AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 2000
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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. 5 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
Amendment No. 8
BUILDERS FIXED INCOME FUND, INC.
2190 Mason Road, Suite 208
St. Louis, Missouri 63131
Telephone: (314) 822-1644
(Registrant's Name, Address and Telephone Number)
JOHN W. STEWART, PRESIDENT
2190 Mason Road, Suite 208
St. Louis, Missouri 63131
Telephone: (314) 822-1644
(Name and Address of Agent for Service)
Copies to:
DEE ANNE SJOGREN, ESQ.
Thompson Coburn, LLP
One Firstar Plaza
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)
[X] 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
If appropriate check this box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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As filed with the Securities and Exchange
Commission on May 2, 2000
Registration No. 333-30221
File No. 811-08273
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Part A
of
Form N-1A
REGISTRATION STATEMENT
BUILDERS FIXED INCOME FUND, INC.
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BUILDERS FIXED INCOME FUND, INC.
2190 MASON ROAD, SUITE 208
ST. LOUIS, MO 63131
(314) 822-1644
Builders Fixed Income Fund, Inc. (the "Fund") is a no-load, non-diversified,
open-end investment company. Its investment objective is to provide current
income. The Fund is designed to provide institutional investors with the
opportunity to invest in an investment grade fixed income portfolio while also
promoting employment in the housing construction trade and related industries
through the ProLoan program.
Prospectus dated June __, 2000
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.
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TABLE OF CONTENTS
RISK/RETURN SUMMARY............................................................3
PERFORMANCE....................................................................4
INVESTMENT OBJECTIVE...........................................................6
INVESTMENT STRATEGIES..........................................................6
RISKS..........................................................................9
MANAGEMENT OF THE FUND........................................................11
PURCHASE, REDEMPTION AND VALUATION OF FUND SHARES.............................12
DISTRIBUTIONS.................................................................15
TAX INFORMATION...............................................................15
DISTRIBUTION PLAN.............................................................16
FINANCIAL HIGHLIGHTS..........................................................18
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RISK/RETURN SUMMARY
FUND OBJECTIVE AND INVESTMENT STRATEGIES
The Fund's investment objective is to provide current income. Under normal
circumstances, the Fund invests at least 65% of its total assets in investment
grade fixed income securities, including at least 30% of its net assets in
mortgage-backed securities that are issued or guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") and
secured by ProLoan mortgages on residential homes that are built by union labor
("ProLoan mortgage-backed securities"). For purposes of this policy, "investment
grade securities" are those rated at the time of purchase A-/A3 or better by
Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's"), respectively, or, if unrated, determined to be comparable by the
Fund's Subadviser. The average credit rating of the Fund's entire portfolio will
be at least AA-/Aa3 as rated by S&P or Moody's, respectively, or the equivalent
rating of another rating agency. Its average effective duration will be within
30% of the duration of the Lehman Aggregate Bond Index, which currently is 4.5
years. Thus, the Fund's duration will be between 3 and 6 years. There is no
assurance, however, that the Fund will achieve its investment objective. See
"Risks."
The Fund invests in different types of fixed income securities, including
corporate bonds, zero coupon bonds and debentures, obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
("government securities") and money market instruments. The Fund also may invest
up to 65% of its net assets in mortgage-backed securities, collateralized
mortgage obligations ("CMOs") and asset-backed securities.
PROLOAN PROGRAM
The ProLoan program is a coordinated effort involving home builders, mortgage
lenders and organized building trade unions. The Fund contracts with banks and
other mortgage lenders to offer ProLoans to individuals whose homes are
substantially union-built and newly constructed or substantially renovated.
Capital Mortgage Management, Inc., the Fund's Manager, coordinates with home
builders and local building trade unions to ensure that residential homes are
built using trained union labor and, thus, are eligible to be included in the
ProLoan program. ProLoan home mortgages offer qualified borrowers the
opportunity to lock in interest rates, typically for up to six months, to allow
time for construction or renovation of the borrower's home. This extended
interest rate protection period is longer than the 45- to 60-day standard
interest rate protection offered with respect to most ordinary home mortgages.
The ProLoan program also allows borrowers to "float down" to a lower interest
rate, if interest rates decline after the borrower has locked in an interest
rate on a ProLoan, by paying a fee to the Fund.
RISKS
The value of your investment in the Fund may go up or down, which means that you
could lose money.
INTEREST RATE RISK: The market value of fixed income securities in which the
Fund invests and, thus, the Fund's net asset value, can be expected to vary
inversely to changes in interest rates. When interest rates rise, the net asset
value of the Fund generally will decline. When interest rates fall, the net
asset value of the Fund generally will increase in value. Zero coupon bonds are
subject to greater market fluctuations from changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest. Debt securities with longer maturities, which tend to produce higher
yields, are subject to potentially greater capital appreciation and depreciation
than obligations with shorter maturities. Changes in the financial strength of
an issuer or changes in the ratings of any particular security may also affect
the value of these securities. Fluctuations in the market value of fixed income
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in the Fund's net asset value.
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The Fund may experience additional interest rate risk because of its investment
in ProLoan mortgage-backed securities, because the Fund will be subject to a
potential six-month interest rate lock period, which is substantially longer
than the typical 45- to 60-day interest rate lock period. During this six-month
period, the potential increase in the market value of ProLoan mortgage-backed
securities is less than the potential decrease, due to the borrower's ability to
float down to a lower interest rate under the ProLoan program. Also, early
repayment of principal on ProLoan mortgage-backed securities may expose the Fund
to a lower rate of return when it reinvests the principal. The interest rate
offered on ProLoans in new markets may be lower than the average market rate
offered by most financial institutions for ordinary home mortgage loans in order
to generate interest in the ProLoan program. As a result, the value of these
ProLoan mortgage-backed securities may be lower than the market value of
comparable mortgage-backed securities.
CREDIT RISK: An issuer of bonds could default on its obligation to pay interest
and repay principal. The Fund may invest up to 35% of its total assets in
investment-grade securities, which are securities rated at the time of purchase
BBB/Baa or higher by S&P or Moody's, respectively, or similarly rated by another
rating agency or, are unrated, but determined to be of comparable quality by the
Subadviser. Obligations rated BBB/ Baa are considered to have speculative
characteristics and are subject to greater credit and market risk than higher
rated securities.
MANAGEMENT RISK: There is a risk that a management strategy employed by Capital
Mortgage Management, Inc. the Fund's Manager, or an investment strategy employed
by Principal Capital Management, LLC, the Fund's Subadviser, could be
unsuccessful.
PERFORMANCE
The bar chart and table below provide some indication of the risks of investing
in the Fund by comparing the Fund's performance with a broad measure of market
performance. Past performance does not guarantee future results.
[BAR CHART]
YEAR-BY-YEAR ANNUAL TOTAL RETURN
Builders Fixed Income Fund
1999 1998
---- ----
-0.58% 6.48%
[END BAR CHART]
During the period shown in the bar chart, the Fund's highest return for a
quarter was 3.23% (quarter ended September 30, 1998) and the lowest return for a
quarter was -1.30% (quarter ended June 30, 1999).
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AVERAGE ANNUAL TOTAL RETURNS
(FOR THE PERIODS ENDING DECEMBER 31, 1999)
Past Since Inception
One Year (10/31/97)
-------- ----------
Builders Fixed Income Fund, Inc. -0.58% 3.42%
Lipper Intermediate Investment Grade Index* -0.98% 3.66%
Lehman Brothers Aggregate Bond Index** -0.83% 4.22%
Lehman Brothers Mortgage-Backed Securities Index*** 1.85% 4.59%
* The Lipper Intermediate Investment Grade Index consists of the 30 largest
mutual funds that invest at least 65% of its assets their investment-grade debt
issues (rated in the top four grades) with dollar-weighted average maturities of
five to ten years.
** The Lehman Brothers Aggregate Bond Index is an unmanaged index generally
representative of intermediate-term government bonds, investment grade corporate
debt securities and mortgage-backed securities.
*** The Lehman Brothers Mortgage-Backed Securities Index is a broad,
market-weighted index of 15- and 30-year fixed rate securities backed by
pools of GNMA, FNMA and FHLMC mortgages, as well as FNMA and FHLMC balloon
mortgages with fixed-rate coupons. The Fund changed its investment policies to
become a core fixed income portfolio and to reduce its exposure to mortgages. As
a result, the Fund no longer compares its performance to this index and has
changed its benchmark to the Lehman Brother Aggregate Bond Index, shown above.
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Deferred Sales Charge (as a percentage of original purchased price) None
Redemption Fee (as a percentage of amount redeemed) None
------
ANNUAL FUND OPERATING EXPENSES (expenses
that are deducted from Fund assets)
Management Fees(1) 0.36%
Distribution (12b-1) Fees 0.10%
Other Expenses(2) 0.19%
------
Total Annual Fund Operating Expenses 0.65%
Fee Waiver(3) -0.05%
------
Net Expenses 0.60%
======
(1) The Fund's Manager receives a management fee of 0.15% plus all fees payable
to the Subadviser. The Subadviser receives a subadvisory fee of 0.165% of the
Fund's net assets.
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(2) The Manager, as Distribution Coordinator, contractually has agreed to waive
its distribution fees and/or reimburse expenses so that Total Operating Expenses
(excluding interest, taxes and extraordinary expenses) do not exceed 0.60% of
the Fund's net assets on an annual basis through December 31, 2000.
(3) The Fee Waiver is comprised of 0.04% subadvisory fees waived by the
Subadviser and 0.01% Distribution (12b-1) Fees waived by the Distribution
Coordinator.
EXAMPLE:
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that:
* you invest $10,000 in the Fund for the time period indicated;
* you redeem all of your shares at the end of those periods;
* your investment has a 5% return each year; and
* the Fund's operating expenses remain the same.
Although your actual costs could be higher or lower, based on these assumptions
your costs would be:
1 year 3 years 5 years 10 years
- ------ ------- ------- --------
$166 $203 $357 $806
You would pay the following expenses if you did not redeem your shares:
1 year 3 years 5 years 10 years
- ------ ------- ------- --------
$61 $203 $357 $806
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide current income. There is no
assurance, however, that the Fund will achieve its investment objective. See
"Risks." 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
Fund shares 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. The investment strategies of the Fund described below
can be changed at any time by the Board of Directors to the extent that such
changes are consistent with the Fund's investment objective.
INVESTMENT STRATEGIES
Under normal circumstances, the Fund invests at least 65% of its total assets in
investment grade fixed income securities, including at least 30% of its net
assets in ProLoan mortgage-backed securities. For purposes of this policy,
"investment grade" securities are those rated at the time of purchase A-/A3 or
better by S&P or Moody's, respectively, or, if unrated, determined to be of
comparable quality by the Subadviser. The Fund may invest in different types of
fixed income securities, including corporate debt obligations such as fixed and
variable-rate bonds, zero coupon bonds and debentures, government securities,
and money market instruments. All of the fixed income securities acquired by the
Fund other than those subject to the 65% requirement described above will be
rated at the time of purchase BBB/Baa or higher by S&P or Moody's, respectively,
or similarly rated by another rating agency or, are unrated but determined to be
of comparable quality by the Subadviser.
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The Fund also may invest up to 65% of its net assets in mortgage-backed
securities, CMOs, and asset-backed securities. Mortgage-backed securities
represent interests in "pools" of commercial or residential mortgage loans
assembled by various government agencies or private issuers. CMOs are mortgage
obligations structured in multiple classes, with each class bearing a different
stated maturity, coupon rate or interest rate sensitivity. The Fund may invest
in mortgage pass-through certificates which are backed by pools of residential
mortgage loans, such as Ginnie Maes, Fannie Maes and Freddie Mac. The Fund also
may invest in commercial mortgage-backed securities, which are securitizations
of mortgage loans backed by commercial real estate. CMOs may be collateralized
by whole mortgage loans but typically are collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA. Asset-backed
securities represent a participation in, or are secured by or payable from, a
stream of payments governed by particular assets. Such securities may include
home equity and manufactured housing loans, automobile and credit card
receivables, and other types of receivables or other assets.
The Fund also invests in government securities including separately traded
registered interest and principal securities ("STRIPS") and other zero coupon
obligations; corporate bonds, notes and debentures; domestic certificates of
deposit, bank deposit notes and bank notes; and cash or cash equivalents,
including commercial paper, loan participation interests and other promissory
notes maturing in 397 days or less. These securities may have a fixed, variable
or floating rate of interest.
DESCRIPTION OF THE PROLOAN PROGRAM. The Fund is designed to provide
institutional investors with the opportunity to invest in an investment grade
bond portfolio while also promoting employment in the housing construction trade
and related industries through the ProLoan program. The ProLoan program is a
coordinated effort involving home builders, mortgage lenders and organized
building trade unions. The Fund contracts with banks and other mortgage lenders
(collectively, "Lenders") to offer ProLoans to individuals whose homes are
substantially union-built and newly constructed or substantially renovated, as
determined by the Fund's Manager. The Manager also coordinates with home
builders and local building trade unions to ensure that residential homes are
built using trained union labor and, thus, are eligible to be included in the
ProLoan program. ProLoan allows qualified borrowers the opportunity to lock in
interest rates on their home mortgages, typically for up to six months, to allow
time for construction or renovation of their home. This extended interest rate
protection period is longer than the 45- to 60-day standard interest rate
protection offered with respect to most ordinary home mortgages.
ProLoans are offered by qualified Lenders with the interest rate and points
established each week by the Subadviser, based on its survey of local markets
and the ability of the Fund to invest in additional ProLoan mortgage-backed
securities. Borrowers pay a ProLoan commitment fee, which is refunded to the
borrower at closing. These commitment fees might not fully compensate the Fund
for the additional interest rate risk it will bear during the six-month interest
rate lock-in period and thus, the Fund may incur a loss. In the event that the
borrower does not close a ProLoan, the unrefunded commitment fees are allocated
between the Fund and the Lender in amounts agreed to by these parties. If
interest rates decline after a borrower has locked in an interest rate on a
ProLoan, the borrower may reduce the interest rate by paying a "float-down" fee
to the Fund, which typically is one-half of one percent of the loan amount. If
construction or renovation of a home is not complete by the date set for
closing, the borrower may extend a ProLoan for up to 60 days, at the discretion
of the Subadviser, for an extension fee which typically is one-quarter of one
percent of the loan amount for each 30 day extension.
PROLOAN MORTGAGE-BACKED SECURITIES. The Fund invests at least 30% of its net
assets in mortgage-backed securities secured by pools of ProLoans created by the
Lenders, which have been securitized and guaranteed by GNMA, FNMA or FHLMC. At
the Subadviser's discretion, a ProLoan may be sold instead of being included in
a pool by a Lender. The Fund purchases ProLoan mortgage-backed securities from
the Lenders at established prices based on the face value of such ProLoans, as
determined pursuant to an agreement between the Fund and the Lenders. ProLoan
mortgage-backed securities typically are delivered to the Fund within eight
months from the initial commitment date.
The Fund commits to acquire ProLoan mortgage-backed securities on a
"when-issued" basis. At the time of the commitment, the Fund's custodian
segregates cash or other liquid assets equal to the amount of the commitment.
The value of the ProLoans underlying the when-issued commitment, and any
subsequent fluctuations in their value, will be taken into account when
determining the Fund's net asset value starting on the day that the Fund agrees
to purchase the securities. The Fund does not earn interest on the securities it
has committed to acquire until they are paid for and delivered on the settlement
date. When the Fund engages in when-issued transactions, it relies on the other
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party to consummate the trade. Failure of that party to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price considered
to be advantageous. The Fund will make commitments to acquire securities on a
when-issued basis only with the intention of completing the transaction and
actually purchasing the securities. If deemed advisable as a matter of
investment strategy, however, the Fund may sell ProLoans 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 ProLoan mortgage commitments.
DIVERSIFICATION AND CONCENTRATION RISK: The Fund is non-diversified, which means
that the Fund may invest a greater percentage of its assets in a particular
issuer compared with diversified mutual funds. The change in value of any one
security could affect the overall value of the Fund more than it would the value
of a diversified fund. The Fund invests at least 30% of its net assets in
ProLoan mortgage-backed securities. As a result, an economic, business,
political or other change affecting the residential building and trade
industries in the geographical areas in which ProLoan programs are offered could
increase the market risk and the potential for fluctuation in the value of the
Fund's shares.
TEMPORARY INVESTMENTS. 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 ("SAI") for a description of the foregoing
securities. Principal and/or interest payments for government securities may or
may not be backed by the full faith and credit of the U.S. Government. The Fund
may not achieve its investment objective if it engages in temporary defensive
strategies.
REPURCHASE AGREEMENTS. The Fund enters 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.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in illiquid
securities, including securities with legal or contractual restrictions on
resale or no readily available market (including repurchase agreements, variable
and floating rate instruments and time deposits with notice/termination dates in
excess of 7 days) and certain securities that are subject to trading
restrictions because they are not registered under the Securities Act of 1933
(the "1933 Act"). The Fund may purchase commercial paper issued pursuant to
section 4(2) of the 1933 Act and securities that are not registered under the
1933 Act but that can be sold to "qualified institutional buyers" in accordance
with Rule 144A under the 1933 Act. These securities will not be considered
illiquid as long as the Subadviser determines, under guidelines approved by the
Board of Directors, that an adequate trading market exists.
CREDIT QUALITY. Under normal market conditions, the Fund will invest at least
65% of its total assets in fixed income securities rated at the time of purchase
A-/A3 or better by S&P or Moody's, respectively, or, if unrated, determined to
be of comparable quality by the Subadviser. The Fund's average credit rating,
calculated based upon the market value of each security in the Fund's portfolio,
will be at least AA-/Aa3 as rated by S&P or Moody's, respectively, or the
equivalent rating of another rating agency. All of the fixed income and floating
rate securities acquired by the Fund other than those subject to the 65%
requirement will be rated at the time of purchase AAA/Aaa, AA/Aa, A or BBB/Baa
by S&P or Moody's, respectively, or are similarly rated by another rating agency
or are unrated but determined to be of comparable quality by the Subadviser.
DURATION. Although the Fund is not restricted as to the maximum or minimum
duration of any individual security it holds, its average effective duration
will be within 30% of the duration of the Lehman Brothers Aggregate Bond Index,
which currently is 4.95 years. Thus, the Fund's duration will be between 3 and 6
years. "Duration" means the average time to receipt of expected cash flows
(discounted to 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 takes into account the effect
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of interest rate changes on bond prices. For example, if interest rates increase
by 1%, the value of a security having an effective duration of five years
generally would decrease in value by 5%.
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 as the market value of fixed rate securities due to the
periodic adjustments in their interest rates. An adjustment that increases the
interest rate of variable and floating rate 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 investment grade
fixed income securities and the resulting net asset value of the Fund's
portfolio will fluctuate with 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.
CMOs involve risks in addition to those found in other types of mortgage-related
obligations, since they may exhibit more price volatility and interest rate
risk. During periods of rising interest rates, CMOs could lose their liquidity
because CMO market makers may choose not to repurchase, or might offer prices
based on current market conditions that are unacceptable to the Fund based on
the Subadviser's analysis of the market value of the security. Zero coupon bonds
also are subject to greater market fluctuations from changing interest rates
than debt obligations of comparable maturities that make current distributions
of interest.
PREPAYMENT RISKS. 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) could
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.
CREDIT RISK. An issuer of bonds could default on its obligation to pay interest
and repay principal. The Fund may invest up to 35% of its total assets in
securities rated at the time of purchase BBB/Baa or higher by S&P or Moody's,
respectively, or are similarly rated by another rating agency or are unrated but
determined to be of comparable quality by the Subadviser. Obligations rated
BBB/Baa are considered to have speculative characteristics and are subject to
greater credit and market risk than higher rated securities. 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 SAI for a
description of applicable debt ratings.
PROLOAN RISKS. ProLoan mortgage-backed securities bear additional risks to those
described above. For example, the Fund could experience additional interest rate
risk, since ProLoan mortgage-backed securities will be subject to a potential
six month interest rate lock period, exclusive of extensions, which is
substantially longer than the typical 45 to 60 day interest rate lock period.
Also, ProLoan interest rates in new markets could be lower than the average
market rate offered by most financial institutions for ordinary home mortgage
loans in order to generate interest in the ProLoan program. As a result, the
market value of these ProLoan mortgage-backed securities could be lower than the
market value of comparable mortgage-backed securities.
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In addition, the Fund's investment in ProLoan mortgage-backed securities
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 (typically up to eight months later). These
securities involve the risk that the yield obtained in the transaction (and thus
the value of the security) may be less favorable than the yield available in the
market when the security is delivered. At the time the Fund makes the commitment
to acquire ProLoan mortgage-backed securities, these commitments will be valued
for purposes of determining the Fund's net asset value and the Fund's custodian
will segregate cash or liquid assets equal to the value of the commitments,
which will be marked to market daily. If the market value of the underlying
commitments declines due to a rise in interest rates or otherwise, the Fund will
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 ProLoan
commitments on the open market or pursuant to a contractual obligation with a
Lender. 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 ProLoans
that secure the Fund's investments and the Fund may incur a loss or will have
lost the opportunity to invest the amount set aside for the ProLoans in the
segregated asset account. The Fund does not intend to engage in ProLoan
commitments for speculative purposes, but only in furtherance of its investment
objective.
The ProLoan program depends upon the continued participation of the Lenders.
There is no assurance that banks, mortgage lenders and other financial
institutions will continue to participate in the ProLoan program. To the extent
that the ProLoan program does not generate sufficient ProLoan mortgage-backed
securities, the Fund will invest in other mortgage-backed securities and fixed
income securities as described in this Prospectus.
There can be no assurance that the Manager will attempt to establish a ProLoan
program in the area in which an investor is located. If the Manager does attempt
to establish a ProLoan program in a particular metropolitan area, there can be
no assurance that its attempt will be successful and there may be a substantial
delay between an investor's purchase of Fund shares and the development of a
ProLoan program in the area in which the investor resides. In addition, the
terms of the ProLoan program typically vary from city to city depending upon the
nature of the regional real estate, mortgage and banking industries.
COMMERCIAL MORTGAGE-BACKED SECURITIES. CMBS transactions are securitizations of
mortgage loans backed by commercial real estate. These pools of commercial loans
typically are diversified by geographic location, property type, loan size and
borrower. Other CMBS structures include pools of loans made to a single
borrower, pools of loans backed by a small number of large loans, or pools that
combine a few large loans with a more diversified pool of small loans.
Commercial real estate typically includes office buildings, multi-family
housing, retail, industrial/warehouse and hotels. For the most part, the loans
are non-recourse to the borrower, which requires investors to rely on the
property's cash flow and value to sustain their investment. The majority of the
loans have amortization schedules considerably longer than the loan term, which
requires a balloon payment usually after 10 years. The ability of the borrower
to refinance and payoff a loan at the balloon date is a key risk to the cash
flow volatility inherent in the CMBS structure.
ASSET-BACKED SECURITIES. Asset-backed securities involve certain risks that do
not exist with mortgage-related securities because 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.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in illiquid
securities. If, through a change in net asset value or other circumstances, the
Fund were in a position where more than 15% of its net assets were invested in
illiquid securities, the Subadviser would seek to take steps to protect the
liquidity of the Fund's portfolio. The sale of illiquid securities may require
more time and result in higher transaction costs and other selling expenses than
the sale of liquid securities.
10
<PAGE>
Rule 144A securities will not be considered illiquid as long as the Subadviser
determines, under guidelines approved by the Board of Directors, that an
adequate trading market exists. The Fund's investment in 144A securities could
increase the level of liquidity during any period that qualified institutional
buyers become uninterested in purchasing these securities.
The Fund's commitments to acquire ProLoan mortgage-backed securities will not be
considered illiquid as long as the Fund has a valid contractual agreement with a
third party to assume the commitments, or provided that the Manager determines,
pursuant to guidelines established by the Board, that an adequate trading market
exists for the commitments. To the extent that a secondary market source or a
Lender becomes uninterested in purchasing the Fund's ProLoan commitments or
refuses to honor its contractual commitment to the Fund, the Fund's ProLoan
commitments would increase the level of illiquidity in its portfolio. As a
result of such illiquidity, the Fund might not be able to sell these commitments
when the Subadviser considers it desirable to do so or may have to sell them at
a lower price than could be obtained if they were more liquid. These factors
could have an adverse impact on the Fund's net asset value.
MANAGEMENT OF THE FUND
MANAGER
Capital Mortgage Management, Inc., located at 2190 South Mason Road, Suite 208,
St. Louis, Missouri 63131, is responsible for the management of the Fund and the
ProLoan program. Capital Mortgage provides or oversees all administrative,
investment advisory and portfolio management services for the Fund. Capital
Mortgage was formed in 1997 to provide management services to the Fund. John W.
Stewart, President of Capital Mortgage, formerly served as Controller/System
Administrator of the approximately $688 million pension fund for the Carpenters'
District Council of Greater St. Louis from August 1988 to September 1997.
Capital Mortgage 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, Capital Mortgage also monitors the Subadviser's
investment program and results.
The Fund paid Capital Mortgage management fees equal to 0.15% of its average
daily net assets during the fiscal year ending December 31, 1999.
INVESTMENT SUBADVISER
Principal Capital Management, LLC, a company of the Principal Financial Group,
is located at 801 Grand Avenue, Des Moines, Iowa 50392. Principal and its
affiliates manage more than $106 billion in assets worldwide, including
approximately $30 billion in US fixed income, primarily for pension and
institutional clients.
At the direction of the Manager, the Fund will pay the Subadviser a monthly fee
equal to an annual rate of 0.165% of its average daily net assets. Principal
began serving as the Fund's Subadviser on June __, 2000. From October 31, 1997
to May 31, 2000, Commerce Bank, N.A. served as the Funds' Subadviser, for which
it received an annual fee of 0.165%.
11
<PAGE>
PORTFOLIO MANAGER
Martin J. Schafer and William C. Armstrong of Principal Capital Management will
serve as portfolio managers of the Fund. Mr. Schafer has 23 years' experience
with an emphasis on mortgage-backed securities. His experience includes over 16
years as a portfolio manager of mutual funds and institutional portfolios, as
well as direct experience in residential mortgage origination and secondary
marketing. Mr. Schafer joined the Principal Group in 1977. Mr. Armstrong has 15
years experience with an emphasis on corporate debt and asset-backed securities.
He joined the Principal as a securities analyst in 1992, and has managed
institutional portfolios since 1997. Prior to joining the Principal Group, he
spent seven years as a bank examiner with the Federal Deposit Insurance
Corporation.
PURCHASE, REDEMPTION AND VALUATION OF FUND SHARES
Shares of the Fund 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 or redemption fee. The redemption price may be paid either in cash or by
a distribution in kind of securities held by the Fund.
PRICING OF FUND 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 ("Business Day"). 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-term obligations with 60 days
less to maturity are valued using the amortized cost method.
The Fund commits to acquire ProLoan mortgage-backed securities when such
securities are issued approximately six months after the origination of the
underlying ProLoans. This "pipeline" of ProLoan mortgage commitments is valued
at the price at which the Fund could assign the commitments to a third party, as
long as this price is considered by the Manager to equal no more than fair
market value. The formula for determining this price is as follows. The Manager
12
<PAGE>
calculates the coupon rate nearest to, but not greater than, the coupon rate
that is 0.625% below the weighted average coupon rate for all ProLoans in the
pipeline. The Manager then subtracts the spread between the forward prices for
three-and one-month FNMA mortgage-backed securities, each with the same coupon
rate as calculated above, from the three-month FNMA forward price, minus an
additional 0.125%. The Manager has determined that this price is equivalent to
the forward price of a six-month FNMA mortgage-backed security. See the SAI for
additional valuation methods.
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. There is no minimum amount
for subsequent investments. The Manager and Distributor may agree to waive this
minimum investment requirement; except that this minimum requirement
automatically will be waived for investments on behalf of 401(k) defined
contribution plans.
Fund shares are sold without a sales charge at the net asset value next
determined after the receipt of a request to purchase shares accompanied by
immediately available funds. Shares of the Fund are offered and purchase orders
accepted at the next determined net asset value. Net asset value is determined
as of 4:00 p.m. Eastern time on each 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.
You may purchase Fund shares as follows:
BY WIRE -- To purchase by wire:
* Call the Fund's transfer agent toll-free at 1-877-923-5626 to obtain an
account number (for new accounts only)
* Complete and return your account application to the transfer agent
* Instruct your bank to wire your investment to:
UMB Bank, N.A.
ABA #1010-0069-5
Credit to: #9870983710
FBO: Builders Fixed Income Fund
Your name(s) _____________________
Your account number ______________
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:
* Contact Capital Mortgage to acquire instructions regarding submission of a
written description of the securities which the investor wishes to
exchange.
* 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, Capital
Mortgage will advise the investor whether the securities to be exchanged
are acceptable. There is no charge for this review by Capital Mortgage.
* Upon acceptance of such orders, the securities must be delivered in fully
negotiable form within five days.
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 Capital Mortgage to review the acceptability of the securities. Capital
Mortgage 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.
13
<PAGE>
BY MAIL -- To purchase Fund shares by mail:
* Complete and sign the account application
* Mail your application and check to:
Builders Fixed Income Fund, Inc.
c/o Unified Fund Services, Inc.
P.O. Box 6110
(431 N. Pennsylvania Street for overnight deliveries)
Indianapolis, IN 46206-6110
If you are making additional purchase of shares, include your account number on
the check. Purchase checks are accepted subject to collection at full face value
in U.S. funds and must be drawn in U.S. dollars on a U.S. bank. Third party
checks will not be accepted by the Fund.
REDEMPTION OF SHARES
You may sell your Fund shares on any Business Day.
Write a letter of instruction that includes:
* your account name(s)
* your account number
* the dollar amount or the number of shares to be redeemed
* how to send the proceeds to you (by check or wire*)
* your signature (the letter must be signed by an authorized person(s) in the
exact name which appears on the account)
* any legal documents, if required
* If you want to have the redemption proceeds wired to your bank account,
provide the name, location, ABA or bank routing number and your bank
account number. Your bank may charge a fee to receive the wire.
Mail your written instructions to:
Builders Fixed Income Fund, Inc.
c/o Unified Fund Services, Inc.
P.O. Box 6110
(431 N. Pennsylvania Street for overnight deliveries)
Indianapolis, IN 46206-6110
Your shares will be sold at the next net asset value calculated after your order
is received in good order by the Fund's transfer agent. Any share certificates
being sold must be returned with your redemption request. The share certificates
must be properly endorsed or accompanied by a stock assignment with signature
guaranteed by a bank, trust company or member of a recognized stock exchange.
You generally will receive the redemption proceeds within seven (7) days after
receipt of your redemption request. The redemption check will be sent to the
address of record.
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<PAGE>
SUSPENSION OF REDEMPTIONS. The Fund reserves the right to suspend redemptions or
postpone the date of payment:
(a) for any periods during which the New York Stock 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 ("SEC") 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 SEC by order may permit for protection of the
Fund's shareholders.
If the shares being redeemed were purchased by check, payment may be delayed to
verify that the check has been honored, normally not more than fifteen (15)
days.
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.
DISTRIBUTIONS
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 and are payable to shareholders of record
as of the opening of business on the day on which declared. Dividends are paid
monthly. The Fund's net investment income will consist of dividends and interest
(including discount) accrued on the securities held by the Fund less applicable
expenses of the Fund. Distributions of the Fund's realized net short-term
capital gain and net capital gain (the excess of net long-term capital gain over
net short-term capital loss) normally will be made annually.
Unless a shareholder elects otherwise by so notifying the Fund in writing, all
dividends and other distributions on the Fund's shares will be automatically
declared and paid in additional shares of the Fund. However, a shareholder may
choose to have distributions of net capital gain paid in shares and dividends
paid in cash or to have all such distributions and dividends paid in cash. An
election may be changed at any time by delivering written notice that is
received by the Transfer Agent at least ten days prior to the payment date for a
dividend or other distribution.
TAX INFORMATION
The following summary deals only with the principal federal income tax
consequences of the ownership of a share of the Fund. It does not deal with
shares of the Fund held by special classes of taxpayers, such as dealers in
securities or currencies, banks, life insurance companies, tax-exempt
organizations, and individuals or entities whose functional currency is not the
U.S. dollar or who are not included within the term "United States Person" as
defined by the Internal Revenue Code of 1986, as amended (the "Code").
Similarly, this summary does not address shares of the Fund held as a hedge,
15
<PAGE>
interests hedged against currency or interest-rate risks, or interests that are
part of a straddle or conversion transaction. The summary is based on the Code,
its legislative history, existing and proposed regulations thereunder, published
rulings and court decisions, all as currently in effect and all subject to
change at any time, perhaps with retroactive effect. PROSPECTIVE PURCHASERS OF
SHARES OF THE FUND SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
CONSEQUENCES OF THEIR PARTICULAR CIRCUMSTANCES UNDER THE CODE AND THE LAWS OF
ANY RELEVANT STATE, COUNTY, CITY, OR OTHER TAXING JURISDICTION APPLICABLE TO THE
ACQUISITION, OWNERSHIP, AND DISPOSITION OF SUCH SHARES.
TAXATION OF SHAREHOLDERS OF THE FUND
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. All dividends and capital gain
distributions paid by the Fund, whether received in cash or reinvested in
additional shares of the Fund, may be subject to federal, state, and local
income tax. The Fund contemplates that distributions to shareholders will be
taxable primarily as ordinary income (principally from interest, original issue
discount (discussed below) and market discount), although the Fund also
anticipates making some distributions taxable to shareholders as capital gains
and losses (principally from the disposition of portfolio securities).
GAIN OR LOSS ON SALE OR EXCHANGE OF FUND SHARES. You will recognize a taxable
gain or loss when you sell shares of the Fund. The nature of that gain or loss,
and the manner in which it is to be recognized for federal income tax purposes,
depend primarily on (1) the length of time you have held the shares, and (2)
whether the amount realized in the transaction--the cash proceeds or the fair
market value of property received--exceeds your adjusted basis in the
relinquished shares. In computing a shareholder's adjusted basis, the Code
increases the original cost of the shares by the excess of the undistributed
capital gains the shareholder is required to report over the tax (imposed on the
RIC and) deemed to have been paid by the shareholder on such gains. In general,
the exchange of Fund shares for other securities or property would also result
in the current recognition of taxable gain or loss unless the exchange is part
of a tax-qualified corporate reorganization under the Code.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT. To the extent the Fund invests in debt
securities (such as zero coupon bonds) that include an "original issue discount"
component (as that term is defined in applicable provisions of the Code and
related regulations), the Fund--regardless of its regular method of tax
accounting--must recognize that original issue discount as income as it accrues.
As discussed above, this increases income and, in order to avoid the 4% excise
tax on insufficient distributions, effectively requires the Fund to increase its
cash distribution before it receives the cash to which the income is
attributable. As a result, the Fund may be required to dispose of securities at
an earlier time than it would have done in the absence of the accrued original
issue discount income. Such dispositions made to fund distribution requirements
may themselves produce currently-taxable gains, requiring additional funds for
distribution.
INFORMATION REPORTING AND BACKUP WITHHOLDING. Each January, the Fund will send
to U.S. shareholders (other than corporations) a statement showing all taxable
distributions and redemption proceeds received during the calendar year. The
Fund will be required to effect so-called "backup withholding" at the rate of
thirty-one percent (31%) if a non-corporate U.S. shareholder fails to provide an
accurate taxpayer identification number to the Fund, or if the Fund is notified
by the Internal Revenue Service that the shareholder has failed to report
certain amounts required to be reported on the shareholder's federal tax
returns.
DISTRIBUTION PLAN
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. This plan allows the Fund to pay distribution
fees for the sale and distribution of its shares and for services provided to
its shareholders. Under this Plan, the annual distribution and service fee
payable to the Manager, as Distribution Coordinator, is a maximum of 0.10% of
the Fund's average daily net assets. Payments made to the Manager, as
Distribution Coordinator, represent compensation for distribution and service
activities, not reimbursement for expenses incurred. Because these fees are paid
out of the Fund's assets on an on-going basis, over time these fees will
increase the cost of your investment in Fund shares and may cost you more than
paying other types of sales charges.
16
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the period from October 31, 1997 (commencement of Fund
operations) to December 31, 1999. Certain information reflects financial results
for a single Fund share. The total returns in the table represent the rate that
an investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been has
been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are incorporated by reference in the SAI, which is
available upon request.
<TABLE>
<CAPTION>
10/31/97*
Year Ended Year Ended to
12/31/99 12/31/98 12/31/97
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 15.14 $ 15.10 $ 15.00
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.83 0.80 0.14
Net Realized and Unrealized Gains (or Losses) on Investments (0.91) 0.15 0.10
-------- -------- --------
Total From Net Investment Operations (0.08) 0.95 0.24
-------- -------- --------
LESS DISTRIBUTIONS:
Dividends (from net investment income) (0.83) (0.80) (0.14)
Distributions (from capital gains) (0.09) (0.11) 0.00
-------- -------- --------
Total Distributions (0.92) (0.91) (0.14)
======== ======== ========
Net Asset Value, End of Period $ 14.14 $ 15.14 $ 15.10
Total Return (0.58%) 6.48% 1.58%+
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period $147,326 $132,848 $120,649
Ratio of Expenses to Average Net Assets
Before Expenses Waived 0.65% 0.71% 0.63%++
After Expenses Waived 0.60% 0.60% 0.58%++
Ratio of Net Income to Average Net Assets 5.70% 5.36% 5.41%++
Portfolio Turnover Rate 91.01% 39.39% 1.29%+
</TABLE>
* Commencement of operations.
+ Not annualized.
++ Annualized.
17
<PAGE>
MANAGER
Capital Mortgage Management, Inc.
2190 South Mason Road, Suite 208
St. Louis, Missouri 63131
SUBADVISER
Principal Capital Management, LLC
801 Grand Avenue
Des Moines, Iowa 50392
DISTRIBUTOR
First Fund Distributors, Inc.
4455 East Camelback Road, Suite 261E
Phoenix, Arizona 85018
CUSTODIAN
UMB Bank, N.A.
928 Grand Boulevard
Kansas City, Missouri 64106
TRANSFER AGENT
Unified Fund Services, Inc.
P.O. Box 6110
Indianapolis, IN 46206-6110
AUDITORS
Deloitte & Touche LLP
One City Centre, 22nd Floor
St. Louis, MO 63101
LEGAL COUNSEL
Thompson Coburn LLP
One Firstar Plaza
St. Louis, MO 63101
<PAGE>
A Statement of Additional Information ("SAI") about the Fund has been filed with
the Securities and Exchange Commission ("SEC"), and is incorporated herein by
reference. Additional information about the Fund's investments is available in
the Fund's annual and semi-annual reports to shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. Shareholders may make inquiries or request the SAI and the Fund's
reports to shareholders without charge by calling or writing the Fund at the
telephone number or the address listed on the cover page or by calling the
Fund's transfer agent toll-free at (877) 923-5626. Information about the Fund
may also be reviewed at the SEC's Public Reference Room in Washington, D.C. or
through the SEC's Internet sight at HTTP:///WWW.SEC.GOV. Information on the
operation of the Public Reference Room may be obtained by calling
1-202-942-8090. Copies of information about the Fund may be obtained, upon
payment of a duplicating fee, by writing the Public Reference Section of the
SEC, Washington, D.C. 20549-6009 or by electronic request at the following
e-mail address: [email protected]. The Fund also maintains an Internet site at
http://www.proloan.com.
FUND'S INVESTMENT COMPANY ACT OF 1940 FILE NUMBER: 811-08273
18
<PAGE>
As filed with the Securities and Exchange
Commission on May 2, 2000
Registration No. 333-30221
File No. 811-08273
================================================================================
Part B
of
Form N-1A
REGISTRATION STATEMENT
BUILDERS FIXED INCOME FUND, INC.
================================================================================
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BUILDERS FIXED INCOME FUND, INC.
JUNE __, 2000
Builders Fixed Income Fund, Inc. (the "Fund") is an open-end, non-diversified
management investment company.
This Statement of Additional Information should be read in conjunction with the
Prospectus for the Fund dated June __, 2000 ("Prospectus"). The Fund's annual
report is incorporated herein by reference. A copy of the Prospectus and annual
report may be obtained without charge by calling toll-free (877) 923-5626. 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.
<PAGE>
TABLE OF CONTENTS
FUND HISTORY...................................................................1
DESCRIPTION OF THE FUND........................................................1
FUND POLICIES.................................................................15
MANAGEMENT OF THE FUND........................................................17
CODE OF ETHICS................................................................19
CONTROL PERSONS AND PRINCIPAL SECURITY HOLDERS................................19
ADVISORY AND OTHER SERVICES...................................................20
BROKERAGE ALLOCATION AND OTHER PRACTICES......................................22
CAPITAL STOCK.................................................................22
PURCHASE, REDEMPTION AND PRICING OF SHARES....................................23
TAX INFORMATION...............................................................25
UNDERWRITER...................................................................26
CALCULATION OF PERFORMANCE DATA...............................................27
FINANCIAL STATEMENTS..........................................................28
APPENDIX A: DESCRIPTION OF BOND RATINGS.......................................29
APPENDIX B: OPTIONS AND FUTURES CONTRACTS.....................................31
<PAGE>
FUND HISTORY
The Fund was incorporated under the laws of the State of Maryland on June 13,
1997. 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.
Prior to January 28, 1999, the Fund's name was "Builders Proloan Fund, Inc."
DESCRIPTION OF THE FUND
The Fund is a non-diversified, no-load, open-end management investment company
registered under the Investment Company Act of 1940 ("1940 Act").
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 and manufactured housing 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
mortgage-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
1
<PAGE>
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 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.
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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.
CASH EQUIVALENTS - Cash equivalents include certificates of deposit, bearer
deposit notes, bankers acceptances, government obligations, commercial paper,
short-term corporate debt securities and repurchase agreements.
CERTIFICATES OF DEPOSIT - Certificates of deposit are issued against funds
deposited in an eligible bank (including its domestic and foreign branches,
subsidiaries and agencies), are for a definite period of time, earn a specified
rate of return and are normally negotiable.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS - Commercial
paper refers to promissory notes representing an unsecured debt of a corporation
or finance company with a fixed maturity of no more than 270 days. The other
corporate obligations in which the Fund may invest consist of high quality, U.S.
dollar denominated short-term bonds and notes (including variable amount master
demand notes) issued by domestic corporations bearing fixed, floating or
variable interest rates.
DEBENTURES - The Fund may invest in debt obligations, such as bonds and
debentures, issued by corporations and other business organizations that are
rated at the time of purchase within the three highest ratings categories of
Standard & Poor's Rating Group ("S&P") or Moody's Investors Service, Inc
("Moody's") or, if unrated, are determined to be of comparable quality by the
Subadviser. Unrated securities will be determined to be of comparable quality to
rated debt obligations if, among other things, other outstanding obligations of
the issuers of such securities are rated A or better. Debentures are unsecured
debt securities. The holder of a debenture is protected only by the general
creditworthiness of the issuer.
ILLIQUID SECURITIES - The Fund may invest up to 15% of its net assets in
illiquid securities, including securities having legal or contractual
restrictions on resale or no readily available market. The Fund's commitments to
acquire ProLoan mortgage-backed securities 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 a Lender becomes
uninterested in purchasing the Fund's mortgage commitments or refuses to honor
its contractual commitment to the Fund, the Fund's mortgage commitments could
increase the level of illiquidity in its portfolio. As a result of such
illiquidity, the Fund may not be able to sell these instruments when the
Subadviser considers it desirable to do so or may have to sell them at a lower
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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.
LOAN PARTICIPATION INTERESTS - LPIs 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 collateralized mortgage obligations ("CMOs"),
residential mortgage pass-through certificates and commercial mortgage-backed
securities ("CMBS").
COLLATERALIZED MORTGAGE OBLIGATIONS - 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.
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
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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" "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.
RESIDENTIAL MORTGAGE PASS-THROUGH CERTIFICATES - Mortgage pass-through
certificates are issued by governmental, government-related and private
organizations which are backed by pools of residential 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
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
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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.
COMMERCIAL MORTGAGE-BACKED SECURITIES. CMBS transactions are
securitizations of mortgage loans backed by commercial real estate. Pools
of commercial loans that are diversified by geographic location, property
type, loan size and borrower back the majority of CMBS deals. Other CMBS
structures include pools of loans made to a single borrower, pools of loans
backed by a small number of large loans, or pools that combine large loans
with a more diversified pool of small loans. Property types typically
include office buildings, multi-family housing, retail,
industrial/warehouse and hotels.
CMBS typically are structured as sequential-pay bonds and receive
credit ratings from AAA through Not Rated. The majority of investment grade
bonds are rated by two or more rating agencies, while at least one rating
agency will rate below investment grade bonds. Sequential-pay means that
all principal collected from the loan payments each month are applied to
the highest rated bond until that bond is paid off, and then the next bond
in the structure will begin to receive principal. Balloon payments,
voluntary prepayments and proceeds from the sale of foreclosed properties
are also applied in this manner. The highest rated bonds are also senior to
those bonds rated lower when receiving interest payments. The lower rated
bonds in the structure act as credit enhancement to those bonds rated
higher as any losses incurred by the pool are applied to the lowest rated
bond until the balance equals zero and then the losses are applied to the
next lowest rated bond. The subordination levels required by the rating
agencies at each rating level reflect the credit quality of the collateral
as the subordination provides protection from credit loss. Higher
subordination levels indicate lower credit quality.
The loans are well call protected with an initial lockout period of
2-3 years, and then defeasance and/or yield maintenance until 3-6 months
prior to the maturity date. For the most part, the loans are non-recourse
to the borrower, which requires investors to rely on the property's cash
flow and value to sustain their investment. The majority of the loans have
amortization schedules considerably longer than the loan term, which
requires a balloon payment usually after 10 years. If a borrower is unable
to make a scheduled balloon payment, the servicer has the ability to modify
the loan, which could result in an extension of the loan term and the
average life of the investment. If a loan goes into default and the
property is foreclosed, the special servicer has up to 3 years to sell the
property out of the trust, which could also result in an extension of the
balloon payment. While the loan is in default and being worked out, the
servicer is required to advance the monthly loan payments which helps avoid
cash flow interruption to bond holders. However, the servicer is not
required to advance the balloon. The ability of the borrower to refinance
and payoff a loan at the balloon date is a key risk to the cash flow
volatility inherent in the structure.
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
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that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the Fund's investment
performance. The Fund's custodian will segregate cash or liquid assets until the
settlement date, in an amount equal to the forward purchase price. There is no
assurance that mortgage dollar rolls can be employed successfully.
MORTGAGES - The Fund may purchase mortgages in the form of whole loans or
participations. The Fund will invest only in residential and multi-family
mortgage loans and whole loan participations that have been underwritten and
originated to secondary market underwriting standards. Although mortgages bear
the same risks as mortgage-backed securities, there are additional risks to be
considered. 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
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
security holders on a periodic basis. Upon insolvency of the servicer, the
security holders may be at risk with respect to collections received by the
servicer but not yet delivered to the security holders. 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 security holders of the trust or
other pool may be at risk with respect to the assets transferred to the trust or
pool by the sponsor.
Mortgages are 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 is subject to the limitation on illiquid securities set
forth under "Fund Policies" below.
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
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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
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 rate futures contracts,
as applicable for hedging purposes. 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.
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
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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.
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.
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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 issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations.
Short-term obligations (or issuers thereof) rated A-1 by Standard & Poor's
have the following characteristics. Liquidity ratios are adequate to meet cash
requirements. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determines whether the issuer's short-term obligation is rated
A-1, A-2, or A-3.
The distinguishing feature of the Duff & Phelps Credit Ratings' short-term
rating is the refinement of the traditional 1 category. The majority of
short-term debt issuers carry the highest rating, yet quality differences exist
within that tier. Obligations rated D-1+ indicate the highest certainty of
timely payment. Safety is just below risk-free U.S. Treasury obligations.
Obligations rated D-1 have a very high certainty of timely payment. Risk factors
are minor. Obligations rated D-1- have a high certainty of timely payment. Risk
factors are very small. Obligations rated D-2 have good certainty of timely
payment. Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
Thomson BankWatch short-term ratings are intended to assess the likelihood
of an untimely or incomplete payment of principal or interest. Obligations rated
TBW-1 indicate a very high likelihood that principal and interest will be paid
on a timely basis. While the degree of safety regarding timely payment of
principal and interest is strong for an obligation rated TBW-2, the relative
degree of safety is not as high as for issues rated TBW-1.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. A rating of F-1+ indicates exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment. Obligations rated F-1 have very strong credit
quality. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+. Issues assigned a rating of F-2
indicate good credit quality.
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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.
11
<PAGE>
SECURITIES LENDING - The Fund may lend its securities in accordance with
the following conditions: (1) the Fund must receive at least 100% collateral in
the form of cash or cash equivalents, securities of the U.S. Government and its
agencies and instrumentalities, and approved bank letters of credit; (2) the
borrower must increase the collateral whenever the market value of the loaned
securities (determined on a daily basis) rises above the level of collateral;
(3) the Fund must be able to terminate the loan after notice, at any time; (4)
the Fund must receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest or other
distributions on the securities loaned, and any increase in market value of the
loaned securities; (5) the Fund may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the securities loaned may
pass to the borrower, provided, however, that if a material event affecting the
investment occurs, the Board must be able to terminate the loan and vote proxies
or enter into an alternative arrangement with the borrower to enable the Board
to vote proxies. While there may be delays in recovery of loaned securities or
even a loss of rights in collateral supplied should the borrower fail
financially, loans will be made only to firms deemed by the Board to be of good
financial standing and will not be made unless the consideration to be earned
from such loans would justify the risk. The Fund currently does not intend to
engage in securities lending absent prior Board approval.
SEPARATELY TRADED REGISTERED INTEREST AND PRINCIPAL SECURITIES ("STRIPS")
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 STRIPS program. 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.
12
<PAGE>
The Fund may acquire zero coupon bonds. Such obligations will not result in
the payment of interest until maturity and typically have greater price
volatility than coupon obligations. The Fund will accrue income on such
investments for tax and accounting purposes, as required, which is distributable
to shareholders and which, because no cash is received at the time of accrual,
may require the liquidation of other portfolio securities to satisfy the Fund's
distribution obligations. These actions may occur under disadvantageous
circumstances and may reduce the Fund's assets, thereby increasing its expense
ratio and decreasing its rate of return. Zero coupon bonds are subject to
greater market fluctuations from changing interest rates than debt obligations
of comparable maturities that make current distributions of interest.
U.S. GOVERNMENT SECURITIES - U.S. Government securities are issued or
guaranteed by the U.S. Government and include U.S. Treasury obligations (see
definition below) and securities issued by U.S. agencies and instrumentalities.
U. S. Government agencies or instrumentalities which issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, GNMA, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development Bank,
Asian-American Development Bank, Agency for International Development, Student
Loan Marketing Association and International Bank of Reconstruction and
Development.
Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some are
backed by the right of the issuer to borrow from the Treasury; others by
discretionary authority of the U.S. Government to purchase the agencies'
obligations; while still others, such as the Student Loan Marketing Association,
are supported only by the credit of the instrumentality. In the case of
securities not 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.
13
<PAGE>
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 Fund's subadviser, Commerce Bank, N.A. (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 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.
14
<PAGE>
FUND POLICIES
The following restrictions have been adopted by the Fund and may be changed only
by the majority vote of the Fund's outstanding shares, which as used herein
means the lesser of (a) 67% of the shares of the Fund present at the meeting if
the holders of more than 50% of the shares are present and represented at the
shareholders' meeting or (b) more than 50% of the shares of the Fund.
The Fund may not:
1. Invest more than 25% of its total assets in the securities of companies
primarily engaged in only one industry other than: (1) the U.S. Government, its
agencies and instrumentalities; and (2) mortgage-related securities. Finance
companies as a group are not considered a single industry for purposes of this
policy.
2. 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.
3. Borrow money or property in excess of 33 1/3% of its total assets
(including the amount borrowed and through reverse repurchase agreements and
mortgage dollar rolls) less all liabilities and indebtedness other than the bank
or other borrowings, except that the Fund may borrow up to an additional 5% of
its total assets for temporary defensive purposes.
4. 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 backed by real estate or securities of
companies engaged in the real estate business or real estate investment trusts.
5. 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.
6. 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 the Subadviser believes the
opportunity for additional income outweighs the risks.
15
<PAGE>
7. Make loans to any person or firm, except that the Fund may enter into
repurchase agreements, lend its investment securities to broker-dealers or other
institutional investors and acquire whole loan or participation mortgages for
investment purposes in accordance with the guidelines stated in the Prospectus;
provided, however, that the making of a loan shall not be construed to include
the acquisition for investment of bonds, debentures, notes or other evidences of
indebtedness of any corporation or government which are publicly distributed.
8. 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.
9. 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.
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. The Fund may not 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. 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, the Fund's Subadviser, 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.
16
<PAGE>
6. For temporary investment purposes, the Fund may invest 100% of its total
assets in cash and cash-equivalent short-term obligations. 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.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Board provides broad supervision over the Fund's
affairs. Capital Mortgage Management, Inc. is responsible for the management of
the Fund and the ProLoan program, and the Fund's officers are responsible for
the Fund's operations. The directors and officers of the Fund are listed below,
together with their principal occupations during the past five years.
Name, Address and Position With Principal Occupation
Date of Birth the Fund During Past 5 Years
- ------------- -------- -------------------
John W. Stewart* Chairman, President, Capital Mortgage
2190 Mason Road, Ste. 208 President, and Management, Inc. (July
St. Louis, MO 63131 Secretary 1997-Present);
(11/21/58) Controller/System
Administrator, Carpenters'
District Council of Greater St.
Louis (August 1988-July 1997)
Terry Nelson* Director Executive Secretary and
1401 Hampton Avenue Treasurer, Carpenters' District
St. Louis, MO 63139 Council of Greater St. Louis
(12/01/40) (Aug. 1993-present); Managing
Trustee, Carpenters' District
Council of Greater St. Louis
pension fund, health and
welfare fund and vacation fund
(Aug. 1993-present); Business
Representative, Carpenters'
District Council of Greater
St. Louis (1981-Aug. 1993);
Director, United Way (Aug.
1993-present).
Dan Mulligan Director Member of United Brotherhood of
1401 Hampton Avenue Carpenters and Joiners of
St. Louis, MO 63139 America (1975-present);
(12/03/49) Director of Organizing for the
Southern Illinois District
Council (1987-present); 3rd
Vice-President of the 12th
Congressional District AFL-CIO
C.O.P.E. (1995-present);
Trustees of the Southern
Illinois Health and Welfare
Fund (1998-present); President
of S.I.D.C. Local 1997
(1985-present).
17
<PAGE>
Name, Address and Position With Principal Occupation
Date of Birth the Fund During Past 5 Years
- ------------- -------- -------------------
James D. Slebiska Director Fifth District General
4281 NE 38th Street Executive Board Member, United
Des Moines, IA 50317 Brotherhood of Carpenters
(10/24/44) (Oct. 1969-present).
Joseph A. Montanaro Director Executive Director, TWA Pilots
3221 McKelvey Directed Account Plan 401K
Suite 105 (July 1993 - present) and
Bridgeton, MO 63044 Chairman of Investment
(12/14/38) Committee (Oct. 1991 - July
1993); Co-Trustee, TWA Flight
Engineers Trust Plan (1976 -
Oct. 1991).
Leonard Terbrock Director Retired (1993-present); Former
5 Mary Rose Executive Secretary and
Hazelwood, MO 63042 Treasurer, Carpenters' District
(07/27/33) Council of Greater St. Louis
(1986-1993) and Assistant
Executive Secretary and
Treasurer (1981-1986);
Director, Catholic Charities
(1992-present); Director, St.
Louis Regional Commerce and
Growth Association (1990-1993);
Director, Sold on St. Louis
(1988-1993); Committee
Chairman, United Way
(1970-1993).
Douglas J. McCarron Director General President, United
101 Constitution Avenue, N.W. Brotherhood of Carpenters and
Washington, D.C. 20001 Joiners of America (Nov.
(9/23/50) 1995-present) and General
Second Vice President
(1992-1995); President,
Southern California Conference
of Carpenters (1995-present)
and Secretary Treasurer
(1987-1995); President and
Chairman, 999 Office Builder
Corporation; Chairman,
Carpenters Health and Welfare
Trust for Southern California;
Chairman, 13 County Carpenters
Vacation, Savings and Holiday
plan; Co-Chairman, Carpenters'
Trusts for Southern California;
President and Chairman, Inland
Empire Hotel Corporation,
President, RPS Resort
Corporation; President and
Chairman, Santa Nella Hotel
Corporation; President, THMI
Motel Corporation; Chairman,
Carpenters Southern California
Administrative Corporation;
Co-Chairman, Carpenters Joint
Apprenticeship and Training
Committee Fund for Southern
California; Chairman,
Carpenters Pension Trust for
Southern California; Chairman,
Carpenters National Health and
Welfare Fund; Chairman,
Carpenter Canadian Local Unions
and Councils Pension Fund and
the General Officers and
Representatives Pension Fund;
Chairman, UBC Pension Fund,
General Office Employees
Retirement Plan, Retirees
Health and Welfare Fund and
Apprenticeship and Training
Fund; Director, Works
Partnership.
18
<PAGE>
Steve Talbott* Treasurer Treasurer, Capital Mortgage
2190 Mason Road, Ste. 208 Management, Inc. (June 1998 -
St. Louis, MO 63131 present); Senior Accountant,
(08/26/72) Tyson Foods, Inc. (July 1997 -
May 1998); Staff Accountant,
Hudson Foods, Inc. (Sept. 1994
- June 1997)
* Messrs. Stewart, Nelson and Talbott, by virtue of their positions, are deemed
to be "interested persons" of the Fund as defined by the 1940 Act.
The Fund compensates each Independent Director by an annual fee of $2,000.
Directors also are reimbursed for any expenses incurred in attending meetings.
For its fiscal year ended December 31, 1999, the Fund paid the following
compensation to its independent directors:
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation From
Aggregate Accrued as Annual Fund and Fund
Compensation Part of Fund Benefits Upon Complex Paid to
Name of Person and Position From Fund Expenses Retirement Directors
- --------------------------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Joseph A. Montanaro, Director $2,000 $0 $0 $2,000
Leonard Terbrock, Director $2,000 $0 $0 $2,000
Douglas J. McCarron $ 0 $0 $0 $ 0
Dan Mulligan $ 0 $0 $0 $ 0
James D. Slebiska $ 0 $0 $0 $ 0
</TABLE>
CODE OF ETHICS
The Fund, the Manager and the Subadviser have each adopted a Code of Ethics
pursuant to Rule 17j-1 of the Investment Company Act of 1940, as amended. Each
Code permits personnel subject to the Code to invest in fixed income securities
that may be purchased or held by the Fund, subject to certain reporting
requirements and restrictions imposed by the Code.
CONTROL PERSONS AND PRINCIPAL SECURITY HOLDERS
As of April 18, 2000, the pension fund of the Carpenters' District Council of
Greater St. Louis, 1401 Hampton Avenue, St. Louis, MO 63144, owned 73.68% of the
Fund's shares and, thus, may be deemed to control the Fund.
As of April 18, 2000, the Carpenters Pension Fund of Illinois, P.O. Box 791, 28
North First Street, Geneva, IL 60134, owned 12.01% of the Fund's outstanding
voting securities.
All directors and officers of the Fund as a group own less than 1% of the
outstanding shares of the Fund. Terry Nelson, a director of the Fund, is
managing trustee of the pension fund of the Carpenters' District Council of
Greater St. Louis described above.
19
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGER. Capital Mortgage Management, Inc., the Fund's Manager, is paid a
management fee by the Fund as compensation for its management services with
respect to the Fund and the ProLoan program, plus all fees payable to
Subadviser. The Management Agreement between the Manager and the Fund initially
was approved by the Board and the initial shareholder of the Fund effective as
of September 24, 1997. John W. Stewart, President, Secretary and a director of
the Fund, owns all of the issued and outstanding stock of the Manager.
For the period October 31, 1997 (commencement of operations) to December 31,
1997, the Fund paid management fees of $73,042 to the Manager, of which Commerce
Bank, N.A. (the Fund's former Subadvisor) received $30,007 in subadvisory fees.
Commerce Bank waived $10,028 of its fees for this period. For the fiscal year
ended December 31, 1998, the Fund paid the Manager $454,819 in management fees,
of which Commerce Bank received $266,833 in subadvisory fees. Commerce Bank
waived $60,047 of its fees during this period. For the fiscal year ended
December 31, 1999, the Fund paid the Manager $491,329 in management fees, of
which Commerce Bank received $283,844 in subadvisory fees. Commerce Bank waived
$55,610 of its fees during this period.
SUBADVISER. The Investment Subadvisory Agreement between Principal Capital
Management, LLC and the Manager, as described in the Prospectus, initially was
approved by the Board on April 24, 2000 and by shareholders of the Fund on May
__, 2000. 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 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 one-hundred twenty (120) days' written notice to the
Fund. The Subadvisory Agreement will continue in effect until May __, 2000, and
annually thereafter; 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.
20
<PAGE>
PRINCIPAL UNDERWRITER. First Fund Distributors, Inc., 4455 E. Camelback Road,
Suite 261-E, Phoenix, AZ 85018 is the Fund's Distributor. First Fund
Distributors, Inc. is an affiliate of Investment Company Administration, L.L.C.,
the Fund's Administrator. For its services, the Distributor receives an annual
fee of $20,000, paid monthly by the Fund's Manager as Distribution Coordinator.
Also as described more fully in the Prospectus, the Fund has adopted a
Distribution Plan in accordance with Rule 12b-1 (the "Plan") under the 1940 Act.
The Plan provides that the Fund will pay to the Manager as Distribution
Coordinator at an annual rate of up to 0.10% of the average daily net assets of
the Fund. The fee is paid to the Manager as compensation for expenses incurred
for distribution related activity. The Fund paid distribution fees of $138,324
for the fiscal year ended December 31, 1999, of which $7,796 was used for
printing/postage, $61,074 was used for wages and benefits, $3,992 was used for
advertising and marketing, $49,475 was used for travel and entertainment, $3,190
was used for conferences and seminars, $17,816 was used for other expenses.
CUSTODIAN. The Fund's securities and cash are held by UMB Bank, N.A., 928 Grand
Avenue, Kansas City, Missouri, 64141-6226, through a custodian agreement. The
Custodian is permitted to deposit some or all of its securities in central
depository systems as allowed by federal law. The Fund pays the Custodian a fee
for serving as custodian of its assets according to the following fee schedule:
1 basis point on the first $100,000,000 of the Fund's net assets; plus 0.75
basis point on the next $100,000,000 of net assets; plus 0.50 basis point of the
Fund's net assets in excess of $200,000,000; subject to a $250 per month
minimum. The Fund also pays the Custodian stated portfolio transaction fees and
the Custodian's out-of-pocket expenses. The Custodian also receives a fee of:
3.0 basis points of the first $100,000,000 of average net assets; 2.0 basis
points of the next $250,000,000; 1.0 basis points of the next $650,000,000 and
0.5 basis points on average net assets in excess of $1,000,000,000; subject to
an annual minimum of $24,000 plus out-of-pocket expenses for serving as Fund
accountant.
TRANSFER AGENT. The Fund has a Transfer Agency Agreement with Unified Fund
Services, Inc., 431 North Pennsylvania Street, Indianapolis, IN 46204-1806. This
agreement governs the transfer agent's responsibility for administering and/or
performing transfer agent functions, for acting as service agent in connection
with dividend and distribution functions and for performing shareholder account
administration agent functions in connection with the issuance, exchange and
redemption or repurchase of the Fund's shares. Under the agreement, the transfer
agent will earn a fee from the Fund determined by multiplying the number of
shareholder accounts at the end of the day by a stated rate and dividing by the
number of days in the year. The rate is $16.20 per open account and $3.00 per
closed account, with a minimum fee of $12,000 per year. The Fund also pays the
Transfer Agent stated activity fees, a one-time fund implementation fee, and the
Transfer Agent's out-of-pocket expenses. The fees paid to the Transfer Agent 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, L.L.C., 2020 E. Financial Way, Suite
100, Glendora, CA 91741 (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
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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 Fund pays the Administrator an annual fee of $50,000
on the first $150 million of the Fund's average daily net assets, and 0.05% of
average daily net assets above $150 million. The Fund paid administration fees
of $10,002 for the period October 31, 1997 (commencement of operations) to
December 31, 1997, $56,132 for the fiscal year ended December 31, 1998 and
$50,001 for the fiscal year ended December 31, 1999.
BROKERAGE ALLOCATION AND OTHER PRACTICES
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.
In selecting brokers or dealers to execute particular transactions, the
Subadviser is authorized to consider the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange Act of
1934), provision of statistical quotations (including the quotations necessary
to determine the Fund's net asset value), the sale of Fund shares by such broker
or the servicing of Fund shareholders by such broker, and other information
provided to the Fund, to the Manager and/or to the Subadviser (or their
affiliates), provided, however, that the Subadviser determines that it has
received the best net price and execution available. The Subadviser also is
authorized to cause the Fund to pay a commission to a broker or dealer who
provides such brokerage and research services for executing a portfolio
transaction that exceeds the amount of the commission another broker or dealer
would have charged for effecting that transaction. The Board, the Manager or the
Subadviser, as appropriate, must determine in good faith, however, that such
commission was reasonable in relation to the value of the brokerage and research
services provided viewed in terms of that particular transaction or in terms of
all the accounts over which the Manager or the Subadviser exercises investment
discretion.
The fees of the Subadviser are not reduced by reason of receipt of such
brokerage and research services. The Subadviser does not provide any services to
the Fund except portfolio investment management and related recordkeeping
services. However, with disclosure to and pursuant to written guidelines
approved by the Board, the Subadviser may execute portfolio transactions through
an affiliated broker-dealer or the Distributor, who may receive usual and
customary brokerage commissions (within the meaning of Rule 17e-1 under the 1940
Act) for doing so.
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CAPITAL STOCK
The Fund was incorporated under the laws of the State of Maryland on June 13,
1997. 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.
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.
PURCHASE, REDEMPTION AND PRICING OF SHARES
OFFERING PRICE. 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.
VALUATION. 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 prices on
the exchange where the security is primarily traded and, if none
exist, to the over-the-counter market.
- 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
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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 commits to acquire ProLoan mortgage-backed securities when
such securities are issued approximately six months after the
origination of the underlying ProLoans. This "pipeline" of ProLoan
mortgage commitments is valued at the price at which the Fund could
assign the commitments to a third party, as long as this price is
considered by the Manager to equal no more than fair market value. The
formula for determining this price is as follows. The Manager
calculates the coupon rate nearest to, but not greater than, the
coupon rate that is 0.625% below the weighted average coupon rate for
all ProLoans in the pipeline. The Manager then subtracts the spread
between the forward prices for three-and one-month FNMA
mortgage-backed securities, each with the same coupon rate as
calculated above, from the three-month FNMA forward price, minus an
additional 0.125%. The Manager has determined that this price is
equivalent to the forward price of a six-month FNMA mortgage-backed
security. The Fund's commitments to acquire mortgage-backed securities
generated through the ProLoan program will not be considered to be
illiquid so long as the Manager determines, pursuant to guidelines
established by the Board of Directors, that an adequate trading market
exists for these commitments. The Custodian will value the Fund's
commitments to acquire ProLoan mortgage-backed securities at the above
price, as long as this price is considered by the Fund's Manager to be
no more than the fair market value of the commitments.
The Exchange, the Manager, the Subadviser and the Fund will be closed on the
following holidays: New Year's Day, Presidents' Day, Martin Luther King, Jr.
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
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:
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* The New York Stock Exchange closes for reasons other than the usual
weekend and holiday closings or trading on the Exchange is restricted,
or
* Disposal of the Fund's securities is not reasonably practicable or it
is not reasonably practicable for the Fund to determine the fair value
of its net assets, or
* The SEC, under the provisions of the 1940 Act, declares a period of
emergency to exist.
Should the Fund stop selling shares, the Board may make a deduction from the
value of the assets held by the Fund to cover the cost of future liquidations of
the assets so as to distribute fairly these costs among all shareholders.
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one shareholder
during any 90-day period, up to the lesser of $250,000 or 1% of the net assets
of the Fund at the beginning of the period. Although redemptions in excess of
this limitation would normally be paid in cash, the Fund reserves the right to
make these payments in whole or in part in securities or other assets in case of
an emergency, or if the payment of a redemption in cash would be detrimental to
the existing shareholders of the Fund as determined by the Board. In these
circumstances, the securities distributed would be valued as set forth in the
prospectus. Should the Fund distribute securities, a shareholder may incur
brokerage fees or other transaction costs in converting the securities to cash.
TAX INFORMATION
STATUS AND TAXATION OF THE FUND
The Fund was organized as a corporation, but intends to continue to qualify for
treatment as a regulated investment company (a "RIC") under the Internal Revenue
Code of 1986, as amended (the "Code") in each taxable year. There can be no
assurance that it actually will so qualify. If the Fund qualifies as a RIC, its
dividend and capital gain distributions generally are subject only to a single
level of taxation. This differs from distributions of a regular business
corporation which, in general, are taxed first as taxable income of the
distributing corporation, and then again as dividend income of the shareholder.
If the Fund does qualify as a RIC but (in a particular tax year) distributes
less than ninety-eight percent (98%) of its ordinary income and its capital gain
net income (as the Code defines each such term), the Fund is subject to an
excise tax. The excise tax, if applicable, is four percent (4%) of the excess of
the amount required to have been distributed over the amount actually
distributed for the applicable year. If the Fund does NOT qualify as a RIC, its
income will be subject to taxation as a regular business corporation, without
reduction by dividends paid to shareholders of the Fund.
To continue to qualify for treatment as a RICunder Subchapter M of the Code ,
the Fund must, among other requirements:
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* Derive at least ninety percent (90%) of its gross income each taxable
year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock or securities
or foreign currencies, and certain other income (including gains from
options, futures, or forward contracts derived with respect to the
RIC's business of investing in stock, securities, or foreign
currencies) ("Income Requirement");
* Diversify its investments in securities within certain statutory
limits; and
* Distribute annually to its shareholders at least ninety percent
(90%) of its investment company taxable income (generally,
taxable net investment income less net capital gain) (the
"Distribution Requirement").
The Fund may acquire zero coupon or other securities issued with original issue
discount. If it does so, the Fund will 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 (a) ninety-eight
percent (98%) of its ordinary income in order to avoid imposition of a 4% excise
tax, and (b) ninety percent (90%) of its investment company taxable income,
including any original issue discount, to satisfy the Distribution Requirement,
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).
Hedging strategies, to reduce risk in various ways, are subject to complex rules
that determine for federal income tax purposes the character and time for
recognition of gains and losses the Fund realizes in connection with the hedge.
The Fund's income from options, futures, and forward contracts, in each case
derived with respect to its business of investing in stock, securities, or
foreign currencies, should qualify as allowable income for the Fund under the
Income Requirement.
The foregoing is only a summary of some of the important federal income tax
considerations affecting the Fund and its shareholders and is not intended as a
substitute for careful tax planning. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD
CONSULT THEIR OWN TAX ADVISERS FOR MORE DETAILED INFORMATION REGARDING THE ABOVE
AND FOR INFORMATION REGARDING FEDERAL, STATE, LOCAL AND FOREIGN TAXES.
UNDERWRITER
RULE 12B-1 PLAN. Pursuant to a plan of distribution adopted by the Fund,
pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the Fund will pay a fee
at an annual rate of 0.10% of its average daily net assets to the Manager, as
Distribution Coordinator, for distribution and related expenses. The Plan
provides for the compensation to the Manager, as Distribution Coordinator,
regardless of the Portfolio's distribution expenses.
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The Plan allows excess distribution expenses to be carried forward by the
Manager, as Distribution Coordinator, and resubmitted in a subsequent fiscal
year, provided that (i) distribution expenses cannot be carried forward for more
than three years following initial submission; (ii) the Board has made a
determination at the time of initial submission that the distribution expenses
are appropriate to be carried forward and (iii) the Board makes a further
determination, at the time any distribution expenses which have been carried
forward are submitted for payment, that payment at the time is appropriate,
consistent with the objectives of the Plan and in the current best interests of
shareholders.
Under the Plan, the Board will be furnished quarterly with information detailing
the amount of expenses paid under the Plan and the purposes for which payments
were made. The Plan may be terminated at any time by vote of a majority of the
Directors of the Fund who are not interested persons. Continuation of the Plan
is considered by such Directors no less frequently than annually. As of December
31, 1999, the amount of unreimbursed expenses carried over to future years, was
$55,610, which represents 0.04% of the Fund's net assets.
CALCULATION OF PERFORMANCE DATA
AVERAGE ANNUAL TOTAL RETURN QUOTATION. The advertised total return for the Fund
is calculated by equating an initial amount invested in the Fund to the ending
redeemable value, according to the following formula:
n
P(1 + T) = 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. The Fund commenced operations on
October 31, 1997. For a two month period from October 31, 1997 (commencement of
operations) to December 31, 1997, the Fund's total return was 1.58% (not
annualized.) For the fiscal year ended December 31, 1998, the Fund's total
return was 6.48%. For the fiscal year ended December 31, 1999, the Fund's total
return was -0.58%
The Fund also may use aggregate total return figures for various periods which
represent the cumulative change in value of an investment in the Fund for the
specific period. Such total returns reflect changes in share prices in the Fund
and assume reinvestment of dividends and distributions.
In reports or other communications to shareholders or in advertising material,
the Fund may from time to time compare its performance with that of other mutual
funds in rankings prepared by Lipper Analytical Services, Inc., Morningstar,
Inc., IBC/Donoghue, Inc. and other similar independent services which monitor
the performance of mutual funds or publications such as the "New York Times" and
the "Wall Street Journal." The Fund also may compare its performance with
various other indices prepared by independent services such as Standard & Poor's
or Morgan Stanley.
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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.
FINANCIAL STATEMENTS
The Fund's financial statements contained in its Annual Report to shareholders
at the end of the fiscal year were audited by 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.
Incorporated by reference herein are the report of Deloitte & Touche LLP, the
Fund's independent accountants, dated January 14, 2000, and the other portions
of Registrant's annual report to shareholders for the fiscal year ended December
31, 1999, under the headings: "SCHEDULE OF INVESTMENTS," "STATEMENT OF ASSETS
AND LIABILITIES," "STATEMENT OF OPERATIONS," "STATEMENTS OF CHANGES IN NET
ASSETS," "NOTES TO FINANCIAL STATEMENTS," and "INDEPENDENT AUDITORS' REPORT."
Copies of the annual report are available, upon request and without charge, by
calling the Fund's transfer agent toll-free at (877) 923-5626, or by writing to
the following address: Builders Fixed Income Fund, Inc., c/o Unified Fund
Services, Inc., Transfer Agent, P.O. Box 6110, Indianapolis, IN 46206-6110.
The Prospectus and this Statement of Additional Information do not contain all
the information included in the Registration Statement filed with the Securities
and Exchange Commission under the Securities Act of 1933 with respect to the
securities offered by the Fund's Prospectus. Certain portions of the
Registration Statement have been omitted from the Prospectus and this Statement
of Additional Information, pursuant to the rules and regulations of the
Securities and Exchange Commission. The Registration Statement including the
exhibits filed therewith may be examined at the office of the Securities and
Exchange Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other documents referred to
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
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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.
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.
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.
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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.
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
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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.
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. The Fund may enter into futures contracts and
options for hedging purposes. Such transactions are described in this Appendix.
USE OF INTEREST RATE FUTURES CONTRACTS. Bond prices are established in both the
cash market and the futures market. In the cash market, bonds are purchased and
sold with payment for the full purchase price of the bond being made in cash,
generally within five business days after the trade. In the futures market, only
a contract is made to purchase or sell a bond in the future for a set price on a
certain date. Historically, the prices for bonds established in the futures
markets have tended to move generally in the aggregate in concert with the cash
market prices and have maintained fairly predictable relationships. Accordingly,
the Fund may use interest rate futures contracts as a defense, or hedge, against
anticipated interest rate changes and not for speculation. As described below,
this would include the use of futures contract sales to protect against expected
increases in interest rates and futures contract purchases to offset the impact
of interest rate declines.
The Fund presently could accomplish a similar result to that which it hopes to
achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
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
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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, 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 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
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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 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.
33
<PAGE>
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.
34
<PAGE>
As filed with the Securities and Exchange
Commission on May 2, 2000
Registration No. 333-30221
File No. 811-08273
================================================================================
Part C
of
Form N-1A
REGISTRATION STATEMENT
BUILDERS FIXED INCOME FUND, INC.
================================================================================
<PAGE>
BUILDERS FIXED INCOME FUND, INC.
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS.
1.1 Articles of Incorporation - filed with the Fund's initial registration
statement on Form N-1A dated June 27, 1997
1.2 Amendment to Articles of Incorporation - filed with the Fund's
Pre-Effective Amendment No. 2 to its registration statement on Form N-1A
dated October 20, 1997
1.3 Amendment to Articles of Incorporation - filed with the Fund's
Post-Effective Amendment No. 3 to its registration statement on Form N-1A
dated January 29, 1999
2.1 By-Laws - filed with the Fund's initial registration statement on Form N-1A
dated June 27, 1997
2.2 Amendment to By-Laws - filed with the Fund's Post-Effective Amendment No. 3
to its registration statement on Form N-1A dated January 29, 1999
3. None.
4.1 (a) Management Agreement -filed with the Fund's Pre-Effective Amendment No.
1 to its registration statement on Form N-1A dated September 12, 1997
(b) Amendment to the Management Agreement - filed with the Fund's
Post-Effective Amendment No. 3 to its registration statement on Form N-1A
dated January 29, 1999
4.2 (a) Subadvisory Agreement with Commerce Bank, N.A.- filed with the Fund's
Pre-Effective Amendment No. 1 to its registration statement on Form N-1A
dated September 12, 1997
(b) Amendment to the Subadvisory Agreement with Commerce Bank, N.A. - filed
with the Fund's Post-Effective Amendment No. 3 to its registration
statement on Form N-1A dated January 29, 1999
(c) Subadvisory Agreement with Principal Capital Management, LLC - Filed
herewith
4.3 (a) Administration Agreement - filed with the Fund's Pre-Effective
Amendment No. 1 to its registration statement on Form N-1A dated September
12, 1997
<PAGE>
(b) Amendment to the Administration Agreement - filed with the Fund's
Post-Effective Amendment No. 3 to its registration statement on Form N-1A
dated January 29, 1999
5. (a) Distribution Agreement - filed with the Fund's Post-Effective Amendment
No. 4 to its registration statement on Form N-1A dated April 28, 2000
(b) Distribution Coordination Agreement - filed with the Fund's
Post-Effective Amendment No. 4 to its registration statement on Form N-1A
dated April 28, 2000
(c) Amendment to Distribution Coordination Agreement - filed with the
Fund's Post-Effective Amendment No. 4 to its registration statement on Form
N-1A dated April 28, 2000
6. None.
7.1 Custodian Agreement - filed with the Fund's Pre-Effective Amendment No. 2
to its registration statement on Form N-1A dated October 20, 1997
7.2 Fund Accounting Agreement - filed with the Fund's Pre-Effective Amendment
No. 2 to its registration statement on Form N-1A dated October 20, 1997
8.1 Transfer Agency Agreement - filed with the Fund's Post-Effective Amendment
No. 3 to its registration statement on Form N-1A dated January 29, 1999
8.2 ProLoan Master Agreement - filed with the Fund's Pre-Effective Amendment
No. 2 to its registration statement on Form N-1A dated October 20, 1997
8.3 ProLoan Liquidity Agreement - filed with the Fund's Pre-Effective Amendment
No.2 to its registration statement on Form N-1A dated October 20, 1997
9. Opinion and Consent of Counsel
10. Consent of Independent Auditors
11. Omitted Financial Statements - none
12. Letter of Investment Intent - filed with the Fund's Pre-Effective Amendment
No. 2 to its registration statement on Form N-1A dated October 20, 1997
13. Amended and Restated Plan Pursuant to Rule 12b-1 - filed with the Fund's
Post-Effective Amendment No. 4 to its registration statement on Form N-1A
dated April 28, 2000
<PAGE>
14. Plan Pursuant to Rule 18f-3 - none
15.1 Code of Ethics for Builders Fixed Income Fund, Inc. and Capital Mortgage
Management, Inc. - filed with the Fund's Post-Effective Amendment No. 4 to
its registration statement on Form N-1A dated April 28, 2000
15.2 Code of Ethics for First Fund Distributors, Inc. - filed with the Fund's
Post-Effective Amendment No. 4 to its registration statement on Form N-1A
dated April 28, 2000
15.3 Code of Ethics for Commerce Bank, N.A. - filed with the Fund's
Post-Effective Amendment No. 4 to its registration statement on Form N-1A
dated April 28, 2000
15.4 Code of Ethics for Principal Capital Management, LLC - Filed herewith
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See "Control Person and Principal Shareholders" in the Statement of
Additional Information dated June __, 2000.
ITEM 25. 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
<PAGE>
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 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT MANAGER
Capital Mortgage Management, Inc. (the "Manager"), 2190 Mason Road, Suite 208
Avenue, St. Louis, Missouri 63131, 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. Principal Capital Management LLC (the "Subadviser") 801 Grand Avenue,
Des Moines, Iowa 50392 offers investment subadvisory services to the Fund.
The officers and directors of Principal Capital Management, LLC are as follows:
Name Title Position with Fund
---- ----- ------------------
Dennis P. Francis Chief Executive Officer/Director None
David J. Drury Director None
J. Barry Griswell Director None
Richard W. Hibbs Executive Vice President/Director None
Craig R. Barnes Executive Vice President/Director None
David Fallow Executive Vice President/Director None
Gregory C. Hauser Executive Vice President/Director None
Richard W. Waugh Vice President/Director None
Timothy M. Howald Chief Operating Officer/Director None
William C. Scales Chief Technology Officer None
ITEM 27. PRINCIPAL UNDERWRITER.
(a) First Fund Distributors, Inc. 4455 E. Camelback Road, Suite 261-E, Phoenix,
AZ 85018, is the principal underwriter for the following investment
companies or series thereof:
Advisors Series Trust
Allegiance Investment Trust
Builders Fixed Income Fund, Inc.
Guinness Flight Investment Funds
Fleming Mutual Fund Group, Inc.
Fremont Mutual Funds
Investors Research Fund, Inc.
Jurika & Voyles Mutual Funds
Kayne Anderson Mutual Funds
Masters' Select Funds Trust
O'Shaughnessy Funds, Inc.
<PAGE>
PIC Investment Trust
The Purisima Funds
Professionally Managed Portfolios
Rainier Investment Management Mutual Funds
Brandes Investment Funds
RNC Mutual Fund Group, Inc.
Trust for Investment Managers
Puget Sound Alternative Investment Series Trust
Dessauer Global Equity Fund
(b) The following information is furnished with respect to the officers of
First Fund Distributors, Inc.:
Name Title Position with Fund
---- ----- ------------------
Robert H. Wadsworth President and Treasurer None
Steven J. Paggioli Vice President and Secretary Assistant Secretary
Eric M. Banhazl Vice President Assistant Secretary
(c) Not Applicable
ITEM 28. 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, Administrator, transfer agent or Subadviser.
ITEM 29. MANAGEMENT SERVICES.
All substantive provisions of any management-related service contract are
discussed in Parts A and B of this Registration Statement.
ITEM 30. UNDERTAKINGS.
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.
<PAGE>
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.
<PAGE>
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 Post-Effective Amendment No. 5 to its Registration Statement on Form
N-1A to be signed on its behalf by the undersigned, thereto duly authorized, in
the city of St. Louis and the State of Missouri on May 1, 2000.
BUILDERS FIXED INCOME FUND, INC.
By: /s/ John W. Stewart
--------------------------------------
John W. Stewart
President
Attest:
/s/ Steve Talbott
- --------------------------------
Steve Talbott, Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 5 to the Registration Statement has been
signed below by the following persons in the capacities and on the date
indicated.
SIGNATURE TITLE Date
- --------- ----- ----
/s/ John W. Stewart President, Secretary and
- ------------------------ Director May 1, 2000
John W. Stewart
/s/ Dan Mulligan + Director May 1, 2000
- ------------------------
Dan Mulligan
/s/ Terry Nelson + Director May 1, 2000
- ------------------------
Terry Nelson
/s/ James D. Slebiska + Director May 1, 2000
- ------------------------
James D. Slebiska
/s/ Joseph A. Montanaro+ Director May 1, 2000
- ------------------------
Joseph A. Montanaro
/s/ Leonard Terbrock + Director May 1, 2000
- ------------------------
Leonard Terbrock
/s/ Douglas McCarron + Director May 1, 2000
- ------------------------
Douglas McCarron
/s/ John W. Stewart
- ------------------------
John W. Stewart, Attorney-In-Fact Under Powers of Attorney
+Filed with the Fund's Registration Statement on Form N-1A on
October 20, 1997, December 1, 1998 and April 28, 2000.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
4.2(c) Subadvisory Agreement with Principal Capital Management LLC
15.4 Code of Ethics for Principal Capital Management LLC
INVESTMENT SUBADVISORY AGREEMENT
Agreement made effective as of the ___ day of June, 2000 between
Capital Mortgage Management, Inc., a Delaware corporation ("Manager"), and
Principal Capital Management, LLC, a Delaware limited liability company
("Subadviser").
WHEREAS, the Manager has entered into a Management Agreement dated
October 23, 1997, as subsequently amended, with the Builders Fixed Income Fund,
Inc. (the "Fund"), an open-end investment company registered under the
Investment Company Act of 1940, as amended ("1940 Act");
WHEREAS, the Manager wishes to retain the Subadviser as subadviser to
furnish certain investment advisory services to the Manager for the benefit of
the existing and future portfolios of the Fund as the Manager and the Subadviser
shall agree upon (collectively, the "Portfolios") in connection with the
Manager's management of the Portfolios, and the Subadviser is willing to furnish
such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. Manager hereby retains the Subadviser as its subadviser
for the Fund and any future Portfolio(s) of the Fund as the Manager and the
Subadviser shall agree upon for the period and on the terms set forth in this
Agreement. Subadviser accepts such appointment and agrees to render the services
to the Manager for the benefit of the Portfolios herein set forth, for the
compensation provided herein. In the performance of its duties, the Subadviser
will act in the best interests of the Portfolios, and will comply with (a)
applicable laws and regulations including, but not limited to, the 1940 Act, (b)
the terms of this Agreement, (c) the Fund's Articles of Incorporation, By-Laws
and currently effective registration statement under the 1940 Act and the
Securities Act of 1933, as amended, (d) the stated investment objective,
policies and restrictions of each applicable Portfolio, and (e) such other
guidelines as the Board of Directors of the Fund (the "Board") reasonably may
establish in writing.
The Manager agrees to provide to the Subadviser current and effective copies of
the Fund's prospectus and statement of additional information as filed on Form
N-1A with the Securities and Exchange Commission. The Manager further agrees to
provide the Subadviser with notice prior to a proposed change in any of the
Fund's investment objectives, policies or restrictions.
2. DUTIES AS INVESTMENT SUBADVISER.
(a) Subject to the supervision of the Board and the Manager, the
Subadviser will provide a continuous investment program for each
Portfolio, including investment research and management with
respect to all securities, investments and cash equivalents in
each Portfolio. The Subadviser will determine from time to time
<PAGE>
what securities and other investments will be purchased, retained
or sold by each Portfolio for which Subadviser has discretion.
The Subadviser will exercise full discretion and act for each
Portfolio in the same manner and with the same force and effect
as such Portfolio itself might or could do with respect to
purchases, sales, or other transactions, as well as with respect
to all other things necessary or incidental to the furtherance or
conduct of such purchases, sales or other transactions.
(b) The Subadviser will place orders pursuant to its investment
determinations for each Portfolio either directly with the issuer
or through brokers. In the selection of brokers and the placement
of orders for the purchase and sale of investments for the
Portfolios, the Subadviser shall use its best efforts to obtain
for the Portfolios the most favorable price and execution
available, except to the extent it may be permitted to pay higher
brokerage commissions for brokerage and research services as
described below. In using its best efforts to obtain the most
favorable price and execution available, the Subadviser, bearing
in mind the Portfolios' best interests at all times, shall
consider all factors it deems relevant, including by way of
illustration, price, the size of the transaction, the nature of
the market for the security, the amount of the commission, the
timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the
broker involved and the quality of service rendered by the broker
in other transactions. Subadviser shall not be deemed to have
acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused a
Portfolio to pay a broker that provides brokerage and research
services to the Subadviser an amount of commission for effecting
a portfolio investment transaction in excess of the amount of
commission another broker would have charged for effecting that
transaction if the Subadviser determines in good faith that such
amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or the
Subadviser's overall responsibilities with respect to the
Portfolios and to other clients of the Subadviser as to which it
exercises investment discretion. In addition, the Subadviser is
authorized to take into account the sale of shares of the Fund in
allocating purchase and sale orders for portfolio securities to
brokers or dealers (including brokers and dealers that are
affiliated with the Manager, Subadviser or the Fund's
distributor), provided that the Subadviser believes that the
quality of the transaction and the commission are comparable to
what they would be with other qualified firms. In no instance
will portfolio securities of the Fund be purchased from or sold
to the Subadviser, Manager, the Fund's distributor or any
affiliated person of the foregoing persons. The Fund agrees that
any entity or person associated with the Subadviser which is a
member of a national securities exchange is authorized to effect
any transaction on such exchange for the account of the Fund
which is permitted by Section 11(a) of the Securities Exchange
Act of 1934, as amended, and that the Fund consents to the
retention of compensation for such transactions by such entity or
person.
2
<PAGE>
(c) The Subadviser will be responsible for periodically determining
the interest rates and discount points for ProLoans originated by
mortgage lenders who participate in the ProLoan Program (as
described in the Fund's current registration statement) pursuant
to the terms of the ProLoan Master Agreement between the Fund and
the mortgage lenders originating such ProLoans, and for
determining, in its sole discretion, whether to grant extensions
of interest rate protection to borrowers with respect to the
borrowers' ProLoans.
(d) The Subadviser will meet with the Manager and the Board at least
quarterly and will provide the Manager and the Board on a regular
basis with economic and investment analyses and reports and make
available to the Manager upon request any economic, statistical
and investment services normally available to institutional or
other customers of the Subadviser.
3. SERVICES NOT EXCLUSIVE. The services furnished by the Subadviser
hereunder are not to be deemed exclusive and the Subadviser shall be free to
furnish similar services to others so long as its services under this Agreement
are not impaired thereby.
4. COMPENSATION. For the services provided and the expenses assumed
pursuant to this Agreement with respect to each Portfolio, the Subadviser shall
receive an annual subadvisory fee equal to 0.165% of the Fund's average daily
net assets. The subadvisory fee shall be accrued daily and paid monthly by the
Fund. If this Agreement becomes effective or terminates with respect to any
Portfolio before the end of any month, the fee for the period from the effective
date to the end of the month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the proportion
that such period bears to the full month in which such effectiveness or
termination occurs.
5. LIMITATION OF LIABILITY OF THE SUBADVISER. The Subadviser shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by any Portfolio in connection with the matters to which this Agreement relate
except a loss resulting from the willful misfeasance, bad faith or negligence on
its part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement. Notwithstanding the foregoing,
the Fund does not hereby waive any right or claim of action against the
Subadviser that may be available under federal or state securities laws.
6. DURATION AND TERMINATION.
(a) As used in this Agreement, the terms "assignment" and "vote of a
majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a)(4) and 2(a)(42),
respectively, of the 1940 Act. This Agreement shall terminate
automatically in the event of its assignment, or upon termination
of the Management Agreement between the Fund and the Manager.
This agreement may be terminated at any time, without the payment
of any penalty, (i) with respect to the Fund, by the Board of
Directors of the Fund, or by vote of a majority of the
3
<PAGE>
outstanding voting securities of the Fund, or by the Manager on
not less than thirty (30) or more than sixty (60) days' written
notice addressed to the Subadviser at its principal place of
business; and (ii) by the Subadviser, without the payment of any
penalty, on not less than one hundred twenty (120) days' written
notice addressed to the Manager at the Manager's principal place
of business.
(b) Unless sooner terminated as provided herein, this Agreement shall
remain in full force and effect until June 1, 2002, and from year
to year thereafter only so long as its continuance is approved in
the manner required by the 1940 Act, as from time to time
amended.
7. ADVERTISING. Neither party will use any advertising that refers to
the other party or its affiliates without the prior consent of such party.
8. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
9. GOVERNING LAW. This Agreement shall be construed in accordance with
the 1940 Act and the laws of the State of Missouri, without giving effect to the
conflicts of laws principles thereof.
10. NOTICE. Any notice, advice or report to be given pursuant to this
Agreement shall be delivered or mailed:
To the Manager: Capital Mortgage Management, Inc.
2109 S. Mason Road, Suite 208
St. Louis, MO 63131
Attention: John W. Stewart
(314) 822-1644
with a copy to: Thompson Coburn LLP
One Firstar Plaza
St. Louis, MO 63101
Attention: Dee Anne Sjogren, Esq.
(314) 552-6295
To the Subadviser: Principal Capital Management, LLC
801 Grand Avenue
Des Moines, Iowa 50392
Attn: Scott Leiberton
4
<PAGE>
11. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
12. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
13. COUNTERPARTS. This Agreement may be executed in counterparts by the
parties hereto, each of which shall constitute an original counterpart, and all
of which, together, shall constitute one Agreement
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
CAPITAL MORTGAGE MANAGEMENT, INC.
By:
---------------------------------------
John W. Stewart, President
PRINCIPAL CAPITAL MANAGEMENT, LLC
By:
---------------------------------------
Name:
------------------------------------
Title:
------------------------------------
5
PRINCIPAL CAPITAL MANAGEMENT, LLC CODE OF ETHICS
STATEMENT OF PURPOSE AND GENERAL PRINCIPLES
The purpose of this Code of Ethics ("CODE") is to prevent conflicts of interest
which may exist, or appear to exist, when persons associated with Principal
Capital Management own or engage in transactions involving Securities (as
defined below) that are owned or are being purchased or sold or are being
considered for purchase or sale for the accounts of clients of Principal Capital
Management. Central to this Code is the principle that Principal Capital
Management employees will adhere to the highest ethical standards and will act
in accordance with the following fiduciary principles:
* The duty at all times to place the interests of clients first.
* The requirement to conduct all personal Securities transactions in a
manner consistent with this Code so as to avoid any actual or
potential conflicts of interest or abuse of an individual's position
of trust and responsibility.
* Persons associated with Principal Capital Management shall not take
inappropriate advantage of their positions.
I. DEFINITION:
A. "SECURITY:" Shall have the meaning set forth in Section 202(a)(18) of
the Investment Advisers Act, except it shall not include securities issued
by the Government of the United States, bankers' acceptances, certificates
of deposit, commercial paper, or shares of open-end management investment
companies (i.e., mutual funds).
B. "ACCESS PERSON:" Means any (1) director or officer of Principal Capital
Management or (2) employee of Principal Capital Management who in the
regular course of his or her duties makes, participates in or obtains
information regarding the purchase or sale of Securities for the accounts
of clients of Principal Capital Management or whose functions relate to the
making of any recommendations with respect to such purchases and sales.
Access Persons consist of these sub-categories: (i) PORTFOLIO MANAGERS
(individuals entrusted with the direct responsibility and authority to make
investment decisions affecting the accounts of clients of Principal Capital
Management), (ii) INVESTMENT PERSONNEL (which include Portfolio Managers as
well as portfolio strategists, fixed income securities analysts and
traders), and (iii) OTHER ACCESS PERSONS (all persons who are not included
in subcategories i or ii).
C. "BEING CONSIDERED FOR PURCHASE OR SALE": A Security is being considered
for purchase or sale when a Portfolio Manager views the purchase or sale of
the Security for a client account as probable. The phrase "purchase or sale
of a Security" includes the writing of an option to purchase or sell a
Security or the purchase of an option to purchase or sell a Security.
D. "BENEFICIAL OWNERSHIP": Beneficial Ownership shall be interpreted in the
same manner as in determining whether a person is subject to the provisions
of Section 16 of the Securities Exchange Act of 1934, and the rules and
regulations thereunder, except that the determination of direct and
indirect beneficial ownership shall apply to all Securities which a person
owns whether publicly registered or private. For example, a person is
considered a Beneficial Owner of any Security or Securities account (1) in
his or her own name, or (2) in the name of members of the person's
immediate family sharing the same household, or (3) Securities a person
might acquire or dispose of through the exercise or conversion of any
derivative security (e.g., an option, whether presently exercisable or
not).
E. RESTRICTED LISTS: Records known as the "RESTRICTED DEBT SECURITIES LIST"
and the "RESTRICTED EQUITY SECURITIES LIST" are maintained within the
Principal Financial Group and are monitored by the Compliance Officer.
These Restricted Lists include the names of all Securities that Principal
Capital Management (1) is currently buying or which Principal Capital
Management expects to buy for client accounts, and (2) currently holds in
client accounts. The reference date for determining when Principal Capital
Management "EXPECTS TO BUY" is the date on which a Portfolio Manager views
the purchase of the Security as probable. Names of Securities shall be
removed from the Restricted Lists 15 days after Principal Capital
Management has (1) ceased considering the Security for purchase, or (2)
entirely liquidated its position in such Security.
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II. EXEMPTED TRANSACTIONS. THIS CODE SHALL NOT APPLY TO:
A. Sales made pursuant to general public tender offers.
B. The acceptance of stock dividends of Securities already owned; the
reinvestment of cash dividends of Securities already owned under a dividend
reinvestment program or the participation in a monthly investment plan for
the purchase of a Security already owned. (Note: The initial purchase or
establishment of dividend reinvestment program or automatic investment plan
must be precleared.)
C. Purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of Securities, to the extent such rights are
acquired directly from the issuers thereof, and sales of such rights.
D. Exercising or selling maturing options or rights to exchange or convert
Securities, but only when those options or rights to exchange or convert
have been acquired or disposed of in accordance with this Code.
E. Purchases or sales effected in any account over which the Access Person
has no direct or indirect influence or control.
F. Purchases or sales which are non-volitional on the part of either the
Access Person or a Principal Capital Management client account.
III. RESTRICTED AND PROHIBITED TRANSACTIONS
A. No Investment Personnel may acquire, directly or indirectly, Beneficial
Ownership in any Security that is part of an initial public offering.
B. No Investment Personnel may acquire, directly or indirectly, Beneficial
Ownership in any Security in a private placement transaction without prior
approval of the Compliance Officer. Investment Personnel who have acquired
Securities in a private placement transaction must disclose that investment
when they play a part in any consideration of an investment in the issuer
of the privately placed Security for a client account. In such
circumstances, a decision to purchase such Securities for a client account
must be subject to an independent review by Investment Personnel with no
personal interest in the issuer.
C. No Access Person may purchase or sell a Security in which he or she has,
or by reason of such transaction acquires, any direct or indirect
Beneficial Ownership while that Security is listed on a Restricted List,
except as provided elsewhere in this Code. [See IV, Preclearance.] No
Portfolio Manager may purchase or sell a Security in which he or she has,
or by reason of such transaction acquires, any direct or indirect
Beneficial Ownership interest within 7 days before and after a client
account that he or she manages trades in that Security.
D. Investment Personnel may not profit directly or indirectly from the
acquisition and disposition (or disposition and acquisition) of Beneficial
Ownership of the same (or equivalent) Securities within 60 calendar days.
Any profits realized on such short-term trades must be disgorged to a
charitable organization designated by management of Principal Capital
Management. Investment Personnel may request exceptions to this prohibition
by submitting a written request to the Compliance Officer prior to
realizing the profit. Such exceptions will be considered on a case-by-case
basis, taking into consideration the facts and circumstances of each
situation.
IV. PRECLEARANCE
A. PORTFOLIO MANAGERS
Portfolio Managers may request permission to trade any security on the
Restricted Debt Securities List. Portfolio Managers may also request
permission to trade securities on the Restricted Equity Securities List in
an amount each calendar quarter that is the greater of 500 shares or 1% of
the daily average trading volume during the 90 days prior to the date the
Portfolio Manager makes the request; provided however Portfolio Managers
may not purchase or sell any security within seven (7) days before and
after a client account the Portfolio Manager manages purchased or sold the
security.
Requests for approval may be made by contacting the person responsible for
maintaining the Restricted Debt Securities List or the Restricted Equity
Securities List.
Approvals to trade are valid for 24 hours after given. Portfolio Managers
who desire an approval that is valid for a longer period may make such a
request when seeking approval to trade.
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B. ACCESS PERSONS OTHER THAN PORTFOLIO MANAGERS
Access Persons other than Portfolio Managers may request permission to
trade any security on the Restricted Debt Securities List. Access Persons
may also request permission to trade securities on the Restricted Equity
Securities List in an amount each calendar quarter that is the greater of
500 shares or 1% of the daily average trading volume during the 90 days
prior to the date the Access Person makes the request. Requests for
approval may be made by contacting the person responsible for maintaining
the Restricted Debt Securities List or the Restricted Equity Securities
List. Approvals to trade are valid for 24 hours after given. Access Persons
who desire an approval that is valid for a longer period may make such a
request when seeking approval to trade.
V. DISCLOSURE OF SECURITIES OWNERSHIP AND SECURITIES TRANSACTIONS
A. When recommending the purchase or sale of Securities for a client
account in accordance with portfolio management procedures, Investment
Personnel must disclose any direct or indirect Beneficial Ownership in any
Security of the issuer whose Securities are under consideration. B. All
Access Persons shall file a report with the Principal Capital Management
Compliance Officer listing all their personal Securities transactions
during the previous calendar quarter in any Security in which such person
has acquired any direct or indirect Beneficial Ownership including
transactions exempt from this Code under Section II. The report shall be
made on a form provided by Principal Capital Management within 10 days
following the end of such calendar quarter. The report shall contain the
following information:
1. the date of the transaction, the title and the number of shares
or the principal amount of each Security involved;
2. the nature of the transaction (e.g., purchase or sale);
3. the price at which the transaction was effected;
4. the name of the broker, dealer, or bank with or through which the
transaction was effected; and
5. if a sale transaction, the date on which the Security was
acquired and the cost basis of the Security.
C. Access Persons must direct brokerage and other firms with which they
have Securities accounts to furnish the Compliance Officer on a timely
basis duplicate copies of confirmations of all personal Securities
transactions.
D. Access Persons must direct brokerage and other firms with which they
have Securities accounts to furnish the Compliance Officer on a timely
basis a duplicate copy of the Access Person's December 31 account
statement.
E. Access Persons who are Portfolio Managers must furnish the Compliance
Officer a listing of all Securities in which they have a direct or indirect
Beneficial Ownership at the time of their appointment as a Portfolio
Manager, and thereafter on an annual basis as of December 31 of each year.
VI. CERTIFICATION OF COMPLIANCE
All Access Persons will be required to certify annually that they have read
and understood the Code and its applicability to them, and that they have
complied with the requirements of the Code and that they have disclosed or
reported all personal Securities transactions as required by the Code. [See
main menu for the Code of Ethics Compliance Form.]
VII. GIFTS
Access Persons are prohibited from receiving any gift or other thing having
a value of more than $100 in the aggregate in any calendar year from any
person or entity that does business with or on behalf of Principal Capital
Management. Gifts do not include occasional dinners, sporting events or
other entertainment that Access Persons attend with their host.
VIII. SERVICE AS A CORPORATE DIRECTOR
Investment Personnel are prohibited from serving on the board of directors
of a publicly traded company, absent prior authorization based on a
determination that board service would be consistent with the interests of
Principal Capital Management and its clients.
IX. ADMINISTRATION AND SANCTIONS
A. ADMINISTRATION.
1. Responsibility for this Code is vested in the Chairman of the
Board of Directors of Principal Capital Management.
Administrative responsibility has been delegated to the
Compliance Officer, Tim Howald. Requests for interpretation of
this Code or for preclearance of purchase or sales as permitted
by this Code should be directed to the Compliance Officer, Tim
Howald.
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2. The Compliance Officer will:
(a) Furnish a copy of this Code of Ethics to all employees so
that they may be aware of their duties and obligations.
(b) Review all reports received pursuant to the reporting
requirements and/or conduct such investigation as will reasonably
be required to detect and report any violations of this Code of
Ethics.
(c) Issue personally, or with the advice of counsel, as may be
appropriate, interpretations of the scope and effect of this Code
of Ethics.
(d) Submit to the Chairman of the Board of Principal Capital
Management quarterly reports of all reported Securities
transactions which suggest the possibility of a violation and any
finding or determination made in respect thereto.
(e) Review and approve or disapprove all requests for approval of
Securities transactions submitted by any employee. The Compliance
Officer may designate certain alternate compliance staff to act
in his/her stead.
B. Sanctions. Upon discovering a violation of this Code, the Chairman of
Principal Capital Management shall impose such sanctions as the Chairman
deems appropriate, upon recommendation of the Compliance Officer. Sanctions
may include a letter of censure as well as suspension or termination of the
employment of the violator.
C. Records. Annually, those individuals charged with the responsibility for
carrying out this Code shall prepare a report to the Board of Directors of
Principal Capital Management that, at a minimum, will include:
1. A summary of existing procedures concerning personal investing,
and any procedural changes made during the past year.
2. Identification of violations requiring significant remedial
action during the past year.
3. Recommendations, if any, as to changes in existing restrictions
or procedures based on experience with this Code, evolving
industry practices or developments in applicable laws or
regulations.
