U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No.
Post-Effective Amendment No.
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No.
(Check appropriate box or boxes)
The Avalon Fund of Ann Arbor, Inc.
--------------------------------------------
(Exact Name of Registrant as Specified in Charter)
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
-------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (800) 355-3553 #112
Terence P. Smith
The Declaration Group
555 North Lane, Suite 6160
Conshohocken, PA 19428
-----------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
Registrant hereby declares its intention to register and indefinite number of
shares of beneficial interest pursuant to Rule 24f-2 under the Investment
Company Act of 1940.
The Registrant hereby amends this Registration Statement on such date of dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration State shall become effective on
such date as the Commission acting pursuant to said Section 8(a) may determine.
<PAGE>
THE AVALON FUND OF ANN ARBOR, INC.
Cross-Reference Sheet Pursuant to Rule 495(a)
PART A PROSPECTUS
- ------ ----------
FORM ITEM CROSS-REFERENCE
- ---- ---- ---------------
Item 1. Cover Page
Item 2. Synopsis
Item 3. Condensed Financial Information
Item 4. General Description of Registrant
Item 5. Management of the Fund
Item 5A. Management's Discussion of Fund Performance
Item 6. Capital Stock and Distributions, Other Securities
Item 7. Purchase of Securities Being Offered
Item 8. Redemption or Repurchase of Securities Being Offered
Item 9. Pending Legal Proceedings (None)
PART B STATEMENT OF ADDITIONAL INFORMATION
- ------ -----------------------------------
FORM ITEM CROSS REFERENCE
- ---- ---- ---------------
Item 10. Cover Page
Item 11. Table of Contents
Item 12. General Information and History
Item 13. Investment Objectives and Policies
Item 14. Management of the Fund
Item 15. Control Persons and Principal Holders of Securities
Item 16. Investment Advisory and Other Services Transfer Agent and Administrator
Item 17. Brokerage Allocation (Portfolio Transactions)
Item 18. Capital stock and Other Securities
Item 19. Purchase, Redemption and Pricing of Securities Being Offered
Item 20. Tax Status
Item 21. Underwriters
Item 22. Calculation of Performance Data
Item 23. Financial Statements*
* to be filed by Amendment
<PAGE>
THE AVALON CAPITAL APPRECIATION FUND
A Series of The Avalon Fund of Ann Arbor, Inc.
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
1-800- __________
(Information, Shareholder Services and Requests)
PROSPECTUS
July 15, 1998
The Avalon Fund of Ann Arbor, Inc. (the "Company") is a newly organized,
diversified open-end management investment company that currently consists of
one portfolio, The Avalon Capital Appreciation Fund (the "Fund"). The Fund's
objective is long-term growth through capital appreciation. The Fund seeks to
achieve its objective by primarily investing in the common stock of companies
that are traded on the New York Stock Exchange ("NYSE"), American Stock Exchange
("ASE") and the NASDAQ. Questar Capital Corporation is the Fund's Manager and
Investment Adviser ("Manager" or "Adviser")
This prospectus covers the offering of Class A (sold subject to an initial sales
charge of 5.75%) shares of the Funds.
This Prospectus concisely sets forth information you ought to know before
investing and should be retained for future reference. A Statement of Additional
Information has been filed with the United States Securities and Exchange
Commission (the "SEC") dated July 15, 1998, which is incorporated herein by
reference and can be obtained without charge by calling the Fund at the phone
number listed above. The SEC maintains a Web Site (http://www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference, and other information regarding registrants that file material
electronically with the SEC.
This Prospectus does not constitute an offering by the Fund in any jurisdiction
in which such offering may not lawfully be made.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE U. S. SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Summary of Fees and Expenses ........................................
The Fund ............................................................
Investment Objectives and Policies ..................................
Risks ...............................................................
Performance Information .............................................
Management of the Fund ..............................................
Valuing Fund Shares .................................................
How to Purchase Shares ..............................................
Additional Information About Purchases...............................
How to Redeem Shares ................................................
Small Accounts ......................................................
Shareholder Services ................................................
Distributions and Taxes .............................................
General Information .................................................
<PAGE>
SUMMARY OF FEES AND EXPENSES
The following summary is provided to assist you in understanding the various
costs and expenses a shareholder in the Fund could bear directly and indirectly.
Annual operating expenses are shown as a percentage of average daily net assets.
Because shares of the Fund were not offered prior to the date of this
prospectus, annual operating expenses of the Fund are based on estimated
expenses. Shareholder transaction expenses for the Fund are expressed as a
percentage of the public offering price, cost per transaction or as otherwise
noted. This Example should not be considered a representation of future Fund
performance or expenses, both of which may vary.
Shareholder Transaction Expenses
Maximum sales charge on purchases 5.75%
Maximum deferred sales charge imposed on redemption 0.00%
Maximum sales charge imposed on dividend reinvestment 0.00%
Redemption Fees 0.00%
Account Closing Fee $10.00
Annual Fund Operating Expenses (as a percentage of average net assets)
Investment Advisory Fee 1.00%
Operating Services Fee 1.95%
-----
Total Estimated Fund Operating Expenses 2.95%
=====
The Manager has voluntarily agreed to limit Total Operating Expenses of the Fund
to ensure the Fund's expenses do not exceed the designated maximum amount shown
above. See "Management of the Fund".
* Other expenses are based on estimated amounts for the Fund's first fiscal
year. A $10.00 wire fee will be charged on wire purchases of less than $1,000.
1
<PAGE>
Hypothetical Example of Effect on Fund Expenses
The Fund does not assess any 12b-1 fees. You would pay the following expenses on
a $1,000 investment if, for each year for the next three years, Fund expenses
are as described above and annual return is 5%. The figures set forth below
include deduction of the maximum sales charge (5.75%) at the time of initial
investment.
1 Year 3 Years
Assuming a complete redemption
at end of period .......................... ------- -------
Assuming no redemption
at end of period .......................... ------- -------
Included in these estimates is the account closing fee of $10 for each period.
This is a flat charge that does not vary with the size of your investment.
Accordingly, for investments larger than $1,000, your total expenses would be
substantially lower in percentage terms than this illustration. The above
examples should not be considered a representation of past or future expenses.
Actual expenses may be more or less than those shown.
THE FUND
The Avalon Capital Appreciation Fund (the "Fund") was organized as a series of
The Avalon Fund of Ann Arbor, Inc. (the "Company") on March 24, 1998, and
commenced operations on July 15, 1998. The Company was organized as a Maryland
Corporation on March 17, 1998. This Prospectus offers shares of the Fund. Each
share represents an undivided, proportionate interest in the Fund. The
Investment Advisor to the Fund is Questar Capital Corporation (the "Advisor").
The Fund's address is 1350 Highland Drive, Suite A, Ann Arbor, MI 48108.
INVESTMENT OBJECTIVES AND POLICIES
The Fund is a diversified mutual fund who's fundamental investment objective is
to seek long-term growth through capital appreciation. The Fund seeks to achieve
its objective by investing primarily in the common stock of companies traded on
the NYSE, ASE, and the NASDAQ. In selecting investments for the Fund, the
Advisor will adopt a contrarian approach to investing, and will allocate Fund
Assets among securities of particular issuers and industry groups, based on the
Advisor's analysis as to the best values then currently available in the
marketplace. Factors included in such analysis include, but are not limited to,
a company's ability to show strong growth momentum while trading at reasonable
valuations relative to the company's growth rate over time, its price-to
earnings
2
<PAGE>
ratio relative to its peer group, the likelihood that a company will benefit
from new or innovative products, services or processes, and other technical and
fundamental analytical factors that indicate a likelihood of conditions that
should enhance a company's prospects for future growth. In selecting investments
for the Fund, the Advisor will also consider industry diversification as an
important factor, and the Advisor's investments in certain industries are likely
to be adjusted from time to time due to the outlook for earnings in certain
sectors. The Advisor may also take a short position in certain companies when,
in the Advisor's opinion, such companies are excessively overvalued in relation
to their peer group. See ("Risks" at page ____ of this Prospectus for a more
detailed discussion of short sales).
Under normal circumstances, the Fund will invest substantially all of its assets
in equity securities of large (over $2 billion in market capitalization), medium
(under $2 billion in market capitalization), and small companies (under $500
million in market capitalization). Investments in smaller companies may involve
greater risks than are associated with investments in larger companies because
smaller companies may be more likely to experience financial difficulties due to
limited product lines and market diversification, fewer financial resources, and
lack of management depth.
Diversification means limiting the amount of Fund assets invested in any one
issuer and limiting the amount of Fund assets invested in any one industry,
thereby reducing the risks of losses incurred by that issuer or industry.
Although the Fund invests primarily in common stock, it may also ordinarily
invest a portion of its assets in cash or cash equivalents such as obligations
issued or guaranteed by the U. S. Government, its agencies and/ or
instrumentality's ("U.S. Government securities"), or high quality money market
instruments such as notes, certificates of deposit or bankers acceptances. The
Advisor may determine that it is appropriate to assume a temporary defensive
posture in the market, in which case, the Fund may invest up to 100% of its
assets in these instruments.
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
3
<PAGE>
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.
RESTRICTED AND ILLIQUID SECURITIES. The Fund will not invest more than 10% of
its net assets in securities that the Advisor 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 Advisor'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.
OPTIONS ON SECURITIES. The Fund may write (i.e. sell) covered put and call
options, and may purchase put and call options, on securities traded on a United
States exchange or properly regulated over-the-counter market. Such options can
include long-term options with duration of up to three years. The Fund may use
options to increase or 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 a futures contract is priced more
attractively than the underlying security or index. The Fund may enter into
options transactions so long as the value of the underlying securities on which
options may be written at any one time does not exceed 10% of the net assets of
the Fund.
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
4
<PAGE>
index and a change in the price of the option, and (2) the possible lack of a
liquid secondary market for an options contract and the resulting inability of
the Fund to close out the position prior to the maturity date. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose price fluctuations are expected to resemble those of the Fund's underlying
securities. The risk that the Fund will be unable to close out a position will
be minimized by entering into such transactions only on national exchanges and
over-the-counter markets with an active and liquid secondary market.
REAL ESTATE. The Fund will not invest in real estate directly, although it may
invest, from time to time, in the securities issued by real estate investment
trusts that are traded on one of the principal U.S. stock exchanges.
PORTFOLIO TURNOVER. The Fund intends to buy and sell securities without regard
to the length of time they have been held. However, the Fund does not expect its
portfolio turnover rate to exceed 75% for its first fiscal year. High portfolio
turnover rates increase transaction costs and the possibility of realizing
capital gains.
FUNDAMENTAL INVESTMENT POLICIES. Fundamental Investment policies may not be
changed without a vote of the holders of a majority of the Fund's shares. All
other investment policies of the Fund may be changed without shareholder
approval. The Fund's investment objective, to seek long-term growth through
capital appreciation, is a fundamental policy. Additional fundamental policies
are:
(1) with respect to 75% of its assets, the Fund may not invest more than 5% of
its total assets in any one issuer and may not own more than 10% of the
outstanding voting securities of a single issuer;
(2) the Fund may not invest more than 25% of its total assets in any one
industry or one company; and
(3) the Fund may only borrow for temporary or emergency purposes, which
borrowings may not exceed 5% of its total assets.
(See "Investment Policies and Restrictions" in the Fund's Statement of
Additional Information for a more detailed discussion of the Fund's investment
policies.)
RISKS
The Fund may be appropriate for long-term, relatively aggressive investors who
understand the potential risks and rewards of investing in common stocks. The
value of the Fund's investments will vary from day-to-day, reflecting changes in
market conditions, interest rates and other company, political, and economic
news. Over the short-term, stock prices can fluctuate dramatically in response
to these factors. However, over longer time periods, stocks, although more
volatile,
5
<PAGE>
have historically shown greater growth potential than other investments. The
Fund is not, in itself, a balanced investment plan, and the Fund's lack of an
operating history may present certain additional risks. Further, the Advisor may
take a short position in a company when, in the Advisor's opinion, the company
is excessively overvalued relative to its peer group. Short sales involve
selling a security that the Fund does not presently own with the expectation of
purchasing that security in the future at a lower price. The primary risks
involved in short sales include losses due to the price of the security rising
instead of falling, resulting in a loss to the Fund when the short sale is
covered, the potential inability of the Fund to borrow shorted securities in
order to effect delivery, and the possibility of losses due to excessive
borrowing costs associated with borrowing the securities. To minimize these
risks, the Advisor will only enter into short sales to the extent that such
sales do not exceed 25% of the Funds assets, will engage in such transaction
only with brokers with whom it has entered into agreements allowing the Fund to
simultaneously borrow the shorted security, and will maintain a segregated
account with its Custodian consisting of cash, cash equivalents, U.S. Government
Securities or other high-grade liquid debt securities, in an amount equal to the
aggregate fair market value of its commitments to such transactions. The value
of the Fund's shares will fluctuate to a greater degree than the shares of funds
utilizing more conservative investment techniques, or those having as investment
objectives the conservation of capital and/or the realization of current income.
When you sell your Fund shares, they may be worth more or less than what you
paid for them. There is no assurance that the Fund can achieve its investment
objective, since all investments are inherently subject to market risk.
PERFORMANCE INFORMATION
The Fund's average annual total return is computed by determining the average
annual compounded rate of return for a specified period that, if applied to a
hypothetical $1000 initial investment, would produce the redeemable value of
that investment at the end of the period, assuming reinvestment of all dividends
and distributions and with recognition of all recurring charges. The Fund may
also utilize a total return calculation for differing periods computed in the
same manner but without annualizing the total return.
The Fund's "yield" refers to the income generated by an investment in the fund
over a thirty day (or one month) period (which period will be stated). Yield is
computed by dividing the net investment income per share earned during the most
recent calendar month by the maximum offering price per share on the last day of
the month. This income is then "annualized." That is, the mount of income
generated by the investment during that thirty-day period is assumed to be
generated each month over a twelve month period and is shown as a percentage of
the investment.
6
<PAGE>
For purposes of the yield calculation, interest income is computed based on the
yield to maturity of each debt obligation and dividend income is computed based
on the stated dividend rate of each equity security in the Fund's portfolio, and
all recurring charges are recognized.
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 publications that monitor mutual fund performance.
The Fund may also, from time to time, compare its performance to the Standard &
Poors Composite Index of 500 Stocks ("S&P 500"), a widely recognized, unmanaged
index of common stock prices.
The standard total return results may not take into account recurring and non-
recurring charges for optional services which only certain shareholders elect
and which involve nominal fees such as a fee for small balances and
redemption's. These fees have the effect of reducing the actual return realized
by shareholders.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. Overall responsibility for the management and supervision of
the Fund rests with the Company's Board of Directors. The Directors approve all
significant agreements between the Fund and the persons and companies that
furnish services to the Fund, including agreements with the Fund's custodian,
transfer agent, investment advisor and administrator. The day-to-day operations
of the Fund are delegated to the Advisor. The Statement of Additional
Information contains background information regarding each of the Company's
Directors and Executive Officers.
MANAGEMENT AGREEMENTS. Questar Capital Corporation (the "Advisor") has entered
into an Investment Advisory Agreement (the "Advisory Agreement") with the Fund
to provide investment management services to the Fund. In addition, the Advisor
has entered into an Operating Services Agreement (the "Services Agreement") with
the Fund to provide virtually all day-to-day operational services to the Fund.
As is further explained below, the combined effect of the Advisory Agreement and
the Services Agreement is to place a cap or ceiling on the Fund's ordinary
operating expenses at 2.95% of daily net asset value of the Fund, expecting
brokerage, interest, taxes, litigation, and other extraordinary expenses.
THE ADVISOR. Questar Capital Corporation (the "Advisor"), 1350 Highland Drive,
Suite A, Ann Arbor, MI 48108, under an Investment Advisory Agreement with the
Fund, furnishes investment advisory services to the Fund. The Advisor
7
<PAGE>
is a Michigan corporation and has been registered as an investment advisor with
the SEC and the State of Michigan since _______________.
INVESTMENT ADVISORY AGREEMENT. Under the terms of the Advisory Agreement, the
Adviser, subject to the supervision of the Board of Directors, will manage the
investment operations of the Fund in accordance with the Fund's investment
policies. In consideration of the Adviser's investment advisory services, the
Fund will pay 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.
Mr. Robert E. Boone, the Fund's portfolio manager, is the principal owner of and
controls the Advisor and is responsible for the day-to-day investment management
of the Fund. Mr. Boone enjoys over 37 years experience in the insurance and
brokerage industries.
Shareholders should understand that while Mr. Boone has extensive experience
advising clients as to their investment strategies and managing portfolios of
common stock, the Fund has no operating history and managing a mutual fund
portfolio is a new position for Mr. Boone. Questar Capital Corporation has been
Investment Advisor to the Fund since inception.
The Advisor furnishes an investment program for the Fund, determines, subject to
the overall supervision and review of the Board of Directors of the Company,
what investments should be purchased, sold and held, and makes changes on behalf
of the Company in the investments of the Fund.
OPERATIONAL SERVICES AGREEMENT. Under the terms of the Services Agreement, the
Adviser, subject to the supervision of the Board of Directors, will provide
day-to-day operational services to the Fund including, but not limited to,
providing or arranging to provide accounting, administrative, legal (except
litigation), dividend disbursing, transfer agent, registrar, custodial,
distribution, shareholder reporting, sub-accounting and recordkeeping services.
The Services Agreement provides that the Adviser pays all fees and expenses
associated with these and other functions, including, but not limited to,
expenses of legal compliance, shareholder communications, and meetings of the
shareholders and the Services Agreement, the Fund will pay to the Adviser on the
last day of each month a fee equal to pay to the Adviser on the day of each
month a fee equal to 1.95% of average net asset value of the Fund, such fee to
be computed daily based upon the net asset value of the Fund. The Advisor has
entered into an Investment Company Services Agreement with Declaration Service
Company to provide Transfer Agent and essentially all administrative services
for the Fund.
From time to time, the Advisor may waive receipt of its fees and/ or voluntarily
8
<PAGE>
assume certain fund expenses, which would have the effect of lowering the Fund's
expense ratio and increasing yield to investors during the time such amounts are
waived or assumed. The Fund will not be required to pay the Manager for any
amounts voluntarily waived or assumed, nor will the Fund be required to
reimburse the Manager for any amounts waived or assumed during a prior fiscal
year.
CUSTODIAN. ________________________serves as Custodian for the Fund.
VALUING FUND SHARES
The value of an individual share in the Fund (the net asset value) is calculated
by dividing the total value of the Fund's investments and other assets
(including accrued income), less any liabilities (including estimated accrued
expenses), by the number of shares outstanding, rounded to the nearest cent. Net
asset value per share is determined as of the close of business of the New York
Stock Exchange (4:00 PM, Eastern Time) on each day the Exchange is open for
business, and on any other day there is sufficient trading in the Fund's
securities to materially affect the net asset value. The net asset value per
share of the Fund will fluctuate.
Securities which are traded on any exchange or on the NASDAQ over-the-counter
market are valued at the last quoted sale price. Lacking a last sale price, a
security is valued at its last bid price except when, in the Advisor's opinion,
the last bid price does not accurately reflect the current value of the
security. All other securities for which over-the-counter market quotations are
readily available are valued at their last bid price. When market quotations are
not readily available, when the Advisor determines the last bid price does not
accurately reflect the current value or when restricted securities are being
valued, such securities are valued as determined in good faith by the Advisor,
subject to review of the Board of Directors of the Company.
HOW TO PURCHASE SHARES
Shares of the Fund are sold on a continuous basis, and you may invest any amount
you choose, as often as you wish, subject to a minimum initial investment of
$__________and subsequent minimum investments of $________ Shares of the Fund
are purchased at their public offering price, which is the net asset value per
share next determined after the order is received and accepted by the Fund's
transfer agent, plus the initial sales charge.
Shares of the Fund are subject to a maximum initial sales charge of 5.75%. This
means that when you purchase your shares, not all of your money will be
immediately invested in the Fund. Part of your purchase price will go to pay the
sales charge. You will not pay a sales charge when you redeem your shares.
9
<PAGE>
The sales charge you pay may be waived under certain circumstances (See
"Policies Affecting Your Sales Charge" on pg. ____)
When opening an account, it is important that you provide the transfer agent
with your correct taxpayer identification number (social security or employer
identification number).
If you are investing in the Fund for the first time, you will need to set up an
account. You may make a direct initial investment by completing and signing the
investment application which accompanies this Prospectus and mailing it,
together with a check or money order made payable to:
The Avalon Capital Appreciation Fund
c/o Declaration Service Company
P.O. Box 844
Conshohocken, PA 19428-0844
BY MAIL: When making subsequent investments by mail, enclose your check with the
return remittance portion of the confirmation of your previous investment or
indicate on your check or a separate piece of paper your name, address and
account number and mail to the address set forth above.
Note: Third party checks will not be accepted, and the Fund reserves the right
to refuse second party checks.
BY WIRE: You may make your initial or subsequent investments in the Fund by
wiring funds. To do so, call the Investor Services Department at 1-800-________
for wiring instructions. There are no wire fees charged by the Fund for
purchases of $_______ or more. A $10 wire fee will be charged by the Fund on
wire purchases of less than $__________. Your bank may also charge wire fees for
this service. Money credited to the Fund's account by 4:00 PM (Eastern Time)
will be applied to purchase shares on that day. (Note: Federal Funds wire
purchase orders will be accepted only when the Fund and Custodian Bank are open
for business)
BY TELEPHONE: Once your account is open, you may make investments by telephone
by calling 1-800-____. The maximum telephone purchase is ___ times the value of
the shares owned, calculated at the last available net asset value. Payment for
shares purchased by telephone is due within three business days after the date
of the transaction. If your telephone order to purchase shares is canceled due
to nonpayment (whether or not your check has been processed by the Fund), you
will be responsible for any loss incurred by the Fund by reason of such
cancellation. Investments by telephone are not available in any Fund retirement
account administered by the Administrator or its agents.
10
<PAGE>
BY AUTOMATIC INVESTMENT PLAN: Once your account is open, you may make
investments automatically by completing the automatic investment plan form
authorizing the Fund to draw on your bank account regularly by check for as
little as $ _____ per month beginning within thirty (30) days after the account
is opened. You should inquire at your bank whether it will honor debits made
through the Automated Clearing House ("ACH") system. You may change the date or
amount of your investment any time by written instruction received by the Fund
at least five business days before the change is to become effective.
To assure proper receipt, please be sure your bank includes the Fund name and
the Fund account number that has been assigned to you. If you are opening a new
account, please complete the Account Registration Form and mail it to the "New
Account" department at the Fund address listed above, after completing your wire
arrangement.
ADDITIONAL INFORMATION ABOUT PURCHASES
PURCHASE POLICIES. Investments must be received and accepted in the Transfer
Agent's office on a business day before 4:00 PM Eastern Time to be credited to
your account that day and to receive that day's share price. Otherwise, your
investment will be credited to your account on the next business day and you
will receive that day's share price.
The maximum single investment permitted is $_________. Any individual order for
more than $________must be pre-approved by the Advisor prior to making the
investment or it will be rejected.
The Transfer Agent and the Fund are not responsible for any delays that occur in
wiring funds, including delays in processing by the investor's bank.
The Fund reserves the right to reject an investment for any reason.
POLICIES AFFECTING YOUR SALES CHARGE. Sales charges do not apply to:
o Current or retired board members, officers or employees of the Fund,
the Company, the Distributor, Declaration, or their subsidiaries,
spouses and unmarried children under 21.
o Current or retired employees of the Advisor, their spouses and
unmarried children under 21.
o Shareholders who have at least $5 million invested in funds of the
Company.
o Purchases made with dividend or capital gain distributions from the
11
<PAGE>
load shares of another fund in the Avalon Fund of Ann Arbor, Inc.
o Current employees, officers and directors of registered brokers,
dealers, investment advisors and other companies that have in effect
at the time of purchase a selling agreement with the Company for the
distribution of Fund shares.
o Purchases of Fund shares made with the proceeds of redemptions of
shares of mutual funds not included in the Avalon Fund of Ann Arbor,
Inc.
HOW TO REDEEM SHARES
You may redeem any or all of your shares at will. The Fund redeems shares at the
net asset value thereof next determined after it has received and accepted a
redemption request; however the redemption proceeds will not be paid until such
time as the redemption request is received in proper order. Redemption requests
must be received prior to the time the net asset value per share is next
determined (generally 4:00 PM Eastern Time on each day the New York Stock
Exchange is open for trading) to obtain the date of receipt's net asset value.
BY MAIL: A written request for redemption in proper order must be sent to The
Avalon Capital Appreciation Fund, c/o Declaration Service Company, P.O. Box 844,
Conshohocken, PA 19428-0844. For express or registered mail, or for overnight
delivery, your request should be addressed to Declaration Service Company, 555
North Lane, Suite 6160, Conshohocken, PA 19428. "Proper Order" requires delivery
to the Transfer Agent of:
(1) a written redemption request signed by each registered owner in the exact
name(s) in which the account is registered, the account number and the number of
shares or the dollar amount to be redeemed;
(2) a signature guarantee when required ( see "Signature Guarantee", page __);
and
(3) such additional documents required to evidence the authority of the persons
requesting redemption on behalf of corporations, or whether as executors,
trustees and other fiduciaries. Redemption proceeds will not be paid until all
documents, in satisfactory form have been received by the Transfer Agent. (see
"Additional Information About Redemptions", page ___).
BY TELEPHONE: Redemptions may be made by telephone, provided you have completed
the Telephone Redemption Authorization section of the purchase application. Upon
proper authority and instructions, redemption proceeds will be wired to the bank
account set forth on the account registration form or, for amounts $5,000 or
less, redemptions will be mailed to the address on the
12
<PAGE>
account registration form. There will be a charge for a bank wire. Neither the
Fund nor the Transfer Agent will be responsible for acting upon instructions
reasonably believed by them to be genuine. The Fund and/ or its Transfer Agent
will, however, employ reasonable procedures to confirm that instructions
communicated by telephone are genuine ( such as requiring some form of personal
identification, providing written confirmations, and the tape recording of
conversations). If the Fund or its Transfer Agent do not employ reasonable
procedures, they may be liable for losses due to unauthorized or fraudulent
transactions.
SPECIAL REDEMPTION ARRANGEMENTS. Special arrangements may be made by
institutional investors, or on behalf of accounts established by brokers,
advisors, banks or similar institutions, to have redemption proceeds transferred
by wire to pre-established accounts upon telephone instructions. For further
information call the Fund at 1-800-__________.
SIGNATURE GUARANTEE. A signature guarantee is required for all redemptions
greater than $5,000 or where the redemption proceeds are to be paid to another
person or sent to an address other than the one of record. A signature guarantee
verifies the authenticity of your signature. The guarantor must be an eligible
guarantor. In order to be eligible, the guarantor must be a participant in the
STAMP Program (Securities Transfer Agent Medallion Program). You may call the
Transfer Agent at 1-800-__________to determine whether the entity that will
guarantee the signature is an eligible guarantor.
Redemption Proceeds May Be Sent To You:
BY MAIL: If your redemption check is to be mailed, it will usually be mailed to
you within 48 hours of receipt of the redemption request. The Fund reserves the
right to hold redemption proceeds for up to seven days. If the shares to be
redeemed were purchased by check, the redemption proceeds will not be mailed to
you until the check has cleared. You may avoid this inconvenience by investing
by bank wire. Redemption checks may also be delayed if you have changed your
address within the last 30 days. Please notify the Fund promptly, in writing, of
any change of address.
BY WIRE: You may authorize the Fund to transmit redemption proceeds by wire
provided you send written instructions with a signature guarantee at the time of
redemption or have completed the banking information portion of the Telephone
Redemption Authorization on the account registration form. Your redemption
proceeds will usually be sent on the first business day following redemption.
However, the Fund reserves the right to hold redemption proceeds for up to seven
days. If the shares to be redeemed were purchased by check, the redemption
proceeds will not be wired until the check has cleared, which may take up to
seven days. There is a $10 charge to cover the cost of the wire, which
12
<PAGE>
will be deducted from the redemption proceeds.
Additional Information about Redemptions
(1) The share redemption price may be more or less than your cost of the shares
redeemed, depending on the per share net asset value next determined after your
redemption request is received.
(2) A request to redeem shares in an IRA or similar retirement account must be
accompanied by an IRS Form W4-P and must state a reason for withdrawal, as
specified by the IRS. Proceeds from the redemption of shares from a retirement
account may be subject to withholding tax.
(3) Excessive purchases and redemptions of Fund shares adversely impact on
effective portfolio management as well as upon Fund expenses. The Fund reserves
the right to refuse investments from shareholders who engage in such
transactions.
Account Closing Fee
In order to reduce Fund expenses, an account closing fee of $10 will be assessed
against those shareholders who redeem all of the shares in their Fund account
and direct redemption proceeds be directed to them by mail or wire. This charge
is payable directly to the Fund's Transfer Agent which, in turn, will reduce its
charges to the Fund by an equal amount.
The purpose of this charge is to allocate to redeeming shareholders a more
equitable portion of the Transfer Agent's fee, including the cost of tax
reporting, which is based upon the number of shareholder accounts. When a
shareholder closes an account, the Fund must continue to carry the account on
its books, maintain the account records and complete year-end tax reporting.
With no assets, the account cannot pay its own expenses and imposes an unfair
burden on remaining shareholders.
SMALL ACCOUNTS
Fund accounts which fall, for any reason other than market fluctuation, below
$500 at any time during a month will be subject to a small account charge of $5
for that month, which is deducted the first business day following the end of
each month. The charge is payable directly to the Fund's Transfer Agent which,
in turn, will reduce its charges to the Fund by an equal amount. The purpose of
the charge is to allocate the cost of maintaining shareholder accounts more
equitably among shareholders.
Active automatic investment plans, UGMA/ UTMA, and retirement plan accounts
13
<PAGE>
will not be subject to the small account charge.
In order to reduce expenses, the Fund may redeem all of the shares in any
shareholder account (other than an active automatic investment plan, UGMA/ UTMA
and retirement plan accounts), if, for a period of more than three months, the
account has a net value of $500 or less and the reduction in its value is not
due to market action. If the Fund elects to close such accounts, it will notify
the shareholders whose accounts are below the minimum of its intention to do so,
and will provide those shareholders with an opportunity to increase the value of
their accounts by investing a sufficient amount to bring the value of their
accounts up to an amount greater than $500 within ninety (90) days of the date
of the notice. No account closing fee will be charged to those investors whose
accounts are closed under the mandatory redemption provision.
SHAREHOLDER SERVICES
Declaration Service Company, P.O. Box 844, Conshohocken, PA 19428-0844, acts as
transfer, shareholder servicing, and dividend paying agent for all Fund
accounts. Simply write or call the Investor Information Department at
1-800-_______ for prompt service on any question about your account.
CONFIRMATION STATEMENTS. Shareholders normally will receive a confirmation
statement after each transaction showing the activity in the account, and an
annual statement showing all transactions for the calendar year just completed.
OTHER SERVICES. The Fund has available a number of plans and services to meet
the special needs of certain investors. Plans available include, but are not
limited to:
(1) payroll deduction plans, including military allotments;
(2) custodial accounts for minors;
(3) a flexible, systematic withdrawal plan: and
(4) various retirement plans such as IRA, 403(b)(7), and employer-adopted
401(k), defined benefit and defined contribution plans.
There is an annual charge for each retirement plan Fund account with respect to
which a service provider acts as custodian. If this charge is not paid
separately prior to the last business day of a calendar year or prior to a total
redemption, it will be deducted from the shareholder's account.
Application forms and brochures describing these plans and services can be
14
<PAGE>
obtained from the Transfer Agent by calling 1-800-__________.
DISTRIBUTIONS AND TAXES
As a shareholder, you are entitled to your share of the Fund's distributed net
income and any gains realized on its investments. The Fund intends to distribute
dividends and capital gain distributions so as to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). By complying with applicable provisions of the Code, the
Fund will not be subject to Federal income tax on its net investment income and
capital gain distributions that are distributed to shareholders.
The Fund is subject to a non-deductible 4% excise tax calculated as a percentage
of certain undistributed amounts of taxable ordinary income and capital gains
net of capital losses. The Fund intends to make such distributions as may be
necessary to avoid this excise tax.
Dividends and Capital Gain Distributions
The Fund's net investment income from dividends and interest is distributed to
you at the end of the calendar year as dividends. Short-term capital gains are
distributed at the end of the calendar year and are included in net investment
income.
The Fund realizes long-term capital gains whenever it sell securities held for
more than 18 months for a higher price than it paid for them. Net realized long-
term capital gains, if any, are distributed at the end of the calendar year as
capital gain distributions. Before they are distributed, net long-term capital
gains are included in the value of each share. After they are distributed, the
value of each share drops by the per-share amount of the distribution (if your
distributions are reinvested, the total value of your holdings will not change).
Reinvestments
Dividend and capital gain distributions are automatically reinvested in
additional shares of the Fund, unless you request the Fund in writing or by
phone to pay dividends and distributions in cash.
The reinvestment price is the net asset value at the close of business on the
day the distribution is paid. Your account statement will confirm the amount
invested and the number of shares purchased.
If you choose cash dividends and distributions, you will receive only those
declared after your request has been processed.
15
<PAGE>
Taxes
Distributions are subject to federal income tax and may be subject to state and
local taxes. Distributions are taxable in the year the Fund pays them,
regardless of whether you receive them in cash or they are reinvested in
additional shares.
Each January, you will receive a tax statement showing the kind and total amount
of all distributions you received during the previous year. You must report
distributions on your tax returns, even if they are reinvested in additional
shares.
"Buying a dividend" creates a tax liability. "Buying a dividend" means buying
shares shortly before a net investment income or a capital gain distribution is
declared and paid on Fund shares. The amount of the distribution you receive is
fully taxable to you even though such distribution is only a return of capital.
Redemptions may be subject to tax. If the redemption value of your Fund shares
is greater than their cost, the difference is a capital gain. Your gain may be
either short-term (for shares held for _________or less) or long-term (for
shares held more than __________).
Important: The foregoing tax information is a brief and selective summary of
certain federal tax rules that may apply to the Fund. Tax matters are highly
individual and complex, and you should consult a qualified tax advisor about
your personal situation.
The Adviser has entered into a Distribution Agreement on behalf of the Fund with
Declaration Distributors, Inc. (the "Distributor"). The Distributor acts as the
Fund's agent once the orders are received from investors. The Distributor's main
office is located at 555 North Lane, Suite 6160, Conshohocken, PA 19428. For
further information regarding the Distribution Agreement, see "Distribution
Agreement" in the Statement of Additional Information.
GENERAL INFORMATION
The shares making up the Fund represent an interest in the Fund's assets only
and in the event of liquidation, each share of the Fund would have the same
rights to the distribution of assets as every other share of the Fund.
No annual or regular meeting of the shareholders is required; however the
Directors may call meetings to take action on matters which require shareholder
vote and other matters as to which the Directors determine a shareholder vote is
necessary or desirable. Subject to Section 16(a) of the Investment Company Act
of 1940, as amended, the Directors may elect their own successors and may
appoint Directors to fill vacancies, including vacancies caused by an increase
in
16
<PAGE>
the number of Directors by action of the Board of Directors.
As a shareholder, you have voting rights with respect to the management and
operation of the Fund and its policies. You are entitled to one vote for each
whole share, and fractional votes for fractional shares held. Shares of the Fund
do not have cumulative voting rights. The Fund's shares are fully paid and non-
assessable, have no pre-emptive or subscription rights, and are fully
transferable, with no conversion rights.
Prior to the public offering made by this Prospectus, Questar Capital
Corporation purchased for investment all of the outstanding shares of the Fund,
and as a result, may be said to control the Fund.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR THE FUND'S STATEMENT OF
ADDITIONAL INFORMATION, INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
<PAGE>
PART B -- STATEMENT OF ADDITIONAL INFORMATION
Included herein is the Statement of Additional Information for
The Avalon Capital Appreciation Fund
STATEMENT OF ADDITIONAL INFORMATION
THE AVALON FUND OF ANN ARBOR, INC.
THE ANN ARBOR CAPITAL APPRECIATION FUND
(THE "FUND")
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the Fund's prospectus dated July 15, 1998 (the "Prospectus")
which may be obtained from Declaration Service Company ("DSC" or the
"Administrator"), P.O. Box 844, Conshohocken, Pennsylvania 19428-0844.
The date of this Statement of Additional Information is July 15, 1998.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION..................................................
INVESTMENT OBJECTIVES AND POLICIES...................................
Investment Restrictions.........................................
PORTFOLIO TURNOVER...................................................
PORTFOLIO TRANSACTIONS...............................................
MANAGEMENT OF THE FUND...............................................
PRINCIPAL HOLDERS OF SECURITIES......................................
ADVISORY AND ADMINISTRATION AGREEMENTS...............................
THE DISTRIBUTOR......................................................
ADDITIONAL INFORMATION ON REDEMPTIONS................................
Suspension of Redemption Privileges.............................
CALCULATION OF PERFORMANCE DATA......................................
TAX STATUS...........................................................
CUSTODIAN............................................................
INDEPENDENT ACCOUNTANTS..............................................
FINANCIAL STATEMENTS.................................................
<PAGE>
GENERAL INFORMATION
The Avalon Fund of Ann Arbor, Inc. (the "Company") is an open-end management
investment company newly organized under the laws of Maryland. There presently
is one series within the Company, The Avalon Capital Appreciation Fund,
representing a separate diversified portfolio of securities, (referred to herein
as the "Fund").
Assets (the "Assets") received by the Company from the issue or sale of shares
of the Fund, and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are allocated to the Fund. The Assets which
constitute the underlying assets of the Fund, must be segregated on the
Company's books of accounts, and are to be charged with the expenses incurred
by, and with respect to, the Fund. In the event additional funds are created,
any general expenses of the Company, not readily identified as belonging to a
particular fund, shall be allocated, at the direction of the Board of Directors
(the "Directors"), among the then existing funds in such manner as the Directors
deem fair and equitable.
Shares represent a proportionate interest in the Fund. All shares are entitled
to such dividends and distributions out of the income belonging to the Fund, as
are declared by the Directors. Upon liquidation of the Company, shareholders of
the Fund are entitled to share pro rata, in the net assets belonging to the Fund
available for distribution. The Directors of the Company have authorized that
Shares of each Fund may be offered in four classes:
(1) a No-Load Class wherein the Shares of the Fund are sold at their net asset
value without sales charges or other transaction fees,
(2) an A Class wherein the Shares of the Fund are subject to an initial sales
charge,
(3) a B Class wherein the shares of the Fund are sold subject to a Contingent
Deferred Sales Charge, and an additional 12b-1 fee, and
(4) a C Class, wherein the shares of the Fund are sold subject to an ongoing
12b-1 fee),
The Directors have adopted allocation plans regarding expenses specifically
attributable to a particular class of shares. Subject to such an allocation, all
shares are entitled to such dividends and distributions out of the income
belonging to the Fund, as are declared by the Directors. Upon liquidation of the
Company, shareholders of the Fund are entitled to share pro rata, adjusted for
expenses attributable to a particular class of shares, in the net assets
belonging to the Fund available for distribution.
As described in the Section titled, "General Information" in the Prospectus, no
annual or regular meeting of shareholders is required; however, the Directors
may call meetings to take action on matters which require a shareholder vote and
1
<PAGE>
other matters where the Directors determine a shareholder vote is necessary or
desirable.
Whether appointed by prior Directors or elected by shareholders, an
"Independent" Director serves as Director of the Trust for a period of three
years. However, the Directors' terms are staggered so that the terms of at least
25% of the Board of Directors will expire every three years. Directors who are
not "interested persons" will stand for election in 2001. A Director whose term
is expiring may be re-elected. Thus, shareholder meetings will ordinarily be
held only once every three years unless otherwise required by the Investment
Company Act of 1940 (the "1940 Act").
On any matter submitted to shareholders, the holder of each share is entitled to
one vote per share (with proportionate voting for fractional shares).
Shares have no cumulative voting rights. Accordingly, in situations where the
shareholders elect Directors, Shareholders representing more than 50% of the
Shares can elect 100% of the Company's Directors, and Shareholders representing
less than 50% of the Shares will not be able to elect any person as a Director.
Shares have no preemptive rights or subscription rights and are fully
transferable. There are no conversion rights.
Under Maryland law, the shareholders of the Company could, under certain
circumstances, be held personally liable for the obligations of the Company.
However, the Articles of Incorporation of the Company disclaims shareholder
liability for acts or obligations of the Company and requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Company or the Directors. The Articles of Incorporation
of the Company provides for indemnification out of the Company's property for
all losses and expenses of any shareholder held personally liable for the
obligations of the Company. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Company itself would be unable to meet its obligations.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Funds' investment
objectives and policies in the Funds' Prospectus.
Investment Restrictions
The following investment restrictions are considered to be fundamental policies
of the Company and may not be changed without first obtaining the affirmative
vote of a majority of the outstanding voting securities of the Fund, which, as
used
2
<PAGE>
herein, means the lesser of: (1) 67% of the Fund's outstanding shares present at
a meeting at which more than 50% of the outstanding shares of the Fund are
represented either in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares.
The Fund may not:
(1) Issue senior securities.
(2) Borrow money, except that the Fund may borrow an amount representing not
greater than 5% of the total assets of the Fund from banks as a temporary
measure for emergency purposes.
(3) Underwrite the securities of other issuers.
(4) Purchase or sell real property, including limited partnership interests;
provided, however, that the Fund may purchase readily marketable interests
in real estate investment trusts or readily marketable securities of
companies, which invest in real estate.
(5) Engage in the purchase or sale of commodities or commodity contracts;
except that, in connection with the purchase of futures contracts or
options on futures contracts, the Fund may invest not more than 2.5% of the
Fund's assets as initial margin deposits or premiums for futures contracts.
Further, the Fund may enter into futures contracts and option transactions,
but only to the extent that obligations under such contracts or
transactions represent not more than 100% of the Fund's assets.
(6) Lend its assets, except that purchases of debt securities in furtherance of
the Fund's investment objectives will not constitute lending of assets and
except that the Fund may lend portfolio securities with an aggregate market
value of not more than 33 1/3% of the Fund's total net assets.(Accounts
receivable for shares purchased by telephone shall not be deemed loans.)
(7) Invest more than 25% of its total assets in securities of companies
principally engaged in any one industry, except that this restriction does
not apply to debt obligations of the United States Government which are
protected by the full faith and credit of the United States Government.
(8) Enter into short sales; provided however, that the Fund can enter into
short sales to the extent that the fair market value of such transactions
does not exceed 25% of the net assets of the Fund, and further provided
that the Fund segregate assets as described below, and only enter into such
transactions with parties from whom it has arranged a simultaneous
borrowing arrangement.
(9) (a) Invest more than 25% of the value of its total assets in securities of
any one issuer, except such limitation shall not apply to obligations
issued or guaranteed by the United States Government, its agencies or
instrumentality's, or
(b) acquire more than 10% of the voting securities of any one issuer.
The following investment restrictions are not considered to be fundamental
policies of the Company and may be changed by the Board of Directors without a
shareholder vote.
3
<PAGE>
The Fund may not:
(10) Invest in warrants to purchase common stock.
(11) Invest in companies for the purpose of exercising control or management
(12) Hypothecate, pledge, or mortgage any of its assets, except to secure loans
as a temporary measure for extraordinary purposes and except as may be
required to collateralize letters of credit to secure state surety bonds.
(13) Participate on a joint or joint and several basis in any trading account.
(14) Invest in any foreign securities.
(15) Invest more than 10% of its total net assets in illiquid securities.
(16) Invest in oil, gas or other mineral leases.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage, resulting from a change in values of fund
securities or amount of net assets, will not be considered a violation of any of
the foregoing restrictions.
The following discussion of the investment objectives, policies and risks
associated with the Fund supplements the discussion in the prospectus.
USE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Futures contracts and options may be used for several reasons: to hedge
securities held to effectively reduce the average weighted maturity; to maintain
cash reserves while remaining fully invested; to facilitate trading; to reduce
transaction costs; or to seek higher investment returns when a futures contract
is priced more attractively than the underlying security or index. No Fund may
use futures contracts or options transactions to leverage assets.
The Fund may purchase or sell options on individual securities, and may enter
into trading in options on futures contracts, may purchase put or call options
on futures contracts, and may sell such options in closing transactions.
An option will not be purchased for a Fund if, as a result, the aggregate
initial margins and the premiums paid for all options and futures contracts that
a Fund owns would exceed 2.5% of its net assets at the time of such purchase.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. Futures contracts that are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC"), an U.S.
4
<PAGE>
Government Agency.
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out an
open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchanges and may be changed.
Brokers may require margin deposits, which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold requiring initial
margin deposits ranging upward from as little as 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes, then to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators". Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
prices of underlying securities. The Fund intends to use futures contracts for
hedging purposes.
Regulations of the CFTC, as applicable to the Fund, require that all of its
futures transactions constitute bona fide hedging transactions. A Fund will only
sell futures contracts to protect securities it owns against price declines or
purchase contracts to protect against an increase in the price of securities it
intends to purchase. As evidence of this hedging interest, it is expected that
approximately 75% of its futures contract purchases will be "completed", that
is, equivalent amounts of related securities will have been purchased or are
being purchased
5
<PAGE>
by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts could
be used to control a Fund's exposure to market fluctuations, the use of futures
contracts may be a more effective means of hedging this exposure. While a Fund
will incur commission expenses in both opening and closing out futures
positions, these costs usually are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
Restrictions on the Use of Futures Contracts
A Fund will not enter into futures contract transaction to the extent that,
immediately thereafter, the sum of its initial margin deposits on open contracts
and premiums paid for all options and futures contracts exceed 2.5% of its net
assets at the time of the transaction. In addition, a Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 100% of the Fund's total assets.
Risk Factors in Futures Transactions
Positions in futures contracts may be undertaken only on an exchange that
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, the Fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations, if
the Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, the Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities positions.
The Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into contracts which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts pursuant to varying investment
strategies can be substantial, due both to the low margin deposits required and
the extremely high degree of leverage involved in futures pricing. Accordingly,
a relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal
6
<PAGE>
to 150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. However, because the Fund engages in futures
transactions solely for hedging purposes, the Funds' Investment Advisor does not
believe that the Fund is subject to the risks of loss frequently associated with
leveraged futures transactions. The Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Utilization of futures transactions by a Fund does involve the risk of imperfect
or no correlation where the securities underlying futures contracts have
different maturities than the portfolio securities being hedged. It is also
possible that a Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
Federal Tax Treatment of Futures Contracts
Except for transactions a Fund has identified as hedging transactions, the Fund
is required for Federal income tax purposes to recognize as income for each
taxable year its net unrealized gains and losses on certain futures contracts
held as of the end of the year, as well as those actually realized during the
year. In most cases, any gain or loss recognized with respect to a futures
contract is considered to be 60% long-term capital gain or loss and 40%
short-term capital gain or loss, without regard to the holding period of the
contract. Furthermore, sales of futures contracts that are intended to hedge
against a change in the value of securities held by the Fund may affect the
holding period of such securities and, consequently, the nature of the gain or
loss on such securities upon disposition.
For a Fund to qualify each year for Federal income tax treatment as a regulated
investment company, at least 90% of its gross income for the taxable year must
7
<PAGE>
be derived from qualifying income; i.e., dividends, interest, income derived
from loans of securities, gains from the sale of securities or other income
derived with respect to the Fund's business of investment in securities or
currencies.
The Fund will distribute to shareholders annually any net capital gains, which
have been recognized for Federal income tax purposes (including unrealized gains
at the end of the Fund's fiscal year), on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the transactions.
Segregated Assets and Covered Positions
When purchasing futures contracts or purchasing securities on a when-issued or
delayed delivery basis, the Funds will restrict and segregate cash, which may be
invested in repurchase obligations or liquid securities. Whenever the Fund
purchases a stock index futures contract, the amount of cash or liquid
securities to be restricted and segregated, when added to the amount deposited
with the broker as margin, will be at least equal to the market value of the
futures contract and not less than the market price at which the futures
contract was initially established. When purchasing securities on a when-issued
or delayed delivery basis, the amount of restricted cash or liquid securities
will be at least equal to the Fund's when-issued or delayed delivery
commitments.
The restricted cash or liquid securities will either be identified as being
restricted in the Fund's accounting records or physically segregated in a
separate account at the Company's custodian. For the purpose of determining the
adequacy of the liquid securities that have been restricted, the securities will
be valued at market or fair market value on a daily basis. If the fair market
value of such securities declines, additional cash or liquid securities will be
restricted on a daily basis, so that the value of the restricted cash or liquid
securities, when added to the amount deposited with the broker as margin, always
equals the amount of such commitments by the Fund.
Fund assets need not be segregated if the Fund "covers" the futures contract or
call option sold. For example, the Fund could cover a futures or forward
contract which it has sold short by owning the securities or currency underlying
the contract. The Fund may also cover this position by holding a call option
permitting the Fund to purchase the same futures or forward contract at a price
no higher than the price at which the sell position was established.
A Fund could cover a call option it has sold by holding the same security
underlying the call option. A Fund may also cover by holding a separate call
option of the same security or stock index with a strike price no higher than
the strike price of the call option sold by the Fund. The Fund could cover a
call option it has sold on a futures contract by entering into a long position
in the
8
<PAGE>
same futures contract at a price no higher than the strike price of the call
option or by owning the securities or currency underlying the futures contract.
The Fund could also cover a call option it has sold by holding a separate call
option permitting it to purchase the same futures contract at a price no higher
than the strike price of the call option sold by the Fund.
PORTFOLIO TURNOVER
The Fund's Investment Advisor buys and sells securities for the Fund to
accomplish its investment objectives. The Funds' investment policies may lead to
frequent changes in investments, particularly in periods of rapidly fluctuating
market environments. The Fund's investments may also be traded to take advantage
of perceived short-term disparities in market values or yields among securities
of comparable quality and maturity.
A change in the securities held by a fund is known as "portfolio turnover."
Anticipated portfolio turnover rates are set forth in the "INVESTMENT OBJECTIVES
AND POLICIES" portion of the prospectus. High portfolio turnover in any given
year indicates a substantial amount of short-term trading, which is likely to
result in payment by the Fund from capital of above-average amounts of markups
to dealers and could result in the payment by shareholders of above-average
amounts of taxes on realized investment gain. Any short-term gain realized on
securities will be taxed to shareholders as ordinary income. See "Tax Status."
PORTFOLIO TRANSACTIONS
Applicable law requires that the Advisor, in executing portfolio transactions
and selecting brokers or dealers, seek the best overall terms available. In
assessing the terms of a transaction, consideration may be given to various
factors, including the breadth of the market in the security, the price of the
security and the financial condition and execution capability of the broker or
dealer (for a specified transaction and on a continuing basis). When
transactions are executed in the over-the-counter market, the Fund intends
primarily to deal with the primary market makers. However, the services of other
brokers will be utilized if it is anticipated that the best overall terms can
thereby be obtained. Purchases of newly issued securities for the Fund usually
are placed with those dealers from whom it appears the best price or execution
will be obtained. Those dealers may be acting as either agents or principals.
MANAGEMENT OF THE FUND
The Directors and Officers of the Company, and their principal occupations
during the past five years are set forth below, along with their business
address,
9
<PAGE>
1350 Highland Drive, Suite A, Ann Arbor, MI, 48108.
Name, Address Position(s) Held Principal Occupation(s)
& Age With Registrant During Last 5 Years
- --------------------------------------------------------------------------------
Robert E. Boone* President, Director Questar Capital Corp., 7/97 to
(65) Present. Partner Investment
Advisors. Mariner Financial
Services, 1980-1994. Partner
Broker/dealer - Financial
Services. 37-year career as
representative and principal
engaged in selling securities
and insurance products. BS
Degree, Bowling Green State
University
John H. Gakenheimer* Director Questar Planning Corp.,
(44) President. Financial Planning
Services. 7/97 to Present.
Twenty-First Century Advisors,
L.L.C., co-founder. 1996-7/97.
Investment advisors to hedge
funds. Money Concepts Financial
Planning Center. President.
Financial Planning services.
1982-1996. Certified Financial
Planner, Registered Options
Principal, Registered Investment
Advisor, BA Degree, Loyola
College.
Richard G. Gerepka* Questar Capital Corp., Branch
(37) Manager. 7/97 to Present.
American Express Financial
Advisors, 1990 to 1997.
Registered representative and
financial planner. Certified
Financial Planner, Registered
10
<PAGE>
Principal, BS Degree, New York
University.
George A. Van Neal SpecCon, Owner - Construction
(--) consultants. 1990 to present.
Richard Trott and Partners
Architects, Columbus, Ohio.
Principal/ Director of Technical
Services. 1987 - 1990. Frequent
Lecturer and speaker
Distinguished architectural and
teaching career spanning 38
years. Registered professional
Architect, Certified
Construction Specifier, Fellow,
Construction Specifications
Institute. BA degree in
Architecture, Ohio State
University, 1961.
Frederick H. Hoops Hoops, Hoops, & Hoops, P.L.C.,
(--) Farmington, Michigan. Attorney &
Counselor at Law. 1994 to
present. Bachelor of Music
Degree, university of Michigan,
1988, Juris Doctor degree,
university of Miami School of
Law, 1993. L.L.M. in Estate
planning, University of Miami
School of Law, 1994.
* Denotes an "interested person" as defined in the Investment Company Act of
1940.
11
<PAGE>
COMPENSATION OF DIRECTORS & OFFICERS
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Benefits Annual Compensation
Name of Aggregate Accrued as Benefits From Registrant
Person, Compensation Part of Fund Upon and Fund paid
Position from Registrant Expenses Retirement To Directors
- -------- --------------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Robert Boone $0.00 $0.00 $0.00 $0.00
President
John Gakenheimer $0.00 $0.00 $0.00 $0.00
Director
Richard G. Gerepka $0.00 $0.00 $0.00 $0.00
Director
George A. VanNeal ------ ------- ------- -------
Director
Frederick H. Hoops ------ ------- ------- -------
Director
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
Other than indicated below, as of March 27, 1998, the Officers and Directors of
the Company, as a group, owned less than 1% of the outstanding shares of the
Fund. The Company is aware of the following persons who owned of record, or
beneficially, more than 5% of the outstanding shares of the Fund at July 15,
1998:
Prior to the effective date of the Fund's Registration Statement, the Advisor
intends to purchase substantially all of the outstanding shares of the Fund, and
will therefore be deemed to control the Fund.
ADVISORY AND ADMINISTRATION AGREEMENTS
Reference is made to "Management of the Fund" in the Prospectus per certain
information concerning the Management and Advisory arrangements of the Fund.
ADVISORY AND OPERATIONAL SERVICE AGREEMENTS. Questar Capital Corporation (the
"Advisor") has entered into an Investment Advisory Agreement (the "Advisory
Agreement") with the Fund to provide investment management services to the Fund.
In addition to the Advisory Agreement, the Advisor has entered into an Operating
Service Agreement (the "Services Agreement") with the Fund to provide, or make
arrangements for the provision of virtually all day-to-day operational services
to the Fund.
Questar Capital Corporation, an investment advisory firm registered with the
Securities Exchange Commission and the State of Michigan, and organized under
the laws of the state of Michigan (the "Advisor"), pursuant to an Advisory
Agreement with the Company dated July 15, 1998, provides investment advisory and
management services to the Company. The Advisor will compensate all personnel,
officers and Directors of the Company if such persons are employees
12
<PAGE>
of the Advisor or its affiliates. The Company pays the expense of printing and
mailing prospectuses and sales materials used for promotional purposes.
As explained in the Prospectus, the terms of the Advisory Agreement and the
Services Agreement empower the Adviser, subject to the Board of Directors of the
Fund, to manage the Fund's assets and provide or arrange for the provision of
operational and other administrative services for the day-to-day operations of
the Fund. The combined effect of the Advisory Agreement and the Services
Agreement is to place a cap or ceiling on the total expenses of the Fund
excepting brokerage, interest, taxes, litigation, and other extraordinary
expenses, at an annual rate of 2.95% of the daily net asset value of the Fund.
The Adviser has entered into Agreements with third party providers to provide,
among other services, accounting, administrative, dividend disbursing, transfer
agent, registrar, custodial, distribution, shareholder reporting, sub-accounting
and recordkeeping services to the Fund.
DURATION AND TERMINATION. Unless earlier terminated as described above, the
Advisory Agreement will remain in effect until July 15, 2000, and thereafter
from year to year if approved annually (a) by the Board of Directors of the Fund
or by a majority of the outstanding shares of the Fund; and (b) by a majority of
the Directors who are not parties to such contract or interested persons (as
defined in the Investment Company Act of 1940) of any such party. Such contract
terminates automatically upon assignment and may be terminated without penalty
on 60 day written notice at the option of either party thereto or by the vote of
the Shareholders of the Fund.
THE DISTRIBUTOR
Reference is made to "The Distributor" in the Prospectus. Set forth below is
further information about the Distributor and the Distribution Agreement.
The Adviser has entered into a Distribution Agreement on the Fund's behalf with
Declaration Distributors, Inc. (the "Distributor"). Under the Agreement, the
Distributor will provide distribution and distribution services to the Fund in
exchange for a fee to be paid by the Adviser and reimbursement by the Adviser of
the Distributor's out of pocket expenses incurred in connection with the
provision of the foregoing.
The Distribution Agreement has an initial term of two years and will remain in
effect from year to year thereafter, but only so long as such continuance is
approved at least annually by a vote of the Fund's Board of Directors or by vote
of a majority of the outstanding voting securities of the Fund and of the
Directors who, except for their positions as Directors, are not "interested
persons" of the Fund (as defined in the Investment Company Act). In addition, in
the Distribution Agreement, either party may terminate the Distribution
Agreement upon 60 days
13
<PAGE>
written notice to the other party. The Distribution Agreement terminates
automatically if "assigned" (as defined in the Investment Company Act). The
Distribution Agreement is subject to the same renewal requirements and
termination provisions as the Advisory Agreement described under "Management of
the Fund Management Arrangements."
ADDITIONAL INFORMATION ON REDEMPTIONS
Suspension of Redemption Privileges:
The Company may suspend redemption privileges or postpone the date of payment
for up to seven days, but cannot do so for more than seven days after the
redemption order is received except during any period (1) when the securities
markets are closed, other than customary weekend and holiday closings, or
trading on an exchange is restricted as determined by the Securities and
Exchange Commission ("SEC"), (2) when an emergency exists, as defined by the
SEC, which makes it not reasonably practicable for the Trust to dispose of
securities owned by it or not reasonably practicable to fairly determine the
value of its assets, or (3) as the SEC may otherwise permit.
CALCULATION OF PERFORMANCE DATA
Total Return
The Fund may advertise its performance in terms of average annual total return
for 1, 5 and 10 year periods, or for such lesser periods as the Fund has been in
existence. Average annual total return is computed by finding the average annual
compounded rates of return over the periods that would equate the initial amount
invested to the ending redeemable value according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years (exponential number)
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods at the end of the year or period;
The calculation assumes all charges are deducted from the initial $1,000 payment
and assumes all dividends and distributions by the Fund are reinvested at the
price stated in the prospectus on the reinvestment dates during the period, and
includes all recurring fees that are charged to all shareholder accounts.
14
<PAGE>
Yield
A Fund may also 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 + 1) - 1]
----------------------------
CD
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 were entitled to receive dividends
D = the maximum offering price per share on the last day of
the period
Nonstandardized Total Return
A Fund may provide the above described standard total return results for a
period which ends as of not earlier than the most recent calendar quarter end
and which begins either twelve months before or at the time of commencement of
the Fund's operations. In addition, the Fund may provide nonstandardized total
return results for differing periods, such as for the most recent six months.
Such nonstandardized total return is computed as otherwise described under
"Total Return" except that the "Total Return" results are not annualized.
TAX STATUS
Taxation of the Funds -- In General
As stated in its prospectus, the Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, the Fund will not be liable for federal
income taxes on its taxable net investment income and capital gain net income
that are distributed to shareholders, provided that the Fund distributes at
least 90% of its net investment income and net short-term capital gain for the
taxable year.
To qualify as a regulated investment company, each Fund must, among other
things, derive in each taxable year 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 foreign currencies, or other
income
15
<PAGE>
derived with respect to its business of investing in such stock, securities or
currencies (the "90% test).
The Code imposes a non-deductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount equal to
the sum of (1) at least 98% of its ordinary income for the calendar year, (2) at
least 98% of its net capital gains for the twelve-month period ending on October
31 of the calendar year and (3) any portion (not taxable to the Fund) of the
respective balance from the preceding calendar year. The Fund intends to make
such distributions as are necessary to avoid imposition of this excise tax.
Taxation of the Funds' Investments
For federal income tax purposes, debt securities purchased by the Fund may be
treated as having original issue discount. Original issue discount represents
interest for federal income tax purposes and can generally be defined as the
excess of the stated redemption price at maturity of a debt obligation over the
issue price. Original issue discount is treated for federal income tax purposes
as earned by the Fund, whether or not any income is actually received, and
therefore, is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount is determined on the basis of a constant
yield to maturity, which takes into account the compounding of accrued interest.
Under Section 1286 of the Code, an investment in a stripped bond or stripped
coupon will result in original issue discount.
Debt securities may be purchased by the Fund at a discount which exceeds the
original issue price plus previously accrued original issue discount remaining
on the securities, if any, at the time the Fund purchases the securities. This
additional discount represents market discount for income tax purposes. In the
case of any debt security issued after July 18, 1984, having a fixed maturity
date of more than one year from the date of issue and having market discount,
the gain realized on disposition will be treated as interest income for purposes
of the 90% test to the extent it does not exceed the accrued market discount on
the security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable).
Generally, market discount is accrued on a daily basis.
The Fund may be required to capitalize, rather than deduct currently, part or
all of any direct interest expense incurred to purchase or carry any debt
security having market discount unless the Fund makes the election to include
market discount currently. Because a Fund must take into account the original
issue discount for purposes of satisfying various requirements for qualifying as
a regulated investment company under Subchapter M of the Code, it will be more
difficult for the Fund to make the distributions to maintain such status and to
avoid the 4% excise tax described above. To the extent that the Fund holds
zero-coupon or deferred interest bonds in its portfolio or bonds paying interest
in
16
<PAGE>
the form of additional debt obligations, the Fund would recognize income
currently even though the Fund received no cash payment of interest, and would
need to raise cash to satisfy the obligations to distribute such income to
shareholders from sales of portfolio securities.
The Fund may purchase debt securities at a premium (i.e., at a purchase price in
excess of face amount). The premium may be amortized if the Fund so elects. The
amortized premium on taxable securities is allowed as a deduction, and, for
securities issued after September 27, 1985, must be amortized under an economic
accrual method.
All Shareholders will be notified annually regarding the tax status of
distributions received from the Fund.
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 or December and made payable to shareholders of record in such
a month will be deemed to have been received on December 31, if the Fund pays
the dividends during the following January. Since some of the net investment
income of the Fund is expected to arise from dividends on domestic common or
preferred stock, some of the Funds' distributions may qualify for the 70%
corporate dividends-received deduction.
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 nevertheless would be taxable to the
shareholder as ordinary income or 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
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing the Fund's shares just prior to a distribution may
receive a return of investment upon distribution that will nevertheless be
taxable to them.
A shareholder of the Fund should be aware that a redemption of shares (including
any exchange into another Portfolio) is a taxable event and, accordingly, a
capital gain or loss may be recognized. If the shareholder of a Fund receives a
distribution taxable as long-term capital gain with respect to shares of the
Fund and redeems or exchanges shares before he has held them for more than six
months, any loss on the redemption or exchange (not otherwise disallowed as
attributable to an exempt-interest dividend) will be treated as long-term
capital loss to the extent of the long term capital gain recognized.
17
<PAGE>
Other Tax Considerations
Distributions to shareholders may be subject to additional state, local and
non-U.S. taxes, depending on each shareholder's particular tax situation.
Shareholders subject to tax in certain states may be exempt from state income
tax on distributions made by the Fund to the extent such distributions are
derived from interest on direct obligations of the United States Government.
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in shares of the Fund.
CUSTODIAN
_______________________ has agreed to act as custodian for the Company.
INDEPENDENT ACCOUNTANTS
______________________________ are the independent accountants for the Company.
FINANCIAL STATEMENTS
The Company was established on March 17, 1998 and commenced offering shares of
the Fund on July 15, 1998. The Fund is a newly created fund, and as such, has
not yet developed an operating history. Financial Statements of the Fund will be
included in the Statement of Additional Information as they become available and
as required by law, [unless previously provided, in which event the Trust will
promptly provide another copy, free of charge, upon request to: Declaration
Service Company, P.O. Box 844, Conshohocken, Pennsylvania 19428-0844.
18
<PAGE>
THE AVALON FUND OF ANN ARBOR, INC.
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements*
(1) Not Applicable
(b) EXHIBITS
Exhibit No. Description of Exhibit
(1) Articles of Incorporation*
(2) By-laws of Registrant
(3) Not Applicable
(4) Not Applicable
(5) Advisory Agreement between Registrant and Questar Capital
Corporation, dated July 15, 1998.
(6) Distribution Agreement among Registrant, Declaration Distributors,
Inc. and Questar Capital Corporation, dated July 15, 1998.
(7) Not Applicable
(8) Custodian Agreement between Registrant and _________, dated
____________, 1998.*
(9.1) Operating Services Agreement between Registrant and Questar Capital
Corporation, dated July 15, 1998
(9.2) Investment Company Services Agreement between Registrant, Questar
Capital Corporation and Declaration Service Company, dated July 15,
1998
(10) Opinion and Consent of Counsel
(11)(a) Consent of Independent Accountants*
(11)(b) Power of Attorney*
(12) Not Applicable
(13) Agreement concerning initial capital of the Fund*
(14) Not Applicable
(15) Not Applicable
(16) Schedule for computation of performance quotation provided in the
Registration Statement in response to Item 22*
(17) Not Applicable
<PAGE>
ITEM 25. Persons Controlled by or under Common Control with Registrant
Information pertaining to persons controlled by or under common control with
Registrant is incorporated by reference to the Statement of Additional
Information of the Avalon Capital Appreciation Fund contained in Part B of the
Registration Statement at the section entitled "Principal Holders of
Securities."
ITEM 26. Number of Holders of Securities
The number of record holders, as of July 15, 1998.
One
ITEM 27. Indemnification
Under Article ____ of the Registrant's Articles of Incorporation, each of its
Directors and officers or person serving in such capacity with another entity at
the request of the Registrant (a "Covered Person") shall be indemnified (from
the assets of the Sub-Trust or Sub-Trusts in question) against all liabilities,
including, but not limited to, amounts paid in satisfaction of judgments, in
compromises or as fines or penalties, and expenses, including reasonable legal
and accounting fees, incurred by the Covered Person in connection with the
defense or disposition of any action, suit or other proceeding, whether civil or
criminal before any court or administrative or legislative body, in which such
Covered Person may be or may have been involved as a party or otherwise or with
which such person may be or may have been threatened, while in office or
thereafter, by reason of being or having been such a Director or officer,
director or Director, except with respect to any matter as to which it has been
determined that such Covered Person (i) did not act in good faith in the
reasonable belief that such Covered Person's action was in or not opposed to the
best interests of the Trust or (ii) had acted with willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office (either and both of the conduct
described in (i) and (ii) being referred to hereafter as "Disabling Conduct"). A
determination that the Covered Person is not entitled to indemnification may be
made by (i) a final decision on the merits by a court or other body before whom
the proceeding was brought that the person to be indemnified was not liable by
reason of Disabling Conduct, (ii) dismissal of a court action or an
administrative proceeding against a Covered Person for insufficiency of evidence
of Disabling Conduct, or (iii) a reasonable determination, based upon a review
of the facts, that the indemnitee was not liable by reason of Disabling Conduct
by (a) a vote of the majority of a quorum of Directors who are neither
"interested persons" of the Trust as defined in Section 1(a)(19) of the 1940 Act
nor parties to the proceeding, or (b) as independent legal counsel in a written
opinion.
ITEM 28. Business and Other Connections of Investment Advisor and Investment
Administrator
Information pertaining to the business relationship and other connections of the
Investment Adviser is incorporated by reference to this Statement of Additional
Information of this Avalon Capital Appreciation Fund contained in Part B of the
Registration Statement of this section entitled "Management of the Fund".
ITEM 29. Principal Underwriters
Registrant has entered into a Distribution Agreement with Declaration
Distributors, Inc., ("DDI").
ITEM 30. Location of Accounts and Records
All accounts and records maintained by the Registrant are kept at the
Administrator's office located at 555 North Lane, Suite 6160 Conshohocken,
Pennsylvania 19428-0844. All accounts and records maintained by ____________,
custodian for Registrant, are maintained in ______________.
<PAGE>
ITEM 31. Not Applicable
ITEM 32. Undertakings
Registrant undertakes to file an amendment to the Registration Statement not
later than six (6) months from the effective date of this Registration to
include financial statement in reference to the Fund's performance. Further,
Registrant undertakes to call a meeting of shareholders for purposes of voting
upon the question of removal of one or more Directors when requested in writing
to do so by the holders of at least 10% of the Trust's outstanding shares, and
in connection with such meeting to comply with the provisions of Section 16(c)
of the Investment Company Act of 1940 relating to shareholder communications.
* To be filed by Amendment
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933, and it has duly caused this
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized in the city of Ann Arbor, State of
Michigan, on the 8th day of May, 1998.
THE AVALON FUND OF ANN ARBOR, INC
By: /S/ Robert E. Boone
-----------------------------
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Document Title
- ------ --------------
2 Bylaws of The Avalon Fund of Ann Arbor, Inc.
5 Advisory Agreement between Registrant and Questar Capital Corporation,
dated July 15, 1998.
6 Distribution Agreement among Registrant, Declaration Distributors,
Inc. and Questar Capital Corporation, dated July 15, 1998.
9.1 Operating Services Agreement between Registrant and Questar Capital
Corporation, dated July 15, 1998
9.2 Investment Company Services Agreement between Registrant, Questar
Capital Corporation and Declaration Service Company, dated July 15,
1998
10 Opinion and Consent of Counsel
BYLAWS
OF
THE AVALON FUND OF ANN ARBOR, INC.
ARTICLE I
STOCKHOLDERS' MEETINGS
Section 1. Place of Meetings. All meetings of stockholders shall be held at such
location as the Board of Directors shall direct.
Section 2. Annual Meeting.
(a) The annual meeting of stockholders for the election of directors and
the transaction of such other business as may properly come before it, if the
annual meeting shall be held, shall be held during the month of December of each
year (or during such other month as the Board of Directors shall determine),
commencing in 1999, at such date and time as shall be fixed by the Board of
Directors and stated in the notice of such meeting, but in no event more than
one hundred twenty (120) days after the occurrence of the event requiring the
meeting to elect directors. Any business of the corporation may be transacted at
the annual meeting without being specifically designated in the notice, except
such business as is specifically required by statute to be stated in the notice.
(b) The corporation shall not be required to hold an annual meeting in any
year in which the election of directors is not required to be acted on by
stockholders under the Investment Company Act of 1940.
Section 3. Special Meeting. Special meetings of the stockholders may be called
by the Board of Directors, the President, any Vice President, or the Secretary,
and shall be called by the Secretary upon the written request of the holders of
shares entitled to not less than ten percent (10%) of all the votes entitled to
be cast at such meeting; provided that such holders prepay the costs to the
corporation of preparing and mailing the notice of the meeting. The business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice.
Section 4. Notice of Meeting. Not less than ten (10) days nor more than ninety
(90) days before the date of every stockholders' meeting, the Secretary shall
give to each stockholder entitled to vote at such meeting and to each other
stockholder entitled to notice of such meeting under applicable law, written or
printed notice stating the time and place of the meeting, and in the case of a
special meeting (or where required by applicable law) the purpose or purposes
for which the meeting is called, either by mail, by presenting it to him
personally or by leaving it at his residence or usual place of business. If
mailed, such notice shall be deemed to be given when deposited in the United
States mail addressed to the stockholder at his post office address as it
appears on the records of the corporation, with postage thereon prepaid.
<PAGE>
Section 5. Quorum. At any meeting of stockholders the presence in person or by
proxy of stockholders entitled to cast a majority of the votes thereat shall
constitute a quorum; but this section shall not affect any requirement under
statute or under the charter for the vote necessary for the adoption of any
measure. If at any meeting a quorum is not present or represented, the Chairman
of the meeting or the holders of a majority of the stock present or represented
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum is present or represented. At such
adjourned meeting at which a quorum is present or represented, any business may
be transacted which might have been transacted at the meeting as originally
called.
Section 6. Stock Entitled to Vote. Each issued share of each class of stock
shall be entitled to vote at any meeting of stockholders except shares owned,
other than in a fiduciary capacity, by the corporation or by another corporation
in which the corporation owns shares entitled to cast a majority of all the
votes entitled to be cast by all shares outstanding and entitled to vote of such
corporation.
Section 7. Voting. Each outstanding share of each class of stock entitled to
vote at a meeting of stockholders shall be entitled to one vote on each matter
submitted to a vote. In all elections for directors every stockholder shall have
the right to vote the shares of each class owned of record by him for as many
persons as there are directors to be elected, but shall not be entitled to
exercise any right of cumulative voting. A stockholder may vote the shares owned
of record by him either in person or by proxy executed in writing by the
stockholder or by his authorized attorney-in-fact. No proxy shall be valid after
eleven (11) months from its date unless otherwise provided in the proxy. At all
meetings of stockholders, unless the voting is conducted by inspectors, all
questions relating to the qualification of voters, the validity of proxies and
the acceptance or rejection of votes shall be decided by the Chairman of the
meeting. A majority of the votes cast at a meeting of stockholders, duly called
and at which a quorum is present, shall be sufficient to take or authorize any
action which may properly come before the meeting, unless a greater number is
required by statute or by the charter.
Section 8. Informal Action. Any action required or permitted to be taken at any
meeting of stockholders may be taken without a meeting, if a consent in writing,
setting forth such action, is signed by all the stockholders entitled to vote on
the subject matter thereof and such consent is filed with the records of the
corporation.
ARTICLE II
DIRECTORS
Section 1. Number. The number of directors of the corporation shall be three
(3). By vote of a majority of the entire Board of Directors, the number of
directors fixed by the charter or by these bylaws may be increased or decreased
from time to time to not more than fifteen (15) nor less than three (3), but the
tenure of office of a director shall not be affected by any decrease in the
number of directors so made by the Board.
2
<PAGE>
Section 2. Election and Qualification. Until the first annual meeting of
stockholders and until successors are duly elected and qualify, the Board of
Directors shall consist of the persons named as such in the charter. At the
first annual meeting of stockholders, the stockholders shall elect directors to
hold office until their successors are elected and qualify. A director need not
be a stockholder of the corporation, but must be eligible to serve as a director
of a registered investment company under the Investment Company Act of 1940.
Section 3. Vacancies. Any vacancy on the Board of Directors occurring between
stockholders' meetings called for the purpose of electing directors may be
filled, if immediately after filling any such vacancy at least two-thirds of the
directors then holding office shall have been elected to such office at an
annual or special meeting of stockholders, in the following manner: (i) for a
vacancy occurring other than by any reason of an increase in directors, by a
majority of the remaining members of the Board, although such majority is less
than a quorum; and (ii) for a vacancy occurring by reason of an increase in the
number of directors, by action of a majority of the entire Board. A director
elected by the Board to fill a vacancy shall be elected to hold office until the
next annual meeting of stockholders or until his successor is elected and
qualified. If by reason of the death, disqualification or bona fide resignation
of any director or directors, more than sixty percent (60%) of the members of
the Board of Directors are interested persons of the corporation, as defined in
the Investment Company Act of 1940, such vacancy shall be filled within thirty
(30) days if it may be filled by the Board, or within sixty (60) days if a vote
of stockholders is required to fill such vacancy; provided that such vacancy may
be filled within such longer period as the Securities and Exchange Commission
may prescribe by rules and regulations, upon its own motion or by order upon
application. In the event that at any time less than a majority of the directors
were elected by the stockholders, the Board or proper officer shall forthwith
cause to be held as promptly as possible, and in any event within sixty (60)
days, a meeting of the stockholders for the purpose of electing directors to
fill any existing vacancies in the Board, unless the Securities and Exchange
Commission shall by order extend such period.
Section 4. Powers. The business and affairs of the corporation shall be managed
under the direction of the Board of Directors, which may exercise all of the
powers of the corporation, except such as are by law or by the charter or by
these bylaws conferred upon or reserved to the stockholders.
Section 5. Removal.
(a) 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 removed directors.
(b) Notwithstanding any other provisions of these bylaws, the Secretary of
the corporation shall promptly call a special meeting of stockholders for the
purpose of voting upon the question of removal of any director upon the written
request of the holders of shares entitled to not less than ten percent (10%) of
all the votes entitled to be cast at such meeting.
3
<PAGE>
(c) Whenever ten or more stockholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
one percent (1%) of the total outstanding shares, whichever is less, shall apply
to the corporation's Secretary in writing, stating that they wish to communicate
with other stockholders with a view to obtaining signatures to a request for a
meeting pursuant to subsection (b) above and accompanied by a form of
communication and request which they wish to transmit, the Secretary shall
within five business days after such application either: (1) afford to such
applicants access to a list of the names and addresses of all stockholders as
recorded on the books of the corporation; or (2) inform such applicants as to
the approximate number of stockholders of record and the approximate cost of
mailing to them the proposed communication and form of request.
(d) If the Secretary elects to follow the course specified in clause (2) of
subsection (c) above, the Secretary, upon the written request of such
applicants, accompanied by a tender of the material to be mailed and of the
reasonable expenses of mailing, shall, with reasonable promptness, mail such
material to all stockholders of record at their addresses as recorded on the
books, unless within five (5) business days after such tender the Secretary
shall mail to such applicants and file with the Securities and Exchange
Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Board of Directors to the effect
that in their opinion either such material contains untrue statements of fact or
omits to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion.
(e) After opportunity for hearing upon the objections specified in the
written statement so filed, the Securities and Exchange Commission may, and if
demanded by the Board of Directors or by such applicants shall, enter an order
either sustaining one or more of such objections or refusing to sustain any of
them. If the Securities and Exchange Commission shall enter an order refusing to
sustain any of such objections, or if, after the entry of an order sustaining
one or more of such objections, the Securities and Exchange Commission shall
find, after notice and opportunity for hearing, that all objections so sustained
have been met, and shall enter an order so declaring, the Secretary shall mail
copies of such material to all shareholders with reasonable promptness after the
entry of such order and the renewal of such tender.
Section 6. Place of Meetings. Meetings of the Board of Directors, regular or
special, may be held at any place in or out of the State of Maryland as the
Board may from time to time determine or as may be specified in the notice of
the meeting.
Section 7. First Meeting of Newly Elected Board. The first meeting of each newly
elected Board of Directors shall be held without notice immediately after and at
the same general place as the annual meeting of the stockholders, for the
purpose of organizing the Board, electing officers and transacting any other
business that may properly come before the meeting.
Section 8. Regular Meetings. Regular meetings of the Board of Directors may be
held without notice at such time and place as shall from time to time be
determined by the Board.
4
<PAGE>
Section 9. Special Meetings. Special meetings of the Board of Directors may be
called at any time either by the Board, the President, a Vice President or a
majority of the directors in writing with or without a meeting. Notice of
special meetings shall either be mailed by the Secretary to each director at
least three (3) days before the meeting or shall be given personally or
telegraphed to each director at least one (1) day before the meeting. Such
notice shall set forth the time and place of such meeting but need not, unless
otherwise required by law, state the purposes of the meeting.
Section 10. Quorum and Vote Required for Action. At all meetings of the Board of
Directors a majority of the entire Board shall constitute a quorum for the
transaction of business, and the action of a majority of the directors present
at any meetings at which a quorum is present shall be the action of the Board of
Directors unless the concurrence of a greater proportion is required for such
action by statute, the articles of incorporation or these bylaws. If at any
meeting a quorum is not present, a majority of the directors present may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present. Members of the Board of Directors or a
committee of the Board may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time; provided, however, that a
director may not participate in a meeting by means of a conference telephone or
similar communications equipment if the purpose of the meeting is to approve the
corporation's investment advisory agreement and/or to approve the selection of
the corporation's auditors, or if participation in such a manner would otherwise
violate the Investment Company Act of 1940 or other applicable laws. Except as
set forth in the preceding sentence, participation in a meeting by these means
constitutes presence in person at the meeting.
Section 11. Executive and Other Committees. The Board of Directors may appoint
from among its members an executive and other committees composed of two (2) or
more directors. The Board may delegate to such committees in the intervals
between meetings of the Board any of the powers of the Board to manage the
business and affairs of the corporation, except the power to: (i) declare
dividends or distributions upon the stock of the corporation; (ii) issue stock
of the corporation; (iii) recommend to the stockholders any action which
requires stockholder approval; (iv) amend the bylaws; (v) approve any merger or
share exchange which does not require stockholder approval; or (vi) take any
action required by the Investment Company Act of 1940 to be taken by the
independent directors of the corporation or by the full Board of Directors.
Section 12. Informal Action. Except as set forth in the following sentence, any
action required or permitted to be taken at any meeting of the Board of
Directors or of a committee of the Board may be taken without a meeting, if a
written consent to such action is signed by all members of the Board or the
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board or committee. Notwithstanding the preceding
sentence, no action may be taken by the Board of Directors pursuant to a written
consent with respect to the approval of the corporation's investment advisory
agreement, the approval of the selection of the corporation's auditors, or any
action required by the Investment Company Act of 1940 or other applicable law to
be taken at a meeting of the Board of Directors to be held in person.
5
<PAGE>
ARTICLE III
OFFICERS AND EMPLOYEES
Section 1. Election and Qualification. At the first meeting of each newly
elected Board of Directors there shall be elected a President, one or more Vice
Presidents, a Secretary and a Treasurer. The Board may also elect one or more
Assistant Secretaries and Assistant Treasurers. No officer need be a director.
Any two or more officers, except the offices of President and Vice President,
may be held by the same person but no officer shall execute, acknowledge or
verify any instrument in more than one capacity, if such instrument is required
by law, charter or these bylaws to be executed, acknowledged or verified by two
or more officers. Each officer must be eligible to serve as an officer of a
registered investment company under the Investment Company Act of 1940. Nothing
herein shall preclude the employment of other employees or agents by the
corporation from time to time without action by the Board.
Section 2. Term, Removal and Vacancies. The officers shall be elected to serve
until the next first meeting of a newly elected Board of Directors and until
their successors are elected and qualified. Any officer may be removed by the
Board, with or without cause, whenever in its judgement the best interests of
the corporation will be served thereby, but such removal shall be without
prejudice to the contractual rights, if any, of the person so removed. A vacancy
in any office shall be filled by the Board for the unexpired term.
Section 3. Bonding. Each officer and employee of the corporation who singly or
jointly with others has access to securities or funds of the corporation, either
directly or through authority to draw upon such funds, or to direct generally
the disposition of such securities shall be bonded against larceny and
embezzlement by a reputable fidelity insurance company. Each such bond, may be
in the form of an individual bond, a schedule or blanket bond covering the
corporation's officers and employees and the officers and employees of the
investment adviser to the corporation and other corporations to which said
investment adviser also acts as investment adviser, shall be in such form and
for such amount (determined at least annually) as the Board of Directors shall
determine in compliance with the requirements of Section 17(g) of the Investment
Company Act of 1940, as amended from time to time, and the rules, regulations or
orders of the Securities and Exchange Commission thereunder.
Section 4. President. The President shall be the principal executive officer of
the corporation. He shall preside at all meetings of the stockholders and
directors, have general and active management of the business of the
corporation, see that all orders and resolutions of the Board of Directors are
carried into effect, and execute in the name of the corporation all authorized
instruments of the corporation, except where the signing shall be expressly
delegated by the Board to some other officer or agent of the corporation.
Section 5. Vice Presidents. The Vice President, or if there be more than one,
the Vice Presidents in the order determined by the Board of Directors, shall, in
the absence or disability of the President, perform the duties and exercise the
powers of the President, and shall have such other duties and powers as the
Board may from time to time prescribe or the President delegate.
6
<PAGE>
Section 6. Secretary and Assistant Secretaries. The Secretary shall give notice
of, attend and record the minutes of meetings of stockholders and directors,
keep the corporate seal and, when authorized by the Board, affix the same to any
instrument requiring it, attesting to the same by his signature, and shall have
such further duties and powers as are incident to his office or as the Board may
from time to time prescribe. The Assistant Secretary, if any, or, if there be
more than one, the Assistant Secretaries in the order determined by the Board,
shall in the absence or disability of the Secretary, perform the duties and
exercise the powers of the Secretary, and shall have such other duties and
powers as the Board may from time to time prescribe or the Secretary delegate.
Section 7. Treasurer and Assistant Treasurers. The Treasurer shall be the
principal financial and accounting officer of the corporation. He shall be
responsible for the custody and supervision of the corporation's books of
account and subsidiary accounting records, and shall have such further duties
and powers as are incident to his office or as the Board of Directors may from
time to time prescribe. The Assistant Treasurer, if any, or, if there be more
than one, the Assistant Treasurers in the order determined by the Board, shall
in the absence or disability of the treasurer, perform all duties and exercise
the powers of the Treasurer, and shall have such other duties and powers as the
Board may from time to time prescribe or the Treasurer delegate.
ARTICLE IV
RESTRICTIONS ON COMPENSATION
TRANSACTIONS AND INVESTMENTS
Section 1. Salary and Expenses. Directors and executive officers as such shall
not receive any salary for their services or reimbursement for expenses from the
corporation; provided that the corporation may pay fees in such amounts and at
such times as the Board of Directors shall determine to directors who are not
interested persons of the corporation for attendance at meetings of the Board of
Directors. Clerical employees shall receive compensation for their services from
the corporation in such amounts as are determined by the Board of Directors.
Section 2. Compensation and Profit from Purchase and Sales. No affiliated person
of the corporation, as defined in the Investment Company Act of 1940, or
affiliated person of such person, shall, except as permitted by Section 17(e) of
the Act, or the rules, regulations or orders of the Securities and Exchange
Commission thereunder, (i) acting as agent, accept from any source any
compensation for the purchase or sale of any property or securities to or for
the corporation or any controlled company of the corporation, as defined in such
Act, or (ii) acting as a broker, in connection with the sale of securities to or
by the corporation or any controlled company of the corporation, receive from
any source a commission, fee or other remuneration for effecting such
transaction.
Section 3. Transactions with Affiliated Person. No affiliated person of the
corporation, as defined in the Investment Company Act of 1940, or affiliated
person of such person shall knowingly (i) sell any security or other property to
the corporation or to any company controlled
7
<PAGE>
by the corporation, as defined in the Act, except shares of stock of the
corporation or securities of which such person is the issuer and which are part
of a general offering to the holders of a class of its securities, (ii) purchase
from the corporation or any such controlled company any security or property
except shares of stock of the corporation or securities of which such person is
the issuer, (iii) borrow money or other property from the corporation or any
such controlled company, or (iv) acting as a principal effect any transaction in
which the corporation or controlled company is a joint or joint and several
participant with such person; provided, however, that this section shall not
apply to any transaction permitted by Sections 17(a), (b), (c), (d) or 21(b) of
the Investment Company Act of 1940 or the rules, regulations or orders of the
Securities and Exchange Commission thereunder, and shall not prohibit the joint
participation by the corporation and an affiliate in a fidelity bond
arrangement.
Section 4. Investment Adviser. The corporation shall employ one or more
investment advisers, the employment of which shall be pursuant to written
agreements in accordance with Section 15 of the Investment Company Act of 1940,
as amended from time to time.
ARTICLE V
STOCK CERTIFICATE AND TRANSFER BOOKS
Section 1. Certificates. The corporation will not issue stock certificates
unless required to do so by state law. Instead shareholder's accounts will be
credited with the number of shares purchased.
Section 2. Written Confirmation. Each shareholder will receive written
confirmation of shares purchased.
Section 3. Stock Ledger. The corporation shall maintain at its office or at the
office of its principal transfer agent, if any, an original or duplicate stock
ledger containing the name and addresses of all stockholders and the number of
shares of each class of stock held by each stockholder.
Section 4. Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as such, as
the owner of shares for all purposes, and shall not be bound to recognize any
equitable or other claim to or interest in such shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Maryland.
Section 5. Transfer Agent and Registrar. The corporation may maintain one or
more transfer offices or agencies, each in charge of a transfer agent designated
by the Board of Directors, where the shares of each class of stock of the
corporation shall be transferable. The corporation may also maintain one or more
registry offices, each in charge of a registrar designated by the Board, where
the shares of such classes of stock shall be registered.
8
<PAGE>
Section 6. Transfers of Stock. Upon surrender to the corporation or a transfer
agent of a certificate for shares of any class duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 7. Fixing of Record Dates and Closing of Transfer Books. The Board of
Directors may fix, in advance, a date as the record date for the purpose of
determining stockholders entitled to notice of, or to vote at, any meeting of
stockholders, or stockholders entitled to receive payment of any dividend or the
allotment of any rights, or in order to make a determination of stockholders for
any other proper purpose. Such date, in any case, shall be not more than ninety
(90) days, and in case of a meeting of stockholders not less than ten (10) days,
prior to the date on which the particular action requiring such determination of
stockholders is to be taken. In lieu of fixing a record date, the Board may
provide that the stock transfer books shall be closed for a stated period but
not to exceed, in any case, twenty (20) days. If the stock transfer books are
closed or a record date is fixed for the purpose of determining stockholders
entitled to vote at a meeting of stockholders, such books shall be closed for at
least ten (10) days immediately preceding such action.
ARTICLE VI
ACCOUNTS, REPORTS, CUSTODIAN AND INVESTMENT ADVISER
Section 1. Inspection of Books. The Board of Directors shall determine from time
to time whether, and, if allowed, when and under what conditions and regulations
the accounts and books of the corporation (except such as may by statute be
specifically open to inspection) or any of them, shall be open to the inspection
of the stockholders, and the stockholders' rights in this respect are and shall
be limited accordingly.
Section 2. Reliance on Records. Each director and officer shall, in the
performance of his duties, be fully protected in relying in good faith on the
books of account or reports made to the corporation by any of its officials or
by an independent public accountant.
Section 3. Preparation and Maintenance of Accounts, Records and Statements. The
President, a Vice President or the Treasurer shall prepare or cause to be
prepared annually, a full and correct statement of the affairs of the
corporation, including a balance sheet or statement of financial condition and a
financial statement of operations for the preceding fiscal year, which shall be
submitted at the annual meeting of the stockholders and filed within twenty (20)
days thereafter at the principal office of the corporation. If the corporation
is not required to hold an annual meeting of stockholders, the statement of
affairs shall be placed on file at the corporation's principal office within one
hundred twenty (120) days after the end on the fiscal year. The proper officers
of the corporation shall also prepare, maintain and preserve or cause to be
prepared. maintained and preserved the accounts, books and other documents
required by Section 2-111 of the Maryland General Corporation Law and Section 31
of the Investment
9
<PAGE>
Company Act of 1940 and shall prepare and file or cause to be prepared and file
the reports required by Section 30 of such Act. No financial statement shall be
filed with the Securities and Exchange Commission unless the officers or
employees who prepared or participated in the preparation of such financial
statement have been specifically designated for such purpose by the Board of
Directors.
Section 4. Auditors. No independent public accountant shall be retained or
employed by the corporation to examine, certify or report on its financial
statements for any fiscal year unless such selection: (i) shall have been
approved by a majority of the entire Board of Directors within thirty (30) days
before or after the beginning of such fiscal year or before the annual
ratification by the stockholders; (ii) shall have been ratified by the
stockholders, provided that any vacancy occurring between such annual
ratification due to the death or resignation of such accountant may be filled by
the Board of Directors; and (iii) shall otherwise meet the requirements of
Section 32 of the Investment Company Act of 1940.
Section 5. Custodianship. All securities owned by the corporation and all cash,
including, without limiting the generality of the foregoing, the proceeds from
sales of securities owned by the corporation and from the issuance of shares of
the capital stock of the corporation, payments of principal upon securities
owned by the corporation, and distributions in respect of securities owned by
the corporation which at the time of payment are represented by the distributing
corporation to be capital distributions, shall be held by a custodian or
custodians which shall be a bank, as that term is defined in the Investment
Company Act of 1940, having capital, surplus and undivided profits aggregating
not less than $2,000,000. The terms of custody of such securities and cash shall
include provisions to the effect that the custodian shall deliver securities
owned by the corporation only (a) upon sales of such securities for the account
of the corporation and receipt by the custodian of payment therefore, (b) when
such securities are called, redeemed or retired or otherwise become payable, (c)
for examination by any broker selling any such securities in accordance with
"street delivery" custom, (d) in exchange for or upon conversion into other
securities alone or other securities and cash whether pursuant to any plan of
merger, consolidation, reorganization, recapitalization or readjustment, or
otherwise, (e) upon conversion of such securities pursuant to their terms into
other securities, (f) upon exercise of subscription, purchase or other similar
rights represented by such securities, (g) for the purpose of exchanging interim
receipts or temporary securities for definitive securities, (h) for the purpose
of redeeming in kind shares of the capital stock of the corporation, or (i) for
other proper corporate purposes. Such terms of custody shall also include
provisions to the effect that the custodian shall hold the securities and funds
of the corporation in a separate account or accounts and shall have sole power
to release and deliver any such securities and draw upon any such account, any
of the securities or funds of the corporation only on receipt by such custodian
of written instruction from one or more persons authorized by the Board of
Directors to give such instructions on behalf of the corporation, and that the
custodian shall deliver cash of the corporation required by this Section 5 to be
deposited with the custodian only upon the purchase of securities for the
portfolio of the corporation and the delivery of such securities to the
custodian, for the purchase or redemption of shares of the capital stock of the
corporation, for the payment of interest, dividends, taxes, management or
supervisory fees or operating expenses, for payments in connection with the
conversion, exchange or surrender of securities owned by the corporation, or
10
<PAGE>
for other proper corporate purposes. Upon the resignation or inability to serve
of any such custodian the corporation shall (a) use its best efforts to obtain a
successor custodian, (b) require the cash and securities of the corporation held
by the custodian to be delivered directly to the successor custodian, and (c) in
the event that no successor custodian can be found, submit to the stockholders
of the corporation, before permitting delivery of such cash and securities to
anyone other than a successor custodian, the question whether the corporation
shall be dissolved or shall function without a custodian; provided, however,
that nothing herein contained shall prevent the termination of any agreement
between the corporation and any such custodian by the affirmative vote of the
holders of a majority of all the shares of the capital stock of the corporation
at the time outstanding and entitled to vote. Upon its resignation or inability
to serve, the custodian may deliver any assets of the corporation held by it to
a qualified bank or trust company selected by it, such assets to be held subject
to the terms of custody which governed such retiring custodian, pending action
by the corporation as set forth in this Section 5.
Section 6. Termination of Custodian Agreement. Any employment agreement with a
custodian shall be terminable on not more than sixty (60) days notice in writing
by the Board of Directors or the custodian and upon any such termination the
custodian shall turn over only to the succeeding custodian designated by the
Board of Directors all funds, securities and property and documents of the
corporation in its possession.
Section 7. Checks and Requisitions. Except as otherwise authorized by the Board
of Directors, all checks and drafts for the payment of money shall be signed in
the name of the corporation by a custodian, and all requisitions or orders for
the payment of money by a custodian or for the issue of checks and drafts
therefore, all promissory notes, all assignments of stock or securities standing
in the name of the corporation, and all requisitions or orders for the
assignment of stock or securities standing in the name of a custodian or its
nominee, or for the execution of powers to transfer the same, shall be signed in
the name of the corporation by not less than two persons (who shall be among
those persons, not in excess of five, designated for this purpose by the Board
of Directors) at least one of which shall be an officer. Promissory notes,
checks or drafts payable to the corporation may be endorsed only to the order of
a custodian or its nominee by the Treasurer or President or by such other person
or persons as shall be thereto authorized by the Board of Directors.
Section 8. Investment Advisory Contract. Any investment advisory contract in
effect after the first annual meeting of stockholders of the corporation, to
which the corporation is or shall become a party, whereby, subject to the
control of the Board of Directors of the corporation, the investment portfolio
with respect to any class of Common Stock of the corporation shall be managed or
supervised by the other party to such contract, shall be effective and binding
only upon the affirmative vote of a majority of the outstanding voting
securities of such class of Common Stock of the corporation (as defined in the
Investment Company Act of 1940), and the investment advisory contract currently
in effect with respect to any class of Common Stock shall be submitted to the
holders of shares of such class of Common Stock for ratification by the
affirmative vote of such majority. Any investment advisory contract to which the
corporation shall be a party whereby, subject to the control of the Board of
Directors of the corporation, the investment portfolio with respect to any class
of Common Stock of the corporation shall be
11
<PAGE>
managed or supervised by the other party to such contract, shall provide, among
other things, that such contract cannot be assigned. Such investment advisory
contract shall prohibit the other party thereto from making short sales of
shares of capital stock of the corporation; and such investment advisory
contract shall prohibit such other party from purchasing shares otherwise than
for investment, and shall require such other party to advise the corporation of
any sales of shares of the capital stock of the corporation made by such person
or organization less than two months after the date of any purchase by him or it
of shares of the capital stock of the corporation. Unless any such contract
shall expressly otherwise provide, any provisions therein for the termination
thereof by action of the Board of Directors of the corporation shall be
construed to require that such termination can be accomplished only upon the
vote of a majority of the entire Board.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Offices. The registered office of the corporation in the State of
Maryland shall be in the City of Baltimore. The corporation may also have
offices at such other places within and without the State of Maryland as the
Board of Directors may from time to time determine. Except as otherwise required
by statute, the books and records of the corporation may be kept outside the
State of Maryland.
Section 2. Seal. The corporate seal shall have inscribed thereon the name of the
corporation, and the words "Corporate Seal" and "Maryland". The seal may be used
by causing it or a facsimile thereof to be impressed, affixed, reproduced or
otherwise.
Section 3. Fiscal Year. The fiscal year of the corporation shall be fixed by the
Board of Directors.
Section 4. Notice of Waiver of Notice. Whenever any notice of the time, place or
purpose of any meeting of stockholders or directors is required to be given
under the statute, the charter or these bylaws, a waiver thereof in writing,
signed by the person or persons entitled to such notice and filed with the
records of the meeting, either before or after the holding thereof, or actual
attendance at the meeting of stockholders in person or by proxy or at the
meeting of directors in person, shall be deemed equivalent to the giving of such
notice to such person. No notice need be given to any person with whom
communication is made unlawful by any law of the United States or any rule,
regulation, proclamation or executive order issued by any such law.
Section 5. Voting of Stock. Unless otherwise ordered by the Board of Directors,
the President shall have full power and authority, in the name and on behalf of
the corporation, (i) to attend, act and vote at any meeting of stockholders of
any company in which the corporation may own shares of stock of record,
beneficially (as the proxy or attorney-in-fact of the record holder) or of
record and beneficially, and (ii) to give voting directions to the record
stockholder of any such stock beneficially owned. At any such meeting, he shall
possess and may exercise any and all
12
<PAGE>
rights and powers incident to the ownership of such shares which, as the holder
or beneficial owner and proxy of the holder thereof, the corporation might
possess and exercise if personally present, and may delegate such power and
authority to any officer, agent or employee of the corporation.
Section 6. Dividends. Dividends upon any class of stock of the corporation,
subject to the provisions of the charter, if any, may be declared by the Board
of Directors in any lawful manner. The source of each dividend payment shall be
disclosed to the stockholders receiving such dividend, to the extent required by
the laws of the State of Maryland and by Section 19 of the Investment Company
Act of 1940 and the rules and regulations of the Securities and Exchange
Commission thereunder.
Section 7. Indemnification.
A. The corporation shall indemnify all of its corporate representatives
against expenses, including attorneys' fees, judgements, fines and amounts paid
in settlement actually and reasonably incurred by them in connection with the
defense of any action, suit or proceeding, or threat or claim of such action,
suit or proceeding, whether civil, criminal, administrative, or legislative, no
matter by whom brought, or in any appeal in which they or any of them are made
parties or a party by reason of being or having been a corporate representative,
if the corporate representative acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation and
with respect to any criminal proceeding, if he had no reasonable cause to
believe his conduct was unlawful provided that the corporation shall not
indemnify corporate representatives in relation to matters as to which any such
corporate representative shall be adjudged in such action, suit or proceeding to
be liable for gross negligence, willful misfeasance, bad faith, reckless
disregard of the duties and obligations involved in the conduct of his office,
or when indemnification is otherwise no permitted by the Maryland General
Corporation Law.
B. In the absence of an adjudication which expressly absolves the corporate
representative, or in the event of a settlement, each corporate representative
shall be indemnified hereunder only if there has been a reasonable determination
based on a review of the facts that indemnification of the corporate
representative is proper because he has met the applicable standard of conduct
set forth in paragraph A. Such determination shall be made: (i) by the Board of
Directors, by a majority vote of a quorum which consists of directors who were
not parties to the action, suit or proceeding, or if such a quorum cannot be
obtained, then by a majority vote of a committee of the Board consisting solely
of two or more directors, not, at the time, parties to the action, suit or
proceeding and who were duly designated to act in the matter by the full Board
in which the designated directors who are parties to the action, suit or
proceeding may participate; or (ii) by a special legal counsel selected by the
Board of Directors or a committee of the Board by vote as set forth in (i) of
this paragraph, or, if the requisite quorum of the full Board cannot be obtained
therefor and the committee cannot be established, by a majority vote of the full
Board in which directors who are parties to the action, suit or proceeding may
participate.
13
<PAGE>
C. The termination of any action, suit or proceeding by judgement, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall create a rebuttable presumption that the person was guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard to the duties and
obligations involved in the conduct of his or her office, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
D. Expenses, including attorneys' fees, incurred in the preparation of
and/or presentation of the defense of a civil or criminal action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding as authorized in the manner provided in Section
2-418(F) of the Maryland General Corporation Law upon receipt of: (i) an
undertaking by or on behalf of the corporate representative to repay such amount
unless it shall ultimately be determined that he or she is entitled to be
indemnified by the corporation as authorized in this bylaw; and (ii) a written
affirmation by the corporate representative of the corporate representative's
good faith belief that the standard of conduct necessary for indemnification by
the corporation has been met.
E. The indemnification provided by this bylaw shall not be deemed exclusive
of any other rights to which those indemnified may be entitled under these
bylaws, any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person subject
to the limitations imposed from time to time by the Investment Company Act of
1940, as amended.
F. This corporation shall have power to purchase and maintain insurance on
behalf of any corporate representative against any liability asserted against
him or her and incurred by him or her in such capacity or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under this bylaw provided that no
insurance may be purchased or maintained to protect any corporate representative
against liability for gross negligence, willful misfeasance, bad faith or
reckless disregard of the duties and obligations involved in the conduct of his
or her office.
G. "Corporate Representative" means an individual who is or was a director,
officer, agent or employee of the corporation or who serves or served another
corporation, partnership, joint venture, trust or other enterprise in one of
these capacities at the request of the corporation and who, by reason of his or
her position, is, was, or is threatened to be made, a party to a proceeding
described herein.
Section 6. Amendments.
A. These bylaws may be altered, amended or repealed and new bylaws may be
adopted by the stockholders by affirmative vote of not less than a majority of
the shares of all classes of stock present or represented at any annual or
special meeting of the stockholders at which a quorum is in attendance.
14
<PAGE>
B. These bylaws may also be altered, amended or repealed and new bylaws may
be adopted by the Board of Directors by affirmative vote of a majority of the
number of directors present at any meeting at which a quorum is in attendance;
but no bylaw adopted by the stockholders shall be amended or repealed by the
Board of Directors if the bylaws so adopted so provides.
C. Any action taken or authorized by the stockholders or by the Board of
Directors, which would be inconsistent with the bylaws then in effect but is
taken or authorized by affirmative vote of not less than the number of shares or
the number of directors required to amend the bylaws so that the bylaws would be
consistent with such action, shall be given the same effect as though the bylaws
had been temporarily amended or suspended so far, but only so far, as was
necessary to permit the specific action so taken or authorized.
Section 9. Reports to Stockholders. The books of account of the corporation
shall be examined by an independent firm of public accountants at the close of
each annual fiscal period of the corporation and at such other times, if any, as
may be directed by the Board of Directors of the corporation. A report to the
stockholders based upon each such examination shall be mailed to each
stockholder of the corporation of record on such date with respect to each
report as may be determined by the Board of Directors at his address as the same
appears on the books of the corporation. Each such report shall include the
financial information required to be transmitted to stockholders by rules or
regulations of the Securities and Exchange Commission under the Investment
Company Act of 1940 and shall be in such form as the Board of Directors shall
determine pursuant to rules and regulations of the Securities and Exchange
Commission.
Section 10. Information to Accompany Dividends. At the time of the payment by
the corporation of any dividend to the holders of any class of stock of the
corporation, each stockholder to whom such dividend is paid shall be notified of
the account or accounts from which it is paid and the amount thereof paid from
each such account.
ARTICLE VIII
SALES, REDEMPTION AND
NET ASSET VALUE OF SHARES
Section 1. Sales of Shares. Shares of any class of Common Stock of the
corporation shall be sold by it for the net asset value per share of such class
of Common Stock outstanding at the time as of which the computation of said net
asset value shall be made as hereinafter provided in these bylaws.
Section 2. Periodic Investment and Dividend Reinvestment Plans. The corporation
acting by and through the Board of Directors shall have the right to adopt and
to offer to the holders of each class of stock and to the public a periodic
investment plan and an automatic reinvestment of dividend plan subject to the
limitations and restrictions imposed thereon and as set forth in the Investment
Company Act of 1940 and any rule or regulation or issued thereunder.
15
<PAGE>
Section 3. Shares Issued for Securities. In the case of shares of any class of
stock of the corporation issued in whole or in part in exchange for securities,
there may, at the discretion of the Board of Directors of the corporation, be
included in the value of said securities, for the purpose of determining the
number of shares of such class stock of the corporation issuable in exchange
therefore, the amount, if any, of brokerage commissions (not exceeding an amount
equal to the rates payable in connection with the purchase of comparable
securities on the New York Stock Exchange) or other similar costs of acquisition
of such securities paid by the holder of said securities in acquiring the same.
Section 4. Redemption of Shares. Each share of each class of Common Stock of the
corporation now or hereafter issued shall be subject to redemption, as provided
in the Articles of Incorporation of the corporation.
Section 5. Suspension of Right of Redemption. The Board of Directors of the
corporation may suspend the right of the holders of any class of Common Stock of
the corporation to require the corporation to redeem shares of such class:
(1) for any period (a) during which the New York Stock Exchange is
closed other than customary weekend and holiday closings, or (b) during
which trading on the New York Stock Exchange is restricted;
(2) for any period during which an emergency, as defined by rules of
the Securities and Exchange Commission or any successor thereto, exists as
a result of which (a) disposal by the corporation of securities owned by it
is not reasonably practicable, or (b) it is not reasonably practicable for
the corporation fairly to determine the value of its net assets; or
(3) for such other periods as the Securities and Exchange Commission
or any successor thereto may by order permit for the protection of security
holders of the corporation.
Section 6. Computation of Net Asset Value. For purposes of these bylaws, the
following rules shall apply:
A. The net asset value of each share of each class of Common Stock of the
corporation shall be determined at such time or times as may be disclosed in the
then currently effective Prospectus relating to such class of Common Stock of
this corporation. The Board of Directors may also, from time to time by
resolution, designate a time or times intermediate of the opening and closing of
trading on the New York Stock Exchange on each day that said Exchange is open
for trading as of which the net asset value of each share of each class of
Common Stock of the corporation shall be determined or estimated.
16
<PAGE>
Any determination or estimation of net asset value as provided in this
Subparagraph A shall be effective at the time as of which such determination or
estimation is made.
The net asset value of each share of each class of Common Stock of the
corporation for purposes of the issue of such class of Common Stock shall be the
net asset value which becomes effective as provided in this Subparagraph A, next
succeeding receipt of the subscription to such share of such class Common Stock.
The net asset value of each share of each class of Common Stock of the
corporation tendered for redemption shall be the net asset value which becomes
effective as provided in this Subparagraph A, next succeeding the tender of such
share of such class of Common Stock for redemption.
B. The net asset value of each share of each class of Common Stock of the
corporation, as of the close of business on any day, shall be the quotient
obtained by dividing the value at such close of the net assets belonging to such
class (meaning the assets belonging to such class and any other assets allocated
to such class less the liabilities belonging to such class and any other
liabilities allocated to such class excluding capital and surplus) of the
corporation by the total number of shares of such class outstanding at such
close.
(i) The assets belonging to any class of Common Stock shall be that
portion of the total assets of the corporation as determined in accordance
with the provisions of Article IV of the Articles of Incorporation of the
corporation. The assets of the corporation shall be deemed to include (a)
all cash on hand, on deposit, or on call, (b) all bills and notes and
accounts receivable, (c) all shares of stock and subscription rights and
other securities owned or contracted for by the corporation, other than its
own Common Stock, (d) all stock and cash dividends and cash distributions,
to be received by the corporation, and not yet received by it but declared
to stockholders of record on a date on or before the date as of which the
net asset value is being determined, (e) all interest accrued on any
interest-bearing securities owned by the corporation, and (f) all other
property of every kind and nature including prepaid expenses; the value of
such assets to be determined in accordance with the corporation's
registration statement filed with the Securities and Exchange Commission.
(ii) The liabilities belonging to any class of Common Stock shall be
that portion of the total liabilities of the corporation as determined in
accordance with the provisions of Article IV of the Articles of
Incorporation of the corporation. The liabilities of the corporation shall
be deemed to include (a) all bills and notes and accounts payable, (b) all
administration expenses payable and/or accrued (including investment
advisory fees), (c) all contractual obligations for the payment of money or
property including the amount of any unpaid dividend declared upon the
corporation's stock and payable to stockholders of record on or before the
day as of which the value of the corporation's stock is being determined,
(d) all reserves, if any, authorized or approved by the Board of Directors
for taxes, including reserves for taxes at current rates based on any
unrealized appreciation in the value of the assets of the corporation, and
(e) all other liabilities of the corporation of whatever kind and nature
except liabilities represented by outstanding capital stock and surplus of
the corporation.
(iii) For the purpose hereof: (a) shares of each class of Common Stock
subscribed for shall be deemed to be outstanding as of the time of
acceptance of any subscription and the entry thereof on the books of the
corporation and the net price thereof shall be deemed to be an asset
belonging to such class; and (b) shares of each class of Common Stock
surrendered for redemption by the corporation shall be deemed to be
outstanding until the time as of which the net asset value for purposes of
such redemption is determined or estimated.
C. The net asset value of each share of each class of Common Stock of the
corporation, as of any time other than the close of business on any day, may be
determined by applying to the net asset value as of the close of business on the
preceding business day, computed as provided in Paragraph B of this Section of
these bylaws, such adjustments as are authorized by or pursuant to the direction
of the Board of Directors and designed reasonably to reflect any material
changes in the market value of securities and other assets held and any other
material changes in the assets or liabilities of the corporation and in the
number of its outstanding shares which shall have taken place since the close of
business on such preceding business day.
D. In addition to the foregoing, the Board of Directors is empowered, in
its absolute discretion, to establish other bases or times, or both, for
determining the net asset value of each share of each class of the Common Stock
of the corporation.
17
INVESTMENT ADVISORY AGREEMENT
This Agreement is made and entered into as of the 15th of July, 1998, by
and between The Avalon Funds of Ann Arbor, Inc., a Maryland corporation (the
"Fund"), and Questar Capital Corporation, a Michigan corporation (hereinafter
referred to as "Questar").
WHEREAS, the Fund is diversified, open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "Act"), and
authorized to issue shares representing interests in The Avalon Capital
Appreciation Fund (the "Portfolio"); and
WHEREAS, Questar is registered as an investment adviser under the
Investment Advisers Act of 1940, and engages in the business of asset
management; and
WHEREAS, the Fund desires to retain Questar to render certain investment
management services to the Fund and Questar is willing to render such services;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows;
1. Obligations of Investment Adviser
(a) Services. Questar agrees to perform the following services (the
"Services") for the Fund:
(1) manage the investment and reinvestment of the Portfolio's
assets;
(2) continuously review, supervise, and administer the investment
program of the Portfolio;
(3) determine, in its discretion, the securities to be purchased,
retained or sold (and implement those decisions);
(4) provide the Fund with records concerning Questar's activities
which the Fund is required to maintain; and
(5) render regular reports to the Fund's officers and directors
concerning Questar's discharge of the foregoing responsibilities.
Questar shall discharge the foregoing responsibilities subject to the
control of the officers and the directors of the Fund and in compliance
with such policies as the directors may from time to time establish, and in
compliance with the objectives, policies, and limitations of the Portfolio
set forth in the Fund's
<PAGE>
prospectus, as amended from time to time, and with all applicable laws and
regulations. All Services to be furnished by Questar under this Agreement
may be furnished through the medium of any directors, officers or employees
of Questar or through such other parties as Questar may determine from time
to time.
Questar agrees, at its own expense or at the expense of one or more of
its affiliates, to render the Services and to provide the office space,
furnishings, equipment and personnel as may be reasonably required in the
judgment of the Board of Directors of the Fund to perform the Services on
the terms and for the compensation provided herein. Questar shall authorize
and permit any of its officers, directors and employees, who may be elected
as directors or officers of the Fund, to serve in the capacities in which
they are elected.
Except to the extent expressly assumed by Questar herein and except to
the extent required by law to be paid by Questar, the Fund shall pay all
costs and expenses in connection with its operation and organization.
(b) Books and Records. All books and records prepared and maintained
by Questar for the Fund under this Agreement shall be the property of the
Fund and, upon request therefor, Questar shall surrender to the Fund such
of the books and records so requested.
2. Portfolio Transactions. Questar is authorized to select the brokers or
dealers that will execute the purchases and sales of portfolio securities for
the Portfolio and is directed to use its best efforts to obtain the best net
results as described in the Fund's prospectus from time to time. Questar may, in
its discretion, purchase and sell portfolio securities from and to brokers and
dealers who provide the Portfolio with research, analysis, advice and similar
services, and Questar may pay to these brokers and dealers, in return for
research and analysis, a higher commission or spread than may be charged by
other brokers and dealers, provided that Questar determines in good faith that
such commission is reasonable in terms either of that particular transaction or
of the overall responsibility of Questar to the Fund and its other clients and
that the total commission paid by the Fund will be reasonable in relation to the
benefits to the Portfolio over the long-term. Questar will promptly communicate
to the officers and the directors of the Fund such information relating to
portfolio transactions as they may reasonably request.
3. Compensation of Questar. The Fund will pay to Questar on the last day of
each month an annual fee equal to 1.00% of average net asset value of the
Portfolio, such fee to be computed daily based upon the net asset value of the
Portfolio as determined by a valuation made in accordance with the Fund's
procedure for calculating Portfolio net asset value as described in the Fund's
Prospectus and/or Statement of Additional Information. During any period when
the determination of a Portfolio's net asset value is suspended by the directors
of the Fund, the net asset value of a share of that Portfolio as of the last
business day prior to such suspension shall, for the purpose of this
2
<PAGE>
Paragraph 3, be deemed to be net asset value at the close of each succeeding
business day until it is again determined.
4. Status of Investment Adviser. The services of Questar to the Fund are
not to be deemed exclusive, and Questar shall be free to render similar services
to others so long as its services to the Fund are not impaired thereby. Questar
shall be deemed to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no authority to act for or represent the
Fund in any way or otherwise be deemed an agent of the Fund. Nothing in this
Agreement shall limit or restrict the right of any director, officer or employee
of Questar, who may also be a director, officer, or employee of the Fund, to
engage in any other business or to devote his or her time and attention in part
to the management or other aspects of any other business, whether of a similar
nature or a dissimilar nature.
5. Permissible Interests. Directors, agents, and stockholders of the Fund
are or may be interested in Questar (or any successor thereof) as directors,
partners, officers, or stockholders, or otherwise; directors, partners,
officers, agents, and stockholders of Questar are or may be interested in the
Fund as directors, stockholders or otherwise; and Questar (or any successor) is
or may be interested in the Fund as a stockholder or otherwise.
6. Liability of Investment Adviser. Questar assumes no responsibility under
this Agreement other than to render the services called for hereunder in good
faith. Questar shall not be liable for any error of judgment or for any loss
suffered by the Fund in connection with the matters to which this Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
receipt of compensation for services (in which case any award of damages shall
be limited to the period and the amount set forth in Section 36(b)(3) of the
Investment Company Act of 1940) or a loss resulting from willful misfeasance,
bad faith or gross negligence on its part in the performance of, or from
reckless disregard by it of its obligations and duties under, this Agreement.
7. Use of Name "Questar." Questar hereby grants to the Fund the right to
use the name "Questar" in connection with the Fund in the United States as long
as Questar continues to serve as investment adviser to the Fund. If, for any
reason, Questar no longer serves as investment adviser to the Fund or if this
Agreement is terminated as provided in Section (8) below, Questar hereby
reserves the right, upon 30 days' written notice to the Fund, to terminate the
Fund's right to use the name "Questar". Upon such notification by Questar, the
Fund will immediately commence to take all appropriate steps to discontinue use
of the name "Questar" and shall take all steps necessary under applicable laws
to change the name of the Fund to a name not confusingly similar to "Questar."
If within a reasonable period of time, but in no event longer than four months,
after receiving notification from Questar as provided in this paragraph, the
Fund does not discontinue the use of the name "Questar," Questar may seek such
legal and equitable relief as it may deem appropriate. Questar hereby reserves
the right also to grant the right to use the name "Questar" to another
investment company, business or enterprise. The
3
<PAGE>
Fund hereby acknowledges and agrees that the name "Questar" is a valuable asset
of Questar and that Questar has established a property right to its use.
8. Term. This Agreement shall remain in effect until no later than July 15,
2000, and from year to year thereafter provided such continuance is approved at
least annually by the vote of a majority of the directors of the Fund who are
not parties to this Agreement or "interested persons" (as defined in the Act) of
any such party, which vote must be cast in person at meeting called for the
purpose of voting on such approval; provided, however, that;
(a) the Fund may, at any time and without the payment of any penalty,
terminate this Agreement upon 120 days written notice to Questar;
(b) the Agreement shall immediately terminate in the event of its
assignment (within the meaning of the Act and the Rules thereunder); and
(c) Questar may terminate this Agreement without payment of penalty on
120 days written notice to the Fund; and
(d) the terms of paragraph 6 and 7 of this Agreement shall survive the
termination of this Agreement.
9. Amendments. No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved by vote of the holders of a majority of the Fund's outstanding
voting securities.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and the year first written above.
THE AVALON FUND OF QUESTAR CAPITAL
ANN ARBOR, INC. CORPORATION
By: /s/ Robert E. Boone By: /s/ Robert E. Boone
------------------------- ----------------------------
Title: President Title: President
---------------------- --------------------------
ATTEST: ATTEST:
/s/ Linda K. Coyne
- ----------------------------- ---------------------------------
Secretary Secretary
[Corporate Seal] [Corporate Seal]
DISTRIBUTION AGREEMENT
The Avalon Fund of Ann Arbor, Inc.
THIS DISTRIBUTION AGREEMENT (the "Agreement") is made as of the 15th day of
July, 1998 by and among The Avalon Fund of Ann Arbor, Inc. (the "Fund"), a
Maryland corporation, Questar Capital Corporation (the "Adviser"), a Michigan
corporation, and Declaration Distributors, Inc. (the "Distributor"), a
Pennsylvania corporation.
WITNESSETH THAT:
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
and has registered its shares of common stock (the "Shares") under the
Securities Act of 1933, as amended (the "1933 Act") in one or more distinct
series of Shares (the "Portfolio" or "Portfolios");
WHEREAS, the Adviser has been appointed investment adviser to the Fund;
WHEREAS, the Distributor is a broker-dealer registered with the U.S.
Securities and Exchange Commission (the "SEC") and a member in good standing of
the National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, the Fund, the Adviser and the Distributor desire to enter into
this Agreement pursuant to which the Distributor will provide distribution
services to the Portfolios of the Fund identified on Schedule A, as may be
amended from time to time, on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement, the Fund, the Adviser and the Distributor,
intending to be legally bound hereby, agree as follows:
<PAGE>
1. Appointment of Distributor. The Fund hereby appoints the Distributor
as its exclusive agent for the distribution of the Shares, and the Distributor
hereby accepts such appointment under the terms of this Agreement. The Fund
shall not sell any Shares to any person except to fill orders for the Shares
received through the Distributor; provided, however, that the foregoing
exclusive right shall not apply: (i) to Shares issued or sold in connection with
the merger or consolidation of any other investment company with the Fund or the
acquisition by purchase or otherwise of all or substantially all of the assets
of any investment company or substantially all of the outstanding shares of any
such company by the Fund; (ii) to Shares which may be offered by the Fund to its
shareholders for reinvestment of cash distributed from capital gains or net
investment income of the Fund; or (iii) to Shares which may be issued to
shareholders of other funds who exercise any exchange privilege set forth in the
Fund's Prospectus. Notwithstanding any other provision hereof, the Fund may
terminate, suspend, or withdraw the offering of the Shares whenever, in its sole
discretion, it deems such action to be desirable, and the Distributor shall
process no further orders for Shares after it receives notice of such
termination, suspension or withdrawal.
2. Fund Documents. The Fund has provided the Administrator with properly
certified or authenticated copies of the following Fund related documents in
effect on the date hereof: the Fund's organizational documents, including
Articles of Incorporation and By-Laws; the Fund's Registration Statement on Form
N-1A, including all exhibits thereto; the Fund's most current Prospectus and
Statement of Additional Information; and resolutions of the Fund's Board of
Directors authorizing the appointment of the Distributor and approving this
Agreement. The Fund shall promptly provide to the Distributor copies, properly
certified or authenticated, of all amendments or supplements to the foregoing.
The Fund shall provide to the Distributor copies of all other information which
the Distributor may reasonably request for use in connection with the
distribution of Shares, including, but not limited to, a certified copy of all
financial statements prepared for the Fund by its independent public
accountants. The Fund shall also supply the Distributor with such number of
copies of the current Prospectus, Statement of Additional Information and
shareholder reports as the Distributor shall reasonably request.
2
<PAGE>
3. Distribution Services. The Distributor shall sell and repurchase Shares
as set forth below, subject to the registration requirements of the 1933 Act and
the rules and regulations thereunder, and the laws governing the sale of
securities in the various states ("Blue Sky Laws"):
a. The Distributor, as agent for the Fund, shall sell Shares to the
public against orders therefor at the public offering price, which shall be the
net asset value of the Shares then in effect.
b. The net asset value of the Shares shall be determined in the manner
provided in the then current Prospectus and Statement of Additional Information.
The net asset value of the Shares shall be calculated by the Fund or by another
entity on behalf of the Fund. The Distributor shall have no duty to inquire into
or liability for the accuracy of the net asset value per Share as calculated.
c. Upon receipt of purchase instructions, the Distributor shall
transmit such instructions to the Fund or its transfer agent for registration of
the Shares purchased.
d. The Distributor shall also have the right to take, as agent for the
Fund, all actions which, in the Distributor's judgment, are necessary to effect
the distribution of Shares.
e. Nothing in this Agreement shall prevent the Distributor or any
"affiliated person" from buying, selling or trading any securities for its or
their own account or for the accounts of others for whom it or they may be
acting; provided, however, that the Distributor expressly agrees that it shall
not for its own account purchase any Shares of the Fund except for investment
purposes and that it shall not for its own account sell any such Shares except
for redemption of such Shares by the Fund, and that it shall not undertake
activities which, in its judgment, would adversely affect the performance of its
obligations to the Fund under this Agreement.
f. The Distributor, as agent for the Fund, shall repurchase Shares at
such prices and upon such terms and conditions as shall be specified in the
Prospectus.
3
<PAGE>
4. Distribution Support Services. In addition to the sale and repurchase of
Shares, the Distributor shall perform the distribution support services set
forth on Schedule B attached hereto, as may be amended from time to time. Such
distribution support services shall include: Review of sales and marketing
literature and submission to the NASD; NASD recordkeeping; and quarterly reports
to the Fund's Board of Directors. Such distribution support services may also
include: fulfillment services, including telemarketing, printing, mailing and
follow-up tracking of sales leads; and licensing Adviser or Fund personnel as
registered representatives of the Distributor and related supervisory
activities.
5. Reasonable Efforts. The Distributor shall use all reasonable efforts in
connection with the distribution of Shares. The Distributor shall have no
obligation to sell any specific number of Shares and shall only sell Shares
against orders received therefor. The Fund shall retain the right to refuse at
any time to sell any of its Shares for any reason deemed adequate by it.
6. Compliance. In furtherance of the distribution services being provided
hereunder, the Distributor and the Fund agree as follows:
a. The Distributor shall comply with the Rules of Conduct of the NASD
and the securities laws of any jurisdiction in which it sells, directly or
indirectly, Shares.
b. The Distributor shall require each dealer with whom the Distributor
has a selling agreement to conform to the applicable provisions of the Fund's
most current Prospectus and Statement of Additional Information, with respect to
the public offering price of the Shares.
4
<PAGE>
c. The Fund agrees to furnish to the Distributor sufficient copies of
any agreements, plans, communications with the public or other materials it
intends to use in connection with any sales of Shares in a timely manner in
order to allow the Distributor to review, approve and file such materials with
the appropriate regulatory authorities and obtain clearance for use. The Fund
agrees not to use any such materials until so filed and cleared for use by
appropriate authorities and the Distributor.
d. The Distributor, at its own expense, shall qualify as a broker or
dealer, or otherwise, under all applicable Federal or state laws required to
permit the sale of Shares in such states as shall be mutually agreed upon by the
parties; provided, however that the Distributor shall have no obligation to
register as a broker or dealer under the Blue Sky Laws of any jurisdiction if it
determines that registering or maintaining registration in such jurisdiction
would be uneconomical.
e. The Distributor shall not, in connection with any sale or
solicitation of a sale of the Shares, or make or authorize any representative,
service organization, broker or dealer to make, any representations concerning
the Shares except those contained in the Fund's most current Prospectus covering
the Shares and in communications with the public or sales materials approved by
the Distributor as information supplemental to such Prospectus.
7. Expenses. Expenses shall be allocated as follows:
a. The Fund and/or the Adviser shall bear the following expenses:
preparation, setting in type, and printing of sufficient copies of the
Prospectus and Statement of Additional Information for distribution to existing
shareholders; preparation and printing of reports and other communications to
existing shareholders; distribution of copies of the Prospectus, Statement of
Additional Information and all other communications to existing shareholders;
registration of the Shares under the Federal securities laws; qualification of
the Shares for sale in the jurisdictions mutually agreed upon by the Fund and
the Distributor; transfer agent/shareholder servicing agent services; supplying
information, prices and other data to be furnished by the Fund under this
Agreement; and any original issue taxes or transfer taxes applicable to the sale
or delivery of the Shares or certificates therefor.
5
<PAGE>
b. The Adviser shall pay all other expenses incident to the sale and
distribution of the Shares sold hereunder, including, without limitation:
printing and distributing copies of the Prospectus, Statement of Additional
Information and reports prepared for use in connection with the offering of
Shares for sale to the public; advertising in connection with such offering,
including public relations services, sales presentations, media charges,
preparation, printing and mailing of advertising and sales literature; data
processing necessary to support a distribution effort; distribution and
shareholder servicing activities of broker-dealers and other financial
institutions; filing fees required by regulatory authorities for sales
literature and advertising materials; any additional out-of-pocket expenses
incurred in connection with the foregoing and any other costs of distribution.
8. Compensation. For the distribution and distribution support services
provided by the Distributor pursuant to the terms of the Agreement, the Adviser
shall pay to the Distributor the compensation set forth in Schedule A attached
hereto, which schedule may be amended from time to time. The Adviser shall also
reimburse the Distributor for its out-of-pocket expenses related to the
performance of its duties hereunder, including, without limitation,
telecommunications charges, postage and delivery charges, record retention
costs, reproduction charges and traveling and lodging expenses incurred by
officers and employees of the Distributor. The Adviser shall pay the
Distributor's monthly invoices for distribution fees and out-of-pocket expenses
within five days of the respective month-end. If this Agreement becomes
effective subsequent to the first day of the month or terminates before the last
day of the month, the Adviser shall pay to the Distributor a distribution fee
that is prorated for that part of the month in which this Agreement is in
effect. All rights of compensation and reimbursement under this Agreement for
services performed by the Distributor as of the termination date shall survive
the termination of this Agreement.
6
<PAGE>
9. Use of Distributor's Name. The Fund shall not use the name of the
Distributor or any of its affiliates in the Prospectus, Statement of Additional
Information, sales literature or other material relating to the Fund in a manner
not approved prior thereto in writing by the Distributor; provided, however,
that the Distributor shall approve all uses of its and its affiliates' names
that merely refer in accurate terms to their appointments or that are required
by the Securities and Exchange Commission (the "SEC") or any state securities
commission; and further provided, that in no event shall such approval be
unreasonably withheld.
10. Use of Fund's Name. Neither the Distributor nor any of its affiliates
shall use the name of the Fund or material relating to the Fund on any forms
(including any checks, bank drafts or bank statements) for other than internal
use in a manner not approved prior thereto by the Fund; provided, however, that
the Fund shall approve all uses of its name that merely refer in accurate terms
to the appointment of the Distributor hereunder or that are required by the SEC
or any state securities commission; and further provided, that in no event shall
such approval be unreasonably withheld.
11. Liability of Distributor. The duties of the Distributor shall be
limited to those expressly set forth herein, and no implied duties are assumed
by or may be asserted against the Distributor hereunder. The Distributor shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the matters to which this Agreement
relates, except to the extent of a loss resulting from willful misfeasance, bad
faith or negligence, or reckless disregard of its obligations and duties under
this Agreement. As used in this Section 9 and in Section 10 (except the second
paragraph of Section 10), the term "Distributor" shall include directors,
officers, employees and other agents of the Distributor.
12. Indemnification of Distributor. The Fund shall indemnify and hold
harmless the Distributor against any and all liabilities, losses, damages,
claims and expenses (including, without limitation, reasonable attorneys' fees
and disbursements and investigation expenses incident thereto) which the
Distributor may incur or be required to pay hereafter, in connection with any
action, suit or other proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which the Distributor may be involved as
a party or otherwise or with which the Distributor may be threatened, by reason
of the offer or sale of the Fund shares prior to the effective date of this
Agreement.
7
<PAGE>
Any director, officer, employee, shareholder or agent of the Distributor
who may be or become an officer, Director, employee or agent of the Fund, shall
be deemed, when rendering services to the Fund or acting on any business of the
Fund (other than services or business in connection with the Distributor's
duties hereunder), to be rendering such services to or acting solely for the
Fund and not as a director, officer, employee, shareholder or agent, or one
under the control or direction of the Distributor, even though receiving a
salary from the Distributor.
The Fund agrees to indemnify and hold harmless the Distributor, and each
person, who controls the Distributor within the meaning of Section 15 of the
1933 Act, or Section 20 of the Securities Exchange Act of 1934, as amended
("1934 Act"), against any and all liabilities, losses, damages, claims and
expenses, joint or several (including, without limitation, reasonable attorneys'
fees and disbursements and investigation expenses incident thereto) to which
they, or any of them, may become subject under the 1933 Act, the 1934 Act, the
1940 Act or other Federal or state laws or regulations, at common law or
otherwise, insofar as such liabilities, losses, damages, claims and expenses (or
actions, suits or proceedings in respect thereof) arise out of or relate to any
untrue statement or alleged untrue statement of a material fact contained in a
Prospectus, Statement of Additional Information, supplement thereto, sales
literature or other written information prepared by the Fund and provided by the
Fund to the Distributor for the Distributor's use hereunder, or arise out of or
relate to any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading. The Distributor (or any person controlling the Distributor) shall
not be entitled to indemnity hereunder for any liabilities, losses, damages,
claims or expenses (or actions, suits or proceedings in respect thereof)
resulting from (i) an untrue statement or omission or alleged untrue statement
or omission made in the Prospectus, Statement of Additional Information, or
supplement, sales or other literature, in reliance upon and in conformity with
information furnished in writing to the Fund by the Distributor specifically for
use therein or (ii) the Distributor's own willful misfeasance, bad faith,
negligence or reckless disregard of its duties and obligations in the
performance of this Agreement.
8
<PAGE>
The Distributor agrees to indemnify and hold harmless the Fund, and each
person who controls the Fund within the meaning of Section 15 of the 1933 Act,
or Section 20 of the 1934 Act, against any and all liabilities, losses, damages,
claims and expenses, joint or several (including, without limitation reasonable
attorneys' fees and disbursements and investigation expenses incident thereto)
to which they, or any of them, may become subject under the 1933 Act, the 1934
Act, the 1940 Act or other Federal or state laws, at common law or otherwise,
insofar as such liabilities, losses, damages, claims or expenses arise out of or
relate to any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus or Statement of Additional Information or any
supplement thereto, or arise out of or relate to any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, if based upon
information furnished in writing to the Fund by the Distributor specifically for
use therein.
A party seeking indemnification hereunder (the "Indemnitee") shall give
prompt written notice to the party from whom indemnification is sought
("Indemnitor") of a written assertion or claim of any threatened or pending
legal proceeding which may be subject to indemnity under this Section; provided,
however, that failure to notify the Indemnitor of such written assertion or
claim shall not relieve the Indemnitor of any liability arising from this
Section. The Indemnitor shall be entitled, if it so elects, to assume the
defense of any suit brought to enforce a claim subject to this Indemnity and
such defense shall be conducted by counsel chosen by the Indemnitor and
satisfactory to the Indemnitee; provided, however, that if the defendants
include both the Indemnitee and the Indemnitor, and the Indemnitee shall have
reasonably concluded that there may be one or more legal defenses available to
it which are different from or additional to those available to the Indemnitor
("conflict of interest"), the Indemnitor shall not have the right to elect to
defend such claim on behalf of the Indemnitee, and the Indemnitee shall have the
right to select separate counsel to defend such claim on behalf of the
Indemnitee. In the event that the Indemnitor elects to assume the defense of any
suit pursuant to the preceding sentence and retains counsel satisfactory to the
Indemnitee, the Indemnitee shall bear the fees and expenses of additional
counsel retained by it, except for reasonable investigation costs which shall be
borne by the Indemnitor. If the Indemnitor (i) does not elect to assume the
defense of a claim, (ii) elects to assume the defense of a claim but chooses
counsel that is not satisfactory to the Indemnitee or (iii) has no right to
assume the defense of a claim because of a conflict of interest, the Indemnitor
shall advance or reimburse the Indemnitee, at the election of the Indemnitee,
reasonable fees and disbursements of any counsel retained by Indemnitee,
including reasonable investigation costs.
9
<PAGE>
13. Dual Employees. The Adviser agrees that only its employees who are
registered representatives of the Distributor ("dual employees") shall offer or
sell Shares of the Portfolios and further agrees that the activities of any such
employees as registered representatives of the Distributor shall be limited to
offering and selling Shares. If there are dual employees, one employee of the
Adviser shall register as a principal of the Distributor and assist the
Distributor in monitoring the marketing and sales activities of the dual
employees. The Adviser shall maintain errors and omissions and fidelity bond
insurance policies providing reasonable coverage for its employees activities
and shall provide copies of such policies to the Distributor. The Adviser shall
indemnify and hold harmless the Distributor against any and all liabilities,
losses, damages, claims and expenses (including reasonable attorneys' fees and
disbursements and investigation costs incident thereto) arising from or related
to the Adviser's employees' activities as registered representatives of the
Distributor, including, without limitation, any and all such liabilities,
losses, damages, claims and expenses arising from or related to the breach by
such dual employees of any rules or regulations of the NASD or SEC.
14. Force Majeure. The Distributor shall not be liable for any delays or
errors occurring by reason of circumstances not reasonably foreseeable and
beyond its control, including, but not limited, to acts of civil or military
authority, national emergencies, work stoppages, fire, flood, catastrophe, acts
of God, insurrection, war, riot or failure of communication or power supply. In
the event of equipment breakdowns which are beyond the reasonable control of the
Distributor and not primarily attributable to the failure of the Distributor to
reasonably maintain or provide for the maintenance of such equipment, the
Distributor shall, at no additional expense to the Fund, take reasonable steps
in good faith to minimize service interruptions, but shall have no liability
with respect thereto
10
<PAGE>
15. Scope of Duties. The Distributor and the Fund shall regularly consult
with each other regarding the Distributor's performance of its obligations and
its compensation under the foregoing provisions. In connection therewith, the
Fund shall submit to the Distributor at a reasonable time in advance of filing
with the SEC copies of any amended or supplemented Registration Statement of the
Fund (including exhibits) under the 1940 Act and the 1933 Act, and at a
reasonable time in advance of their proposed use, copies of any amended or
supplemented forms relating to any plan, program or service offered by the Fund.
Any change in such materials that would require any change in the Distributor's
obligations under the foregoing provisions shall be subject to the Distributor's
approval. In the event that a change in such documents or in the procedures
contained therein increases the cost or burden to the Distributor of performing
its obligations hereunder, the Distributor shall be entitled to receive
reasonable compensation therefore.
16. Duration. This Agreement shall become effective as of the date first
above written, and shall continue in force for one year from that date and
thereafter from year to year, provided continuance is approved at least annually
by either (i) the vote of a majority of the Directors of the Fund, or by the
vote of a majority of the outstanding voting securities of the Fund, and (ii)
the vote of a majority of those Directors of the Fund who are not interested
persons of the Fund, and who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on the approval.
17. Termination. This Agreement shall terminate as follows:
a. This Agreement shall terminate automatically in the event of its
assignment.
b. This Agreement shall terminate upon the failure to approve the
continuance of the Agreement after the initial one year term as set forth in
Section 16 above.
c. This Agreement shall terminate at any time upon a vote of the
majority of the Directors who are not interested persons of the Fund or by a
vote of the majority of the outstanding voting securities of the Fund, upon not
less than 60 days prior written notice to the Distributor.
d. The Distributor may terminate this Agreement upon not less than 60
days prior written notice to the Fund.
11
<PAGE>
Upon the termination of this Agreement, the Fund shall pay to the
Distributor such compensation and out-of-pocket expenses as may be payable for
the period prior to the effective date of such termination. In the event that
the Fund designates a successor to any of the Distributor's obligations
hereunder, the Distributor shall, at the expense and direction of the Fund,
transfer to such successor all relevant books, records and other data
established or maintained by the Distributor pursuant to the foregoing
provisions.
Sections 7, 8, 9, 10, 11, 12, 13, 14, 15, 17, 21, 22, 24, 25 and 26 shall
survive any termination of this Agreement.
18. Amendment. The terms of this Agreement shall not be waived, altered,
modified, amended or supplemented in any manner whatsoever except by a written
instrument signed by the Distributor and the Fund and shall not become effective
unless its terms have been approved by the majority of the Directors of the Fund
or by a "vote of majority of the outstanding voting securities" of the Fund and
by a majority of those Directors who are not "interested persons" of the Fund or
any party to this Agreement.
19. Non-Exclusive Services. The services of the Distributor rendered to the
Fund are not exclusive. The Distributor may render such services to any other
investment company.
20. Definitions. As used in this Agreement, the terms "vote of a majority
of the outstanding voting securities," "assignment," "interested person" and
"affiliated person" shall have the respective meanings specified in the 1940 Act
and the rules enacted thereunder as now in effect or hereafter amended.
12
<PAGE>
21. Confidentiality. The Distributor shall treat confidentially and as
proprietary information of the Fund all records and other information relating
to the Fund and prior, present or potential shareholders and shall not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except as may be required by
administrative or judicial tribunals or as requested by the Fund.
22. Notice. Any notices and other communications required or permitted
hereunder shall be in writing and shall be effective upon delivery by hand or
upon receipt if sent by certified or registered mail (postage prepaid and return
receipt requested) or by a nationally recognized overnight courier service
(appropriately marked for overnight delivery) or upon transmission if sent by
telex or facsimile (with request for immediate confirmation of receipt in a
manner customary for communications of such respective type and with physical
delivery of the communication being made by one or the other means specified in
this Section 20 as promptly as practicable thereafter). Notices shall be
addressed as follows:
(a) if to the Fund:
The Avalon Fund of Ann Arbor, Inc.
C/O Questar Capital Corporation
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
Attention: Robert E. Boone, President
(b) if to the Adviser:
Questar Capital Corporation
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
Attention: Robert E. Boone, President
(c) if to the Distributor:
Declaration Distributors, Inc.
555 North Lane, Suite 6160
Conshohocken, PA 19428
Attn: Mr. Terence P. Smith, President
or to such other respective addresses as the parties shall designate by like
notice, provided that notice of a change of address shall be effective only upon
receipt thereof.
23. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
24. Governing Law. This Agreement shall be administered, construed and
enforced in accordance with the laws of the Commonwealth of Pennsylvania to the
extent that such laws are not preempted by the provisions of any law of the
United States heretofore or hereafter enacted, as the same may be amended from
time to time.
25. Entire Agreement. This Agreement (including the Exhibits attached
hereto) contains the entire agreement and understanding of the parties with
respect to the subject matter hereof and supersedes all prior written or oral
agreements and understandings with respect thereto.
26. Miscellaneous. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof. The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction. This Agreement may be executed in two counterparts,
each of which taken together shall constitute one and the same instrument.
13
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
The Avalon Fund of Ann Arbor, Inc.
By: /s/ Robert E. Boone
-------------------------------
Robert E. Boone, President
Questar Capital Corporation
By: /s/ Robert E. Boone
-------------------------------
Robert E. Boone, President
Declaration Distributors, Inc.
By: /s/ Terence P. Smith
-------------------------------
Terence P. Smith, President
<PAGE>
SCHEDULE A
The Avalon Fund of Ann Arbor, Inc.
Portfolio and Fee Schedule
Portfolios covered by Distribution Agreement:
The Avalon Capital Appreciation Fund
Fees for distribution and distribution support services on behalf of the
Portfolios:
Included in fee schedule "Investment Company Services Agreement",
Schedule B, Dated as of July 15, 1998.
<PAGE>
SCHEDULE B
Distribution Support Services
1. Provide national broker dealer for Fund registration.
2. Review and submit for approval to the NASD all advertising and promotional
materials.
3. Maintain all books and records required by the NASD.
4. Subject to approval of Distributor, license personnel as registered
representatives of the Distributor to distribute no load fund shares
sponsored by the Adviser.
5. Telemarketing services (additional cost - to be negotiated).
6. Fund fulfillment services, including sampling prospective shareholders
inquiries and related mailings (additional cost - to be negotiated).
THE AVALON FUND OF ANN ARBOR, INC.
OPERATING SERVICES AGREEMENT
This Agreement is made and entered into as of the 15th of July, 1998, by
and between The Avalon Fund of Ann Arbor, Inc., a Maryland corporation (the
"Fund"), and Questar Capital Corporation, a Michigan corporation (hereinafter
referred to as "Questar").
WHEREAS, the Fund is a diversified, open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "Act"), and
authorized to issue shares representing interests in The Avalon Capital
Appreciation Fund (the "Portfolio"); and
WHEREAS, Questar is registered as an investment adviser under the
Investment Advisers Act of 1940, and engages in the business of asset management
and the provision of certain other administrative and recordkeeping services in
connection therewith; and
WHEREAS, the Fund wishes to engage Questar, to provide, or arrange for the
provision of, certain operational services which are necessary for the
day-to-day operations of the Portfolio in the manner and on the terms and
conditions hereinafter set forth, and Questar wishes to accept such engagement;
<PAGE>
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, the Fund and Questar agree as follows:
1. Obligations of Questar
(a) Services. The Fund hereby retains Questar to provide, or, upon
receipt of written approval of the Fund arrange for other companies to provide,
following services to the Portfolio in the manner and to the extent that such
services are reasonably necessary for the operation of the Portfolio
(collectively, the "Services"):
(1) accounting services and functions, including costs and
expenses of any independent public accountants;
(2) non-litigation related legal and compliance services,
including the expenses of maintaining registration and qualification of the Fund
and the Portfolio under federal, state and any other applicable laws and
regulations;
(3) dividend disbursing agent, dividend reinvestment agent,
transfer agent, and registrar services and functions (including answering
inquiries related to shareholder Portfolio accounts);
(4) custodian and depository services and functions;
<PAGE>
(5) distribution, marketing, and/or underwriting services;
(6) independent pricing services;
(7) preparation of reports describing the operations of the
Portfolio, including the costs of providing such reports to broker-dealers,
financial institutions and other organizations which render services and
assistance in connection with the distribution of shares of the Portfolio;
(8) sub-accounting and recordkeeping services and functions
(other than those books and records required to be maintained by Questar under
the Investment Advisory Agreement between the Fund and Questar dated July 15,
1998), including maintenance of shareholder records and shareholder information
concerning the status of their Portfolio accounts by investment advisers,
broker-dealers, financial institutions, and other organizations on behalf of
Questar;
(9) shareholder and board of directors communication services,
including the costs of preparing, printing and distributing notices of
shareholders' meetings, proxy statements, prospectuses, statements of additional
information, Portfolio reports, and other communications to the Fund's Portfolio
shareholders, as well as all expenses of shareholders' and board of directors'
meetings, including the compensation and reimbursable expenses of the directors
of the Fund;
<PAGE>
(10) other day-to-day administrative services, including the
costs of designing, printing, and issuing certificates representing shares of
the Portfolio, and premiums for the fidelity bond maintained by the Fund
pursuant to Section 17(g) of the Act and rules promulgated thereunder (except
for such premiums as may be allocated to third parties, as insureds thereunder).
(a) Exclusions from Service. Notwithstanding the provisions of
Paragraph 1(a) above, the Services shall not include and Questar will not be
responsible for any of the following:
(1) all brokers' commissions, issue and transfer taxes, and other
costs chargeable to the Fund or the Portfolio in connection with securities
transactions to which the Fund or the Portfolio is a party or in connection with
securities owned by the Fund or the Portfolio;
(2) the interest on indebtedness, if any, incurred by the Fund or
the Portfolio;
(3) the taxes, including franchise, income, issue, transfer,
business license, and other corporate fees payable by the Fund or the Portfolio
to federal, state, county, city, or other governmental agents;
<PAGE>
(4) the expenses, including fees and disbursements of counsel, in
connection with litigation by or against the Fund or the Portfolio; and
(5) any other extraordinary expense of the Fund or Portfolio.
(b) Books and Records. All books and records prepared and maintained
by Questar for the Fund under this Agreement shall be the property of the Fund
and, upon request therefor, Questar shall surrender to the Fund such of the
books and records so requested.
(c) Staff and Facilities. Questar assumes and shall pay for
maintaining the staff, personnel, space, equipment and facilities necessary to
perform its obligations under this Agreement.
2. Obligations of the Fund
(a) Fee. The Fund will pay to Questar on the last day of each month an
annual fee equal to 1.95% of average net asset of the Portfolio, such fee to be
computed daily based upon the net asset value of the Portfolio as determined by
a valuation made in accordance with the Fund's procedure for calculating
Portfolio net asset value as described in the Fund's Prospectus and/or Statement
of Additional Information. During any period when the determination of a
Portfolio's net asset value is suspended by the directors of the Fund, the net
asset value of a share of that Portfolio as of the last business
<PAGE>
day prior to such suspension shall, for the purpose of this Paragraph 2(a), be
deemed to be the net asset value at the close of each succeeding business day
until it is again determined.
(b) Information. The Fund will, from time to time, furnish or
otherwise make available to Questar such information relating to the business
and affairs of the Portfolio as Questar may reasonably require in order to
discharge its duties and obligations hereunder.
3. Term. This Agreement shall remain in effect until no later than July 15,
2000, and from year to year thereafter provided such continuance is approved at
least annually by the vote of a majority of the directors of the Fund who are
not parties to this Agreement or "interested persons" (as defined in the Act) of
any such party, which vote must be cast in person at a meeting called for the
purpose of voting on such approval; provided, however, that:
(a) the Fund, at any time and without the payment of any penalty
terminate this Agreement upon 120 days written notice to Questar;
(b) the Agreement shall immediately terminate in the event of its
assignment (within the meaning of the Act and the Rules thereunder); and
<PAGE>
(c) Questar may terminate this Agreement without payment of penalty on
120 days written notice to the Fund.
4. Miscellaneous
(a) Performance Review. Questar will permit representatives of the
Fund, including the Fund's independent auditors, to have reasonable access to
the personnel and records of Questar in order to enable such representatives to
monitor the quality of services being provided and the level of fees due Questar
pursuant to this Agreement. In addition, Questar shall promptly deliver to the
board of directors of the Fund such information as may reasonably be requested
from time to time to permit the board of directors to make an informed
determination regarding continuation of this Agreement and the payments
contemplated to be made hereunder.
(b) Notices. Any notice under this Agreement shall be given in
writing, addressed and delivered, or mailed postpaid, to the other party at the
principal office of such party.
(c) Choice of Law. This Agreement shall be construed in accordance
with the laws of the State of Michigan and the applicable provisions of the Act.
To the extent the applicable law of the State of Michigan or any of the
provisions herein conflict with the applicable provisions of the Act, the latter
shall control.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement on the day and year first above written.
The Avalon Fund of Ann Arbor, Inc.
ATTEST: /s/ Shirley H. Boone By: /s/ Robert E. Boone
--------------------------- -----------------------------
Shirley H. Boone, Treasurer Robert E. Boone, President
Questar Capital Corporation
ATTEST: /s/ Shirley H. Boone By: /s/ Robert E. Boone
--------------------------- -----------------------------
Shirley H. Boone, Secretary Robert E. Boone, President
INVESTMENT COMPANY SERVICES AGREEMENT
The Avalon Fund of Ann Arbor, Inc.
This AGREEMENT, dated as of the 15th day of July, 1998 , made by and between The
Avalon Fund of Ann Arbor, Inc. ("Fund"), a corporation operating as an open-end,
management investment company registered under the Investment Company Act of
1940, as amended (the "Act"), duly organized and existing under the laws of the
State of Maryland, Questar Capital Corporation ("Adviser"), a corporation duly
organized under the laws of the State of Michigan, and Declaration Service
Company ("Declaration"), a corporation duly organized under the laws of the
Commonwealth of Pennsylvania (collectively, the "Parties").
WITNESSETH THAT:
WHEREAS, the Fund is authorized by its Articles of Incorporation and
By-Laws to issue separate series of shares representing interests in separate
investment portfolios which are identified on Schedule "C" attached hereto and
which Schedule "C" may be amended from time to time by mutual agreement of the
Fund and Declaration; and
WHEREAS, the Fund and the Adviser have entered into an "Operating Services
Agreement" dated as of July 15, 1998, authorizing the Adviser to provide certain
investment company services to the Fund, and which further authorizes the
Adviser to enter into this Investment Company Services Agreement (hereafter
"Agreement") on behalf of the Fund; and WHEREAS, the Parties desire to enter
into an agreement whereby Declaration will provide the services to the Fund as
specified herein and set forth in particular in Schedule "A" which is attached
hereto and made a part hereof.
NOW THEREFORE, in consideration of the premises and mutual covenants
1
<PAGE>
contained herein, and in exchange of good and valuable consideration, the
sufficiency and receipt of which are hereby acknowledged, the Parties hereto,
intending to be legally bound, do hereby agree as follows:
GENERAL PROVISIONS
Section 1. Appointment. The Adviser hereby appoints Declaration as servicing
agent to the Fund and Declaration hereby accepts such appointment. In order that
Declaration may perform its duties under the terms of this Agreement, the Board
of Directors of the Fund shall direct the officers, investment adviser, legal
counsel, independent accountants and custodian of the Fund to cooperate fully
with Declaration and, upon request of Declaration, to provide such information,
documents and advice relating to the Fund which Declaration requires to execute
its responsibilities hereunder. In connection with its duties, Declaration shall
be entitled to rely, and will be held harmless by the Fund when acting in
reasonable reliance, upon any instruction, advice or document relating to the
Fund as provided to Declaration by any of the aforementioned persons on behalf
of the Fund. All fees charged by any such persons acting on behalf of the Fund
will be deemed an expense of the Fund.
Any services performed by Declaration under this Agreement will conform to
the requirements of:
(a) the provisions of the Act and the Securities Act of 1933, as amended,
and any rules or regulations in force thereunder;
(b) any other applicable provision of state and federal law;
(c) the provisions of the Articles of Incorporation and the By-Laws as
amended from time to time and delivered to Declaration;
2
<PAGE>
(d) any policies and determinations of the Board of Directors of the Fund
which are communicated to Declaration; and
(e) the policies of the Fund as reflected in the Fund's registration
statement as filed with the U.S. Securities and Exchange Commission.
Nothing in this Agreement will prevent Declaration or any officer thereof
from providing the same or comparable services for or with any other person,
firm or corporation. While the services supplied to the Fund may be different
than those supplied to other persons, firms or corporations, Declaration will
provide the Fund equitable treatment in supplying services. The Fund recognizes
that it will not receive preferential treatment from Declaration as compared
with the treatment provided to other Declaration clients.
Section 2. Duties and Obligations of Declaration.
Subject to the provisions of this Agreement, Declaration will provide to
the Fund the specific services as set forth in Schedule "A" attached hereto.
Section 3. Definitions. For purposes of this Agreement:
"Certificate" will mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement. To be effective, such
Certificate shall be given to and received by the custodian and shall be signed
on behalf of the Fund by any two of its designated officers, and the term
Certificate shall also include instructions communicated to the custodian by
Declaration.
3
<PAGE>
"Custodian" will refer to that agent which provides safekeeping of the
assets of the Fund.
"Instructions" will mean communications containing instructions transmitted
by electronic or telecommunications media including, but not limited to,
Industry Standardization for Institutional Trade Communications,
computer-to-computer interface, dedicated transmission line, facsimile
transmission (which may be signed by an officer or unsigned) and tested telex.
"Oral Instruction" will mean an authorization, instruction, approval, item
or set of data, or information of any kind transmitted to Declaration in person
or by telephone, telegram, telecopy or other mechanical or documentary means
lacking original signature, by a person or persons reasonably identified to
Declaration to be a person or persons so authorized by a resolution of the Board
of Directors of the Fund to give Oral Instructions to Declaration on behalf of
the Fund.
"Shareholders" will mean the registered owners of the shares of the Fund in
accordance with the share registry records maintained by Declaration for the
Fund.
"Shares" will mean the issued and outstanding shares of the Fund.
"Signature Guarantee" will mean the guarantee of signatures by an "eligible
guarantor institution" as defined in Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
Broker-dealers guaranteeing signatures must be members of a clearing corporation
or maintain net capital of at least $100,000. Signature guarantees will be
accepted from any eligible guarantor institution which participates in a
4
<PAGE>
signature guarantee program.
"Written Instruction" will mean an authorization, instruction, approval,
item or set of data or information of any kind transmitted to Declaration in an
original writing containing an original signature or a copy of such document
transmitted by telecopy including transmission of such signature reasonably
identified to Declaration to be the signature of a person or persons so
authorized by a resolution of the Board of Directors of the Fund, or so
identified by the Fund to give Written Instructions to Declaration on behalf of
the Fund.
Concerning Oral and Written Instructions For all purposes under this
Agreement, Declaration is authorized to act upon receipt of the first of
any Written or Oral Instruction it receives from the Fund or its agents. In
cases where the first instruction is an Oral Instruction that is not in the
form of a document or written record, a confirmatory Written Instruction or
Oral Instruction in the form of a document or written record shall be
delivered. In cases where Declaration receives an Instruction, whether
Written or Oral, to enter a portfolio transaction onto the Fund's records,
the Fund shall cause the broker/dealer executing such transaction to send a
written confirmation to the Custodian.
Declaration shall be entitled to rely on the first Instruction received.
For any act or omission undertaken by Declaration in compliance therewith,
it shall be free of liability and fully indemnified and held harmless by
the Fund, provided however, that in the event a Written or Oral Instruction
received by Declaration is countermanded by a subsequent Written or Oral
Instruction received prior to acting upon such countermanded Instruction,
Declaration shall act upon such subsequent Written or Oral Instruction. The
sole obligation of Declaration with respect to any follow-up or
confirmatory Written Instruction or Oral Instruction in documentary or
written form shall be to make reasonable efforts
5
<PAGE>
to detect any such discrepancy between the original Instruction and such
confirmation and to report such discrepancy to the Fund. The Fund shall be
responsible and bear the expense of its taking any action, including any
reprocessing, necessary to correct any discrepancy or error. To the extent
such action requires Declaration to act, the Fund shall give Declaration
specific Written Instruction as to the action required.
The Fund will file with Declaration a certified copy of each resolution of
the Fund's Board of Directors authorizing execution of Written Instructions
or the transmittal of Oral Instructions as provided above.
Section 4. Indemnification.
(a) Declaration, its directors, officers, employees, shareholders, and
agents will be liable for any loss suffered by the Fund resulting from the
willful misfeasance, bad faith, gross negligence or reckless disregard on the
part of Declaration in the performance of its obligations and duties under this
Agreement.
(b) Any director, officer, employee, shareholder or agent of Declaration,
who may be or become an officer, director, employee or agent of the Fund, will
be deemed, when rendering services to the Fund, or acting on any business of the
Fund (other than services or business in connection with Declaration' duties
hereunder), to be rendering such services to or acting solely for the Fund and
not as a director, officer, employee, shareholder or agent of, or under the
control or direction of Declaration even though such person may be receiving
compensation from Declaration.
(c) The Fund agrees to indemnify and hold Declaration harmless, together
with its directors, officers, employees, shareholders and agents from and
against any and all claims,
6
<PAGE>
demands, expenses and liabilities (whether with or without basis in fact or law)
of any and every nature which Declaration may sustain or incur or which may be
asserted against Declaration by any person by reason of, or as a result of:
(i) any action taken or omitted to be taken by Declaration except
claims, demands, expenses and liabilities arising from willful misfeasance, bad
faith, negligence or reckless disregard on the part of Declaration in the
performance of its obligations and duties under this Agreement; or
(ii) any action taken or omitted to be taken by Declaration in
reliance upon any Certificate, instrument, order or stock certificate or other
document reasonably believed by Declaration to be genuine and signed,
countersigned or executed by any duly authorized person, upon the Oral
Instructions or Written Instructions of an authorized person of the Fund, or
upon the written opinion of legal counsel for the Fund or Declaration; or
(iii) the offer or sale of shares of the Fund to any person, natural
or otherwise, which is in violation of any state or federal law.
If a claim is made against Declaration as to which Declaration may seek
indemnity under this Section, Declaration will notify the Fund promptly after
receipt of any written assertion of such claim threatening to institute an
action or proceeding with respect thereto and will notify the Fund promptly of
any action commenced against Declaration within ten (10) days after Declaration
has been served with a summons or other legal process. Failure to notify the
Fund will not, however, relieve the Fund from any liability which it may have on
account of the indemnity under this Section so long as the Fund has not been
prejudiced in any material respect by such failure.
The Fund and Declaration will cooperate in the control of the defense of
any action,
7
<PAGE>
suit or proceeding in which Declaration is involved and for which indemnity is
being provided by the Fund to Declaration. The Fund may negotiate the settlement
of any action, suit or proceeding subject to Declaration's approval, which will
not be unreasonably withheld. Declaration reserves the right, but not the
obligation, to participate in the defense or settlement of a claim, action or
proceeding with its own counsel. Costs or expenses incurred by Declaration in
connection with, or as a result of such participation, will be borne solely by
the Fund if:
(i) Declaration has received an opinion of counsel from counsel to the
Fund stating that the use of counsel to the Fund by Declaration would present an
impermissible conflict of interest;
(ii) the defendants in, or targets of, any such action or proceeding
include both Declaration and the Fund, and legal counsel to Declaration has
reasonably concluded that there are legal defenses available to it which are
different from or additional to those available to the Fund or which may be
adverse to or inconsistent with defenses available to the Fund (in which case
the Fund will not have the right to direct the defense of such action on behalf
of Declaration); or
(iii) the Fund authorizes Declaration to employ separate counsel at
the expense of the Fund.
(d) The terms of this Section will survive the termination of this
Agreement.
Section 5. Representations and Warranties.
(a) Declaration represents and warrants that:
8
<PAGE>
(i) it is a corporation duly organized and existing and in good
standing under the laws of Pennsylvania;
(ii) it is empowered under applicable laws and by its Certificate of
Incorporation and By-Laws to enter into and perform this Agreement;
(iii) all requisite corporate proceedings have been taken to authorize
Declaration to enter into and perform this Agreement;
(iv) it has and will continue to have access to the facilities,
personnel and equipment required to fully perform its duties and obligations
hereunder;
(v) no legal or administrative proceedings have been instituted or
threatened which would impair Declaration's ability to perform its duties and
obligations under this Agreement;
(vi) its entrance into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or obligation of
Declaration or any law or regulation applicable to it;
(vii) it is registered as a transfer agent under Section 17A(c)(2) of
the Exchange Act;
(viii) this Agreement has been duly authorized by Declaration and,
when executed and delivered, will constitute valid, legal and binding obligation
of Declaration, enforceable in accordance with its terms.
(b) The Fund represents and warrants that:
9
<PAGE>
(i) it is a business Fund duly organized and existing and in good
standing under the laws of the State of Maryland;
(ii) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement;
(iii) all requisite proceedings have been taken to authorize the Fund
to enter into and perform this Agreement;
(iv) no legal or administrative proceedings have been instituted or
threatened which would impair the Fund's ability to perform its duties and
obligations under this Agreement;
(v) the Fund's entrance into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or obligations of the
Fund, or any law or regulation applicable to either;
(vi) the Shares are properly registered or otherwise authorized for
issuance and sale;
(vii) this Agreement has been duly authorized by the Fund and, when
executed and delivered, will constitute valid, legal and binding obligation of
the Fund, enforceable in accordance with its terms.
(c) Delivery of Documents
The Fund will furnish or cause to be furnished to Declaration the following
10
<PAGE>
documents:
(i) current Prospectus and Statement of Additional Information;
(ii) most recent Annual Report;
(iii) most recent Semi-Annual Report for registered investment
companies on Form N-SAR;
(iv) certified copies of resolutions of the Fund's Board of Directors
authorizing the execution of Written Instructions or the
transmittal of Oral Instructions and those persons authorized to
give those Instructions.
(d) Record Keeping and Other Information
Declaration will create and maintain all records required of it pursuant to
its duties hereunder and as set forth in Schedule "A" in accordance with all
applicable laws, rules and regulations, including records required by Section
31(a) of the Act. All such records will be the property of the Fund and will be
available during regular business hours for inspection, copying and use by the
Fund. Where applicable, such records will be maintained by Declaration for the
periods and in the places required by Rule 31a-2 under the Act. Upon termination
of this Agreement, Declaration will deliver all such records to the Fund or such
person as the Fund may designate.
In case of any request or demand for the inspection of the Share records of
the Fund, Declaration shall notify the Fund and secure instructions as to
permitting or refusing such inspection. Declaration may, however, exhibit such
records to any person in any case where it
11
<PAGE>
is advised by its counsel that it may be held liable for failure to do so.
Section 6. Compensation. The Adviser agrees to pay Declaration compensation for
its services, and to reimburse it for expenses at the rates, times, manner and
amounts as set forth in Schedule "B" attached hereto and incorporated herein by
reference and as will be set forth in any amendments to such Schedule "B" agreed
upon in writing by the Parties. Upon receipt of an invoice therefor, the Adviser
agrees to pay such fees within five (5) business days. In addition, the Adviser
agrees to reimburse Declaration for any out-of-pocket expenses paid by
Declaration on behalf of the Fund within ten (10) calendar days of the Fund's
receipt of an invoice therefor.
For the purpose of determining fees payable to Declaration, the value of
the Fund's net assets will be computed at the times and in the manner specified
in the Fund's Prospectus and Statement of Additional Information then in effect.
During the term of this Agreement, should the Fund seek services or
functions in addition to those outlined below or in Schedule "A" attached
hereto, a written amendment to this Agreement specifying the additional services
and corresponding compensation will be executed by the Parties.
In the event that Adviser is more than sixty (60) days delinquent in its
payments of monthly billings in connection with this Agreement (with the
exception of specific amounts which may be contested in good faith by the Fund),
this Agreement may be terminated upon thirty (30) days' written notice by
Declaration. The Adviser must notify Declaration in writing of any contested
amounts within thirty (30) days of receipt of a billing for such amounts.
Disputed amounts are not due and payable while they are being disputed.
Section 7. Days of Operation. Nothing contained in this Agreement is intended to
or will
12
<PAGE>
require Declaration, in any capacity hereunder, to perform any functions or
duties on any holiday, day of special observance or any other day on which the
New York Stock Exchange ("NYSE") is closed. Functions or duties normally
scheduled to be performed on such days will be performed on and as of the next
succeeding business day on which the NYSE is open. Notwithstanding the
foregoing, Declaration will compute the net asset value of the Fund on each day
required pursuant to Rule 22c-1 promulgated under the Act.
Section 8. Acts of God, etc. Declaration will not be liable or responsible for
delays or errors caused by acts of God or by reason of circumstances beyond its
control including, acts of civil or military authority, national emergencies,
labor difficulties, mechanical breakdown, insurrection, war, riots, or failure
or unavailability of transportation, communication or power supply, fire, flood
or other catastrophe.
In the event of equipment failures beyond Declaration's control,
Declaration will, at no additional expense to the Fund, take reasonable steps to
minimize service interruptions but will have no liability with respect thereto.
The foregoing obligation will not extend to computer terminals located outside
of premises maintained by Declaration. Declaration has entered into and
maintains in effect agreements making reasonable provision for emergency use of
electronic data processing equipment to the extent appropriate equipment is
available.
Section 9. Inspection and Ownership of Records. In the event of a request or
demand for the inspection of the records of the Fund, Declaration will use its
best efforts to notify the Fund and to secure instructions as to permitting or
refusing such inspection. Declaration may, however, make such records available
for inspection to any person in any case where it is advised in writing by its
counsel that it may be held liable for failure to do so after notice to the
Fund.
Declaration recognizes that the records it maintains for the Fund are the
property of
13
<PAGE>
the Fund and will be surrendered to the Fund upon written notice to Declaration
as outlined under Section 10(c) below. The Fund is responsible for the payment
in advance of any fees owed to Declaration. Declaration agrees to maintain the
records and all other information of the Fund in a confidential manner and will
not use such information for any purpose other than the performance of
Declaration' duties under this Agreement.
Section 10. Duration and Termination.
(a) The initial term of this Agreement will be for the period of two (2)
years, commencing on the date hereinabove first written (the "Effective Date")
and will continue thereafter subject to termination by either Party as set forth
in subsection (c) below.
(b) The fee schedules set forth in Schedule "B" attached hereto will be
fixed for the initial term commencing on the Effective Date of this Agreement
and will continue thereafter subject to their review and any adjustment.
(c) After the initial term of this Agreement, a Party may give written
notice to the other (the day on which the notice is received by the Party
against which the notice is made shall be the "Notice Date") of a date on which
this Agreement shall be terminated ("Termination Date"). The Termination Date
shall be set on a day not less than ninety (90) days after the Notice Date. The
period of time between the Notice Date and the Termination Date is hereby
identified as the "Notice Period". Any time up to, but not later than fifteen
(15) days prior to the Termination Date, the Adviser or Associates will pay to
Declaration such compensation as may be due as of the Termination Date and will
likewise reimburse Declaration for any out-of-pocket expenses and disbursements
reasonably incurred or expected to be incurred by Declaration up to and
including the Termination Date.
(d) In connection with the termination of this Agreement, if a successor to
any of
14
<PAGE>
Declaration' duties or responsibilities under this Agreement is designated by
the Fund by written notice to Declaration, Declaration will promptly, on the
Termination Date and upon receipt by Declaration of any payments owed to it as
set forth in Section 10(c) above, transfer to the successor, at the Adviser's
expense, all records which belong to the Fund and will provide appropriate,
reasonable and professional cooperation in transferring such records to the
named successor.
(e) Should the Fund desire to move any of the services outlined in this
Agreement to a successor service provider prior to the Termination Date,
Declaration shall make a good faith effort to facilitate the conversion on such
prior date, however, there can be no guarantee that Declaration will be able to
facilitate a conversion of services prior to the end of the Notice Period.
Should services be converted to a successor service provider prior to the end of
the Notice Period, or if the Fund is liquidated or its assets merged or
purchased or the like with another entity, payment of fees to Declaration shall
be accelerated to a date prior to the conversion or termination of services and
calculated as if the services had remained at Declaration until the expiration
of the Notice Period and shall be calculated at the asset levels on the Notice
Date.
(f) Notwithstanding any other provisions of Paragraph 10, and after the
passage of one (1) year from the date of the Agreement, in the event the Fund
deregisters as an Investment Company with the United States Securities and
Exchange Commission ("SEC"), this Agreement may be terminated by the Fund upon
ninety (90) days written notice to Declaration. The Termination Date shall be
ninety (90) days after the receipt of such notice by Declaration. Any time up
to, but not later than fifteen (15) days prior to the Termination Date, the
Adviser will pay to Declaration such compensation as may be due as of the
Termination Date and will likewise reimburse Declaration for any out-of-pocket
expenses and disbursements reasonably incurred or expected to be incurred by
Declaration up to and including the Termination Date.
15
<PAGE>
(g) Notwithstanding the foregoing, this Agreement may be terminated at any
time by either Party in the event of a material breach by the other Party
involving negligence, willful misfeasance, bad faith or a reckless disregard of
its obligations and duties under this Agreement provided that such breach shall
have remained unremedied for sixty (60) days or more after receipt of written
specification thereof.
Section 11. Rights of Ownership. All computer programs and procedures developed
to perform services required to be provided by Declaration under this Agreement
are the property of Declaration. All records and other data except such computer
programs and procedures are the exclusive property of the Fund and all such
other records and data will be furnished to the Fund in appropriate form as soon
as practicable after termination of this Agreement for any reason.
Section 12. Amendments to Documents. The Fund will furnish Declaration written
copies of any amendments to, or changes in, the Articles of Incorporation,
By-Laws, Prospectus or Statement of Additional Information in a reasonable time
prior to such amendments or changes becoming effective. In addition, the Fund
agrees that no amendments will be made to the Prospectus or Statement of
Additional Information of the Fund which might have the effect of changing the
procedures employed by Declaration in providing the services agreed to hereunder
or which amendment might affect the duties of Declaration hereunder unless the
Fund first obtains Declaration' approval of such amendments or changes.
Section 13. Confidentiality. Both Parties hereto agree that any non-public
information obtained hereunder concerning the other Party is confidential and
may not be disclosed to any other person without the consent of the other Party,
except as may be required by applicable law or at the request of the U.S.
Securities and Exchange Commission or other governmental agency. Declaration
agrees that it will not use any non-public information for any purpose other
than performance of its duties or obligations hereunder. The obligations of the
Parties
16
<PAGE>
under this Section will survive the termination of this Agreement. The Parties
further agree that a breach of this Section would irreparably damage the other
Party and accordingly agree that each of them is entitled, without bond or other
security, to an injunction or injunctions to prevent breaches of this provision.
Section 14. Notices. Except as otherwise provided in this Agreement, any notice
or other communication required by or permitted to be given in connection with
this Agreement will be in writing and will be delivered in person or sent by
first class mail, postage prepaid or by prepaid overnight delivery service to
the respective parties as follows:
If to the Fund:
The Avalon Fund of Ann Arbor, Inc.
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
Attention: Robert E. Boone
President
If to the Adviser:
Questar Capital Corporation
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
Attention: Robert E. Boone
President
If to Declaration:
Declaration Service Company
555 North Lane, Suite 6160
Conshohocken, PA 19428
Attention: Mr. Terence P. Smith
President
Section 15. Amendment. No provision of this Agreement may be amended or modified
in any manner except by a written agreement properly authorized and executed by
the Parties.
17
<PAGE>
This Agreement may be amended from time to time by supplemental agreement
executed by the Parties and the compensation stated in Schedule "B" attached
hereto may be adjusted accordingly as mutually agreed upon.
Section 16. Authorization. The Parties represent and warrant to each other that
the execution and delivery of this Agreement by the undersigned officer of each
Party has been duly and validly authorized; and when duly executed, this
Agreement will constitute a valid and legally binding enforceable obligation of
each Party.
Section 17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which when so executed will be deemed to be an original,
but such counterparts will together constitute but one and the same instrument.
Section 18. Assignment. This Agreement will extend to and be binding upon the
Parties hereto and their respective successors and assigns; provided, however,
that this Agreement will not be assignable by any of the parties without the
written consent of the other parties, which consents shall be authorized or
approved by a resolution by its respective Boards of Directors.
Section 19. Governing Law. This Agreement will be governed by the laws of the
State of Pennsylvania and the exclusive venue of any action arising under this
Agreement will be Montgomery County, Commonwealth of Pennsylvania.
Section 20. Severability. If any part, term or provision of this Agreement is
held by any court to be illegal, in conflict with any law or otherwise invalid,
the remaining portion or portions will be considered severable and not be
affected and the rights and obligations of the parties will be construed and
enforced as if the Agreement did not contain the particular part, term or
provision held to be illegal or invalid, provided that the basic agreement is
not thereby materially impaired.
18
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement
consisting of eighteen (18) typewritten pages, together with Schedules "A," "B"
and "C" (Pages 19-26, attached), to be signed by their duly authorized officers
as of the day and year first above written.
The Avalon Fund of Ann Arbor, Inc.
- ---------------------------
By: Robert E. Boone
President
Questar Capital Corporation
- ---------------------------
By: Robert E. Boone
President
Declaration Service Company
- ---------------------------
By: Terence P. Smith
President
19
<PAGE>
SCHEDULE A
Accounting Services Provided by Declaration Service Company
- --------------------------------------------------------------------------------
o Journalize each Portfolio's investment, capital share and income and
expense activities.
o Verify investment buy/sell trade tickets when received from the adviser and
transmit trades to the Fund's custodian for proper settlement.
o Maintain individual ledgers for investment securities.
o Maintain historical tax lots for each security.
o Reconcile cash and investment balances of each Portfolio with the
custodian, and provide the adviser with the beginning cash balance
available for investment purposes.
o Update the cash availability throughout the day as required by the adviser.
o Post to and prepare each Portfolio's Statement of Assets and Liabilities
and Statement of Operations.
o Calculate expenses payable pursuant to the Fund's various contractual
obligations.
o Control all disbursements from the Fund on behalf of each Portfolio and
authorize such disbursements upon instructions of the Fund.
o Calculate capital gains and losses.
o Determine each Portfolio's net income.
o At the Portfolio's expense, obtain security market prices or if such market
prices are not readily available, then obtain such prices from services
approved by the adviser, and in either case calculate the market or fair
value of each Portfolio's investments.
o Where applicable, calculate the amortized cost value of debt instruments.
20
<PAGE>
o Transmit or mail a copy of the portfolio valuations to the adviser.
o Compute the net asset value of each Portfolio.
o Report applicable net asset value and performance data to performance
tracking organizations.
o Compute each Portfolio's yields, total returns, expense ratios and
portfolio turnover rate.
o Prepare and monitor the expense accruals and notify Fund management of any
proposed adjustments.
o Prepare monthly financial statements, which will include, without
limitation, the Schedule of Investments, the Statement of Assets and
Liabilities, the Statement of Operations, the Statement of Changes in Net
Assets, the Cash Statement, and the Schedule of Capital Gains and Losses.
o Prepare monthly security transactions listings.
o Prepare monthly broker security transactions summaries.
o Supply various Fund and Portfolio statistical data as requested on an
ongoing basis.
o Assist in the preparation of support schedules necessary for completion of
Federal and state tax returns.
o Assist in the preparation and filing of the Fund's annual and semiannual
reports with the SEC on Form N-SAR.
o Assist in the preparation and filing of the Fund's annual and semiannual
reports to shareholders and proxy statements.
o Assist with the preparation of amendments to the Fund's Registration
Statements on From N-1A and other filings relating to the registration of
shares.
o Monitor each Portfolio's status as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended from time to
time ("Code").
o Determine the amount of dividends and other distributions payable to
shareholders as necessary to, among other things, maintain the
qualification as a regulated investment
21
<PAGE>
company of each Portfolio of the Fund under the Code.
o Provide other accounting services as may be agreed upon from time to time
in writing by the Fund and Declaration.
Administrative Services Provided by Declaration Service Company
- --------------------------------------------------------------------------------
o Provide overall day-to-day Fund administrative management, including
coordination of investment adviser, custodian, transfer agency,
distribution and pricing and accounting services.
o Preparation and filing of all Federal and State reports including:
o Fund's post-effective amendments under the Securities Act of 1933 and
the Investment Company Act of 1940.
o Form N-SAR - Semi-Annual report for Registered Investment Companies.
o The Fund's Annual and Semi-Annual Report.
o Rule 24f-2 Notice - filing regarding sale(s) of securities.
o Rule 17g-1 filing with the SEC regarding Fidelity Bond coverage.
o Ongoing monitoring and filing of State Blue Sky registrations.
o Prepare and file such reports, applications and documents as may be
necessary or desirable to register the Fund's shares with the Federal and
state securities authorities, and monitor the sale of Fund shares for
compliance with Federal and state securities laws.
o Prepare and file reports to shareholders, including the annual report to
shareholders, and coordinate mailing Prospectuses, notices, proxy
statements, proxies and other reports to shareholders.
o Assist with layout and printing of shareholder communications, including
Prospectuses and reports to shareholders.
22
<PAGE>
o Administer contracts on behalf of the Fund with, among others, the Fund's
investment adviser, custodian, transfer agent/shareholder servicing agent,
distributor, and accounting services agent.
o Prepare and maintain materials for directors/management meetings including,
agendas, minutes, attendance records and minute books.
o Coordinate shareholder meetings, including assisting Fund counsel in
preparation of proxy materials, preparation of minutes and tabulation of
results.
o Monitor and pay Fund bills, maintain Fund budget and report budget expenses
and variances to Fund management.
o Monitor the Fund's compliance with the investment restrictions and
limitations imposed by the 1940 Act and state Blue Sky laws and applicable
regulations thereunder, the fundamental and non-fundamental investment
policies and limitations set forth in the Fund's Prospectuses and Statement
of Additional Information, and the investment restrictions and limitations
necessary for each Portfolio of the Fund to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended, or any successor statute.
o Prepare and distribute to appropriate parties notices announcing the
declaration of dividends and other distributions to shareholders.
o Provide administrative services as may be agreed from time to time in
writing by Declaration.
23
<PAGE>
Transfer Agent, Shareholder Servicing Agent and Dividend Disbursing Agent
Services provided by Declaration Service Company
- --------------------------------------------------------------------------------
o Examine and process new accounts, subsequent payments, liquidations,
exchanges, transfers, telephone transactions, check redemptions automatic
withdrawals, and wire order trades.
o Reinvest or pay dividends and make other distributions.
o Answer investor and dealer telephone and/or written inquiries, except as
otherwise agreed by the Transfer Agent and the Fund.
o Process and confirm address changes.
o Process standard account record changes as required, i.e. Dividend Codes,
etc.
o Microfilm and/or store source documents for transactions, such as account
applications and correspondence.
o Perform backup withholding for those accounts in accordance with Federal
regulations.
o Solicit missing taxpayer identification numbers.
o Provide remote access inquiry to Fund records via Fund supplied hardware
(fund responsible for connection line and monthly fee).
24
<PAGE>
o Maintain the following shareholder information in such a manner as the
Transfer Agent shall determine:
o Name and address, including zip code.
o Balance of Shares.
o Number of Shares, issuance date of each share outstanding and
cancellation date of each share no longer outstanding, if issued.
o Balance of dollars available for redemption.
o Dividend code (daily accrual, monthly reinvest, monthly cash or
quarterly cash).
o Type of account code.
o Establishment date indicating the date an account was opened, carrying
forward pre-conversion data as available.
o Original establishment date for accounts opened by exchange.
o W-9 withholding status and periodic reporting.
o State of residence code.
o Social security or taxpayer identification number, and indication of
certification.
o Historical transactions on the account for the most recent 18 months,
or other period as mutually agreed to from time to time.
o Indication as to whether phone transaction can be accepted for this
account. Beneficial owner code, i.e. male, female, joint tenant, etc.
o Provide the following reports and statements:
o Prepare daily journals for Fund reflecting all shares and dollar
activity for the previous day.
o Supply information monthly for Fund's preparation of Blue Sky
reporting.
o Supply monthly purchase, redemption and liquidation information for
use in Fund's N-SAR report.
o Provide monthly average daily balance reports for the Fund.
o Prepare and mail copies of summary statements to dealers and
investment advisers.
o Mail transaction confirmation statements daily to investors.
o Address and mail four periodic financial reports (material must be
adaptable to Transfer Agent's mechanical equipment as reasonably
specified by the Transfer Agent).
o Mail periodic statement to investors.
o Compute, prepare and furnish all necessary reports to governmental
authorities: Forms 1099R, 1099DIV, 1099B, 1042 and 1042S.
o Enclose various marketing material as designated by the Fund in
25
<PAGE>
statement mailings, i.e. monthly and quarterly statements (material
must be adaptable to mechanical equipment as reasonably specified by
the Transfer Agent).
o Prepare and mail confirmation statements to dealers daily.
o Prepare certified list of stockholders for proxy mailing.
SCHEDULE B
Compensation Schedule for Services Provided by Declaration Service Company
Per Portfolio
-------------
0.20% on first $25 million of average annual assets
0.15% on next $25 million of average annual assets
0.10% on next $50 million of average annual assets
0.075% in excess of $100 million of average annual assets
Transfer Agent/ Shareholder Services:
- -------------------------------------
$ 7.50 per Shareholder Account
Minimum annual fees:
- --------------------
Year one (1) $ 42,000 (normal minimum reduced by 25%, per agreement)
Year two (2) 67,000
Year three (3) 78,000
Thereafter 89,000
26
<PAGE>
Plus out-of-pocket expenses to include, but not limited to: wire fees, bank
service charges, printing, copying, postage, courier, account statement/
confirmation (including programming costs for specialized statements/
confirmations), Fund/SERV and Networking Costs, portfolio price quotation
service, asset allocation charges, travel, telephone, registration fees, and
other standard miscellaneous items.
Additional classes of shares per portfolio
Each category of fee ( including annual minimums) increases by 50% for the
second class of shares per portfolio, and by 25% for each additional class of
shares per portfolio.
SCHEDULE C
The Avalon Fund of Ann Arbor, Inc.
Portfolios covered by this Agreement:
The Avalon Capital Appreciation Fund
27
The Law Offices of David D. Jones, P.C.
11014 Meadow Rue
The Woodlands, Texas 77380
281-298-9644 (phone)
281-298-8709 (fax)
[email protected] (e-mail)
The Avalon Fund of Ann Arbor, Inc. March 27, 1998
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
Dear Sirs:
As counsel to The Avalon Fund of Ann Arbor, Inc. (the "Company"), a corporation
organized under the laws of the State of Maryland, I have been asked to render
my opinion with respect to the issuance of an indefinite number of shares of
beneficial interest of the Company (the "Shares") representing proportionate
interests in Avalon Capital Appreciation Fund (the "Fund"). The Shares of the
Fund are a series of the Company consisting of multiple classes of shares, all
as more fully described in the Prospectus and Statement of Additional
Information contained in the Registration Statement on Form N-1A, to which this
opinion is an exhibit, to be filed with the Securities and Exchange Commission.
I have examined the Company's Articles of Incorporation, dated March 17, 1998,
the Prospectus and Statement of Additional Information contained in the
Registration Statement, and such other documents, records and certificates as
deemed necessary for the purposes of this opinion.
Based on the foregoing, I am of the opinion that the Shares, when issued,
delivered and paid for in accordance with the terms of the Prospectus and
Statement of Additional Information, will be legally issued, fully paid, and
non-assessable by the Company.
Very Truly Yours,
/s/ David D. Jones
David D. Jones
Attorney & Counselor at Law
