U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [2]
Post-Effective Amendment No.
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
Pre-effective Amendment No. [2]
(Check appropriate box or boxes)
The Avalon Fund of Ann Arbor, Inc.
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(Exact Name of Registrant as Specified in Charter)
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
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(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
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(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 an indefinite number of
shares of beneficial interest pursuant to Rule 24f-2 under the Investment
Company Act of 1940.
The Registrant hereby states that this Registration Statement shall become
effective in accordance with Section 8(a) of the Securities Act of 1933 on
September 23, 1998 or on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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THE AVALON FUND OF ANN ARBOR, INC.
Cross-Reference Sheet Pursuant to Rule 495(a)
PART A PROSPECTUS
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FORM ITEM CROSS-REFERENCE
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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
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FORM ITEM CROSS REFERENCE
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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
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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
September 23, 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").
The Fund currently offers a single class of shares, Class A shares. Class A
shares are sold subject to an initial sales charge of 4.75%.
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 September 23, 1998, which is incorporated herein by
reference and which 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.
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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 .................................................
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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
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Maximum sales charge on purchases 4.75%
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
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Annual Fund Operating Expenses (as a percentage of average net assets)
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Investment Advisory Fee 1.00%
Operating Services Fee 1.95%
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Total Fund Operating Expenses 2.95%
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The Manager has voluntarily agreed to waive receipt of its fees and/or absorb
certain expenses of the Fund, to the extent possible, to insure that the Fund's
expenses do not exceed the designated maximum amount shown above.
See "Management of the Fund".
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 assumed to be 5%. The figures set
forth below include deduction of the maximum sales charge (4.75%) at the time of
initial investment.
1 Year 3 Years
Assuming a complete redemption
at end of period .......................... $ 95 $ 153
Assuming no redemption
at end of period .......................... $ 85 $ 143
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.
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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 September 23, 1998. The Company was organized as a
Maryland Corporation on March 17, 1998. This Prospectus offers Class A shares of
the Fund only.. 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. This means that the
Advisor will analyze the market with a view towards taking an investment
position that is CONTRARY to the positions taken by a majority of other
similarly situated investors. The Advisor will take such positions when the
Advisor feels that a particular security is vulnerable to a sudden price decline
due to its stock price being artificially upheld by unreasonable investor
perception, or when the Advisor feels that a security should be purchased
because it is undervalued by the investor community. In implementing such an
approach, the Advisor 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. In order for the Advisor to
choose a security for inclusion in the Fund, the security must normally have the
following four characteristics: (1) A low price-to-earnings ratio based upon the
trailing twelve months earnings. The P/E ratio must be lower than the Standard
and Poors 500; (2) A strong balance sheet; (3) A solid business which can be
understood by the Advisor; and (4) A catalyst event which will, in the Advisor's
opinion, increase the value of the shares. 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).
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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 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.
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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.
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RISK FACTORS. The primary risks associated with the use of options are; (1)
imperfect correlation between a change in the value of the underlying security
or index and a change in the price of the option, 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.)
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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, 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.
The Company is aware of a potential problem that may occur when the year changes
from 1999 to 2000. Many computers and computer programs have been built where
dates are calculated using only two digits. As a result, these computers and
programs cannot tell the difference between 1900 and 2000, and when the year
changes from 1999 to 2000, there may be significant problems. The Company has
taken steps to address this problem, specifically by entering into contracts
only with vendors who are aggressively addressing the problem and by updating
the Company's own systems to address the problem. As of the date of this filing,
the Company does not foresee "The Year 2000 Problem" as having any significant
negative impact on the Company or the Fund.
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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.
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.
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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, excepting
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 is a
Michigan corporation and has been registered as an investment advisor with the
SEC and the State of Michigan. Although the Advisor has extensive experience
managing investment portfolios for individuals and institutions, the Advisor has
no previous experience advising a mutual fund, and this may result in additional
risks to the Fund.
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.
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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, fund
share distribution, shareholder reporting, sub-accounting and record keeping
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
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. CoreStates Bank, N.A., 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.
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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
$1000 for both regular and IRA accounts and subsequent minimum investments of
$500 for regular accounts and $50 for IRA accounts. 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, plus the initial sales charge.
Shares of the Fund are subject to a maximum initial sales charge of 4.75%. 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.
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.
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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 $10,000 or more. A $10 wire fee will be charged by the Fund on wire
purchases of less than $10,000. 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 5 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.
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 $ 50 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 $5,000,000. Any individual order for
more than $5,000,000 must be pre-approved by the Advisor prior to making the
investment or it will be rejected.
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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
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:
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(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 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.
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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, but not later than 15 days after the redemption
order. 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 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 redemptions of Fund shares adversely impact on effective
portfolio management as well as upon Fund expenses. The Fund reserves the
right to refuse additional 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.
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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.
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
obtained from the Transfer Agent by calling 1-800-__________.
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<PAGE>
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 12 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.
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.
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<PAGE>
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 or long-term, depending on the length of time held and when
they were purchased. Short-term and long-term gains normally are taxed at
different rates.
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 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.
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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 September 23, 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 September 23, 1998.
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),
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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
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.
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<PAGE>
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 herein, means the lesser of: (1) 67% of the Fund's outstanding shares
resent 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 engage in repurchase agreements and 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.)
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<PAGE>
(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.
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.
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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.
Government Agency.
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<PAGE>
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 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.
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<PAGE>
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 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.
7
<PAGE>
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
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.
8
<PAGE>
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 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."
9
<PAGE>
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, 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
10
<PAGE>
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
Principal, BS Degree, New York
University.
George A. Van Neal SpecCon, Owner - Construction
(64) 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.,
(33) 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 $0.00 $0.00 $0.00 $0.00
Director
Frederick H. Hoops $0.00 $0.00 $0.00 $0.00
Director
</TABLE>
12
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
Other than indicated below, as of September 15, 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 September 1,
1998:
None
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 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.
13
<PAGE>
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 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."
14
<PAGE>
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.
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)/CD + 1) - 1]
Where: A = dividends and interest earned during the period
B = expenses accrued for the period (net of reimbursement)
C = the average daily number of shares outstanding during
the period that were entitled to receive dividends
D = the maximum offering price per share on the last day of
the period
15
<PAGE>
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 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.
16
<PAGE>
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 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.
17
<PAGE>
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.
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.
18
<PAGE>
CUSTODIAN
CoreStates Bank, N.A. has agreed to act as custodian for the Company.
INDEPENDENT ACCOUNTANTS
McCurdy & Company, Cincinnati, Ohio, are the independent accountants for the
Company.
AUDITORS' REPORT
To The Shareholders and Trustees
The Avalon Fund of Ann Arbor:
We have audited the accompanying statement of assets and liabilities of the
Avalon Fund of Ann Arbor (comprised of the Avalon Capital Appreciation Fund) as
of September 21, 1998. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. Our procedures included
confirmation of cash held by the custodian as of September 21, 1998, by
correspondence with the custodian. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the Avalon
Capital Appreciation Fund as of September 21, 1998, in conformity with generally
accepted accounting principles.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
September 21, 1998
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
THE AVALON FUND OF ANN ARBOR
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 21, 1998
Avalon Capital
Appreciation Fund
ASSETS:
Cash in Bank $110,000
Total Assets $110,000
LIABILITIES: $ 0
Total Liabilities $ 0
NET ASSETS $110,000
NET ASSETS CONSIST OF:
Capital Paid In $110,000
OUTSTANDING SHARES
100 Million Shares
Authorized at 0.0001 Par Value
Class A 11,000
NET ASSET VALUE PER SHARE $10
OFFERING PRICE PER SHARE $10
See Accountants' Audit Report
<PAGE>
THE AVALON FUND OF ANN ARBOR
NOTES TO FINANCIAL STATEMENTS
September 21, 1998
1. ORGANIZATION
The Avalon Fund of Ann Arbor, Inc. (the "Company") is an open- end
management investment company newly organized under the laws of Maryland on
March 17, 1998. The initial incorporation provides for 100 million shares
at 0.0001 par value. There presently is one series within the Company, the
Avalon Capital Appreciation Fund, representing a separate diversified
portfolio of securities. This series consists of only Class A shares.
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 of 4.75%,
(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.
<PAGE>
THE AVALON FUND OF ANN ARBOR
NOTES TO FINANCIAL STATEMENTS
September 21, 1998
1. ORGANIZATION (Cont'd)
The Fund uses an independent custodian and transfer agent. No transactions
other than those relating to organizational matters and the sale of 11,000
Shares of the Avalon Capital Appreciation Fund have taken place to date.
2. RELATED PARTY TRANSACTIONS
As of September 21, 1998, all of the outstanding shares of the Fund were
owned by the Robert Boone IRA. A shareholder who beneficially owns,
directly or indirectly, more than 25% of the Fund's voting securities may
be deemed a "control person" (as defined in the 1940 Act) of the Fund.
Robert Boone is the C.E.O. of Questar Capital Corporation and a director of
the Fund.
Questar Capital Corporation, the Fund's investment adviser, is registered
as an investment adviser under the Investment Advisers Act of 1940.
Questar Capital Corporation (the "Adviser") has entered into an Investment
Advisory Agreement (the "Advisory Agreement") with the Fund to provide
investment management services to the Fund. In addition, the Adviser 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, excepting brokerage, interest, taxes, litigation, and other
extraordinary expenses.
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.
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, fund share distribution,
shareholder reporting, sub-accounting and record keeping 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 1.95%
<PAGE>
THE AVALON FUND OF ANN ARBOR
NOTES TO FINANCIAL STATEMENTS
September 21, 1998
2. RELATED PARTY TRANSACTIONS (Cont'd)
of average net asset value of the Fund, such fee to be computed daily based
upon the net asset value of the Fund. The Adviser 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 Adviser may waive receipt of its fees and/or
voluntarily 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.
3. CAPITAL STOCK AND DISTRIBUTION
At September 21, 1998, an unlimited number of shares were authorized and
paid in capital amounted to $110,000 for the Avalon Capital Appreciation
Fund. Transactions in capital stock were as follows:
Shares Sold:
Avalon Capital Appreciation Fund 11,000
Shares Redeemed:
Avalon Capital Appreciation Fund 0
Net Increase:
Avalon Capital Appreciation Fund 11,000
Shares Outstanding:
Avalon Capital Appreciation Fund 11,000
<PAGE>
THE AVALON FUND OF ANN ARBOR, INC.
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(1) Not Applicable Auditors Report
(2) Statement of Assets and Liabilities
(b) EXHIBITS
Exhibit No. Description of Exhibit
(1) Registrant's Articles of Incorporation
(2) By-laws of Registrant is incorporated herein by reference from
Registrant's initial Registration Statement filed on May 8, 1998.
(3) Not Applicable
(4) Not Applicable
(5) Advisory Agreement between Registrant and Questar Capital Corporation,
dated July 15, 1998 is incorporated herein by reference from
Registrant's initial Registration Statement filed on May 8, 1998.
(6) Distribution Agreement among Registrant, Declaration Distributors,
Inc. and Questar Capital Corporation, dated July 15, 1998 is
incorporated herein by reference from Registrant's initial
Registration Statement filed on May 8, 1998.
(7) Not Applicable
(8) Custodian Agreement between Registrant and CoreStates Bank, N.A. dated
September 23, 1998.
(9.1) Operating Services Agreement between Registrant and Questar Capital
Corporation, dated July 15, 1998 is incorporated herein by reference
from Registrant's initial Registration Statement filed on May 8, 1998.
(9.2) Investment Company Services Agreement between Registrant, Questar
Capital Corporation and Declaration Service Company, dated July
15,1998 is incorporated herein by reference from Registrant's initial
Registration Statement filed on May 8, 1998.
(10) Opinion and Consent of Counsel is incorporated herein by reference
from Registrant's initial Registration Statement filed on May 8, 1998.
(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) Not Applicable
(17) Financial Data Schedule
<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 September 23, 1998.
One
ITEM 27. Indemnification
Under Article VII 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.
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.
<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 18th day of September, 1998.
THE AVALON FUND OF ANN ARBOR, INC
By: /s/ Robert E. Boone
<PAGE>
Exhibit Index
EXHIBIT 1 REGISTRANT'S ARTICLES OF INCORPORATION
EXHIBIT 8 CUSTODIAN AGREEMENT BETWEEN REGISTRANT AND CORESTATES BANK, N.A.
EXHIBIT 11(a) CONSENT OF INDEPENDENT AUDITORS
EXHIBIT 11(b) POWER OF ATTORNEY
EXHIBIT 13 SUBSCRIPTION AGREEMENT
EXHIBIT 17 FINANCIAL DATA SCHEDULE
EXHIBIT 1
ATRICLES OF INCORPORATION
ARTICLES OF INCORPORATION
OF
THE AVALON FUND OF ANN ARBOR CORP
FIRST: The undersigned, David O. Smith, whose post office address is 1013
Centre Road, Wilmington, DE, 19805 being at least eighteen years of age, does
hereby form a corporation under the General Laws of the State of Maryland.
SECOND: The name of the corporation (which is hereinafter called the
Corporation) is:
THE AVALON FUND OF ANN ARBOR CORP
THIRD: The purpose or purposes of the corporation shall be to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation law of the State of Maryland.
FOURTH: The post office address of the principal office of the Corporation
in Maryland is 11 East Chase Street, Baltimore, MD 21202. The name and post
office address of the resident agent is CSC-Lawyers Incorporating Service
Company, at the same address. Said resident agent is a domestic corporation of
the State of Maryland.
FIFTH: The total number of shares of stock which the Corporation has
authority to issue is
One Hundred Million (100,000,000) at 0.0001 par value
SIXTH: THE NUMBER OF DIRECTORS OF THE Corporation shall be 1 which number
may be increased or decreased pursuant to the by-laws of the Corporation, and so
long as there are less than three (3) stockholders, the number of directors may
be less than three (3) but not less than the number of stockholders, and the
name (s) of the director (s) who shall act until their successors are duly
chosen and qualified is (are):
Terence P. Smith
SEVENTH: the duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation on March
17, 1998, and severally acknowledged the same to be my act.
----------------------------
David O. Smith, Incorporator
ACTION OF SOLE INCORPORATOR
THE AVALON FUND OF ANN ARBOR CORP
- ---------------------------------
The undersigned, without a meeting, being the sole incorporator of the
Corporation, does hereby elect the person(s) listed below to serve as
director(s) of the corporation until the first annual meeting of shareholders
and until their successors are elected and qualify:
TERENCE P. SMITH
----------------------------
David O. Smith, Incorporator
Dated: March 17, 1998
<PAGE>
ARTICLES OF AMENDMENT
OF
THE AVALON FUND OF ANN ARBOR CORP
, a Maryland Corporation,
having its principal office in Baltimore, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: the charter of the Corporation is hereby amended by striking out
ARTICLE SECOND and inserting inlieu thereof the following:
SECOND: The name of this corporation shall be THE AVALON FUND OF ANN ARBOR,
INC.
SECOND: the amendment of the charter of the corporation as hereinabove set
forth has been duly advised by the board of directors and approved by the
shareholders of the corporation.
I, Terence P. Smith, certify under the penalties of perjury that to the
best of my knowledge, information, and belief the foregoing resolution is true
in all material respects.
EXHIBIT 8
CUSTODIAN AGREEMENT BETWEEN
REGISTRANT AND CORESTATES BANK, N.A.
CUSTODIAN AGREEMENT
THE AVALON FUND OF ANN ARBOR, INC.
THIS AGREEMENT, dated as of the ___ day of September, 1998 is by an between
The Avalon Fund of Ann Arbor, Inc. (the "Company"), a corporation duly organized
under the laws of the state of Maryland, Questar Capital Corporation, a limited
liability company organized under the laws of the state of Michigan (the
"Adviser"), and CoreStates Bank, N.A. (the "Bank")
WHEREAS, the Company and the Adviser have entered into an Operating
Services Agreement wherein the Adviser is obligated to provide, or arrange to
provide, certain services to the Company, including custodial services, and;
WHEREAS, the Adviser desires to appoint the Bank to act as Custodian of the
Company's portfolio securities, cash and other property from time to time
deposited with or collected by the Bank for the Company, and the Company
consents to such appointment, and;
WHEREAS, the Bank is qualified and authorized to act as Custodian for the
Company and the separate series thereof (each a "Fund", and collectively, the
"Funds"), and is willing to act in such capacity upon the terms and conditions
herein set forth;
NOW THERFORE, in consideration of the premises and mutual covenants herein
contained, the parties hereto, intending to be legally bound, do hereby agree as
follows:
SECTION 1. The terms defined in this Section 1, wherever used in this Agreement,
or in any amendment or supplement hereto, shall have the meanings herein
specified unless the context otherwise requires.
CUSTODIAN: The term Custodian shall mean the Bank in its capacity as Custodian
under this Agreement.
DEPOSITORY: The term depository means any depository service which acts as a
system for the central handling of securities where all securities of any
particular class or series of an issuer deposited within the system are treated
as fungible and may be transferred by bookkeeping entry without physical
delivery.
PROPER INSTRUCTIONS: For purposes of this Agreement, the Custodian shall be
deemed to have Proper Instructions upon receipt of written (including
instructions received by means of computer terminals or facsimile
transmissions), telephone or telegraphic instructions from a person or persons
authorized from time to time by the Directors of the Company to give the
particular class of instructions. Telephone or telegraphic instructions shall be
confirmed in writing by such persons as said Directors shall have from time to
time authorized to give the particular instructions without awaiting receipt of
written confirmation, and the Custodian shall not be liable for the Company's
failure to confirm such instructions in writing.
SECURITIES: The term securities means stocks, bonds, rights, warrants and all
other negotiable or non-negotiable paper issued in certificated or book-entry
form commonly known as "Securities" in banking custom or practice.
SHAREHOLDER: The term Shareholder shall mean the registered owner from time to
time of the Shares of the Company in accordance with the registry records
maintained by the Company or any agent on the Company's behalf.
SECTION 2. The Adviser hereby appoints the Custodian as Custodian of the
Company's cash, Securities and other property, to be held by the Custodian as
provided in this Agreement. The Custodian hereby accepts such appointment
subject to the terms and conditions hereinafter provided. The Bank shall open a
separate custodial account in the name of the Company on the books and records
of the Bank to hold the Securities of the Company deposited with, transferred to
or collected by the Bank for the account of each Fund of the Company, and a
separate cash account to which the Bank shall credit monies received by the Bank
for the account of or from each Fund of the Company. Such cash shall be
segregated from the assets of any and all other accounts of the Company and
shall be and remain the sole property of the Company.
SECTION 3. The Company shall from time to time file with the Custodian a
certified copy of each resolution of its Board of Directors authorizing certain
person or persons to give Proper Instructions and specifying the class of
instructions that may be given by each person to the Custodian under this
Agreement, together with certified signatures of such persons authorized to
sign, which shall constitute conclusive evidence of the authority of the
officers and signatories designated therein to act, and shall be considered in
full force and effect with the Custodian fully protected in acting in reliance
thereon until it receives written notice to the contrary; provided, however,
that if the certifying officer is authorized to give Proper Instructions, the
certification shall be also signed by a second officer of the Company.
SECTION 4. The Company will cause to be deposited with the Custodian hereunder
the applicable net asset value of the Shares sold from time to time whether
representing initial issue, other stock or reinvestments of dividends and/or
distributions payable to Shareholders.
SECTION 5. The Bank, acting as agent for the Company, is authorized, directed
and instructed, subject to the further provisions of this Agreement:
(a) to hold Securities issued only on bearer from in bearer form
(b) to register in the name of the nominee of the Bank, the Bank's
Depositories, or sub-custodians, (I) Securities issued only in
registered form, and (ii) Securities issued in both bearer and
registered form, which are freely interchangeable without penalty;
(c) to deposit any securities which are eligible foe deposit (I) with any
domestic or foreign Depository on such terms and conditions as such
Depository may require, including provisions for limitation or
exclusion of liability on the part of the Depository; and (ii) with
any sub-custodian which the Bank uses, including any subsidiary or
affiliate of the Bank;
(d) (i) to credit for the account of the Company all proceeds received
and payable on or in respect of the assets maintained hereunder.
(ii) to debit the account of the Company for the cost of acquiring
Securities the Bank has received for the Company, against
delivery of such Securities to the Bank;
(iii)to present for payment Securities and other obligations
(including coupons) upon maturity, when called foe redemption,
and when income payments are due, and
(iv) to make exchanges of Securities which, in the Bank's opinion, are
purely ministerial as, for example, the exchange of Securities in
temporary for Securities in definitive form or the mandatory
exchange of certificates;
(e) to forward to the Company, and/or any other person designated by the
Company, all proxies and proxy materials received by the Bank in
connection with Securities held in the Company's account, which have
been registered in the name of the Bank's nominee , or being held by
any Depository, or sub-custodian, on behalf of the Bank;
(f) to sell any fractional interest of any Securities which the Bank has
received resulting from any stock dividend, stock split, distribution,
exchange, conversion or similar activity;
(g) to release the Company's name, address and aggregate share position to
the issuers of any domestic Securities in the account of the Company,
provided any such information to any issuer;
(h) to endorse and collect all checks, drafts or other orders for the
payment of money received by the Bank for the account of or from the
Company;
(i) at the direction of the Company, to enroll designated Securities
belonging to the Company and held hereunder in a program for the
automatic reinvestment of all income and capital gains distributions
on those Securities in new shares (an "Automatic Reinvestment
Program"), or instruct any Depository holding such Securities to
enroll those Securities in an Automatic Reinvestment Program;
(j) At the direction of the Company, to receive, deliver and transfer
Securities and make payments and collections of monies in connection
therewith, enter purchase and sale orders and perform any other acts
incidental or necessary to the performance of the above acts with
brokers, dealer or similar agents selected by the Company, including
any broker, dealer or similar agent affiliated with the Bank, for the
account and risk of the Company in accordance with accepted industry
practice in the relevant market, provided, however, if it so
determined that any certificated Securities transferred to a
Depository or sub-custodian, the Bank, or the Banks nominee, the
Bank's sole responsibility for such Securities under this Agreement
shall be to safekeep the Securities in accordance with Section 11
hereof; and
(k) to notify the Company and/or any other person designated by the
Company upon receipt of notice by the Bank of any call for redemption,
render offer, subscription, rights, merger, consolidation,
reorganization or recapitalization which (I) appears in The Wall
Street Journal (New York edition), The Standard & Poor's Called Bond
Record for Preferred Stocks, Financial Daily Called Bond Service, The
Kenny Services, any official notifications from The Depository Trust
Company and such other publications or services to which the Bank may
from time to time subscribe, (ii) requires the Bank to act in response
thereto and (iii) pertain to Securities belonging to the Company and
held hereunder which have been registered in the name of the Bank's
nominee or are being held by a Depository or sub-custodian on behalf
of the Bank. Notwithstanding anything contained herein to the
contrary, the Company shall have the sole responsibility for
monitoring the applicable dates on which Securities with put option
features must be exercised. All solicitation fees payable to the Bank
unless expressly agreed to the contrary in writing by the Bank.
Notwithstanding anything in this Section to the contrary, the Bank is authorized
to hold Securities for the Company which have transfer limitations imposed upon
them by the Securities Act of 1933, as amended , or represent shares of mutual
funds (I) in the name of the Company, (ii) in the name of the Bank's nominee, or
(iii) with any Depository or sub-custodian
SECTION 6. The Custodian's compensation shall be as set forth in Schedule A
hereto attached, or as shall be set forth in amendments to such schedule
approved by the Company and the Adviser and to the extent such compensation
relates to services provided hereunder to such Fund. All expenses and taxes
payable with respect to the Securities in the account of the Company including,
without limitation, commission charges on purchases and sales and the amount of
any loss or liability for stockholders' assessments or otherwise, claimed or
asserted against the Bank's nominee by reason of any registration hereunder
shall be charged to the Adviser.
SECTION 7. In connection with its functions under this Agreement, the Custodian
shall:
(a) render to the Company a daily report of all monies received or paid on
behalf of the Company; and
(b) create, maintain, and retain all records relating to its activities
and obligations under this Agreement in such manner as will meet the
obligations of the Company with respect to the Custodian's activities
in accordance with generally accepted accounting principles. All
records maintained by the Custodian in connection with the performance
of its duties under this Agreement will remain the property of the
Company, and in the event of termination of this Agreement, will be
relinquished to the Company.
SECTION 8. Any Securities deposited with any Depository or with any
sub-custodian will be represented in accounts in the name of the Bank which
include only property held by the Bank as Custodian for customers in which the
Bank acts in a fiduciary or agency capacity.
Should any Securities which are forwarded to the Bank by the Company, and which
are subsequently deposited to the Bank's account in any Depository or with any
sub-custodian, or which the Company may arrange to deposit in the Bank's account
in any Depository or with any sub-custodian, not be deemed acceptable for
deposit by such Depository or sub-custodian, for any reason, and as a result
thereof there is a short position in the account of the Bank with the Depository
for such Security, the Company agrees to furnish the Bank immediately with like
Securities in acceptable form.
SECTION 9. The Company represents and warrants that: (I) it has the legal right,
power and authority to execute, deliver and perform this Agreement and to carry
out all of the transactions contemplated hereby; (ii) it has obtained all
necessary authorizations; (iii) the execution, delivery and performance of this
Agreement and the carrying out of any of the transactions contemplated and
performance of this Agreement and the carrying out of any of the transactions
contemplated hereby will not be in conflict with, result in a breach of or
constitute a default under any agreement or other instrument to which the
Company is a party of which is otherwise known to the Company; (iv) it does not
require the consent of approval of any governmental agency or instrumentality,
except any such consents and approvals which the Company has obtained; (v) the
execution and delivery of this Agreement by the Company will not violate any
law, regulation, charter, by-law, order of any court or governmental agency or
judgement applicable to the Company; and (vi) all persons executing this
Agreement on behalf of the Company are duly authorized to do so.
In the event any of the foregoing representation should become untrue, incorrect
or misleading, the Company agrees to notify the Bank immediately in writing
thereof.
The Adviser represents and warrants that: (I) it has the legal right, power and
authority to execute, deliver and perform this Agreement and to carry out all of
the transactions contemplated hereby; (ii) it has obtained all necessary
authorizations; (iii) the execution, delivery and performance of this Agreement
and the carrying out of any of the transactions contemplated and performance of
this Agreement and the carrying out of any of the transactions contemplated
hereby will not be in conflict with, result in a breach of or constitute a
default under any agreement or other instrument to which the Adviser is a party
of which is otherwise known to the Adviser; (iv) it does not require the consent
of approval of any governmental agency or instrumentality, except any such
consents and approvals which the Adviser has obtained; (v) the execution and
delivery of this Agreement by the Adviser will not violate any law, regulation,
charter, by-law, order of any court of governmental agency or judgement
applicable to the Adviser; and (vi) all persons executing this Agreement on
behalf of the Adviser are duly authorized to do so.
In the event any of the foregoing representation should become untrue, incorrect
or misleading, the Adviser agrees to notify the Bank immediately in writing
thereof.
SECTION 10. The Bank represents and warrants that: (I) it has the legal right,
power and authority to execute, deliver and perform this Agreement and to carry
out all of the transactions contemplated hereby; (ii) it has obtained all
necessary authorizations; (iii) the execution, delivery and performance of this
Agreement and the carrying out of any of the transactions contemplated hereby
will not be in conflict with, result in a breach of or constitute a default
under any agreement or other instrument to which the Bank is a party or which is
otherwise known to the Bank; (iv) it does not require the consent or approval of
any governmental agency or instrumentality, except any such consents or
approvals which the Bank has obtained; (v) the execution and delivery of this
Agreement by the Bank will not violate any law, regulation, charter, by-law,
order of any court or governmental agency or judgement applicable to the Bank;
and (vi) all persons executing this Agreement on behalf of the Bank and carrying
out the transactions contemplated hereby on behalf of the Bank are duly
authorized to do so. In the event that any of the foregoing representations
should become untrue, incorrect or misleading, the Bank agrees to notify the
Company and the Adviser immediately in writing thereof.
SECTION 11. All cash and Securities held by the Bank hereunder shall be kept
with the care exercised as to the Bank's own similar property. The Bank may at
its option insure itself against loss from any cause but shall be under no
obligation to insure for the benefit of the Company.
SECTION 12. No liability of any kind shall by attached to or incurred by the
Custodian by reason of its custody of the Company's assets held by it from time
to time under this Agreement, or otherwise by reason of its position as
Custodian hereunder except only for its own negligence, bad faith, or willful
misconduct in the performance of its duties as specifically set forth in the
this Agreement. Without limiting the generality of the foregoing sentence, the
Custodian:
(a) may rely upon the advice of counsel for the Company; and for any
action taken or suffered in good faith based upon such advice or
statements the Custodian shall not be liable to anyone;
(b) shall not be liable for anything done or suffered to be done in good
faith in accordance with any request or advice of, or based upon
information furnished by, the Company or its authorized officers or
agents;
(c) is authorized to accept a certificate of the Secretary or Assistant
Secretary of the Company, or Proper Instructions, to the effect that a
resolution in the form submitted has been duly adopted by its Board of
Directors or by the Shareholders, as conclusive evidence that such
resolution has been duly adopted and is in full force and effect; and
(d) may rely and shall be protected in acting upon any signature, written
(including telegraph or other mechanical) instructions, request,
letter of transmittal, certificate, opinion of counsel, statement,
instrument, report, notice, consent, order, or other paper or document
reasonably believed by it to b genuine and to have been signed,
forwarded or presented by the purchaser, Company or other proper party
or parties.
SECTION 13. The Company, its successors and assigns do hereby fully indemnify
and hold harmless the Custodian its successors and assigns, from any and all
loss, liability, claims, demand, actions, suits and expenses of any nature as
the same may arise from the failure of the Company to comply with any law, rule,
regulation, or order of the United States, any state or any other jurisdiction,
governmental authority, body, or board relating to the sale, registration,
qualification of units of beneficial interest in the Company, or from the
failure of the Company to perform any duty or obligation under this Agreement.
Upon written request of the Custodian, the Company shall assume the entire
defense of any claim subject to the foregoing indemnity, or the joint defense
with the Custodian of such claim, as the Custodian shall request. The
indemnities and defense provisions of this Section 13 shall indefinitely survive
termination of this Agreement.
SECTION 14. This Agreement may be amended from time to time without notice to or
approval of the Shareholders by a supplemental agreement executed by the
Company, the Adviser and the Bank amending and supplementing this Agreement in
the manner mutually agreed.
SECTION 15. Either the Company or the Custodian may give one-hundred and twenty
days' (120) written notice to the other of the termination of this Agreement,
such termination to take effect at the time specified in the notice. In case
such notice of termination is given either by the Company or by the Custodian,
the Directors of the Company shall, by resolution duly adopted, promptly appoint
a successor Custodian, (the "Successor Custodian") which Successor Custodian
shall be a bank or a Trust company in good standing, with legal capacity to
accept custody of the cash and Securities of a mutual fund. Upon receipt of
Proper Instructions, the Custodian shall deliver such cash and Securities as it
may then be holding hereunder directly as above provided, the Custodian then
acting shall continue to act as Custodian under this Agreement.
Every Successor Custodian appointed hereunder shall execute and deliver an
appropriate written acceptance of its appointment and shall thereupon become
vested with the rights, powers, obligations and custody of its predecessor
Custodian. The Custodian ceasing to act shall nevertheless, upon request of the
Company and the Successor Custodian and upon payment of its charges and
disbursements, execute and instrument in form approved by its counsel
transferring to the Successor Custodian all the predecessor Custodian's rights,
duties, obligations and custody.
Subject to the provisions of Section 21 hereof, in case the Custodian shall
consolidate with or merge into any other corporation, the corporation remaining
after or resulting from such consolidation or merger shall ipso facto without
the execution or filing of any papers or other documents, succeed to and be
substituted for the Custodian with like effect as though originally named as
such, provided, however, in every case that said Successor corporation maintains
the qualifications set out in Section 17(f) of the Investment Company Act of
1940, as amended.
SECTION 16. This Agreement shall take effect when assets of the Company are
first delivered to the Custodian.
SECTION 17. This Agreement may be executed in two or more counterparts, each of
which when so executed shall be deemed to be an original, but such counterparts
shall together constitute but one and the same instrument.
SECTION 18. A copy of the Articles of Incorporation of the Company is on file
with the Secretary of State of Maryland, and notice is hereby given that this
instrument is executed on behalf of the Company only, and that the obligations
of this instrument are not binding upon any of the Directors, officers or
Shareholders of the Company individually, but binding only upon the assets and
property of the Company. No Fund of the Company shall be liable for the
obligations of any other Fund of the Company.
SECTION 19. The Custodian shall create and maintain all records relating to its
activities and obligations under this Agreement in such manner as will meet the
obligations of the Company under the Investment Company Act of 1940, as amended,
with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder, applicable Federal and state tax laws and any other law or
administrative rules or procedures which may be applicable to the Company.
Subject to security requirements of the Custodian applicable to its own
employees having access to similar records within the Custodian, the books and
records of the Custodian pertaining to this Agreement shall be open to
inspection and audit at any reasonable times by officers of, attorneys for, and
auditors employed by, the Company.
SECTION 20. Any sub-custodian appointed hereunder shall be qualified under
Section 17(f) of the 1940 act and will perform its duties in accordance with the
requirements of this Agreement.
SECTION 21. Nothing contained in this Agreement is intended to or shall require
the Custodian in any capacity hereunder to perform any functions or duties on
any holiday or other day of special observance on which the Custodian is closed.
Functions or duties normally scheduled to be performed on such days shall be
performed on, and as of, the next business day the Custodian is open.
SECTION 22. This Agreement shall extent to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by the Company without the written consent of
the Custodian, or by the Custodian without the written consent of the Company,
authorized or approved by a resolution of its Board of Directors.
SECTION 23. All communications (other that Proper Instructions which are to be
furnished hereunder to either party, or under any amendment hereto, shall be
sent by mail to the address listed below, provided that in the event that the
Bank, in its sole discretion, shall determine that an emergency exists, the Bank
may use such other means of communication as the Bank deems advisable.
To the Company: The Avalon Fund of Ann Arbor, Inc.
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
To the Adviser: Questar Capital Corporation
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
To the Bank: CoreStates Bank N.A.
530 Walnut St.
Philadelphia, PA 19101-7618
SECTION 24. This Agreement, and any amendments hereto, shall be governed,
construed, and interpreted in accordance with the laws of The Commonwealth of
Pennsylvania applicable to agreements made and to be performed entirely within
such Commonwealth.
SECTION 25. Fees and expenses
As compensation for its services under this Agreement, the Custodian may retain
those fees which are specified in its published or otherwise generally
applicable fee schedule in effect at the time its services are being rendered.
The Company recognizes that this schedule might be changed from time to time
with prior notice to the Company.
MUTUAL FUND CUSTODY ADMINISTRATIVE FEES
- ---------------------------------------
1.0 basis points on the first $2.5 billion
.75 basis points on the next $2.5 billion
.50 basis points on the next $5.0 billion
.40 basis points on the remainder
MINIMUM ANNUAL FEE: $3,500
TRANSACTION FEES
- ----------------
$ 4.00 per trade and maturity through Depository Trust Company via DepLink
$10.00 per trade and maturity through Depository Trust Company via non DepLink
$10.00 per trade and maturity clearing book entry through Federal Reserve
$30.00 per transaction for GIC contracts/Physical Securities
$10.00 per trade and maturity clearing through Participants Trust Company
$ 4.00 paydowns on mortgage-backed securities
$ 5.50 Fed wire charge on Repo collateral in/out
$ 5.50/$7.50 other wired transfers in/out
$ 5.50 dividend reinvestment
$ 2.50 Fed charge for sale/return of collateral
$ 8.00 future contracts
$15.00 options
IN WITNESS WHEREOF, The Company, the Adviser and the Custodian have caused this
Agreement to be signed by their respective officers as of the day and year first
above written.
THE AVALON FUND OF QUESTAR CAPITAL
ANN ARBOR, INC. CORPORATION
- ----------------------- ----------------------
By: Robert E. Boone By: Robert E. Boone
President President
CORESTATES BANK N.A.
- -----------------------
Paul T. Cahill
Vice President
EXHIBIT 11(a)
CONSENT OF INDEPENDENT AUDITORS
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
Pre-effective Amendment No. 1 to the Registration Statement for the Avalon Fund
of Ann Arbor of all references to our firm included in or made a part of this
Amendment.
McCurdy & Associates CPA's, Inc.
September 21, 1998
EXHIBIT 11(b)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below consititutes and appoints Robert E. Boone and John H. Gakenheimer, or
either of them, as his true and lawful attorney-in-fact and agent, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Given and signed in Ann Arbor, Michigan, on September 25, 1998.
By: _________________ By: _________________
Robert E. Boone John H. Gakenheimer
By: _________________ By: _________________
Richard G. Gerepka George A. Van Neal
By: __________________
Frederick A. Hoops
EXHIBIT 13
SUBSCRIPTION AGREEMENT
The Avalon Fund of Ann Arbor, Inc.
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
Gentlemen:
The undersigned ("Subscriber") hereby subscribes for and agrees to acquire
from The Avalon Fund of Ann Arbor, Inc., a corporation incorporated under the
laws of the State of Maryland (the "Corporation"), the number of shares of
$.0001 par value Common stock of The Avalon Capital Appreciation Fund (the
"Shares") of the Corporation shown below in consideration of a cash contribution
of $100,000 ($10.00 per share).
Subscriber hereby represents and warrants to the Corporation that:
(a) Subscriber hereby acknowledges and agrees that the shares will be
issued in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act of 1933 (the "Securities Act"), and that such Shares
will or may also be issued in reliance upon the exemptions from registration
contained in relevant sections of the Maryland Securities Act and/or comparable
exemptions contained in the securities laws of other jurisdictions to the extent
applicable, and that the transfer of such shares may be restricted or limited as
a condition to the availability of such exemptions.
(b) The shares are being purchased for investment for the account of the
undersigned and without the intent of participating directly or indirectly in a
distribution of such Shares, and the Shares will not be transferred except in a
transaction that is in compliance with any and all applicable securities laws.
(c) Subscriber has been supplied with, or has had access to, all
information, including financial statements and other financial information, of
the Corporation, to which a reasonable investor would attach significance in
making investment decisions, and has had the opportunity to ask questions of,
and receive answers from, knowledgeable individuals concerning the Corporation
and the Shares.
(d) Subscriber understands that no registration statement or prospectus
with respect to the corporation or the shares is yet effective, and Subscriber
has made his own inquiry and analysis with respect to the Corporation and the
shares.
(e) Subscriber personally, or together with his purchaser representative,
has such knowledge and experience in financial and business matters to be
capable of evaluating the merits and risks of an investment in the Corporation
and the Shares.
(f) Subscriber is financially able to bear the economic risk of this
investment, can afford to hold the shares for an indefinite period and can
afford a complete loss of this investment. Subscriber has no present intention
to sell the shares.
Dated as of the _______ day of September, 1998
Shares of
The Avalon Capital Appreciation Fund Subscribed Purchase Amount
10,000 $100,000
SUBSCRIBED BY:
QUESTAR CAPITAL CORPORATION
- -------------------------------------
Robert E. Boone
President
ACCEPTED BY:
THE AVALON FUND OF ANN ARBOR, INC.
- -------------------------------------
Robert E. Boone
President
EXHIBIT 17
FINANCIAL DATA SCHEDULE
The Company was established on March 17, 1998 and commenced offering shares of
the Fund on September 23, 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.
