shares
-----------------
The Corporation may issue, sell, redeem, repurchase, and otherwise deal
in and with shares of its stock in fractional denominations to the same extent
as its whole shares, and fractional shares shall have proportionately all the
rights of whole shares, including, without limitation, the right to vote, the
right to receive dividends and distributions, and the right to participate
upon liquidation of the Corporation; provided that the issue of shares in
fractional denominations shall be limited to such transactions and be made
upon such terms as may be fixed by or under authority of the by-laws or the
Board of Directors.
(j) Indemnification
---------------
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
12
<PAGE> 13
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.
EIGHTH: Meetings of stockholders may be held inside or outside the
State of Maryland, if the by-laws so provide. The books of the Corporation
may be kept (subject to any provisions of law) inside or outside the State of
Maryland at such place of places as may
13
<PAGE> 14
be designated from time to time by the Board of Directors or in the by-laws of
the Corporation. Elections of directors need not be by ballot unless the
by-laws of the Corporation shall so provide.
NINTH: The Corporation reserves the right to amend, change or
repeal any provision contained in these articles of incorporation, in the
manner now or hereafter prescribed by law, and all rights conferred upon
stockholders herein are granted subject to this reservation.
TENTH: The original by-laws of the Corporation shall be adopted by
the initial directors named herein. Thereafter the Board of Directors shall
have power to make, alter or repeal by-laws except as the by-laws from time to
time in effect may require stockholder action for adoption, alteration or
repeal of particular by-law provisions.
ELEVENTH: The duration of the Corporation shall be perpetual.
THE UNDERSIGNED, being the incorporator named above, has adopted and
signed these articles of incorporation for the purpose of forming the
Corporation described herein pursuant to the general Corporation Law of the
State of Maryland, and does hereby acknowledge that said adoption and signing
are his acts, this 12th day of June 1997.
/s/ John R. Short
-------------------------------
John R. Short
14
<PAGE> 1
EXHIBIT 2
BUILDERS PROLOAN FUND, INC.
BY-LAWS
ARTICLE
STOCKHOLDERS
SECTION 1.1 Annual Meeting. The Corporation shall hold an
--------------
annual meeting of its stockholders to elect Directors and transact any other
business within its powers, during the month of April in each year at such date
and time as may be designated by the Board of Directors, except that the
Corporation shall not be required to hold an annual meeting in any year in
which none of the following matters is required to be acted upon by
stockholders under the Investment Company Act of 1940, as amended (the "1940
Act"): election of Directors, approval of the Investment Advisory Agreement,
ratification of the selection of independent public accountants or approval of
a Distribution Agreement. Except as the Charter or statute provides
otherwise, any business may be considered at an annual meeting without the
purpose of the meeting having been specified in the notice. Failure to hold
an annual meeting does not invalidate the Corporation's existence or affect
any otherwise valid corporate acts.
SECTION 1.2 Special Meeting. At any time in the interval
---------------
between annual meetings, a special meeting of the stockholders may be called by
the Chairman of the Board or the President or by a majority of the Board of
Directors by vote at a meeting or in writing (addressed to the Secretary of
the Corporation) with or without a meeting.
SECTION 1.3 Place of Meetings. Meetings of stockholders shall
-----------------
be held at such place in the United States as is set from time to time by the
Board of Directors.
SECTION 1.4 Notice of Meetings; Waiver of Notice. Not less than
------------------------------------
ten nor more than 90 days before each stockholders' meeting, the Secretary
shall give written notice of the meeting to each stockholder entitled to vote
at the meeting and each other stockholder entitled to notice of the meeting.
The notice shall state the time and place of the meeting and, if the meeting
is a special meeting or if notice of the purpose is required by statute, the
purpose of the meeting. Notice is given to a stockholder when it is
personally delivered to him, left at his residence or usual place of business,
or mailed to him at his address as it appears on the records of the
Corporation. Notwithstanding the foregoing provisions, each person who is
entitled to notice waives notice if he before or after the meeting signs a
waiver of the notice which is filed with the records of stockholders'
meetings, or is present at the meeting in person or by proxy.
SECTION 1.5 Quorum; Voting. Unless a statute or the Charter
--------------
provides otherwise, at a meeting of stockholders the presence in person or by
proxy of stockholders entitled to cast a majority of all the votes entitled to
be cast at the meeting constitutes a quorum,
<PAGE> 2
and a majority of all the votes cast at a meeting at which a quorum is present
is sufficient to approve any matter which properly comes before the meeting,
except that a plurality of all the votes cast at a meeting at which a quorum
is present is sufficient to elect a director.
SECTION 1.6 Adjournments. Whether or not a quorum is present, a
------------
meeting of stockholders convened on the date for which it was called may be
adjourned from time to time by the stockholders present in person or by proxy
by a majority vote. Any business which might have been transacted at the
meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present. No further notice of an
adjourned meeting other than by announcement shall be necessary if held on a
date not more than 120 days after the original record date.
SECTION 1.7 General Right to Vote; Proxies. Unless the Charter
------------------------------
provides for a greater or lesser number of votes per share or limits or denies
voting rights, each outstanding share of stock, regardless of class, is
entitled to one vote on each matter submitted to a vote at a meeting of
stockholders and fractional shares shall be entitled to corresponding
fractions of one vote. In all elections for Directors, each share of stock
may be voted for as many individuals as there are Directors to be elected and
for whose election the share is entitled to be voted. A stockholder may vote
the stock he owns of record either in person or by written proxy signed by the
stockholder or by his duly authorized attorney in fact. Unless a proxy
provides otherwise, it is not valid more than 11 months after its date.
SECTION 1.8 List of Stockholders. At each meeting of
--------------------
stockholders a full, true and complete list of all stockholders entitled to vote
at such meeting, showing the number and class of shares held by each and
certified by the transfer agent for such class or by the Secretary, shall be
furnished by the Secretary.
SECTION 1.9 Conduct of Voting. At all meetings of stockholders,
-----------------
unless the voting is conducted by inspectors, the proxies and ballots shall be
received, and all questions touching the qualification of voters and the
validity of proxies and the acceptance or rejection of votes shall be decided
by the chairman of the meeting. If demanded by stockholders present in person
or by proxy entitled to cast 10% in number of votes entitled to be cast, or if
ordered by the chairman, the vote upon any election or question shall be taken
by ballot and, upon like demand or order, the voting shall be conducted by two
inspectors, in which event the proxies and ballots shall be received, and all
questions touching the qualification of voters and the validity of proxies and
the acceptance or rejection of votes shall be decided by such inspectors.
Unless so demanded or ordered, no vote need be by ballot and voting need not
be conducted by inspectors. The stockholders at any meeting may choose an
inspector or inspectors to act at such meeting, and in default of such
election the chairman of the meeting may appoint an inspector or inspectors.
No candidate for election as a director at a meeting shall serve as an
inspector thereat.
SECTION 1.10 Informal Action by Stockholders. Any action
-------------------------------
required or permitted to be taken at a meeting of stockholders may be taken
without a meeting if there is filed with
2
<PAGE> 3
the records of stockholders' meetings an unanimous written consent which sets
forth the action and is signed by each stockholder entitled to vote on the
matter and a written waiver of any right to dissent signed by each stockholder
entitled to notice of the meeting but not entitled to vote at it.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1 Function of Directors. The business and affairs of
---------------------
the Corporation shall be managed under the direction of its Board of
Directors. All powers of the Corporation may be exercised by or under
authority of the Board of Directors, except as conferred on or reserved to the
stockholders by statute or by the Charter or By-Laws.
SECTION 2.2 Number of Directors. The Corporation shall have at
-------------------
least three Directors; provided that, if there is no stock outstanding, the
number of Directors may be less than three but not less than one, and, if
there is stock outstanding and so long as there are less than three
stockholders, the number of Directors may be less than three but not less than
the number of stockholders. The Corporation shall have the number of
Directors provided in the Charter until changed as herein provided. A
majority of the entire Board of Directors may alter the number of Directors
set by the Charter to not exceeding 25 nor less than the minimum number then
permitted herein, but the action may not affect the tenure of office of any
director.
SECTION 2.3 Election and Tenure of Directors. Until the first
--------------------------------
annual meeting of shareholders and until successors or additional Directors
are duly elected and qualify, the Board shall consist of the persons named as
such in the Charter. At the first annual meeting of stockholders and at each
annual meeting thereafter, the stockholders shall elect Directors to hold
office until the next annual meeting and until their successors are elected
and qualify.
SECTION 2.4 Removal of Director. Unless a statute or the
-------------------
Charter provides otherwise, the stockholders may remove any director, with or
without cause, by the affirmative vote of a majority of all the votes entitled
to be cast for the election of Directors.
SECTION 2.5 Vacancy on Board. The stockholders may elect a
----------------
successor to fill a vacancy on the Board of Directors which results from the
removal of a director. A director elected by the stockholders to fill a
vacancy which results from the removal of a director serves for the balance of
the term of the removed director. A majority of the remaining Directors,
whether or not sufficient to constitute a quorum, may fill a vacancy on the
Board of Directors which results from any cause except an increase in the
number of Directors and a majority of the entire Board of Directors may fill a
vacancy which results from an increase in the number of Directors; provided,
in either case, that immediately after filling such vacancy at least
two-thirds of the Directors then holding office shall have been elected to
such office by the stockholders at an annual or special meeting thereof. If at
any time after the first annual meeting
3
<PAGE> 4
of stockholders of the Corporation a majority of Directors in office shall
consist of Directors elected by the Board of Directors, a meeting of the
stockholders shall be called forthwith for the purpose of electing the entire
Board of Directors, and the terms of office of the Directors then in office
shall terminate upon the election and qualification of such Board of
Directors. A director elected by the Board of Directors to fill a vacancy
serves until the next annual meeting of stockholders and until his successor
is elected and qualifies.
SECTION 2.6 Regular Meetings. After each meeting of
----------------
stockholders at which a Board of Directors shall have been elected, the Board of
Directors so elected shall meet as soon as practicable for the purpose of
organization and the transaction of other business; and in the event that no
other time is designated by the stockholders, the Board of Directors shall meet
one hour after the time for such stockholders' meeting or immediately following
the close of such meeting, whichever is later, on the day of such meeting. Such
first regular meeting shall be held at any place as may be designated by the
stockholders, or in default of such designation at the place designated by the
Board of Directors for such first regular meeting, or in default of such
designation at the place of the holding of the immediately preceding meeting
of stockholders. No notice of such first meeting shall be necessary if held
as hereinabove provided. Any other regular meeting of the Board of Directors
shall be held on such date and at any place as may be designated from time to
time by the Board of Directors.
SECTION 2.7 Special Meetings. Special meetings of the Board of
----------------
Directors may be called at any time by the Chairman of the Board or the
President or by a majority of the Board of Directors by vote at a meeting, or
in writing with or without a meeting. A special meeting of the Board of
Directors shall be held on such date and at any place as may be designated
from time to time by the Board of Directors. In the absence of designation
such meeting shall be held at such place as may be designated in the call.
SECTION 2.8 Notice of Meeting. Except as provided in Section
-----------------
2.6, the Secretary shall give notice to each director of each regular and
special meeting of the Board of Directors. The notice shall state the time and
place of the meeting. Notice is given to a director when it is delivered
personally to him, left at his residence or usual place of business, or sent by
telegraph or telephone, at least 24 hours before the time of the meeting or, in
the alternative by mail to his address as it shall appear on the records of the
Corporation, at least 72 hours before the time of the meeting. Unless the
By-Laws or a resolution of the Board of Directors provides otherwise, the
notice need not state the business to be transacted at or the purposes of any
regular or special meeting of the Board of Directors. No notice of any meeting
of the Board of Directors need be given to any director who attends, or to any
director who, in writing executed and filed with the records of the meeting
either before or after the holding thereof, waives such notice. Any meeting
of the Board of Directors, regular or special, may adjourn f from time to time
to reconvene at the same or some other place, and no notice need be given of
any such adjourned meeting other than by announcement.
SECTION 2.9 Action by Directors. Unless a statute or the
-------------------
Charter or these By-Laws requires a greater proportion, the action of a majority
of the Directors present at a meeting
4
<PAGE> 5
at which a quorum is present is action of the Board of Directors. A majority
of the entire Board of Directors shall constitute a quorum for the transaction
of business. In the absence of a quorum, the Directors present by majority
vote and without notice other than by announcement may adjourn the meeting
from time to time until a quorum shall attend. At any such adjourned meeting
at which a quorum shall be present, any business may be transacted which might
have been transacted at the meeting as originally notified. Any action
required or permitted to be taken at a meeting of the Board of Directors may
be taken without a meeting, if an unanimous written consent which sets forth
the action is signed by each member of the Board and filed with the minutes of
proceedings of the Board.
SECTION 2.10 Meeting by Conference Telephone. Members of the
-------------------------------
Board of Directors may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time. Participation in a meeting by
these means constitutes presence in person at a meeting.
SECTION 2.11 Compensation. By resolution of the Board of
------------
Directors a fixed sum and expenses, if any, for attendance at each regular or
special meeting of the Board of Directors or of committees thereof, and other
compensation for their services as such or on committees of the Board of
Directors, may be paid to Directors. A director who serves the Corporation in
any other capacity also may receive compensation for such other services,
pursuant to a resolution of the Directors.
ARTICLE III
COMMITTEES
SECTION 3.1 Committees. The Board of Directors may appoint from
----------
among its members an Executive Committee and other committees composed of two
or more Directors and delegate to these committees any of the powers of the
Board of Directors, except the power to declare dividends or other
distributions on stock, elect Directors, issue stock other than as provided in
the next sentence, recommend to the stockholders any action which requires
stockholder approval, amend the By-Laws, or approve any merger or share
exchange which does not require stockholder approval. If the Board of
Directors has given general authorization for the issuance of stock, a
committee of the Board, in accordance with a general formula or method
specified by the Board by resolution or by adoption of a stock option or other
plan, may fix the terms of stock subject to classification or reclassification
and the terms on which any stock, may be issued, including all terms and
conditions required or permitted to be established or authorized by the Board
of Directors.
SECTION 3.2 Committee Procedure. Each committee may fix rules
-------------------
of procedure for its business. A majority of the members of a committee shall
constitute a quorum for the transaction of business and the act of a majority
of those present at a meeting at which a quorum is present shall be the act of
the committee. The members of a committee present at any
5
<PAGE> 6
meeting, whether or not they constitute a quorum, may appoint a director to
act in the place of an absent member. Any action required or permitted to be
taken at a meeting of a committee may be taken without a meeting, if an
unanimous written consent which sets forth the action is signed by each member
of the committee and filed with the minutes of the committee. The members of
a committee may conduct any meeting thereof by conference telephone in
accordance with the provisions of Section 2.10.
SECTION 3.3 Emergency. In the event of a state of disaster of
---------
sufficient severity to prevent the conduct and management of the affairs and
business of the Corporation by its Directors and officers as contemplated by
the Charter and the By-Laws, any two or more available members of the then
incumbent Executive Committee shall constitute a quorum of that Committee for
the full conduct and management of the affairs and business of the Corporation
in accordance with the provisions of Section 3.1. In the event of the
unavailability, at such time, of a minimum of two members of the then
incumbent Executive Committee, the available Directors shall elect an
Executive Committee consisting of any two members of the Board of Directors,
whether or not they be officers of the Corporation, which two members shall
constitute the Executive Committee for the full conduct and management of the
affairs of the Corporation in accordance with the foregoing provisions of this
Section. This Section shall be subject to implementation by resolution of the
Board of Directors passed from time to time for that purpose, and any
provisions of the By-Laws (other than this Section) and any resolutions which
are contrary to the provisions of this Section or to the provisions of any
such implementary resolutions shall be suspended until it shall be determined
by any interim Executive Committee acting under this Section that it shall be
to the advantage of the Corporation to resume the conduct and management of
its affairs and business under all the other provisions of the By-Laws.
ARTICLE IV
OFFICERS
SECTION 4.1 Executive and Other Officers. The Corporation shall
----------------------------
have a President, a Secretary, and a Treasurer who shall be the executive
officers of the Corporation. It may also have a Chairman of the Board; the
Chairman of the Board shall be an executive officer if he is designated as the
chief executive officer of the Corporation. The Board of Directors may
designate who shall serve as chief executive officer, having general
supervision of the business and affairs of the Corporation, or as chief
operating officer, having supervision of the operations of the Corporation; in
the absence of designation the President shall serve as chief executive
officer and chief operating officer. The Corporation may also have one or
more Vice-Presidents, assistant officers, and subordinate officers as may be
established by the Board of Directors. A person may hold more than one office
in the Corporation but may not serve concurrently as both President and
Vice-President of the Corporation. The Chairman of the Board shall be a
director; the other officers may be Directors.
6
<PAGE> 7
SECTION 4.2 Chairman of the Board. The Chairman of the Board,
---------------------
if one be elected, shall preside at all meetings of the Board of Directors and
of the stockholders at which he shall be present; and, in general, he shall
perform all such duties as are from time to time assigned to him by the Board
of Directors.
SECTION 4.3 President. The President, in the absence of the
---------
Chairman of the Board, shall preside at all meetings of the Board of Directors
and of the stockholders at which he shall be present; he may sign and execute,
in the name of the Corporation, all authorized deeds, mortgages, bonds,
contracts or other instruments, except in cases in which the signing and
execution thereof shall have been expressly delegated to some other officer or
agent of the Corporation; and, in general, he shall perform all duties usually
performed by a president of a corporation and such other duties as are from
time to time assigned to him by the Board of Directors or the chief executive
officer of the Corporation.
SECTION 4.4 Vice-Presidents. The Vice-President or
---------------
Vice-Presidents, at the request of the chief executive officer or the
President, or in the President's absence or during his inability to act, shall
perform the duties and exercise the functions of the President, and when so
acting shall have the powers of the President. if there be more than one
vice-President, the Board of Directors may determine which one or more of the
Vice-Presidents shall perform any of such duties or exercise any of such
functions, or if such determination is not made by the Board of Directors, the
chief executive officer, or the President may make such determination; otherwise
any of the Vice-Presidents may perform any of such duties or exercise any of
such functions. The Vice-President or Vice-Presidents shall have such other
powers and perform such other duties, and have such additional descriptive
designations in their titles (if any), as are from time to time assigned to
them by the Board of Directors, the chief executive officer, or the President.
SECTION 4.5 Secretary. The Secretary shall keep the minutes of
---------
the meetings of the stockholders, of the Board of Directors and of any
committees, in books provided for the purpose; he shall see that all notices
are duly given in accordance with the provisions of the By-Laws or as required
by law; he shall be custodian of the records of the Corporation; he may
witness any document on behalf of the Corporation, the execution of which is
duly authorized, see that the corporate seal is affixed where such document is
required or desired to be under its seal, and, when so affixed, may attest the
same; and, in general, he shall perform all duties incident to the office of a
secretary of a corporation, and such other duties as are from time to time
assigned to him by the Board of Directors, the chief executive officer, or the
President.
SECTION 4.6 Treasurer. The Treasurer shall have charge of and
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be responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust
companies or other depositories as shall, from time to time, be selected by
the Board of Directors; he shall render to the President and to the Board of
Directors, whenever requested, an account of the financial condition of the
Corporation; and, in general, he shall perform all the duties incident to the
office of a treasurer of a corporation, and such other duties
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as are from time to time assigned to him by the Board of Directors, the chief
executive officer, or the President.
SECTION 4.7 Assistant and Subordinate Officers. The assistant
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and subordinate officers of the Corporation are all officers below the office of
Vice-President, Secretary, or Treasurer. The assistant or subordinate
officers shall have such duties as are from time to time assigned to them by
the Board of Directors, the chief executive officer, or the President.
SECTION 4.8 Election, Tenure and Removal of Officers. The Board
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of Directors shall elect the officers. The Board of Directors may from time
to time authorize any committee or officer to appoint assistant and
subordinate officers. The President serves for one year. All other officers
shall be appointed to hold their offices, respectively, during the pleasure of
the Board. The Board of Directors (or, as to any assistant or subordinate
officer, any committee or officer authorized by the Board) may remove an
officer at any time. The removal of an officer does not prejudice any of his
contract rights. The Board of Directors (or, as to any assistant or
subordinate officer, any committee or officer, authorized by the Board) may
fill a vacancy which occurs in any office for the unexpired portion of the
term.
SECTION 4.9 Compensation. The Board of Directors shall have
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power to fix the salaries and other compensation and remuneration, of whatever
kind, of all officers of the Corporation. It may authorize any committee or
officer, upon whom the power of appointing assistant and subordinate officers
may have been conferred, to fix the salaries, compensation and remuneration of
such assistant and subordinate officers.
ARTICLE V
STOCK
SECTION 5.1 Certificates for Stock. Each stockholder is
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entitled to certificates which represent and certify the shares of stock he
holds in the Corporation. Each stock certificate shall include on its face the
name of the corporation that issues it, the name of the stockholder or other
person to whom it is issued, and the class of stock and number of shares it
represents. It shall be in such form, not inconsistent with law or with the
Charter, as shall be approved by the Board of Directors or any officer or
officers designated for such purpose by resolution of the Board of Directors.
Each stock certificate shall be signed by the Chairman of the Board, the
President, or a Vice-President, and countersigned by the Secretary, an Assistant
Secretary, the Treasurer, or an Assistant Treasurer. Each certificate may be
sealed with the actual corporate seal or a facsimile of it or in any other
form and the signatures may be either manual or facsimile signatures. A
certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued.
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SECTION 5.2 Transfers. The Board of Directors shall have power and
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authority to make such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of certificates of stock; and
may appoint transfer agents and registrars thereof. The duties of transfer
agent and registrar may be combined.
SECTION 5.3 Record Date and Closing of Transfer Books. The
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Board of Directors may set a record date or direct that the stock transfer books
be closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted
other rights. The record date may not be more than 90 days before the date on
which the action requiring the determination will be taken; the transfer books
may not be closed for a period longer than 20 days; and, in the case of a
meeting of stockholders, the record date or the closing of the transfer books
shall be at least ten days before the date of the meeting.
SECTION 5.4 Stock Ledger. The Corporation shall maintain a
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stock ledger which contains the name and address of each stockholder and the
number of shares of stock of each class which the stockholder holds. The stock
ledger may be in written form or in any other form which can be converted
within a reasonable time into written form for visual inspection. The
original or a duplicate of the stock ledger shall be kept at the offices of a
transfer agent for the particular class of stock, or, if none, at the
principal office in the State of Maryland or the principal executive offices
of the Corporation.
SECTION 5.5 Certification of Beneficial Owners. The Board of
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Directors may adopt by resolution a procedure by which a stockholder of the
Corporation may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth
the class of stockholders who may certify; the purpose for which the
certification may be made; the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure which
the Board considers necessary or desirable. On receipt of a certification
which complies with the procedure adopted by the Board in accordance with this
Section, the person specified in the certification is, for the purpose set
forth in the certification, the holder of record of the specified stock in
place of the stockholder who makes the certification.
SECTION 5.6 Lost Stock Certificates. The Board of Directors of
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the Corporation may determine the conditions for issuing a new stock
certificate in place of one which is alleged to have been lost, stolen, or
destroyed, or the Board of Directors may delegate such power to any officer or
officers of the Corporation. In their discretion, the Board of Directors or
such officer or officers may refuse to issue such new certificate save upon
the order of some court having jurisdiction in the premises.
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ARTICLE VI
FINANCE
SECTION 6.1 Checks, Drafts, Etc. All checks, drafts and orders
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for the payment of money, notes and other evidences of indebtedness, issued in
the name of the Corporation, shall, unless otherwise provided by resolution of
the Board of Directors, be signed by the President, a Vice-President or an
Assistant Vice-President and countersigned by the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary.
SECTION 6.2 Annual Statement of Affairs. The President shall
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prepare annually a full and correct statement of the affairs of the
Corporation, to include a balance sheet and a financial statement of
operations for the preceding fiscal year. The statement of affairs shall be
submitted at the annual meeting of the stockholders and, within 20 days after
the meeting, placed on file at the Corporation's principal office.
SECTION 6.3 Fiscal Year. The fiscal year of the Corporation
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shall be the twelve calendar months period ending December 31 in each year,
unless otherwise provided by the Board of Directors.
SECTION 6.4 Dividends. If declared by the Board of Directors at
---------
any meeting thereof, the Corporation may pay dividends on its shares in cash,
property, or in shares of the capital stock of the Corporation, unless such
dividend is contrary to law or to a restriction contained in the Charter.
SECTION 6.5 Custodian. All securities and cash of the
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Corporation shall be placed in the custody of a bank or trust company
("Custodian") having (according to its last published report) not less than
$2,000,000 aggregate capital, surplus and undivided profits, provided such a
Custodian can be found ready and willing to act (or maintained in such other
manner as is consistent with Section 17(f) of the 1940 Act and the rules and
regulations promulgated thereunder). The Corporation shall enter into a written
contract with the Custodian regarding the powers, duties and compensation of the
Custodian with respect to the cash and securities of the Corporation. The
Corporation shall upon the resignation or inability to serve of the Custodian
use its best efforts to obtain a successor custodian; require that the cash and
securities owned by the Corporation be delivered directly to the successor
custodian; and in the event that no successor custodian can be found, submit to
the shareholders, before permitting delivery of the cash and securities owned by
the Corporation to other than a successor custodian, the question whether or
not the Corporation shall be liquidated or shall function without a custodian.
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ARTICLE VII
SUNDRY PROVISIONS
SECTION 7.1 Books and Records. The Corporation shall keep
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correct and complete books and records of its accounts and transactions and
minutes of the proceedings of its stockholders and Board of Directors and of any
executive or other committee when exercising any of the powers of the Board of
Directors. The books and records of a Corporation may be in written form or
in any other form which can be converted within a reasonable time into written
form for visual inspection. Minutes shall be recorded in written form but may
be maintained in the form of a reproduction. The original or a certified copy
of the By-Laws shall be kept at the principal office of the Corporation.
SECTION 7.2 Corporate Seal. The Board of Directors shall
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provide a suitable seal, bearing the name of the Corporation, which shall be in
the charge of the Secretary. The Board of Directors may authorize one or more
duplicate seals and provide for the custody thereof. If the Corporation is
required to place its corporate seal to a document, it is sufficient to meet
the requirement of any law, rule, or regulation relating to a corporate seal
to place the word "Seal" adjacent to the signature of the person authorized to
sign the document on behalf of the Corporation.
SECTION 7.3 Bonds. The Board of Directors may require any
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officer, agent or employee of the Corporation to give a bond to the
Corporation, conditioned upon the faithful discharge of his duties, with one
or more sureties and in such amount as may be satisfactory to the Board of
Directors.
SECTION 7.4 Voting of Shares in Other Corporations. Stock of
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other corporations or associations, registered in the name of the Corporation,
may be voted by the President, a Vice-President, or a proxy appointed by
either of them. The Board of Directors, however, may by resolution appoint
some other person to vote such shares, in which case such person shall be
entitled to vote such shares upon the production of a certified copy of such
resolution.
SECTION 7.5 Mail. Any notice or other document which is
----
required by these By-Laws to be mailed shall be deposited in the U.S. mail,
postage prepaid.
SECTION 7.6 Execution of Documents. A person who holds more
----------------------
than one office in the Corporation may not act in more than one capacity to
execute, acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer.
SECTION 7.7 Amendments. Subject to the special provisions of
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Section 2.2: (a) any and all provisions of these By-Laws may be altered or
repealed and new by-laws may be adopted at any annual meeting of the
stockholders, or at any special meeting called for that purpose, and (b) the
Board of Directors shall have the power, at any regular or special meeting
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thereof, to make and adopt new by-laws, or to amend, alter or repeal any of
the By-Laws of the Corporation.
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