1933 Act Registration No. 811-08617
1940 Act Registration No. 333-47541
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20546
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [4]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [10]
AVALON FUNDS, INC.
(Formerly Hughes Funds, Inc.)
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(Exact name of registrant as specified in Charter)
125 Lincoln Avenue
Santa Fe, New Mexico 87501-2052
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(Address of Principle Executive Offices and Zip Code)
(505) 983-1111
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(Registrant's Telephone Number including Area Code)
Stacey Stone
Unified Fund Services, Inc.
431 North Pennsylvania Street
Indianapolis, Indiana 46204
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(Name and Address of Agent for Service)
Please send copy of communications to:
DAVID D. JONES, ESQUIRE
4747 Research Forest Drive
Suite 180, # 303
The Woodlands, TX 77381
(281) 367-8409
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Approximate Date of Proposed Public Offering:
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As soon as practicable following effective date.
It is proposed that this filing will become effective (check appropriate box):
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/ / 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)(3)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant declares hereby that an indefinite number or amount of its securities
has been registered by this Registration Statement.
TOTAL NUMBER OF PAGES _____
EXHIBIT INDEX BEGINS
ON PAGE _____
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PROSPECTUS
DATED MARCH 10, 2001
TABLE OF CONTENTS
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THE BASICS ABOUT THE EDUCATION FUND
THE FUND ................ 2 (the "Fund")
PAST PERFORMANCE ........ 3 A Non-Diversified Mutual Fund offered by
FEES AND EXPENSES ....... 4 Avalon Funds, Inc.
125 Lincoln Avenue, Suite 100
AN EXAMPLE OF EXPENSES Santa Fe, New Mexico 87501-2052
OVER TIME ............... 4 1-866-375-7008
ADDITIONAL INVESTMENT The Fund attempts to achieve its investment
INFORMATION ............. 4 objective of capital growth by investing
primarily in a diversified portfolio of the
THE FUND'S common stock and securities convertible into
INVESTMENT common stock of companies that provide
ADVISER ................. 5 products, services and support to the
educational field.
HOW TO BUY
SHARES OF THE FUND ...... 5 The minimum investment in the Fund is $2,500
for regular accounts and $1000 for retirement
HOW TO SELL accounts. The minimum subsequent investment is
(REDEEM) YOUR SHARES .... 8 $1000 for regular accounts and $100 for
retirement accounts.
DIVIDENDS AND
DISTRIBUTIONS ........... 9 The Fund is a No-Load Fund. This means that
100% of your initial investment is invested in
TAX CONSIDERATIONS ...... 10 shares of the Fund.
GENERAL INFORMATION ..... 10 The Securities and Exchange Commission has not
approved or disapproved these securities or
FINANCIAL HIGHLIGHTS .... 11 determined if this prospectus is truthful or
complete. Any representation to the contrary
HOW TO GET is a crime.
MORE INFORMATION ........ 12
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THE BASICS ABOUT THE FUND
INVESTMENT OBJECTIVE:
The Fund aims to increase the value of your investment through capital growth
while supporting the enhancement of educational opportunities. Capital growth is
achieved when the prices of the securities in which the Fund invests increase
over time, thereby increasing the value of your shares.
INVESTMENT STRATEGIES:
The Fund seeks to achieve capital growth by investing at least 85% of its total
assets primarily in a diversified portfolio of the common stock and securities
convertible into common stock of companies that provide products, services and
support to the educational field. Such companies include, but are not limited
to, educational licensing and certification providers, private sector education
companies, companies that provide online education access and content, book
publishers, and trade school companies (throughout this prospectus, these types
of companies will be called "Education Companies").
The Fund's Adviser invests in Education Companies that, in the Adviser's
opinion, have an above-average potential for future earnings growth. Generally,
the Adviser will invest in:
(1) Established companies with above-average prospects for growth. These
companies will have strong performance records, solid market positions,
high margins and return on equity, and reasonable financial strength;
(2) Small and medium-sized companies (less than $6 billion in total market
capitalization) that may be out of favor or not closely followed by
investors and are selling at prices which do not reflect adequately their
long-term business potential;
(3) Companies in industries that are undergoing consolidation, where the
likelihood of acquisitions is high.
The Fund may also invest up to 40% of its assets in foreign Education Companies
when, in the Adviser's opinion, such investments would be advantageous to the
Fund and help the Fund to achieve its investment objective. However, the Fund
will not invest in foreign markets that are considered to be "emerging markets".
HOW DOES INVESTING IN EDUCATION COMPANIES ASSIST THE FUND TO ACHIEVE ITS
INVESTMENT OBJECTIVES?
The Fund's Adviser believes that as the world becomes more complicated and
interdependent, the need for private sector educational efforts will increase
dramatically. The private sector has demonstrated the ability to provide sorely
needed quality in many different aspects of education delivery. Further,
education is changing in three fundamental ways:
1. Education is being provided earlier in childhood and is continuing
throughout a person's lifetime;
2. The on-site presence of a teacher is no longer required for effective
learning to take place in many situations. The use of online educational
delivery is expanding very rapidly; and
3. The private sector is playing an ever increasing role in all phases of
education, including internet business-to-business supplies and textbook
vending.
The Fund believes that developing profitable holdings in companies taking
advantage of these fundamental changes to educational delivery will help the
Fund achieve its investment objective while supporting the enhancement of
education in this country and other countries.
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PRINCIPAL RISKS OF INVESTING IN THE FUND
General Risks- You may lose money by investing in the Fund. The value of the
Fund's investments will vary from day-to-day, and when you sell your Fund
shares, they may be worth less than what you paid for them.
Stock Price/Market Risk. The price of a company's stock may fall because of
problems with the company, or simply because investors become concerned about
the company. Additionally, stock prices may decline for reasons that have
nothing to do with the particular company but which result from general market,
economic, political and global conditions. In the past, stocks have recovered
from declines, but some stock market slumps have lasted for months or even
years.
Small To Medium-Cap Stocks Risk. The Fund may invest in companies with smaller
market capitalizations (less than $6 billion in market capitalization). Smaller
companies often have less liquidity, less management depth, narrower market
penetrations, less diverse product lines, and fewer resources than larger
companies. As a result, investors may be less willing to invest in these
companies and their stock prices may react more violently to changes in the
marketplace.
Foreign Securities Risk. Investing in foreign securities is riskier compared to
domestic investments. Foreign companies are generally not subject to the U.S.
regulations or uniform accounting, auditing and financial reporting standards,
so there may be less publicly available information about these companies.
Dividends and interest on foreign securities may be subject to foreign
withholding taxes. Also, foreign securities are often denominated in a currency
other than the U.S. dollar, resulting in currency exchange risk. Although the
Fund intends to invest in securities of foreign issuers domiciled in nations
which the Adviser considers as having stable and friendly governments, there is
the possibility of expropriation, confiscation, taxation, currency blockage or
political or social instability which could affect investments of foreign
issuers domiciled in such nations.
Sector Risk- The Fund invests primarily in "Education Companies". Investing a
single market sector is riskier that investing a variety of market sectors.
Non-Diversification Risk- The Fund is classified as "non-diversified" under the
federal securities laws. This means that the Fund has the ability to concentrate
a relatively high percentage of its investments in the securities of a small
number of companies. Investing in this manner makes the Fund more susceptible to
a single economic, political or regulatory event than a more diversified fund
might be. Also, a change in the value of a single company will have a more
pronounced effect on the Fund than such a change would have on a more
diversified fund.
PAST PERFORMANCE
This Fund has not been previously offered to the public. Accordingly,
performance information concerning the Fund is not yet available.
3
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FEES AND EXPENSES
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
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SHAREHOLDER FEES:
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(fees paid directly from your investment)
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Maximum Front-end Sales Charges None
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Maximum Back-End Sales Charges None
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Maximum Sales Charge
on Reinvested Dividends None
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Redemption Fees 0.50%1
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ANNUAL FUND OPERATING EXPENSES:
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(expenses that are deducted from Fund assets)
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Management Fees2 1.50%
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Distribution (12b-1) Fees3 0.25%
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Other Expenses 0.00%
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Total Annual Fund Operating Expenses 1.75%
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1. The Fund will charge you a redemption fee of 0.5% of the value of your
redemption if you redeem your shares less than 6 months after purchasing
them. If charged, this fee would increase your costs. This fee is not a fee
to finance sales or sales promotion expenses, but is imposed to discourage
short-term trading of Fund shares. Furthermore, such fees, when imposed,
are credited directly to the assets of the Fund to help defray the expense
to the Fund of such short-term trading activities.
2. Management fees include a fee of 0.50% for investment advisory services and
1.00% for administrative and other services. Both fees are paid to the
Fund's Adviser. On December 1, 2000, the Fund's Board of Directors approved
new investment advisory and operating services agreements between the Fund
and Avalon Trust Company. The Fund's sole shareholder approved the Board's
selection of investment adviser on December 11, 2000.
3. Because 12b-1 fees are paid out of the assets of the Fund on an ongoing
basis, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
AN EXAMPLE OF EXPENSES OVER TIME:
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 periods indicated, reinvest all
dividends and distributions, and then redeem all your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same as stated in the table
above. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
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One Year Three Years Five Years Ten Years
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$178 $553 $952 $2072
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A redemption fee of 0.50% of net assets redeemed prior to six months is not
included in these calculations. If that fee were included, your costs would be
higher.
ADDITIONAL INVESTMENT INFORMATION
The Fund is a diversified mutual fund whose primary investment objective is
growth of capital. The Fund seeks to achieve its objective by investing
primarily in a diversified portfolio of common stock and securities convertible
into common stock while supporting the enhancement of education in this and
other countries. There can be no assurance that the Fund's investment objective
will be achieved.
Described below are the types of securities in which the Fund primarily invests.
A full listing of the Fund's investment options, restrictions and limitations,
including those that may be changed only by vote of the Fund's shareholders, can
be found in the Fund's Statement of Additional Information ("SAI").
COMMON STOCKS. The Fund will ordinarily invest at least 85% of its total assets
in common stock or securities convertible into common stock. The market value of
common stock can fluctuate significantly, reflecting the business performance of
the issuing company, investor perceptions and general economic or financial
market movements. Smaller companies are especially sensitive to these factors.
Despite the risk of price volatility, however, common
4
<PAGE>
stocks historically have offered the greatest potential for gain on investment,
compared to other classes of financial assets.
FOREIGN SECURITIES. The Fund may invest up to 40% of its assets in common stock
of foreign issuers which are publicly traded on U.S. exchanges, either directly
or in the form of American Depository Receipts (ADRs). The Fund will only invest
in ADRs that are issuer sponsored. Sponsored ADRs typically are issued by a U.S.
bank or trust company and evidence ownership of underlying securities issued by
a foreign corporation.
PREFERRED STOCK. The Fund may invest, without limitation, in preferred stock.
Preferred stock generally pays dividends at a specified rate and generally has
preference over common stock in the payments of dividends and the liquidation of
the issuer's assets. Dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Accordingly, Shareholders may
suffer a loss of value if dividends are not paid. The market prices of preferred
stocks are also sensitive to changes in interest rates and in the issuer's
creditworthiness. Accordingly, shareholders may experience a loss of value due
to adverse interest rate movements or a decline in the issuer's credit rating.
TEMPORARY DEFENSIVE POSITIONS. Ordinarily, the Fund's portfolio will be invested
primarily in common stocks. However, the Fund is not required to be fully
invested in common stocks and, in fact, usually maintains some portion of its
total assets in cash and cash reserves. Under adverse market conditions, cash
and cash reserves may represent a significant percentage of the Fund's total net
assets. The Fund usually invests its cash and cash reserves in U.S. Government
debt instruments, other unaffiliated mutual funds (money market funds) and
repurchase agreements. During times when the Fund holds a significant portion of
its net assets in cash and cash reserves, it will not be investing according to
its investment objective, and the Fund's performance may be negatively affected
as a result.
THE FUND'S INVESTMENT ADVISER
Avalon Trust Company (the "Adviser"), 125 Lincoln Avenue, Suite 100, Santa Fe,
New Mexico 87501, serves as investment adviser to the Fund. The Adviser is a
state-regulated independent trust company organized and incorporated under the
laws of the State of New Mexico.
The Adviser's principal business and occupation is to provide fiduciary trust
services, financial management services and investment advisory services to
individuals, families, foundations, and other institutions throughout the United
States. The Adviser manages the investment portfolio and business affairs of the
Fund under an Investment Advisory Agreement with the Fund, and manages, or
arranges to manage, the daily operations of the Fund under an Operating Services
Agreement. The Fund's Board of Directors selected the Adviser to serve as
investment adviser to the Fund on December 1, 2000, and the Fund's sole
shareholder approved the Board's selection on December 11, 2000.
For its investment advisory services to the Fund, the Fund pays to the Adviser,
on the last day of each month, an annualized fee equal to 0.50% of the average
net assets of the Fund, such fee to be computed daily based upon the daily
average net assets of the Fund.
The Portfolio Managers
----------------------
Mr. Roger Decort and Mr. Owen Quattlebaum are responsible for choosing the
securities in which the Fund will invest and for providing the day-to-day
investment management services for the Fund. Mr. Decort is President and Chief
Executive Officer of the Adviser. Mr. Quattlebaum is Senior Vice President and
Chief Investment Officer of the Adviser. Mr. Quattlebaum and Mr. Decort have
been executive officers of the Adviser since the firm's inception, and each has
over thirty years experience in the financial management field.
HOW TO BUY SHARES OF THE FUND
Minimum Investment Amounts
--------------------------
Payments for Fund shares must be in U.S. dollars, and in order to avoid fees and
delays, should be drawn on a U.S. bank. Fund management may reject any purchase
order for Fund shares and may waive the minimum investment amounts in its sole
discretion.
5
<PAGE>
Your purchase of Fund shares is subject to the following minimum investment
amounts:
MINIMUM MINIMUM
TYPE OF INVESTMENT SUBSEQUENT
ACCOUNT TO OPEN ACCOUNT INVESTMENTS
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REGULAR $2,500 $1,000
IRAs $1,000 $ 100
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AUTOMATIC INVESTMENT PLAN MEMBERS
MINIMUM MINIMUM
TYPE OF INVESTMENT SUBSEQUENT
ACCOUNT TO OPEN ACCOUNT INVESTMENTS
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REGULAR $2,500 $100 per month minimum
IRAs $1,000 $100 per month minimum
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Opening and Adding To Your Account
----------------------------------
You can invest in the Fund by mail, wire transfer and through participating
financial service professionals. After you have established your account and
made your first purchase, you may make additional purchases by telephone. You
may also invest in the Fund through an automatic investment plan. Any questions
you may have can be answered by calling the Fund, toll-free, at 1-866-375-7008.
Purchasing Shares By Mail
-------------------------
To make your initial investment in the Fund, simply complete the Application
Form included with this Prospectus, make a check payable to The Education Fund,
and mail the Form and check to:
Avalon Funds, Inc.
c/o Unified Fund Services, Inc.
431 North Pennsylvania Street
Indianapolis, Indiana 46204
To make subsequent purchases, simply make a check payable to The Education Fund
and mail the check to the above-mentioned address. Be sure to note your Fund
account number on the check.
Your purchase order, if accompanied by payment, will be processed upon receipt
by Unified Fund Services, Inc., the Fund's Transfer Agent. If the Transfer Agent
receives your order and payment by the close of regular trading on the NYSE
(currently 4:00 p.m. Eastern time), your shares will be purchased at the Fund's
NAV calculated at the close of regular trading on that day. Otherwise, your
shares will be purchased at the NAV determined as of the close of regular
trading on the next business day.
Purchasing Shares by Wire Transfer
----------------------------------
To make an initial purchase of shares by wire transfer, you need to take the
following steps:
1. Call 1-866-375-7008 to inform us that a wire is being sent.
2. Fill out and mail or fax an Account Application to the Transfer Agent
3. Obtain an account number from the Transfer Agent
4. Ask your bank to wire funds to the account of:
UMB Bank, N.A., ABA #: 101000695
Credit: The Education Fund, Acct. # 9870912465
Further credit: [Your Name, Your Account number]
Include your name(s), address and taxpayer identification number or Social
Security number on the wire transfer instructions. The wire should state that
you are opening a new Fund account.
6
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To make subsequent purchases by wire, ask your bank to wire funds using the
instructions listed above, and be sure to include your account number on the
wire transfer instructions.
If you purchase Fund shares by wire, you must complete and file an Application
Form with the Transfer Agent before any of the shares purchased can be redeemed.
Either fill out and mail the Application Form included with this prospectus, or
call the transfer agent and they will send you an application. You should
contact your bank (which will need to be a commercial bank that is a member of
the Federal Reserve System) for information on sending funds by wire, including
any charges that your bank may make for these services.
Purchases through Financial Service Organizations
-------------------------------------------------
You may purchase shares of the Fund through participating brokers, dealers, and
other financial professionals. Simply call your investment professional to make
your purchase. If you are a client of a securities broker or other financial
organization, such organizations may charge a separate fee for administrative
services in connection with investments in Fund shares and may impose account
minimums and other requirements. These fees and requirements would be in
addition to those imposed by the Fund. If you are investing through a securities
broker or other financial organization, please refer to its program materials
for any additional special provisions or conditions that may be different from
those described in this Prospectus (for example, some or all of the services and
privileges described may not be available to you). Securities brokers and other
financial organizations have the responsibility of transmitting purchase orders
and funds, and of crediting their customers' accounts following redemptions, in
a timely manner in accordance with their customer agreements and this
Prospectus.
Purchasing Shares by Automatic Investment Plan
----------------------------------------------
You may purchase shares of the Fund through an Automatic Investment Plan
("Plan"). The Plan provides a convenient way for you to have money deducted
directly from your checking, savings, or other accounts for investment in shares
of the Fund. You can take advantage of the Plan by filling out the Automatic
Investment Plan application included with this Prospectus. You may only select
this option if you have an account maintained at a domestic financial
institution which is an Automatic Clearing House member for automatic
withdrawals under the Plan. The Fund may alter, modify, amend or terminate the
Plan at any time, and will notify you at least 30 days in advance if it does so.
For more information, call the Transfer Agent at 1-866-375-7008.
Purchasing Shares by Telephone
------------------------------
In order to be able to purchase shares by telephone, your account authorizing
such purchases must have been established prior to your call. Your initial
purchase of shares may not be made by telephone. Shares purchased by telephone
will be purchased at the per share NAV next determined after the Transfer Agent
receives your order for shares. Call the Transfer Agent for details.
You may make purchases by telephone only if you have an account at a bank that
is a member of the Automated Clearing House. Most transfers are completed within
three business days of your call. To preserve flexibility, the Company may
revise or eliminate the ability to purchase Fund shares by phone, or may charge
a fee for such service, although the Company does not currently expect to charge
such a fee.
The Fund's Transfer Agent employs certain procedures designed to confirm that
instructions communicated by telephone are genuine. Such procedures may include,
but are not limited to, requiring some form of personal identification prior to
acting upon telephonic instructions, providing written confirmations of all such
transactions, and/or tape recording all telephonic instructions. Assuming
procedures such as the above have been followed, neither the Transfer Agent nor
the Fund will be liable for any loss, cost, or expense for acting upon telephone
instructions that are believed to be genuine. The Company shall have authority,
as your agent, to redeem shares in your account to cover any such loss. As a
result of this policy, you will bear the risk of any loss unless the Fund has
failed to follow procedures such as the above. However, if the Fund fails to
follow such procedures, it may be liable for such losses.
Determining Share Prices
------------------------
Shares of the Fund are offered at each share's net asset value ("NAV"). NAV per
share is calculated by adding the value of Fund investments, cash and other
assets, subtracting Fund liabilities, and then dividing the result by the number
of shares outstanding. The Fund generally determines the total value of its
shares by using market prices for the securities comprising its portfolio.
Securities for which quotations are not available and any other assets are
valued at
7
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fair market value as determined in good faith by the Adviser, subject to the
review and supervision of the Board of Directors. The Fund's per share NAV is
computed on all days on which the New York Stock Exchange ("NYSE") is open for
business at the close of regular trading hours on the Exchange, currently 4:00
p.m. Eastern time. In the event that the NYSE closes early, the share price will
be determined as of the time of closing.
Distribution Fees
-----------------
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 under the
1940 Act (the "12b-1 Plan") for its No-Load shares, pursuant to which the Fund
pays the Adviser a monthly fee for shareholder servicing expenses of 0.25% per
annum of the Fund's average daily net assets. The Adviser may, in turn, pay such
fees to third parties for eligible services provided by those parties to the
Fund.
Be aware that if you hold your shares for a substantial period of time, you may
indirectly pay more than the economic equivalent of the maximum front-end sales
charge allowed by the National Association of Securities Dealers due to the
recurring nature of Distribution (12b-1) fees.
Miscellaneous Purchase Information
----------------------------------
The Fund reserves the right to refuse to accept applications under circumstances
or in amounts considered disadvantageous to shareholders. Applications will not
be accepted unless they are accompanied by payment in U.S. funds. Payment must
be made by wire transfer, check or money order drawn on a U.S. bank, savings and
loan association or credit union. The Fund's custodian may charge a fee against
your account, in addition to any loss sustained by the Fund, for any payment
check returned to the custodian for insufficient funds. If you place an order
for Fund shares through a securities broker, and you place your order in proper
form before 4:00 p.m. Eastern time on any business day in accordance with their
procedures, your purchase will be processed at the NAV calculated at 4:00 p.m.
on that day, provided the securities broker transmits your order to the Transfer
Agent before 5:00 p.m. Eastern time. The securities broker must send to the
Transfer Agent immediately available funds in the amount of the purchase price
within three business days of placing the order.
HOW TO SELL (REDEEM) YOUR SHARES
You may sell (redeem) your shares at any time. You may request the sale of your
shares either by mail, by telephone or by wire.
By Mail
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Sale requests should be mailed via U.S. mail or overnight courier service to:
Unified Fund Services, Inc.
431 North Pennsylvania Street
Indianapolis, Indiana 46204
The selling price of the shares being redeemed will be the Fund's per share net
asset value next calculated after receipt of all required documents in Good
Order. Payment of redemption proceeds will be made no later than the third
business day after the valuation date unless otherwise expressly agreed by the
parties at the time of the transaction.
Good Order means that the request must include:
1. Your account number.
2. The number of shares to be sold (redeemed) or the dollar value of the
amount to be redeemed.
3. The signatures of all account owners exactly as they are registered on the
account.
4. Any required signature guarantees.
5. Any supporting legal documentation that is required in the case of estates,
trusts, corporations or partnerships and certain other types of accounts.
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Signature Guarantees --
--------------------
A signature guarantee of each owner is required to redeem shares in the
following situations, for all size transactions:
(i) if you change the ownership on your account;
(ii) when you want the redemption proceeds sent to a different address than is
registered on the account;
(iii) if the proceeds are to be made payable to someone other than the account's
owner(s);
(iv) any redemption transmitted by federal wire transfer to your bank; and
(v) if a change of address request has been received by the Company or Unified
Fund Services, Inc. within 15 days previous to the request for redemption.
In addition, signature guarantees are required for all redemptions of $10,000 or
more from any Fund shareholder account. A redemption will not be processed until
the signature guarantee, if required, is received in Good Order.
Signature guarantees are designed to protect both you and the Fund from fraud.
To obtain a signature guarantee, you should visit a bank, trust company, member
of a national securities exchange or other broker-dealer, or other eligible
guarantor institution. (Notaries public cannot provide signature guarantees.)
Guarantees must be signed by an authorized person at one of these institutions,
and be accompanied by the words "Signature Guarantee."
By Telephone
------------
You may redeem your shares in the Fund by calling the Transfer Agent at
1-866-375-7008 if you elected to use telephone redemption on your account
application when you initially purchased shares. Redemption proceeds must be
transmitted directly to you or to your pre-designated account at a domestic
bank. You may not redeem by telephone if a change of address request has been
received by the Company or the Transfer Agent within 15 days previous to the
request for redemption. During periods of substantial economic or market
changes, telephone redemptions may be difficult to implement. If you are unable
to contact the Transfer Agent by telephone, shares may be redeemed by delivering
the redemption request in person or by mail. You should understand that with the
telephone redemption option, you may be giving up a measure of security that you
might otherwise have had were you to redeem your shares in writing. In addition,
interruptions in telephone service may mean that you will be unable to effect a
redemption by telephone if desired.
Shares purchased by check for which a redemption request has been received will
not be redeemed until the check or payment received for investment has cleared,
a period that may last up to 15 days.
By Wire
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You may request the redemption proceeds be wired to your designated bank if it
is a member bank or a correspondent of a member bank of the Federal Reserve
System. The Custodian charges a $10 fee for outgoing wires.
Redemption At The Option Of The Fund
------------------------------------
If the value of the shares in your account falls to less than $2,500, the
Company may notify you that, unless your account is increased to $2,500 in
value, it will redeem all your shares and close the account by paying you the
redemption proceeds and any dividends and distributions declared and unpaid at
the date of redemption. You will have thirty days after notice to bring the
account up to $2,500 before any action is taken. This minimum balance
requirement does not apply to IRAs and other tax-sheltered investment accounts.
This right of redemption shall not apply if the value of your account drops
below $2,500 as the result of market action. The Company reserves this right
because of the expense to the Fund of maintaining very small accounts. IRA and
other qualified retirement plan accounts are not subject to the Fund's
above-descried redemption rights.
DIVIDENDS AND DISTRIBUTIONS
Dividends paid by the Fund are derived from its net investment income. Net
investment income will be distributed at least annually. The Fund's net
investment income is made up of dividends received from the stocks it holds, as
well as interest accrued and paid on any other obligations that might be held in
its portfolio.
The Fund realizes capital gains when it sells a security for more than it paid
for it. The Fund may make distributions of its net realized capital gains (after
any reductions for capital loss carry forwards), generally, once a year.
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Unless you elect to have your distributions paid in cash, your distributions
will be reinvested in additional shares of the Fund. You may change the manner
in which your dividends are paid at any time by writing to Unified Fund
Services, Inc., 431 North Pennsylvania Street, Indianapolis, Indiana 46204.
TAX CONSIDERATIONS
The Fund intends to qualify as a regulated investment company under Sub Chapter
M of the Internal Revenue Code so as to be relieved of federal income tax on its
capital gains and net investment income currently distributed to its
shareholders. To qualify as a regulated investment company, the Fund must, among
other things, derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities, or other income derived with respect to its
business of investing in such stock or securities, and distribute substantially
all of such income to its shareholders at least annually.
The Fund intends to distribute to shareholders, at least annually, usually in
December, substantially all net investment income and any net capital gains
realized from sales of the Fund's portfolio securities. Dividends from net
investment income and distributions from any net realized capital gains are
reinvested in additional shares of the Fund unless the shareholder has requested
in writing to have them paid by check.
Dividends from investment income and net short-term capital gains are generally
taxable to you as ordinary income. Distributions of long-term capital gains are
taxable as long-term capital gains regardless of the length of time shares in
the Fund have been held. Distributions are taxable, whether received in cash or
reinvested in shares of the Fund.
You will be advised annually of the source of distributions for federal income
tax purposes.
If you fail to furnish your social security or other tax identification number
or to certify properly that it is correct, the Fund may be required to withhold
federal income tax at the rate of 31% (backup withholding) from your dividend,
capital gain and redemption payments. Dividend and capital gain payments may
also be subject to backup withholding if you fail to certify properly that you
are not subject to backup withholding due to the under-reporting of certain
income.
Taxable distributions generally are included in your gross income for the
taxable year in which they are received. However, dividends declared in October,
November and December and made payable to shareholders of record in such month
will be deemed to have been received on December 31st if paid by the Fund during
the following January.
Distributions by the Fund will result in a reduction in the fair market value of
the Fund's shares. Should a distribution reduce the fair market value below your
cost basis, such distribution would be taxable to you as ordinary income or as a
long-term capital gain, even though, from an investment standpoint, it may
constitute a partial return of capital. In particular, you should be careful to
consider the tax implications of buying shares of the Fund just prior to a
distribution. The price of such shares include the amount of any forthcoming
distribution so that you may receive a return of investment upon distribution
which will, nevertheless, be taxable.
A redemption of shares is a taxable event and, accordingly, a capital gain or
loss may be recognized. You should consult a tax Adviser regarding the effect of
federal, state, local, and foreign taxes on an investment in the Fund.
GENERAL INFORMATION
The Fund will not issue stock certificates evidencing shares. Instead, your
account will be credited with the number of shares purchased, relieving you of
responsibility for safekeeping of certificates and the need to deliver them upon
redemption. Written confirmations are issued for all purchases of shares.
In reports or other communications to investors, or in advertising material, the
Fund may describe general economic and market conditions affecting the Fund and
may compare its performance with other mutual funds as listed in the rankings
prepared by Lipper Analytical Services, Inc. or similar nationally recognized
rating services and financial
10
<PAGE>
publications that monitor mutual fund performance. The Fund may also, from time
to time, compare its performance to the S&P 500, or some other appropriate
index.
According to the law of Maryland under which the Company is incorporated, and
the Company's bylaws, the Company is not required to hold an annual meeting of
shareholders unless required to do so under the Investment Company Act of 1940.
Accordingly, the Company will not hold annual shareholder meetings unless
required to do so under the Act. Shareholders do have the right to call a
meeting of shareholders for the purpose of voting to remove directors. Please
see the SAI for further information on your rights as a shareholder.
The Board of Directors of the Company has approved Codes of Ethics (the "Codes")
for the Company, the Adviser, and the Fund's principal underwriter. The Codes
govern the personal activities of persons who may have knowledge of the
investment activities of the Funds ("Access Persons"), requires that they file
regular reports concerning their personal securities transactions, and prohibits
activities that might result in harm to the Fund. The Codes also place
significant restrictions on the ability of Access Persons to engage in personal
transactions in securities that are or may be purchased and sold by the Fund.
The Board is responsible for overseeing the implementation of and compliance
with the Codes. A copy of each Code has been filed with the Securities and
Exchange Commission ("SEC"). You can review and/or copy the Codes at the SEC's
Public Reference Room in Washington, DC, and information concerning the
operation of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. You may also find a copy of the Codes on the SEC's EDGAR
database at the SEC's web site (www.sec.gov ). Copies of the Codes can also be
obtained, after paying a duplicating fee, by electronic request
([email protected]), or by writing the SEC's Public Reference Section,
Washington, DC 20549-0102.
FINANCIAL HIGHLIGHTS
This Fund is being offered to the public for the first time. Accordingly,
financial performance information is not yet available.
11
<PAGE>
HOW TO GET MORE INFORMATION
Additional information about the Fund is available in the Funds' Statement of
Additional Information (SAI). The SAI contains more detailed information on all
aspects of the Fund. A current SAI, dated December 11, 2000, has been filed with
the SEC and is incorporated by reference into this prospectus. You may obtain a
copy of the Fund's SAI, free of charge, by requesting one from the Fund.
To receive information concerning the Fund, or to request a copy of the SAI or
other documents relating to the Fund, please contact the Fund at:
Avalon Funds, Inc.
c/o Unified Fund Services, Inc.
431 North Pennsylvania Street
Indianapolis, Indiana 46204
1-866-375-7008
A copy of your requested document(s) will be sent to you within three days of
your request.
OR YOU MAY VISIT OUR WEB SITE ON THE INTERNET AT WWW.AVALON-FUNDS.COM:
Information about the Fund (including the SAI) can also be reviewed and copied
at the SEC's Public Reference Room in Washington, DC, and information concerning
the operation of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. Information about the Fund is also available on the SEC's EDGAR
database at the SEC's web site (www.sec.gov ). Copies of this information can be
obtained, after paying a duplicating fee, by electronic request
([email protected]), or by writing the SEC's Public Reference Section,
Washington, DC 20549-0102.
Investment Company Act No.
811-8883
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
THE EDUCATION FUND
Dated March 10, 2001
AVALON FUNDS, INC.
125 Lincoln Avenue, Suite 100
Santa Fe, New Mexico 87501-2052
1-866-375-7008
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of The Education Fund, dated March 10, 2001.
You may obtain a copy of the Prospectus, free of charge, by writing to Avalon
Funds, Inc, c/o Unified Fund Services, Inc., 431 North Pennsylvania Street,
Indianapolis, Indiana 46204 or by calling 1-866-375-7008.
TABLE OF CONTENTS
Management of the Fund
Investment Policies and Restrictions
Investment Adviser
Directors and Officers
Performance Information
Purchasing and Redeeming Shares
Tax Information
Portfolio Transactions
Custodian
Transfer Agent
Administration
Distributor
Legal Counsel
Distribution Plan
Financial Statements
<PAGE>
MANAGEMENT OF THE FUND
Avalon Funds, Inc. (the "Company"), an open-end management investment company,
was incorporated in Maryland on July 16, 1998 under the name Hughes Funds, Inc.
The affairs of the Company are managed by a Board of Directors, which approves
all significant agreements between the Company and the persons and companies
that furnish services to the Fund, including agreements with the Fund's
custodian, transfer agent, investment Adviser and administrator. All such
agreements are subject to limitations imposed by state and/or federal securities
laws, and to the extent that any such contract may contradict such statutes, the
contract would be unenforceable. The day-to-day operations of the Fund are
delegated to the Adviser. On December 1, 2000, the Board of Directors of the
Company approved a change in the Company's name to Avalon Funds, Inc., nominated
a new slate of directors, approved a new investment advisory agreement with
Avalon Trust Company, approved significant changes to the Hughes Health Care
Fund (now called The Education Fund), and approved new service agreements with a
number of service providers. On December 11, 2000, the Company's sole
shareholder approved the newly nominated directors, approved the new investment
advisory agreement with Avalon Trust Company, and approved the Company's Plan of
Distribution Pursuant to Rule 12b-1.
The Company's Articles of Incorporation permit the Board of Directors to issue
500,000,000 shares of common stock. The Board of Directors has the power to
designate one or more series ("funds") of shares of common stock and to classify
or reclassify any unissued shares with respect to such series. Currently, the
Company has registered the following funds:
The Hughes Value Fund
The Hughes Growth Fund
The Hughes Market Neutral Fund
The Hughes Technology Fund
The Hughes Health Care Fund
(now The Education Fund - the "Fund" throughout this SAI)
The Hughes Financial Services Fund
Only the Fund's shares are currently being offered by the Company. Shares of the
Value, Growth and Market Neutral Funds previously have been offered by the
Company, but none of those funds currently have shareholders, they are not
currently offered to the public, and the newly appointed board is expected to
reclassify those shares in the near future.
The Company is also authorized to designate classes of shares within each
series. The Company has designated four classes of shares; (1) a No-Load Class
that sold to the public without any front or back-end sales loads or charges;
(2) Class A shares which are sold to the public with a front-end sales charge;
(3) Class B shares which are sold to the public with a contingent deferred sales
charge ("CDSC") which declines to zero over a period of years; and (4) Class C
shares which are sold with a 1% CDSC which terminates after thirteen months and
an ongoing additional service and distribution fee. Shareholders of each share
class are entitled: (i) to one vote per full share; (ii) to such distributions
as may be declared by the Company's Board of Directors out of funds legally
available; and (iii) upon liquidation, to participate ratably in the assets
available for distribution. There are no conversion or sinking fund provisions
applicable to the shares, and the holders have no preemptive rights and may not
cumulate their votes in the election of directors. The shares are redeemable and
are fully transferable. All shares issued and sold by the Fund will be fully
paid and nonassessable. Matters of general interest to the shareholders are
voted upon by all shareholders; matters applicable to a class of shareholders
are voted upon only by the holders of that share class. This SAI relates only to
No-Load shares of The Education Fund.
INVESTMENT POLICIES AND RESTRICTIONS
The Fund's investment objectives and the manner in which the Fund pursues its
investment objectives are generally discussed in the prospectus. This Section
provides additional information concerning the Fund's investments and its
investment restrictions.
The Fund is classified as "non-diversified" under the federal securities laws.
This means that the Fund has the ability to concentrate a relatively high
percentage of its investments in the securities of a small number of companies.
Investing in this manner makes the Fund more susceptible to a single economic,
political or regulatory event than a more diversified fund might be. Also, a
change in the value of a single company will have a more pronounced effect on
the Fund than such a change would have on a more diversified fund.
COMMON STOCKS. The Fund will ordinarily invest at least 85% of its total assets
in common stock or securities convertible into common stock of "Education
Companies", as that term is defined in the Fund's prospectus. The market value
of common stock can fluctuate significantly, reflecting the business performance
of the issuing company, investor perceptions and general economic or financial
market movements. Smaller companies are especially sensitive to these factors.
Despite the risk of price volatility, however, common stocks historically have
offered the greatest potential for gain on investment, compared to other classes
of financial assets.
FOREIGN SECURITIES. The Fund may invest up to 40% of its assets in common stock
of foreign "Education Companies" which are publicly traded on U.S. exchanges,
either directly or in the form of American Depository Receipts (ADRs). The Fund
will only invest in ADRs that are issuer sponsored. Sponsored ADRs typically are
issued by a U.S. bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation.
PREFERRED STOCK. The Fund may invest, without limitation, in preferred stock.
Preferred stock generally pays dividends at a specified rate and generally has
preference over common stock in the payments of dividends and the
13
<PAGE>
liquidation of the issuer's assets. Dividends on preferred stock are generally
payable at the discretion of the issuer's board of directors. Accordingly,
Shareholders may suffer a loss of value if dividends are not paid. The market
prices of preferred stocks are also sensitive to changes in interest rates and
in the issuer's creditworthiness. Accordingly, shareholders may experience a
loss of value due to adverse interest rate movements or a decline in the
issuer's credit rating.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real estate investment
trusts (REITs). Equity REITs invest directly in real property while mortgage
REITs invest in mortgages on real property. REITs may be subject to certain
risks associated with the direct ownership of real estate, including declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, and variations in rental income. REITs pay dividends to
their shareholders based upon available funds from operations. It is quite
common for these dividends to exceed the REITs taxable earnings and profits
resulting in the excess portion of such dividends being designated as a return
of capital. The Fund intends to include the gross dividends from such REITs in
its distribution to its shareholders and, accordingly, a portion of the Fund's
distributions may also be designated as a return of capital. The Fund will not
invest more than 10% of its assets in REITS.
OPTIONS ON EQUITIES. Although the Fund will not normally do so, the Fund may
occasionally invest in options contracts to decrease its exposure to the effects
of changes in security prices, to hedge securities held, to maintain cash
reserves while remaining fully invested, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when an options contract
is priced more attractively than the underlying security or index.
The Fund may write (i.e. sell) covered call options, and may purchase put and
call options, on equity securities traded on a United States exchange or
properly regulated over-the-counter market. The Fund may also enter into such
transactions on Indexes. Options contracts can include long-term options with
durations of up to three years.
The Fund may enter into these transactions so long as the value of the
underlying securities on which options contracts may be written at any one time
does not exceed 100% of the net assets of the Fund, and so long as the initial
margin required to enter into such contracts does not exceed five percent (5%)
of the Fund's total net assets. When writing covered call options, to minimize
the risks of entering into these transactions, the Fund will maintain a
segregated account with its Custodian consisting of the underlying securities
upon which the option was written, cash, cash equivalents, U.S. Government
Securities or other high-grade liquid debt securities, denominated in U.S.
dollars or non-U.S. currencies, in an amount equal to the aggregate fair market
value of its commitments to such transactions.
Risk Factors. The primary risks associated with the use of options are; (1)
imperfect correlation between a change in the value of the underlying security
or index and a change in the price of the option or futures contract, and (2)
the possible lack of a liquid secondary market for an options or futures
contract and the resulting inability of the Fund to close out the position prior
to the maturity date. Investing only in those contracts whose price fluctuations
are expected to resemble those of the Fund's underlying securities will minimize
the risk of imperfect correlation. Entering into such transactions only on
national exchanges and over-the-counter markets with an active and liquid
secondary market will minimize the risk that the Fund will be unable to close
out a position.
DEBT SECURITIES. The Fund may invest in corporate or U.S. Government debt
securities including zero coupon bonds. Corporate debt securities may be
convertible into preferred or common stock. In selecting corporate debt
securities for the Fund, the Adviser reviews and monitors the creditworthiness
of each issuer and issue. U.S. Government securities include direct obligations
of the U.S. Government and obligations issued by U.S. Government agencies and
instrumentalities. The market value of such securities fluctuates in response to
interest rates and the creditworthiness of the issuer. In the case of securities
backed by the full faith and credit of the United States Government,
shareholders are only exposed to interest rate risk.
Zero coupon bonds do not provide for cash interest payments but instead are
issued at a discount from face value. Each year, a holder of such bonds must
accrue a portion of the discount as income. Because issuers of zero coupon bonds
do not make periodic interest payments, their prices tend to be more volatile
than other types of debt securities when market interest rates change.
14
<PAGE>
MONEY MARKET FUNDS. The Fund may invest in securities issued by other registered
investment companies that invest in short-term debt securities (i.e., money
market fund). As a shareholder of another registered investment company, the
Fund would bear its pro rata portion of that company's advisory fees and other
expenses. Such fees and expenses will be borne indirectly by the Fund's
shareholders.
REPURCHASE AGREEMENTS. The Fund may invest a portion of its assets in repurchase
agreements ("Repos") with broker-dealers, banks and other financial
institutions, provided that the Fund's custodian always has possession of the
securities serving as collateral for the Repos or has proper evidence of book
entry receipt of said securities. In a Repo, the Fund purchases securities
subject to the seller's simultaneous agreement to repurchase those securities
from the Fund at a specified time (usually one day) and price. The repurchase
price reflects an agreed-upon interest rate during the time of investment. All
Repos entered into by the Fund must be collateralized by U.S. Government
Securities, the market values of which equal or exceed 102% of the principal
amount of the money invested by the Fund. If an institution with whom the Fund
has entered into a Repo enters insolvency proceedings, the resulting delay, if
any, in the Fund's ability to liquidate the securities serving as collateral
could cause the Fund some loss if the securities declined in value prior to
liquidation. To minimize the risk of such loss, the Fund will enter into Repos
only with institutions and dealers considered creditworthy.
CASH RESERVES. The Fund may hold up to 100% of its net assets in cash to
maintain liquidity and for temporary defensive purposes.
The Fund may take a temporary defensive position when, in the Adviser's opinion,
market conditions are such that investing according to the Fund's normal
investment objectives would place the Fund in imminent risk of loss. In such an
event, the Adviser could temporarily convert some or all of the Fund's
investments to cash. Such actions are subject to the supervision of the Board of
Directors. You should be aware that any time the Fund is assuming a temporary
defensive position, the Fund will not be invested according to its investment
objectives, and its performance will vary, perhaps significantly, from its norm.
Restricted and Illiquid Securities.
----------------------------------
The Fund will not invest more than 15% of its net assets in securities that the
Adviser determines, under the supervision of the Board of Directors, to be
illiquid and/or restricted. Illiquid securities are securities that may be
difficult to sell promptly at an acceptable price because of lack of available
market and other factors. The sale of some illiquid and other types of
securities may be subject to legal restrictions. Because illiquid and restricted
securities may present a greater risk of loss than other types of securities,
the Fund will not invest in such securities in excess of the limits set forth
above.
When-Issued Securities and Delayed-Delivery Transactions.
---------------------------------------------------------
The Fund may purchase securities on a when-issued basis, and it may purchase or
sell securities for delayed-delivery. These transactions occur when securities
are purchased or sold by the Fund with payment and delivery taking place at some
future date. The Fund may enter into such transactions when, in the Adviser's
opinion, doing so may secure an advantageous yield and/or price to the Fund that
might otherwise be unavailable. The Fund has not established any limit on the
percentage of assets it may commit to such transactions, but to minimize the
risks of entering into these transactions, the Fund will maintain a segregated
account with its Custodian consisting of cash, cash equivalents, U.S. Government
Securities or other high-grade liquid debt securities, denominated in U.S.
dollars or non-U.S. currencies, in an amount equal to the aggregate fair market
value of its commitments to such transactions.
Portfolio Turnover.
------------------
The Fund does not yet have any reportable portfolio turnover. Higher portfolio
turnover rates may result in higher rates of net realized capital gains to the
Fund, thus the portion of the Fund's distributions constituting taxable gains
may increase. In addition, higher portfolio turnover activity can result in
higher brokerage costs to the Fund. The Fund anticipates that its annual
portfolio turnover will be not greater than 75%.
The complete list of the Fund's investment restrictions is as follows:
The Fund will not:
15
<PAGE>
1. Acquire securities of any one issuer that at the time of investment (a)
represent more than 10% of the voting securities of the issuer or (b) have
a value greater than 10% of the value of the outstanding securities of the
issuer;
2. Invest less than 85% of its assets (valued at time of investment) in
securities of "Education Companies", as that term is defined in the
prospectus, except for temporary defensive purposes, as that term has been
defined above;
3. Borrow money, except from banks for temporary or emergency purposes in
amounts not exceeding 5% of the value of the Fund's assets at the time of
borrowing;
4. Underwrite the distribution of securities of other issuers, or acquire
"restricted" securities that, in the event of a resale, might be required
to be registered under the Securities Act of 1933;
5. Make margin purchases or short sales of securities;
6. Invest in companies for the purpose of management or the exercise of
control;
7. Lend money (but this restriction shall not prevent the Fund from investing
in debt securities or repurchase agreements, or lend its portfolio
securities);
8. Acquire or retain any security issued by a company, an officer or director
of which is an officer or director of the Company or an officer, director
or other affiliated person of the Adviser;
9. Invest in oil, gas or other mineral exploration or development programs,
although it may invest in marketable securities of companies engaged in
oil, gas or mineral exploration;
10. Purchase or sell real estate or real estate loans or real estate limited
partnerships, although it may invest in marketable securities of companies
that invest in real estate or interests in real estate;
11. Purchase warrants on securities;
12. Issue senior securities; or
13. Invest in commodities, or invest in futures or options on commodities.
Restrictions 1 through 13 listed above are fundamental policies, and may be
changed only with the approval of a "majority of the outstanding voting
securities" of the Fund as defined in the Investment Company Act of 1940.
The Fund has also adopted the following restrictions that may be changed by the
Board of Directors without shareholder approval:
The Fund may not:
a. Invest more than 25% of its assets (valued at time of investment) in
securities of issuers with less than three years' operation (including
predecessors);
b. Invest more than 15% of its net assets in securities that are not readily
marketable;
c. Acquire securities of other investment companies except (a) by purchase in
the open market, where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission and
(b) where acquisition results from a dividend or merger, consolidation or
other reorganization.
d. Pledge, mortgage or hypothecate its assets, except for temporary or
emergency purposes and then to an extent not greater than 5% of its total
assets at cost; or
e. Invest more than 10% of the Fund's assets (valued at time of investment) in
initial margin deposits of options or futures contracts.
16
<PAGE>
INVESTMENT ADVISER
Information on the Fund's Investment Adviser, Avalon Trust Company (the
"Adviser"), is set forth in the prospectus. This Section contains additional
information concerning the Adviser.
Investment Advisory Agreement.
-----------------------------
The Company has entered into an Investment Advisory Agreement with the Adviser.
Under the terms of the Advisory Agreement, the Adviser, manages the investment
operations of the Fund in accordance with the Fund's investment policies and
restrictions. The Adviser furnishes an investment program for the Fund,
determines what investments should be purchased, sold and held, and makes
changes on behalf of the Company in the investments of the Fund. At all times
the Adviser's actions on behalf of the Fund are subject to the overall
supervision and review of the Board of Directors of the Company. The fund's
initial shareholder approved the engagement of Adviser on December 11, 2000.
The Agreement provides that the Adviser shall not be liable for any loss
suffered by the Fund or its shareholders as a consequence of any act or omission
in connection with services under the Agreement, except by reason of the
Adviser's willful misfeasance, bad faith, gross negligence, or reckless
disregard of its obligations and duties under the Advisory Agreement.
The Agreement has a term of two years, but may be continued from year to year so
long as its continuance is approved at least annually:
(a) by the vote of a majority of the Directors of the Fund who are not
"interested persons" of the Fund or the adviser cast in person at a meeting
called for the purpose of voting on such approval, and
(b) by the Board of Directors as a whole or by the vote of a majority (as
defined in the 1940 Act) of the outstanding shares of the Fund.
The Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
Operating Services Agreement.
-----------------------------
The Company has also entered into an Operating Services Agreement with the
Adviser ("Services Agreement"). Under the terms of the Services Agreement, the
Adviser provides, OR ARRANGES TO PROVIDE, day-to-day operational services to the
Fund including, but not limited to;
1. accounting 6. custodial
2. administrative 7. fund share distribution
3. legal (except litigation) 8. shareholder reporting
4. dividend disbursing and transfer agent 9. sub-accounting, and
5. registrar 10. record keeping services
For its services to the Fund under this Agreement, the Fund pays to the Adviser
on the last day of each month, a fee equal to 1.00% of average net asset value
of the Fund, such fee to be computed daily based upon the net asset value of the
Fund.
Under the Services Agreement, the Adviser may, with the Company's permission,
employ third parties to assist it in performing the various services required of
the Fund. The Adviser is responsible for compensating such parties.
The Adviser, with the Company's consent, has entered into a Mutual Fund Services
Agreement with Unified Fund Services, Inc. ("Unified") to provide Transfer Agent
and essentially all administrative services for the Fund. The Adviser has also
entered into a Distribution Agreement with the Fund and Unified Financial
Securities, Inc. ("UFS") wherein UFS will act as principal underwriter for the
Fund's shares. All fees owed to Unified and USF are paid by the Adviser.
The effect of the Investment Advisory Agreement and the Operating Services
Agreement is to place a "cap" on the Fund's normal operating expenses at 1.50%.
The only other expenses incurred by the Fund are distribution (12b-1)fees,
brokerage fees, taxes, if any, legal fees relating to Fund litigation, and other
extraordinary expenses.
The Board of Directors of the Company has approved Codes of Ethics (the "Codes")
for the Company, the Adviser, and the Fund's principal underwriter. The Codes
govern the personal activities of persons who may have knowledge
17
<PAGE>
of the investment activities of the Funds ("Access Persons"), requires that they
file regular reports concerning their personal securities transactions, and
prohibits activities that might result in harm to the Fund. The Codes also place
significant restrictions on the ability of Access Persons to engage in personal
transactions in securities that are or may be purchased and sold by the Fund.
The Board is responsible for overseeing the implementation of and compliance
with the Codes. A copy of each Code has been filed with the Securities and
Exchange Commission ("SEC"). You can review and/or copy the Codes at the SEC's
Public Reference Room in Washington, DC, and information concerning the
operation of the Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. You may also find a copy of the Codes on the SEC's EDGAR
database at the SEC's web site (www.sec.gov ). Copies of the Codes can also be
obtained, after paying a duplicating fee, by electronic request
([email protected]), or by writing the SEC's Public Reference Section,
Washington, DC 20549-0102.
DIRECTORS AND OFFICERS
The Board Of Directors has overall responsibility for conduct of the Company's
affairs. The day-to-day operations of the Fund are managed by the Adviser,
subject to the bylaws of the Company and review by the Board of Directors. The
directors of the Company, including those directors who are also officers, are
listed below.
18
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Name, Date of Birth, Position(s) with Fund Principal Occupation for
Address and/or Company the Last Five Years
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Roger Decort* (07/23/39) President of Self-employed financial adviser since
6520 East Bar Z Lane Company, Chairman of 1987, serving high net worth
Paradise Valley, AZ 85253 Board of Directors, individuals. Chief Executive Officer
Director of Avalon Trust Company since 1998. In
1999, founded and currently serves as
Chief Executive Officer of Vancadia
Capital Corporation, Vancouver, British
Columbia, a Canadian Merchant Bank.
Ph.D., International Finance, Somerset
University, England (1983); M.A.,
American Graduate School of
International Management, Glendale, AZ
(1971); B.A., Thiel College,
Greenville, PA (1961). Retired
Commander, US Naval Reserves
(1961-1989).
--------------------------------------------------------------------------------------------------
Robert J. Nurock (05/25/37) Director Retired since 1999. From 1982 -- 1999
400 Wall Street, # 607 served as President, Market Strategist
Seattle, WA 98121 for Investor's Analysis, Inc., Santa Fe
New Mexico, an investment consultant
and advisory company offering
investment services to institutions and
individuals. Certified Market
Technician, Market Technicians
Association. Listed in Who's Who in
America and Who's Who in Finance and
Industry. Frequent speaker and guest
commentator, both in print and on
television. Has over 26 years
experience in the investment industry.
--------------------------------------------------------------------------------------------------
Earl H. Douple, Jr. (09/27/49) Director 1985- Present; Treasurer and Business
P.O. Box 24 Manager of Canopy, Inc., The Plains,
The Plains, VA 20198 VA, a financial consulting firm.
Formerly Managing Partner, Smothers &
Douple Law Firm, Washington, DC. MBA
in Finance, The Colgate Darden
Graduate School of Business
Administration, University of Virginia
(1985); LLM in Administrative Law,
Georgetown University, Washington, DC
(1976); Juris Doctorate, Dickinson
School of Law, Carlisle, PA (1974);
AB in Economics, Dickinson College,
Carlisle, PA (1971)
--------------------------------------------------------------------------------------------------
</TABLE>
* Indicates an "interested person" as defined in the Investment Company Act of
1940.
The table below sets forth the compensation anticipated to be paid by the
Corporation to each of the directors of the Corporation during the fiscal year
ending November 30, 2001.
Name of Director Compensation Pension Annual Total Compensation
from Corp Benefits Benefits Paid to Director
--------------------------------------------------------------------------------
Roger Decort $0.00 $0.00 $0.00 $0.00
Robert J. Nurock $2,000.00 $0.00 $0.00 $2,000.00
Earl H. Douple $2,000.00 $0.00 $0.00 $2,000.00
As of December 11, 2000, the following persons owned more than 5% of the Fund's
outstanding shares.
19
<PAGE>
Name & Address Number of Fund Shares Percentage of Fund
Of Shareholder Owned Total Net Assets
--------------------------------------------------------------------------------
Andrea B. Currier, an individual 10,000 100.00%
The Plains, VA
The Company will call a meeting of shareholders for the purpose of voting upon
the question of removal of a director or directors when requested in writing to
do so by record holders of at least 10% of the Fund's outstanding common shares.
The Corporation's bylaws contain procedures for the removal of directors by its
stockholders. At any meeting of stockholders, duly called and at which a quorum
is present, the stockholders may by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any director or
directors from office and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of the removed directors.
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return" for a
period is the percentage change in value during the period of an investment in
Fund shares, including the value of shares acquired through reinvestment of all
dividends and capital gains distributions. "Average Annual Total Return" is the
average annual compounded rate of change in value represented by the Total
Return Percentage for the period.
[n]
Average Annual Total Return is computed as follows: P(1+T) = ERV
Where: P = a hypothetical initial investment of $1000]
T = average annual total return
n = number of years
ERV = ending redeemable value of shares at the end of the period
Yield. The Fund may advertise performance in terms of a 30-day yield quotation.
The 30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
6
Yield = 2[(a-b/cd + 1) - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that they were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
The Fund's performance is a function of conditions in the securities markets,
portfolio management, and operating expenses. Although information such as that
shown above is useful in reviewing the Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
In sales literature, the Fund's performance may be compared with that of market
indices and other mutual funds. In addition to the above computations, the Fund
might use comparative performance as computed in a ranking determined by Lipper
Analytical Services, Morningstar, Inc., or that of another service.
PURCHASING AND REDEEMING SHARES
Redemptions will be made at net asset value. The Fund's net asset value is
determined on days on which the New York Stock Exchange is open for trading. For
purposes of computing the net asset value of a share of the Fund, securities
traded on security exchanges, or in the over-the-counter market in which
transaction prices are reported, are valued at the last sales price at the time
of valuation or, lacking any reported sales on that day, at the most recent bid
quotations. Securities for which quotations are not available and any other
assets are valued at a fair market value as determined in
20
<PAGE>
good faith by the Adviser, subject to the review and supervision of the board of
directors. The price per share for a purchase order or redemption request is the
net asset value next determined after receipt of the order.
The Fund is open for business on each day that the New York Stock Exchange
("NYSE") is open. The Fund's share price or net asset value per share ("NAV") is
normally determined as of 4:00 p.m., New York time. The Fund's share price is
calculated by subtracting its liabilities from the closing fair market value of
its total assets and dividing the result by the total number of shares
outstanding on that day. Fund liabilities include accrued expenses and dividends
payable, and its total assets include the market value of the portfolio
securities as well as income accrued but not yet received. Since the Fund
generally does not charge sales or redemption fees, the NAV is the offering
price for shares of the Fund. For shares redeemed prior to being held for at
least six months, the redemption value is the NAV less a service fee equal to
0.50% of the NAV.
TAX INFORMATION
The Fund intends to qualify as a regulated investment company under SubChapter M
of the Internal Revenue Code so as to be relieved of federal income tax on its
capital gains and net investment income currently distributed to its
shareholders. To qualify as a regulated investment company, the Fund must, among
other things, derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities, or other income derived with respect to its
business of investing in such stock or securities.
If the Fund qualifies as a regulated investment company and distributes at least
90% of its net investment income, the Fund will not be subject to Federal income
tax on the income so distributed. However, the Fund would be subject to
corporate income tax on any undistributed income other than tax-exempt income
from municipal securities.
The Fund intends to distribute to shareholders, at least annually, substantially
all net investment income and any net capital gains realized from sales of the
Fund's portfolio securities. Dividends from net investment income and
distributions from any net realized capital gains are reinvested in additional
shares of the Fund unless the shareholder has requested in writing to have them
paid by check.
Dividends from investment income and net short-term capital gains are generally
taxable to the shareholder as ordinary income. Distributions of long-term
capital gains are taxable as long-term capital gains regardless of the length of
time shares in the Fund have been held. Distributions are taxable, whether
received in cash or reinvested in shares of the Fund.
Each shareholder is advised annually of the source of distributions for federal
income tax purposes. A shareholder who is not subject to federal income tax will
not be required to pay tax on distributions received.
If shares are purchased shortly before a record date for a distribution, the
shareholder will, in effect, receive a return of a portion of his investment,
but the distribution will be taxable to him even if the net asset value of the
shares is reduced below the shareholder's cost. However, for federal income tax
purposes the original cost would continue as the tax basis.
If a shareholder fails to furnish his social security or other tax
identification number or to certify properly that it is correct, the Fund may be
required to withhold federal income tax at the rate of 31% (backup withholding)
from dividend, capital gain and redemption payments to him. Dividend and capital
gain payments may also be subject to backup withholding if the shareholder fails
to certify properly that he is not subject to backup withholding due to the
under-reporting of certain income.
Taxation of the Shareholder. Taxable distributions generally are included in a
shareholder's gross income for the taxable year in which they are received.
However, dividends declared in October, November and December and made payable
to shareholders of record in such month will be deemed to have been received on
December 31st if paid by the Fund during the following January.
Distributions by the Fund will result in a reduction in the fair market value of
the Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution would be taxable to the shareholder
as
21
<PAGE>
ordinary income or as a long-term capital gain, even though, from an investment
standpoint, it may constitute a partial return of capital. In particular,
investors should be careful to consider the tax implications of buying shares of
the Fund just prior to a distribution. The price of such shares include the
amount of any forthcoming distribution so that those investors may receive a
return of investment upon distribution which will, nevertheless, be taxable to
them.
A redemption of shares is a taxable event and, accordingly, a capital gain or
loss may be recognized. Each investor should consult a tax Adviser regarding the
effect of federal, state, local, and foreign taxes on an investment in the Fund.
Dividends. A portion of the Fund's income may qualify for the dividends-received
deduction available to corporate shareholders to the extent that the Fund's
income is derived from qualifying dividends. Because the Fund may earn other
types of income, such as interest, income from securities loans, non-qualifying
dividends, and short-term capital gains, the percentage of dividends from the
Fund that qualifies for the deduction generally will be less than 100%. The Fund
will notify corporate shareholders annually of the percentage of Fund dividends
that qualifies for the dividend received deductions.
A portion of the Fund's dividends derived from certain U.S. Government
obligations may be exempt from state and local taxation. Short-term capital
gains are distributed as dividend income. The Fund will send each shareholder a
notice in January describing the tax status of dividends and capital gain
distributions for the prior year.
Capital Gain Distribution. Long-term capital gains earned by the Fund from the
sale of securities and distributed to shareholders are federally taxable as
long-term capital gains, regardless of the length of time shareholders have held
their shares. If a shareholder receives a long-term capital gain distribution on
shares of the Fund, and such shares are held six months or less and are sold at
a loss, the portion of the loss equal to the amount of the long-term capital
gain distribution will be considered a long-term loss for tax purposes.
Short-term capital gains distributed by the Fund are taxable to shareholders as
dividends, not as capital gains.
PORTFOLIO TRANSACTIONS
The Fund will generally purchase and sell securities without regard to the
length of time the security has been held. Accordingly, it can be expected that
the rate of portfolio turnover may be substantial. The Fund expects that its
annual portfolio turnover rate will not exceed 75% under normal conditions.
However, there can be no assurance that the Fund will not exceed this rate, and
the portfolio turnover rate may vary from year to year.
High portfolio turnover in any year will result in the payment by the Fund of
above-average transaction costs and could result in the payment by shareholders
of above-average amounts of taxes on realized investment gains. Distributions to
shareholders of such investment gains, to the extent they consist of short-term
capital gains, will be considered ordinary income for federal income tax
purposes.
Decisions to buy and sell securities for the Fund are made by the Adviser
subject to review by the Corporation's Board of Directors. In placing purchase
and sale orders for portfolio securities for the Fund, it is the policy of the
Adviser to seek the best execution of orders at the most favorable price. In
selecting brokers to effect portfolio transactions, the determination of what is
expected to result in the best execution at the most favorable price involves a
number of largely judgmental considerations. Among these are the Adviser's
evaluation of the broker's efficiency in executing and clearing transactions.
Over-the-counter securities are generally purchased and sold directly with
principal market makers who retain the difference in their cost in the security
and its selling price. In some instances, the Adviser feels that better prices
are available from non-principal market makers who are paid commissions
directly.
CUSTODIAN
UMB Bank, 928 Grand Blvd., 10th Floor, Kansas City, Missouri 64106, acts as
custodian for the Fund. As such, UMB Bank holds all securities and cash of the
Fund, delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments and performs other
duties, all as directed by officers of the Company. UMB does not exercise any
supervisory function over management of the Fund, the purchase and sale of
securities or the payment of distributions to shareholders. All fees charged by
UMB are paid by the Adviser.
22
<PAGE>
TRANSFER AGENT
Unified Fund Services, Inc. ("Unified"), 431 North Pennsylvania Street,
Indianapolis, Indiana 46204, acts as transfer, dividend disbursing, and
shareholder servicing agent for the Fund pursuant to a written agreement with
the Company and the Adviser. Under the agreement, Unified is responsible for
administering and performing transfer agent functions, dividend distribution,
shareholder administration, and maintaining necessary records in accordance with
applicable rules and regulations.
For the services to be rendered as transfer agent, The Adviser pays Unified an
annual fee, paid monthly, based on the average net assets of the Fund, as
determined by valuations made as of the close of each business day of the month.
ADMINISTRATION
Unified also acts as Administrator to the Fund pursuant to a written agreement
with the Company and Adviser. The Administrator supervises all aspects of the
operations of the Fund except those performed by the Fund's investment Adviser
under the Fund's investment advisory agreement. The Administrator is responsible
for:
(a) calculating the Fund's net asset value
(b) preparing and maintaining the books and accounts specified in Rule 31a-1
and 31a-2 of the Investment Company Act of 1940
(c) preparing financial statements contained in reports to stockholders of the
Fund
(d) preparing the Fund's federal and state tax returns
(e) preparing reports and filings with the Securities and Exchange Commission
(f) preparing filings with state Blue Sky authorities
(g) maintaining the Fund's financial accounts and records
For the services to be rendered as Administrator, The Adviser pays Unified an
annual fee, paid monthly, based on the average net assets of the Fund, as
determined by valuations made as of the close of each business day of the month.
PRINCIPAL UNDERWRITER
Unified Financial Securities, Inc. ("UFS"), 431 North Pennsylvania Street,
Indianapolis, Indiana 46204, acts as principal underwriter for the Company. The
purpose of acting as an underwriter is to facilitate the registration of the
Funds' shares under state securities laws and to assist in the sale of shares.
UFS is an affiliated company of the Fund's Transfer Agent, Unifed Fund Services,
Inc. UFS is compensated by the Adviser for its services to the Company under a
written agreement for such services.
INDEPENDENT ACCOUNTANTS
McCurdy & Associates, CPA's, Inc., 27955 Clemens Road, Westlake, Ohio, 44145
will serve as the Company's independent auditors for its fiscal year ending
November 30, 2001.
LEGAL COUNSEL
David Jones & Assoc., P.C., 4747 Research Forest Drive, Suite 180, # 303, The
Woodlands, TX 77381, has passed on certain matters relating to this Registration
Statement and acts as counsel to the Company.
DISTRIBUTION PLAN
As noted in the Fund's Prospectus, the Fund has adopted a plan pursuant to Rule
12b-1 under the 1940 Act (collectively, the "Plan") whereby the Fund may pay up
to a maximum of 0.25% per annum of the Fund's average daily net assets to the
Adviser, Distributor, dealers and others, for providing personal service and/or
maintaining shareholder accounts relating to the distribution of the Fund's
shares. The fees are paid on a monthly basis, based on the Fund's average daily
net assets attributable to each class of shares.
23
<PAGE>
Pursuant to the Plan, the Adviser is paid a fee each month (up to the maximum of
0.25% per annum of average net assets of each share class) for expenses incurred
in the distribution and promotion of the Fund's shares, including but not
limited to, printing of prospectuses and reports used for sales purposes,
preparation and printing of sales literature and related expenses,
advertisements, and other distribution-related expenses as well as any
distribution or service fees paid to securities dealers or others who have
executed a dealer agreement with the underwriter. Any expense of distribution in
excess of 0.25% per annum will be borne by the Adviser without any additional
payments by the Fund. You should be aware that it is possible that Plan accruals
will exceed the actual expenditures by the Adviser for eligible services.
Accordingly, such fees are not strictly tied to the provision of such services.
The Plan also provides that to the extent that the Fund, the Adviser, or other
parties on behalf of the Fund, or the Adviser make payments that are deemed to
be payments for the financing of any activity primarily intended to result in
the sale of shares issued by the Fund within the context of Rule 12b-1, such
payments shall be deemed to be made pursuant to the Plan. In no event shall the
payments made under the Plan, plus any other payments deemed to be made pursuant
to the Plan, exceed the amount permitted to be paid pursuant to the Conduct
Rules of the National Association of Securities Dealers, Inc., Article III,
Section 26(d)(4).
The Board of Directors has determined that a consistent cash flow resulting from
the sale of new shares is necessary and appropriate to meet redemptions and to
take advantage of buying opportunities without having to make unwarranted
liquidations of portfolio securities. The Board therefore believes that it will
likely benefit the Fund to have monies available for the direct distribution
activities of the Adviser in promoting the sale of the Fund's shares, and to
avoid any uncertainties as to whether other payments constitute distribution
expenses on behalf of the Fund. The Board of Directors, including the non-
interested Directors, has concluded that in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plans will benefit the Fund and its shareholders.
The Plan has been approved by the Funds' Board of Directors, including all of
the Directors who are non-interested persons as defined in the 1940 Act, and by
the Fund's sole shareholder. The Plan must be renewed annually by the Board of
Directors, including a majority of the Directors who are non-interested persons
of the Fund and who have no direct or indirect financial interest in the
operation of the Plans. The votes must be cast in person at a meeting called for
that purpose. It is also required that the selection and nomination of such
Directors be done by the non-interested Directors. The Plans and any related
agreements may be terminated at any time, without any penalty: 1) by vote of a
majority of the non-interested Directors on not more than 60 days' written
notice, 2) by the Adviser on not more than 60 days' written notice, 3) by vote
of a majority of the Fund's outstanding shares, on 60 days' written notice, and
4) automatically by any act that terminates the Advisory Agreement with the
Adviser. The Adviser or any dealer or other firm may also terminate their
respective agreements at any time upon written notice.
The Plan and any related agreements may not be amended to increase materially
the amounts to be spent for distribution expenses without approval by a majority
of the Fund's outstanding shares, and all material amendments to the Plan or any
related agreements shall be approved by a vote of the non-interested Directors,
cast in person at a meeting called for the purpose of voting on any such
amendment.
The Adviser is required to report in writing to the Board of Directors of the
Fund, at least quarterly, on the amounts and purpose of any payment made under
the Plans, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the Plans should be continued.
24
<PAGE>
FINANCIAL STATEMENTS
AVALON FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 11, 2000
Education Fund
ASSETS:
Cash in Bank $ 100,000
------------
Total Assets $ 100,000
LIABILITIES: $ 0
------------
Total Liabilities $ 0
------------
NET ASSETS $ 100,000
------------
NET ASSETS CONSIST OF:
Capital Paid In $ 100,000
------------
OUTSTANDING SHARES 10,000
NET ASSET VALUE PER SHARE $ 10.00
OFFERING PRICE PER SHARE $ 10.00
See Accountants' Audit Report
25
<PAGE>
AVALON FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 11, 2000
1. ORGANIZATION
Avalon Funds, Inc. (the "Company"), an open-end management investment
company, was incorporated in Maryland on July 16, 1998 under the name
Hughes Funds, Inc. The affairs of the Company are managed by a Board of
Directors, which approves all significant agreements between the Company
and the persons and companies that furnish services to the Fund, including
agreements with the Fund's custodian, transfer agent, investment Adviser
and administrator. All such agreements are subject to limitations imposed
by state and/or federal securities laws, and to the extent that any such
contract may contradict such statutes, the contract would be unenforceable.
The day-to-day operations of the Fund are delegated to the Adviser. On
December 1, 2000, the Board of Directors of the Company approved a change
in the Company's name to Avalon Funds, Inc., nominated a new slate of
directors, approved a new investment advisory agreement with Avalon Trust
Company, approved significant changes to the Hughes Health Care Fund (now
called the Education Fund), and approved new service agreements with a
number of service providers. On December 11, 2000, the Company's sole
shareholder approved the newly nominated directors, approved the new
investment advisory agreement with Avalon Trust Company, and approved the
Company's Plan of Distribution Pursuant to Rule 12b-1.
The Company's Articles of Incorporation permit the Board of Directors to
issue 500,000,000 shares of common stock. The Board of Directors has the
power to designate one or more series ("funds") of shares of common stock
and to classify or reclassify any unissued shares with respect to such
series. Currently, the Company has registered the following funds:
The Hughes Value Fund
The Hughes Growth Fund
The Hughes Market Neutral Fund
The Hughes Technology Fund
The Hughes Health Care Fund (now the Education Fund)
The Hughes Financial Services Fund
Only the Fund's shares are currently being offered by the Company. Shares
of the Value, Growth and Market Neutral Funds previously have been offered
by the Company, but none of those funds currently have shareholders, they
are not currently offered to the public, and the newly appointed board is
expected to reclassify those shares in the near future.
The Company is also authorized to designate classes of shares within each
series. The Company has designated four classes of shares; (1) a No-Load
Class that sold to the public without any front or back-end sales loads or
charges (the Education Fund will charge a redemption fee of 0.5% of the
value of the redemption if shares are redeemed less than 6 months after
purchasing them); (2) Class A shares which are sold to the public with a
front-end sales charge; (3) Class B shares which are sold to the public
with a contingent deferred sales charge ("CDSC") which declines to zero
over a period of years; and (4) Class C shares which are sold with a 1%
CDSC which terminates after thirteen months and an ongoing additional
service and distribution fee. Shareholders of each share class are
entitled: (i) to one vote per full share; (ii) to such distributions as may
be declared by the Company's Board of Directors out of funds legally
available; and (iii) upon liquidation, to participate ratably in the assets
available for distribution. There are no conversion or sinking fund
provisions applicable to the shares, and the holders have no preemptive
rights and may not cumulate their votes in the election of directors. The
shares are redeemable and are fully transferable. All shares issued and
sold by the Fund will be fully paid and nonassessable. Matters of general
interest to the shareholders are voted upon by all shareholders; matters
applicable to a class of shareholders are voted upon only by the holders of
that share class.
The primary investment objective of the Fund is to achieve capital growth
while supporting the enhancement of educational opportunities.
26
<PAGE>
2. RELATED PARTY TRANSACTIONS
As of December 11, 2000, all of the outstanding shares of the Fund were
owned by Andrea B. Currier. A shareholder who beneficially owns, directly
or indirectly, more than 25% of the Fund's voting securities may be deemed
a "control person" (as defined in the 1940 Act) of the Fund.
Avalon Trust Company, the Fund's investment adviser, is registered as an
investment adviser under the Investment Advisers Act of 1940. Certain
directors and officers of Avalon Funds, Inc. are also directors and
officers of Avalon Trust Company.
For its investment advisory services to the Fund, the Fund pays to the
Adviser, on the last day of each month, an annualized fee equal to 0.50% of
the average net assets of the Fund, such fee to be computed daily based
upon the daily average net assets of the Fund.
The Company has also entered into an Operating Services Agreement with the
Adviser ("Services Agreement"). Under the terms of the Services Agreement,
the Adviser provides, OR ARRANGES TO PROVIDE, day-to-day operational
services to the Fund including, but not limited to;
1. accounting 6. custodial
2. administrative 7. fund share distribution
3. legal (except litigation) 8. shareholder reporting
4. dividend disbursing and transfer agent 9. sub-accounting, and
5. registrar 10. record keeping services
For its services to the Fund under this Agreement, the Fund pays to the
Adviser on the last day of each month, a fee equal to 1.00% of average net
asset value of the Fund, such fee to be computed daily based upon the net
asset value of the Fund.
Under the Services Agreement, the Adviser may, with the Company's
permission, employ third parties to assist it in performing the various
services required of the Fund. The Adviser is responsible for compensating
such parties.
The Adviser, with the Company's consent, has entered into a Mutual Fund
Services Agreement with Unified Fund Services, Inc. ("Unified") to provide
Transfer Agent and essentially all administrative services for the Fund.
The Adviser has also entered into a Distribution Agreement with the Fund
and Unified Financial
27
<PAGE>
Securities, Inc. ("UFS") wherein UFS will act as principal underwriter for
the Fund's shares. All fees owed to Unified and USF are paid by the
Adviser.
The effect of the Investment Advisory Agreement and the Operating Services
Agreement is to place a "cap" on the Fund's normal operating expenses at
1.50%. The only other expenses incurred by the Fund are distribution
(12b-1) fees, brokerage fees, taxes, if any, legal fees relating to Fund
litigation and other extraordinary expenses.
3. DISTRIBUTION PLAN
As noted in the Fund's Prospectus, the Fund has adopted a plan pursuant to
Rule 12b-1 under the 1940 Act (collectively, the "Plan") whereby the Fund
may pay up to a maximum of 0.25% per annum of the Fund's average daily net
assets to the Adviser, Distributor, dealers and others, for providing
personal service and/or maintaining shareholder accounts relating to the
distribution of the Fund's shares. The fees are paid on a monthly basis,
based on the Fund's average daily net assets attributable to each class of
shares.
Pursuant to the Plan, the Adviser is paid a fee each month (up to the
maximum of 0.25% per annum of average net assets of each share class) for
expenses incurred in the distribution and promotion of the Fund's shares,
including but not limited to, printing of prospectuses and reports used for
sales purposes, preparation and printing of sales literature and related
expenses, advertisements, and other distribution-related expenses as well
as any distribution or service fees paid to securities dealers or others
who have executed a dealer agreement with the underwriter. Any expense of
distribution in excess of 0.25% per annum will be borne by the Adviser
without any additional payments by the Fund. You should be aware that it is
possible that Plan accruals will exceed the actual expenditures by the
Adviser for eligible services. Accordingly, such fees are not strictly tied
to the provision of such services.
4. CAPITAL STOCK AND DISTRIBUTION
At December 11, 2000 paid in capital amounted to $100,000 for the Education
Fund. Transactions in capital stock were as follows:
No-Load Shares Sold:
Education Fund 10,000
No-Load Shares Redeemed:
Education Fund 0
------------
Net Increase:
Education Fund 10,000
------------
No-Load Shares Outstanding:
Education Fund 10,000
------------
--------------------------------------------------------------------------------
28
<PAGE>
OPINION OF MCCURDY & ASSOCIATES CPA'S, INC.
To The Shareholders and Directors
Avalon Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of Avalon
Funds, Inc. (comprised of the Education Fund) as of December 11, 2000. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. Our procedures included
confirmation of cash held by the custodian as of December 11, 2000, by
correspondence with the custodian. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the
Education Fund as of December 11, 2000, in conformity with generally accepted
accounting principles.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
December 11, 2000
29
<PAGE>
PART C
OTHER INFORMATION
ITEM 23 EXHIBITS
(a) Articles of Incorporation.
--------------------------
1. Articles of Incorporation of Hughes Funds, Inc., dated July 16, 1998-
Filed as Exhibit 23A to pre-effective amendment # 1, filed on August
26, 1998, and incorporated herein by reference.
2. Amended and Restated Articles of Incorporation of Avalon Funds, Inc.-
Attached herein as Exhibit 23A.
(b) Bylaws of Registrant.
---------------------
1. By-Laws of Hughes Funds, Inc.- Filed as Exhibit 23B to pre-effective
amendment # 1, filed on August 26, 1998, and incorporated herein by
reference.
2. By-Laws of Avalon Funds, Inc., dated December 1, 2000- attached herein
as Exhibit 23B.
(c) Instruments Defining Rights of Shareholders
-------------------------------------------
[Not Applicable]
(d) Investment Advisory Agreements.
-------------------------------
1. Investment Advisory Agreement between Hughes Funds, Inc. and Hughes
Investment Advisors, LLC- Filed as Exhibit 23D to pre-effective
amendment # 1, filed on August 26, 1998, and incorporated herein by
reference.
2. Investment Advisory Agreement between Registrant and Avalon Trust
Company- attached herein as Exhibit 23D.
(e) Underwriting Contracts.
-----------------------
1. Distribution Agreement between Registrant, Avalon Trust Company and
Unified Financial Securities, Inc.- attached herein as Exhibit 23E.
(f) Bonus or Profit-Sharing Contracts.
----------------------------------
None [Not Applicable]
(g) Custodian Agreement.
--------------------
1. Custodian Agreement between Hughes Funds, Inc., Hughes Investment
Advisors, LLC and UMB Bank, Kansas City- Filed as Exhibit 23G to
pre-effective amendment # 3, filed on September 30, 1998, and
incorporated herein by reference.
2. Custodian Agreement between Registrant, Avalon Trust Company and UMB
Bank, Kansas City- attached herein as exhibit 23G.
(h) Other Material Contracts.
-------------------------
1. Operating Services Agreement between Hughes Funds, Inc. and Hughes
Investment Advisors, LLC- Filed as Exhibit 23H(1) to pre-effective
amendment # 1, filed on August 26, 1998, and incorporated herein by
reference.
2. Operating Services Agreement between Registrant and Avalon Trust
Company- attached herein as Exhibit 23H(1).
3. Investment Company Services Agreement between Hughes Funds, Inc.,
Hughes Investment Advisors, LLC and Mutual Shareholder Services, LLC-
Filed as Exhibit 23H(2) to pre-effective amendment # 1, filed on
August 26, 1998, and incorporated herein by reference.
4. Mutual Fund Services Agreement between Registrant, Avalon Trust
Company and Unified Fund Services, Inc.- attached herein as Exhibit
23H(2).
5. Agreement and Plan of Succession between Hughes Funds, Inc. and Avalon
Trust Company- attached herein as Exhibit 23H(3).
6. Asset Purchase Agreement between Hughes Investment Advisors, LLC and
Avalon Trust Company- attached as Exhibit 23H(4).
<PAGE>
(i) Opinion of Counsel.
-------------------
1. Opinion of David Jones & Assoc., P.C.- attached herein as Exhibit 23I.
(j) Other Opinions.
---------------
1. Opinion and Consent of McCurdy & Associates CPA's, Inc.- attached
herein as Exhibit 23J.
(k) Omitted Financial Statements
----------------------------
1. None- Reference is made to Part B, containing audited financial
statements of Registrant, dated December 11, 2000.
(l) Initial Capital Agreements.
---------------------------
1. Subscription Agreement for shares of the Education Fund between
Registrant and Andrea B. Currier- attached as Exhibit 23L.
(m) Rule 12b-1 Plans.
-----------------
1. Plan of Distribution Pursuant to Rule 12b-1 for No-Load Shares-
attached herein as Exhibit 23M(1)
(n) Financial Data Schedule.
------------------------
1. None [Not Applicable]
(o) Rule 18f-3 Plan.
----------------
1. None [Not Applicable]
(p) Codes of Ethics.
----------------
1. Code of Ethics of Registrant and Avalon Trust Company- attached as
Exhibit 23P
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is directly or indirectly controlled by, or under common
control with the Registrant.
ITEM 25 INDEMNIFICATION.
Section 2-418 of the General Corporation Law of Maryland authorizes
the registrant to indemnify its directors and officers under specified
circumstances. Section 7 of Article VII of the bylaws of the
registrant (exhibit 2 to the registration statement, which is
incorporated herein by reference) provides in effect that the
registrant shall provide certain indemnification to its directors and
officers. In accordance with section 17(h) of the Investment Company
Act, this provision of the bylaws shall not protect any person against
any liability to the registrant or its shareholders to which he or she
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.
ITEM 26 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser, Avalon Trust Company, is a state chartered trust company
organized and regulated under the laws of the state of New Mexico. In
addition to serving as investment adviser to The Education Fund, the
Adviser offers a full range of trust services to individuals,
families, companies and institutions.
ITEM 27 PRINCIPAL UNDERWRITERS.
Unified Financial Securities, Inc.
431 North Pennsylvania Street
Indianapolis, Indiana 46204
<PAGE>
ITEM 28 LOCATION OF ACCOUNTS AND RECORDS.
Unified Fund Services, Inc.
431 North Pennsylvania Street
Indianapolis, Indiana 46204
Avalon Trust Company
125 Lincoln Avenue, Suite 100
Santa Fe, New Mexico 87501-2052
ITEM 29 MANAGEMENT SERVICES.
Unified Fund Services, Inc.
431 North Pennsylvania Street
Indianapolis, Indiana 46204
ITEM 30 UNDERTAKINGS.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of this post-effective amendment # 4 to its
Registration Statement pursuant to Rule 485(a) under the Securities Act of 1933
and has duly caused this post-effective amendment # 4 to its Registration
Statement on Form N1-A to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Santa Fe and State of New Mexico on the 10th day
of January, 2001.
AVALON FUNDS, INC.
(Registrant)
/s/ Roger Decort
-----------------
By: ROGER DECORT
Its: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Name Title Date
--------------------------------------------------------------------------------
/s/ Roger Decort President, Director, Chairman January 10, 2001
----------------------------
ROGER DECORT
/s/ Clark H. Woolley Treasurer January 10, 2001
----------------------------
CLARK H. WOOLLEY
/s/ Julia P. Harvold, Esq. Secretary January 10, 2001
----------------------------
JULIA P. HARVOLD, ESQ.
/s/ Earl H. Douple, Jr. Director January 10, 2001
----------------------------
EARL H. DOUPLE, JR.
/s/ Robert J. Nurock Director January 10, 2001
----------------------------
ROBERT J. NUROCK
<PAGE>
EXHIBIT INDEX
Exhibit 23A- Amended and Restated Articles of Incorporation of Avalon
Funds, Inc.
Exhibit 23B- By-Laws of Avalon Funds, Inc.
Exhibit 23D- Investment Advisory Agreement Between Registrant and Avalon
Trust Company.
Exhibit 23E- Distribution Agreement Between Registrant, Avalon Trust
Company and Unified Financial Securities, Inc.
Exhibit 23G- Custodian Agreement Between Registrant, Avalon Trust Company
and UMB Bank, Kansas City.
Exhibit 23H(1)- Operating Services Agreement Between Registrant and Avalon
Trust Company.
Exhibit 23H(2)- Mutual Fund Services Agreement Between Registrant, Avalon
Trust Company and Unified Fund Services, Inc.
Exhibit 23H(3)- Agreement and Plan of Succession between Hughes Funds, Inc.
and Avalon Trust Company.
Exhibit 23H(4)- Asset Purchase Agreement Between Hughes Investment Advisors
and Avalon Trust Company.
Exhibit 23I- Opinion and Consent of David Jones & Assoc., P.C.
Exhibit 23J- Opinion and Consent of McCurdy & Associates CPA's, Inc.
Exhibit 23L- Subscription Agreement For Shares of The Education Fund
Between Registrant and Andrea B. Currier.
Exhibit 23M- Plan of Distribution Pursuant to Rule 12b-1 For No-Load
Shares.
Exhibit 23P(1)- Code of Ethics for Registrant and Avalon Trust Company.
--------------------------------------------------------------------------------
