THE AVALON CAPITAL APPRECIATION FUND
(the "Fund")
A Series of The Avalon Fund of Maryland, Inc.
1350 Highland Drive, Suite A
Ann Arbor, MI 48108
1-877-228-2566
PROSPECTUS
FEBRUARY 1, 2000
(Supplemented as of February 18, 2000)
The Fund's primary investment objective is growth of capital. The Fund
attempts to achieve its investment objective by investing primarily in a
diversified portfolio of common stocks and securities convertible into common
stocks.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
PAGE
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RISK/RETURN SUMMARY............................................................1
PERFORMANCE INFORMATION........................................................3
FEES AND EXPENSES..............................................................5
INVESTMENT OBJECTIVES AND POLICIES.............................................6
INVESTMENT ADVISER.............................................................8
INVESTING IN THE FUND.........................................................10
HOW TO SELL (REDEEM) YOUR SHARES..............................................16
DIVIDENDS AND DISTRIBUTIONS...................................................19
PRINCIPAL UNDERWRITER.........................................................19
TAX CONSIDERATIONS............................................................19
GENERAL INFORMATION...........................................................21
DISTRIBUTION FEES.............................................................21
FINANCIAL HIGHLIGHTS..........................................................23
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RISK/RETURN SUMMARY
Investment Objective
- --------------------
The Fund's primary investment objective is to achieve growth of capital.
Principal Investment Strategies
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The Fund attempts to achieve its investment objective by investing at least
65% of its assets in a diversified portfolio of common stocks and securities
convertible into common stocks. Under normal circumstances, the Fund
concentrates its investments in Small and Mid- Cap stocks. Small and Mid-Cap
companies are companies with total market capitalization of less than $5
billion. The Fund's Adviser believes that the common stock and securities
convertible into common stock of Small and Mid-Cap companies offer the greatest
long-term potential for capital growth, due to the various dynamics that
influence the growth potential of those types of companies.
To achieve its investment objective of capital growth, the Fund seeks to
invest in companies that have an above-average potential for future earnings
growth. The Fund's portfolio manager, under the Adviser's supervision, will
choose what it considers to be the most promising investments for the Fund using
a proprietary quantitative analytical model.
In seeking to maximize the Fund's growth potential, the Fund's portfolio
manager may also sell securities short when it feels that a particular security
is vulnerable to a sudden price decline. The Fund may also invest in options
contracts when the portfolio manager's proprietary research indicates that the
Fund will benefit from such investments.
The portfolio manager will also consider industry diversification as an
important factor, and the portfolio manager's investments in certain industries
are likely to be adjusted from time to time due to the outlook for earnings in
certain sectors.
Short Sales
- -----------
The Fund may attempt to limit its exposure to possible declines in the
market value of portfolio securities through short sales of securities. The Fund
also may use short sales in an attempt to realize gain. To effect a short sale,
the Fund sells a security it does not own and simultaneously borrows the
security, usually from a brokerage firm, to make delivery to the buyer. The Fund
then is obligated to replace the borrowed security by purchasing it at the
market price at some future date. Until the security is replaced, the Fund is
required to pay the lender any accrued interest or dividends and may be required
to pay a premium.
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The Fund will realize a gain if the security declines in price between the
date of the short sale and the date on which the Fund replaces the borrowed
security. The Fund will incur a loss if the price of the security increases
between those dates. The amount of any gain will be decreased, and the amount of
any loss increased, by the amount of any premium or interest the Fund may be
required to pay in connection with a short sale. A short position may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
No short sale will be effected which will, at the time of its making, cause
the aggregate market value of all securities sold short to exceed 25% of the
value of the Fund's net assets. To secure the Fund's obligation to replace any
borrowed security, the Fund will place in a segregated account, an amount of
cash or liquid securities, at such a level that (i) the amount deposited in the
account plus the amount deposited with the broker as collateral will equal the
current value of the security sold short and (ii) the amount deposited in the
segregated account plus the amount deposited with the broker as collateral will
not be less than the market value of the security at the time it was sold short;
or otherwise cover its short position in accordance with positions taken by the
SEC.
In addition to the short sales discussed above, the Fund may also make
short sales "against the box", i.e., short sales made when the Fund owns
securities identical to those sold short. The Fund may only engage in short sale
transactions in securities listed on one or more national securities exchange or
on NASDAQ.
In addition to common stock, the Fund may invest in foreign equity
securities when, in the Adviser's opinion, such investments would be
advantageous to the Fund and help the Fund to achieve its investment objective.
The Fund may also, from time to time, invest a portion of its assets in
other securities, such as corporate notes, United States Government bonds,
bills, and notes; money market instruments, repurchase agreements, and options
on equities. The Fund may also hold a portion of its assets in cash.
Principal Risks of Investing in the Fund
- ----------------------------------------
Stock Market Risk. The principal risk of investing in the Fund is the risk
of losses due to declines in the prices of the common stocks held by the Fund.
The Fund invests primarily in common stock, so the Fund will be subject to the
risks associated with common stocks, including price volatility and the
creditworthiness of the issuing company. The stock market trades in cyclical
price patterns, with prices generally rising or falling over time. These
cyclical periods may last for a significant period of time.
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Short Selling. The principal risks of selling short are the risk of losses
due to increases in the price of the stock sold short, losses resulting from
borrowing costs, and opportunity cost resulting from "locking in" a profit or
loss on stocks shorted "against the box".
Small-Cap Company Risk. The Fund invests in companies that are considered
to be smaller companies. Companies with small market capitalizations can be
riskier investments than larger capitalized companies, due to their lack of
experience, product diversification, cash reserves and lack of management depth.
General Risks. You may lose money by investing in the Fund. Your risk of
loss is greater if you hold your investment for shorter time periods. The Fund
may be appropriate for long-term 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. The Fund has a limited
operating history, and this may pose additional risks. When you sell your Fund
shares, they may be worth more or less than what you paid for them. There is no
assurance that the Fund can achieve its investment objective, since all
investments are inherently subject to market risk.
PERFORMANCE INFORMATION
The bar chart and table below provide you with information regarding the
Fund's annual return. You should bear in mind that past performance is not an
indication of future results.
The bar chart shows the total return that the Fund achieved for calendar
year 1999. The front-end sales charge (or load) that you pay when you purchase
shares of the Fund is not reflected in the bar chart. If the sales charge was
reflected, the return shown in the bar chart would be lower. Also, the Adviser
reimbursed expenses and/or waived fees that the Fund otherwise would have paid
for the year presented. If the Adviser had not taken those actions, the return
shown in the bart chart would have been lower.
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[GRAPHIC OMITTED] -------------------------
Highest Quarterly Return:
70.43% 45.64%, 4th Quarter, 1999
1999 Lowest Quarterly Return:
-2.14%, 1st Quarter, 1999
-------------------------
- -----------------------------------
* As a percent of average net assets
The following table compares the average annual return on shares of the
Fund with that of a broad measure of market performance over the periods
indicated. The Fund's performance presented in the table reflects the effects of
the maximum applicable sales charge and the Fund's operating expenses. No
comparable reductions have been made in the performance presented for the Index.
FOR THE PERIOD FROM
OCTOBER 2, 1998
(COMMENCEMENT OF
AVERAGE ANNUAL YEAR ENDED OPERATIONS) THROUGH
TOTAL RETURN DECEMBER 31, 1999 DECEMBER 31, 1999
- ------------ ----------------- -----------------
The Avalon Capital Appreciation Fund 62.33% 50.67%
Russell 2000 Index* 19.62% 34.04%
- ---------------------------
* The Russell 2000 Index is a broad stock index made up of 2,000 small market
capitalization companies. The Index tracks the general stock market
performance of these 2,000 companies.
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FEES AND EXPENSES
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES:
- -----------------
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases 4.75%
(as a percentage of offering price)
Redemption Fees None(1)
(as a percentage of amount redeemed, if applicable)
ANNUAL FUND OPERATING EXPENSES:
- ------------------------------
(expenses that are deducted from Fund assets)
Management Fees(2) 1.95%
Distribution (12b-1) Fees(3) 1.00%
Other Expenses 0%
-----
Total Annual Fund Operating Expenses(4) 2.95%
=====
- ---------------------------------
(1) The Fund will charge you an account closing fee of $10.00. This is a flat
charge that does not vary with the size of your investment. If charged,
this fee would increase your costs. This fee is not a fee to finance sales
or sales promotion expenses, but is imposed to discourage short-term
trading of Fund shares. Furthermore, such fees, when imposed, are credited
directly to the assets of the Fund to help defray the expense to the Fund
of such short-term trading activities.
(2) Management fees include a fee of 0.50% for investment advisory services and
1.45% for administrative and other services. Both fees are paid to the
Fund's Adviser.
(3) Because 12b-1 fees are paid out of the assets of the Fund on an ongoing
basis, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
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(4) During the year ended September 30, 1999, the Adviser voluntarily waived a
portion of the management fee. Giving effect to this waiver, the Management
Fees and Total Annual Fund Operating Expenses actually paid by the Fund for
its fiscal year ended September 30, 1999 were 1.54% and 2.54%,
respectively.
Example: This Example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. An account closing fee
of $10.00 and the maximum sales charge of 4.75% is included in these
calculations. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
One Year Three Years
-------- -----------
$759 $1,344
INVESTMENT OBJECTIVES AND POLICIES
The Fund is a diversified mutual fund whose primary investment objective is
growth of capital. The Fund seeks to achieve its objective by investing
primarily in a diversified portfolio of common stock and securities convertible
into common stock of Small and Mid- Cap companies. There can be no assurance
that the Fund's investment objective will be achieved.
Described below are the primary types of securities in which the Fund may
invest. A full listing of the Fund's investment restrictions and limitations,
including those that may be changed only by vote of the Fund's shareholders, can
be found in the Fund's Statement of Additional Information ("SAI").
COMMON STOCKS. The Fund will ordinarily invest at least 65% of its assets
in common stock or securities convertible into common stock of companies with
market capitalization of less than $8 billion. The market value of common stock
can fluctuate significantly, reflecting the business performance of the issuing
company, investor perceptions and general economic or financial market
movements. Smaller companies are especially sensitive to these factors.
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OPTIONS ON EQUITIES. The Fund may invest in options contracts to decrease
its exposure to the effects of changes in security prices, to hedge securities
held, to maintain cash reserves while remaining fully invested, to facilitate
trading, to reduce transaction costs, or to seek higher investment returns when
an options contract is priced more attractively than the underlying security or
index.
The Fund may write (i.e. sell) covered call options, and may purchase put
and call options, on equity securities traded on a United States exchange or
properly regulated over-the-counter market. The Fund may also enter into such
transactions on Indexes. Options contracts can include long-term options with
durations of up to three years.
The Fund may enter into these transactions so long as the value of the
underlying securities on which options contracts may be written at any one time
does not exceed 100% of the net assets of the Fund, and so long as the initial
margin required to enter into such contracts does not exceed five percent (5%)
of the Fund's total net assets. When writing covered call options, to minimize
the risks of entering into these transactions, the Fund will maintain a
segregated account with its Custodian consisting of the underlying securities
upon which the option was written, cash, cash equivalents, U.S. Government
Securities or other high-grade liquid debt securities, denominated in U.S.
dollars or non-U.S. currencies, in an amount equal to the aggregate fair market
value of its commitments to such transactions.
RISKS ASSOCIATED WITH OPTIONS. The primary risks associated with the use of
options are; (1) imperfect correlation between a change in the value of the
underlying security or index and a change in the price of the option or futures
contract, and (2) the possible lack of a liquid secondary market for an options
or futures contract and the resulting inability of the Fund to close out the
position prior to the maturity date. Investing only in those contracts whose
price fluctuations are expected to resemble those of the Fund's underlying
securities will minimize the risk of imperfect correlation. Entering into such
transactions only on national exchanges and over-the-counter markets with an
active and liquid secondary market will minimize the risk that the Fund will be
unable to close out a position.
CASH RESERVES. The Fund may hold up to 100% of its net assets in cash to
maintain liquidity and for temporary defensive purposes.
The Fund may take a temporary defensive position when, in the Adviser's
opinion, market conditions are such that investing according to the Fund's
normal investment objectives would place the Fund in imminent risk of loss. In
such an event, the Adviser could temporarily convert some or all of the Fund's
investments to cash. Such actions are subject to the supervision of the Board of
Directors. You should be aware that any time the Fund is assuming a temporary
defensive position, the Fund will not be invested according to its investment
objectives, and its performance will vary, perhaps significantly, from its norm.
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INVESTMENT ADVISER
Questar Capital Corporation (the "Adviser"), 1350 Highland Drive, Suite A,
Ann Arbor, Michigan 48108, under an Investment Advisory Agreement with the Fund,
furnishes investment advisory services to the Fund. The Advisor is a Michigan
corporation and is registered as an investment adviser with the Securities and
Exchange Commission and the State of Michigan. The Adviser has been investment
adviser to the Fund since its inception. The Adviser manages, or arranges for
the management of, the investment portfolio and business affairs of the Fund
under an Investment Advisory Agreement with the Fund, and manages, or arranges
to manage, the daily operations of the Fund under an Operating Services
Agreement.
Investment Advisory Agreement.
- ------------------------------
Under the terms of the Advisory Agreement, the Adviser is responsible to
manage the investment operations of the Fund in accordance with the Fund's
investment policies and restrictions. The Adviser is responsible to furnish an
investment program for the Fund, determine what investments should be purchased,
sold and held, and make changes on behalf of the Company in the investments of
the Fund. At all times the Adviser's actions on behalf of the Fund are subject
to the overall supervision and review of the Board of Directors of the Company.
For its investment advisory services to the Fund, the Company pays to the
Adviser, on the last day of each month, a fee equal to 0.50% of average net
asset value of the Fund. The fee is computed daily based upon the net asset
value of the Fund.
The Adviser may, with the Fund's approval, retain a sub-adviser to assist
in performing the various investment management services required by the Fund.
The Adviser is responsible for compensating such sub-adviser(s).
Operating Services Agreement.
- -----------------------------
Under the terms of the Operating Services Agreement, the Adviser provides,
or arranges to provide, day-to-day operational services to the Fund including,
but not limited to;
o Accounting
o Administrative
o Legal (Except Litigation)
o Dividend Disbursing and Transfer Agent
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o Registrar
o Custodial
o Fund Share Distribution
o Shareholder Reporting
o Sub-accounting; and
o Record Keeping Services
For its services to the Fund under this Agreement, the Fund pays to the
Adviser, on the last day of each month, a fee equal to 1.45% 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 may, with the Fund's permission, employ third parties to assist
it in performing the various services required by the Fund. The Adviser is
responsible for compensating such parties.
Portfolio Manager
- -----------------
The Adviser has entered into a sub-advisory agreement with Navellier
Management, Inc. ("Navellier"). Under this sub-advisory agreement, Navellier
provides day-to-day portfolio management for the Fund, including the selection
of investments, subject to the overall supervision of the Adviser.
Navellier was founded in 1993 as an investment advisory firm whose
principal business is providing financial management services to individuals,
pension funds and institutional portfolios. Navellier presently manages
approximately $4.0 billion in client assets.
Mr. Louis G. Navellier is the founder and President of Navellier and has
been its chief investment officer since the firm's inception. He serves as
portfolio manager to the Fund. Mr. Navellier has over fourteen years of
experience as an investment manager. He is a graduate of California State
University, Hayward with an MBA in Finance. In 1980, Mr. Navellier began
publishing the MPT Review, a stock advisory newsletter. Since 1985, Mr.
Navellier has been actively managing investment portfolios through his company,
Navellier & Associates, Inc. In 1993, Mr. Navellier founded Navellier
Management, Inc. In addition to the Fund, Navellier Management, Inc. also
manages a series of no-load mutual funds, as well as a no- load annuity product.
9
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In order to assist the Fund to grow and prosper in its first year of
development, the Adviser has voluntarily agreed to waive receipt of its fees
and/ or voluntarily assume certain Fund expenses, to cap the Fund's Total Annual
Expenses at not greater than 2.95% of average net assets. This action had the
effect of lowering the Fund's expense ratio and increasing the Fund's total
return during the time such amounts are waived or assumed. The Fund will not be
required to pay the Adviser for any amounts voluntarily waived or assumed, nor
will the Fund be required to reimburse the Adviser for any amounts waived or
assumed during a prior fiscal year. The Adviser's commitment to waive fees
and/or assume expenses is entirely voluntary, and may be amended or terminated
at any time upon notice to the Board of Directors. However, should the Adviser
amend or terminate its commitment, it will notify you in writing at least 30
days prior to any change.
INVESTING IN THE FUND
Determination of Share Price
- ----------------------------
Shares of the Fund are offered at each share's public offering price, which
is the Fund's per share net asset value ("NAV") plus the applicable sales
charge. NAV per share is calculated by adding the value of Fund investments,
cash and other assets, subtracting Fund liabilities, and then dividing the
result by the number of shares outstanding. The Fund generally determines the
total value of its shares by using market prices for the securities comprising
its portfolio. Securities for which quotations are not available and any other
assets are valued at a fair market value as determined in good faith by the
Adviser, subject to the review and supervision of the Board Of Directors.
The Fund's per share NAV is computed on all days on which the New York
Stock Exchange is open for business at the close of regular trading hours on the
Exchange, currently 4:00 p.m. East Coast time.
Sales Charges
- -------------
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.
10
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You may pay a reduced sales charge, or no sales charge at all, under
certain conditions. You may pay a reduced sales charge for larger investments.
The following sales charges apply to different investment amounts:
AS A PERCENTAGE AS A PERCENTAGE
AMOUNT OF PURCHASE OF OFFERING PRICE OF NET ASSET VALUE
- ------------------ ----------------- ------------------
Up to $100,000 4.75% 5.00%
$100,001 to $250,000 3.50% 3.63%
$250,001 to $500,000 2.60% 2.67%
$500,001 to $1 million 2.00% 2.04%
Over $1 million 0.00% 0.00%
Questar Capital Corporation, the Fund's principal underwriter, will pay a
dealer concession of a portion of the applicable sales charge to brokers,
dealers, and other authorized financial professionals who sell shares of the
Fund. From time to time, the Fund's principal underwriter may reallow up to 100%
of the sales charge to participating brokers and dealers. Such reallowances may
based on attainment of certain sales levels. Dealers will be notified in advance
concerning any additional reallowance program, as well as any conditions
attaching thereto. During periods when 90% or more of the sales charge is
reallowed, such dealers may be deemed to be underwriters as that term is defined
in the Securities Act of 1933.
You may purchase shares at net asset value without the imposition of a
sales charge if you purchase at least $1 million in shares, in the aggregate,
within a thirteen month period. You must sign a letter of intent to accumulate
purchases at the time of your initial purchase in order to avoid the sales
charge. If you do not complete your accumulated purchase commitment within
thirteen months, your shares will be charged the sales charge applicable to the
actually invested amount.
Sales charges do not apply to:
o Current or retired board members, officers or employees of the
Fund, the Company, the Distributor, the Transfer Agent, or their
subsidiaries, spouses and unmarried children under 21.
o Current or retired employees of the Adviser and Sub-Adviser, or
their spouses and unmarried children under 21.
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o Shareholders who have at least $5 million invested in funds of
the Avalon Fund of Maryland, Inc.
o Purchases made with dividend or capital gain distributions from
the load shares of another fund in the Avalon Fund of Maryland,
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
Distributor 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
Maryland, Inc.
Opening and Adding To Your Account
- ----------------------------------
You can invest directly in the Fund in a number of ways. Simply choose the
one that is most convenient for you. Any questions you may have can be answered
by calling 1-877-228-2566.
Payments for Fund shares must be in U.S. dollars, and in order to avoid
fees and delays, should be drawn on a U.S. bank. Please remember that Fund
management reserves the right to reject any purchase order for Fund shares if,
in the Fund's opinion, such an order would cause a material detriment to
existing shareholders. Your purchase of Fund shares is subject to the following
minimum investment amounts:
<TABLE>
<CAPTION>
MINIMUM INVESTMENT TO OPEN ACCOUNT TO ADD TO AN ACCOUNT
- ------------------ --------------- --------------------
<S> <C> <C>
Regular Account $1,000 $ 100
IRAs $ 500 $ 50
AUTOMATIC INVESTMENT PLANS
- --------------------------
Regular Accounts $1,000 $ 50 per month minimum
IRAs $ 500 $ 50 per month minimum
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HOW TO INVEST TO OPEN AN ACCOUNT TO ADD TO ACCOUNT
- ------------- ------------------ -----------------
By Mail Complete an Account Registra- Make your check payable to The
tion Form, make a check payable Avalon Capital Appreciation Fund
to The Avalon Capital and mail it to the address at left.
Appreciation Fund and mail the
Form and check to The Avalon Please include your account
Fund of Maryland Inc., c/o number on your check. Or use
Declaration Service Company, the convenient form attached to
555 North Lane, Suite 6160, your regular Fund statement.
Conshohocken, PA 19428.
By Wire Ask your bank to wire funds to Ask your bank to wire immedi-
Account of First Union National ately available funds to the loca-
Bank, NA, ABA #:031201467 tion described at the left, except
that the wire should purchase
Credit: Avalon Fund of Maryland, rather than to open a new ac-
Inc., Acct. #:2014227237132 count.
Further credit: The Avalon Capital Include your name and Fund
Appreciation Fund. account number.
The wire should state that the
purchase is to be in your name(s).
The wire should state that you
are opening a new Fund account.
Include your name(s), address
and taxpayer identification num-
ber or Social Security number and
the name of the Fund in which you
are purchasing shares.
Call 1-877-228-2566 to inform us
that a wire is being sent.
Automatic Not Applicable. You must open When you open your account, or
Investment Plan: an account by one of the other at any time thereafter, you can
methods before you can begin begin making automatic monthly
making automatic investments investments directly from your
through an automatic investment checking or NOW account by
plan. completing the automatic
investment plan form. You can
obtain this form by calling us at
1-877-228-2566.
By Telephone: Telephone transactions may not Call 1-877-228-2566 to make
be used for initial purchases. If your purchase.
you want to make subsequent
transactions via telephone, please
select this service on your
account Registration Form.
</TABLE>
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The Avalon Fund of Maryland, Inc. (the "Company") wants you to be kept
current regarding the status of your account in the Fund. To assist you, the
following statements and reports will be sent to you:
Confirmation Statements After every transaction that affects your account
balance or your account registration.
Financial Reports Semi-annually - to reduce Fund expenses, only one copy
of the financial report will be mailed to each
taxpayer identification number even if you have more
than one account in the Fund.
Purchase By Mail
- ----------------
Your purchase order, if accompanied by payment, will be processed upon
receipt by Declaration Service Company, the Fund's Transfer Agent. If the
Transfer Agent receives your order and payment by the close of regular trading
on the Exchange (currently 4:00 p.m. East Coast time), your shares will be
purchased at the Fund's net asset value calculated at the close of regular
trading on that day. Otherwise, your shares will be purchased at the net asset
value determined as of the close of regular trading on the next business day.
The Company does not consider the U.S. Postal Service or any other
independent delivery service to be its agent. Therefore, deposit in the mail or
with such services, or receipt at Declaration Service Company's Post Office Box,
of purchase applications or redemption requests does not constitute receipt by
the Custodian or the Fund. Do not mail letters by overnight courier to the post
office box address. Correspondence mailed by overnight courier should be sent to
the Fund at:
Declaration Service Company
555 North Lane, Suite 6160
Conshohocken, PA 19428
All applications to purchase shares of the Fund are subject to acceptance
or rejection by authorized officers of the Company and are not binding until
accepted. Applications will not be accepted unless they are accompanied by
payment in U.S. funds. Payment must be made by check or money order drawn on a
U.S. bank, savings & loan or credit union. The Custodian will charge a $20.00
fee against your account, in addition to any loss sustained by the Fund, for any
payment check returned to the Custodian for insufficient funds. The Company
reserves the right to refuse to accept applications under circumstances or in
amounts considered disadvantageous to shareholders. If you place an order for
Fund shares through a securities broker, and you place your order in proper form
before 4:00 p.m. East Coast time on any business day in accordance with their
procedures, your purchase will be processed at the public offering price
calculated at 4:00 p.m. on that day, if the securities broker then
14
<PAGE>
transmits your order to the Transfer Agent before the end of its business day
(which is usually 5:00 p.m. East Coast time). The securities broker must send to
the Transfer Agent immediately available funds in the amount of the purchase
price within three business days for the order.
By Financial Service Organization
- ---------------------------------
If you are a client of a securities broker or other financial organization,
you should note that such organizations may charge a separate fee for
administrative services in connection with investments in Fund shares and may
impose account minimums and other requirements. These fees and requirements
would be in addition to those imposed by the Fund. If you are investing through
a securities broker or other financial organization, please refer to its program
materials for any additional special provisions or conditions that may be
different from those described in this Prospectus (for example, some or all of
the services and privileges described may not be available to you). Securities
brokers and other financial organizations have the responsibility of
transmitting purchase orders and funds, and of crediting their customers'
accounts following redemptions, in a timely manner in accordance with their
customer agreements and this Prospectus.
Automatic Investment Plan
- -------------------------
Once you have opened your account, you may make additional investments
automatically by completing the automatic investment plan form authorizing the
Fund to draw on your bank account regularly for as little as $50 per month
beginning within thirty (30) days after you have opened your account. You should
inquire at your bank whether it will honor debits made through the Automated
Clearing House System. You may change the date or amount of your investment at
any time by written instructions delivered to the Fund at least five business
days before you want the change to become effective.
To assure proper receipt, please make 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 shown above or purchases by mail.
Telephone Purchases
- -------------------
In order to be able to purchase shares by telephone, your account
authorizing such purchases must have been established prior to your call. Your
initial purchase of shares may not be made by telephone. Shares purchased by
telephone will be purchased at the per share net asset value determined at the
close of business on the day that the transfer agent receives payment through
the Automatic Clearing House. Call the Transfer Agent for details.
You may make purchases by telephone only if you have an account at a bank
that is a member of the Automated Clearing House. Most transfers are completed
within three business days of your call. To preserve flexibility, the Company
may revise or eliminate the ability to purchase Fund shares by phone, or may
charge a fee for such service, although the Company does not currently expect to
charge such a fee.
Declaration Service Company, the Fund's transfer agent, employs certain
procedures designed to confirm that instructions communicated by telephone are
genuine. Such procedures may include, but are not limited to, requiring some
form of personal identification prior to acting upon telephonic instructions,
providing written confirmations of all such transactions, and/or tape recording
all telephonic instructions. Assuming procedures such as the above have been
followed, neither the Transfer Agent nor the Fund will be liable for any loss,
cost, or expense for acting upon telephone instructions that are believed to be
genuine. The Company shall have authority, as your agent, to redeem shares in
your account to cover any such loss. As a result of this policy, you will bear
the risk of any loss unless the Fund has failed to follow procedures such as the
above. However, if the Fund fails to follow such procedures, it may be liable
for such losses.
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<PAGE>
Wire Purchases
- --------------
If you purchase Fund shares by wire, you must complete and file an Account
Registration Form with the Transfer Agent before any of the shares purchased can
be redeemed. You should contact your bank (which will need to be a commercial
bank that is a member of the Federal Reserve System) for information on sending
funds by wire, including any charges that your bank may make for these services.
Miscellaneous Purchase Information
- ----------------------------------
Federal regulations require that you provide a certified taxpayer
identification number whenever you open or reopen an account. Congress has
mandated that if any shareholder fails to provide and certify to the accuracy of
the shareholder's social security number or other taxpayer identification
number, the Company will be required to withhold a percentage, currently 31%, of
all dividends, distributions and payments, including redemption proceeds, to
such shareholder as a backup withholding procedure.
For economy and convenience, share certificates will not be issued.
HOW TO SELL (REDEEM) YOUR SHARES
You may sell (redeem) your shares at any time. You may request the sale of
your shares either by mail, by telephone or by wire.
By Mail
- -------
Sale requests should be mailed via U.S. mail or overnight courier service
to:
Declaration Service Company
555 North Lane, Suite 6160
Conshohocken, PA 19428
The selling price of the shares being redeemed will be the Fund's per share
net asset value next calculated after receipt of all required documents in Good
Order. Payment of redemption proceeds will be made no later than the third
business day after the valuation date unless otherwise expressly agreed by the
parties at the time of the transaction.
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<PAGE>
Good Order means that the request must include:
1. Your account number.
2. The number of shares to be sold (redeemed) or the dollar value of the
amount to be redeemed.
3. The signatures of all account owners exactly as they are registered on
the account.
4. Any required signature guarantees.
5. Any supporting legal documentation that is required in the case of
estates, trusts, corporations or partnerships and certain other types
of accounts.
Signature Guarantees
- --------------------
A signature guarantee of each owner is required to redeem shares in the
following situations, for all size transactions:
(i) If you change the ownership on your account;
(ii) When you want the redemption proceeds sent to a different address than
is registered on the account;
(iii)If the proceeds are to be made payable to someone other than the
account's owner(s);
(iv) Any redemption transmitted by federal wire transfer to your bank; and
(v) If a change of address request has been received by the Company or
Declaration Service Company within 15 days previous to the request for
redemption.
In addition, signature guarantees are required for all redemptions of
$10,000 or more from any Fund shareholder account. A redemption will not be
processed until the signature guarantee, if required, is received in Good Order.
Signature guarantees are designed to protect both you and the Fund from
fraud. To obtain a signature guarantee, you should visit a bank, trust company,
member of a national securities exchange or other broker-dealer, or other
eligible guarantor institution. (Notaries
17
<PAGE>
public cannot provide signature guarantees.) Guarantees must be signed by an
authorized person at one of these institutions, and be accompanied by the words
"Signature Guarantee."
By Telephone
- ------------
You may redeem your shares in the Fund by calling the Transfer Agent at
1-877-228-2566 if you elected to use telephone redemption on your account
application when you initially purchased shares. Redemption proceeds must be
transmitted directly to you or to your pre-designated account at a domestic
bank. You may not redeem by telephone if a change of address request has been
received by the Company or the Transfer Agent within 15 days previous to the
request for redemption. During periods of substantial economic or market
changes, telephone redemptions may be difficult to implement. If you are unable
to contact the Transfer Agent by telephone, shares may be redeemed by delivering
the redemption request in person or by mail. You should understand that with the
telephone redemption option, you may be giving up a measure of security that you
might otherwise have had were you to redeem your shares in writing. In addition,
interruptions in telephone service may mean that you will be unable to effect a
redemption by telephone if desired.
Shares purchased by check for which a redemption request has been received
will not be redeemed until the check or payment received for investment has
cleared.
By Wire
- -------
You may request the redemption proceeds be wired to your designated bank if
it is a member bank or a correspondent of a member bank of the Federal Reserve
System. The Custodian charges a $10 fee for outgoing wires.
Redemption At The Option Of The Fund
- ------------------------------------
If the value of the shares in your account falls to less than $1000, the
Company may notify you that, unless your account is increased to $1000 in value,
it will redeem all your shares and close the account by paying you the
redemption proceeds and any dividends and distributions declared and unpaid at
the date of redemption. You will have thirty days after notice to bring the
account up to $1000 before any action is taken. This minimum balance requirement
does not apply to IRAs and other tax-sheltered investment accounts. This right
of redemption shall not apply if the value of your account drops below $1000 as
the result of market action. The Company reserves this right because of the
expense to the Fund of maintaining very small accounts.
18
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Dividends paid by the Fund are derived from its net investment income. Net
investment income will be distributed at least annually. The Fund's net
investment income is made up of dividends received from the stocks it holds, as
well as interest accrued and paid on any other obligations that might be held in
its portfolio.
The Fund realizes capital gains when it sells a security for more than it
paid for it. The Fund may make distributions of its net realized capital gains
(after any reductions for capital loss carry forwards), generally, once a year.
Unless you elect to have your distributions paid in cash, your
distributions will be reinvested in additional shares of the Fund. You may
change the manner in which your dividends are paid at any time by writing to
Declaration Service Company, 555 North Lane, Suite 6160, Conshohocken, PA 19428.
PRINCIPAL UNDERWRITER
Questar Capital Corporation, 1350 Highland Drive, Suite A, Ann Arbor MI
48108. ("Questar") acts as principal underwriter for the Company. The purpose of
acting as an underwriter is to facilitate the registration of the Funds' shares
under state securities laws and to assist in the sale of shares. Questar also
acts as the investment adviser to the Fund. Questar is compensated for its
services to the Fund by receiving 12b-1 fees and by retaining a portion of the
sales charge on shares sold. Questar provides services to the Fund under a
written agreement for such services.
TAX CONSIDERATIONS
The Fund intends to qualify as a regulated investment company under Sub
Chapter M of the Internal Revenue Code so as to be relieved of federal income
tax on its capital gains and net investment income currently distributed to its
shareholders. To qualify as a regulated investment company, the Fund must, among
other things, derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities, or other income derived with respect to its
business of investing in such stock or securities, and distribute substantially
all of such income to its shareholders at least annually.
19
<PAGE>
The Fund intends to distribute to shareholders, at least annually,
substantially all net investment income and any net capital gains realized from
sales of the Fund's portfolio securities. Dividends from net investment income
and distributions from any net realized capital gains are reinvested in
additional shares of the Fund unless the shareholder has requested in writing to
have them paid by check.
Dividends from investment income and net short-term capital gains are
generally taxable to you as ordinary income. Distributions of long-term capital
gains are taxable as long-term capital gains regardless of the length of time
shares in the Fund have been held. Distributions are taxable, whether received
in cash or reinvested in shares of the Fund.
You will be advised annually of the source of distributions for federal
income tax purposes.
If you fail to furnish your social security or other tax identification
number or to certify properly that it is correct, the Fund may be required to
withhold federal income tax at the rate of 31% (backup withholding) from your
dividend, capital gain and redemption payments. Dividend and capital gain
payments may also be subject to backup withholding if you fail to certify
properly that you are not subject to backup withholding due to the
under-reporting of certain income.
Taxable distributions generally are included in your gross income for the
taxable year in which they are received. However, dividends declared in October,
November and December and made payable to shareholders of record in such month
will be deemed to have been received on December 31st if paid by the Fund during
the following January.
Distributions by the Fund will result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below your cost basis, such distribution would be taxable to you as ordinary
income or as a long-term capital gain, even though, from an investment
standpoint, it may constitute a partial return of capital. In particular, you
should be careful to consider the tax implications of buying shares of the Fund
just prior to a distribution. The price of such shares include the amount of any
forthcoming distribution so that you may receive a return of investment upon
distribution which will, nevertheless, be taxable.
A redemption of shares is a taxable event and, accordingly, a capital gain
or loss may be recognized. You should consult a tax Adviser regarding the effect
of federal, state, local, and foreign taxes on an investment in the Fund.
20
<PAGE>
GENERAL INFORMATION
The Fund will not issue stock certificates evidencing shares. Instead, your
account will be credited with the number of shares purchased, relieving you of
responsibility for safekeeping of certificates and the need to deliver them upon
redemption. Written confirmations are issued for all purchases of shares.
In reports or other communications to investors, or in advertising
material, the Fund may describe general economic and market conditions affecting
the Fund and may compare its performance with other mutual funds as listed in
the rankings prepared by Lipper Analytical Services, Inc. or similar nationally
recognized rating services and financial publications that monitor mutual fund
performance. The Fund may also, from time to time, compare its performance to
the S&P 500, or some other appropriate index.
According to the law of Maryland, under which the Company is incorporated,
and the Company's bylaws, the Company is not required to hold an annual meeting
of shareholders unless required to do so under the Investment Company Act of
1940. Accordingly, the Company will not hold annual shareholder meetings unless
required to do so under the Act.
DISTRIBUTION FEES
The Fund has adopted a Distribution Plan (the "12b-1 Plan"), pursuant to
which the Fund pays Questar a monthly fee for shareholder services at an annual
rate of 0.25% of the Fund's average daily net assets, and a monthly fee for
distribution expenses of 0.75% per annum of the Fund's average daily net assets
on all of its share classes. Questar may, in turn, pay some or all of such fees
to third parties for providing eligible services to the Fund.
The 12b-1 Plan provides that the Fund may finance activities which are
primarily intended to result in the sale of the Fund's shares. These services
include, among other things, processing new shareholder account applications,
preparing and transmitting to the Fund's Transfer Agent computer processable
tapes of all transactions by customers, and serving as the primary source of
information to customers in answering questions concerning the Fund and their
transactions with the Fund.
Payments under the 12b-1 Plan are not tied exclusively to the distribution
and/or shareholder servicing expenses actually incurred by Questar, and such
payments may exceed the expenses actually incurred. The Company's Board of
Directors evaluates the Plan on a regular basis.
21
<PAGE>
You should be aware that if you hold your shares for a substantial period
of time, you may indirectly pay more than the economic equivalent of the maximum
front-end sales charge allowed by the National Association of Securities Dealers
due to the recurring nature of distribution (12b-1) fees.
22
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance over the period for which it has been in operation.
Certain information reflects financial results for a single share of the Fund
calculated based on the average daily number of shares outstanding throughout
the period reported. The total return in the table represents the rate that an
investor would have earned on an investment in the Fund (assuming reinvestment
of all dividends and distributions). This information has been audited by
McCurdy & Associates CPA's, Inc., whose report, along with the Fund's financial
statements and related footnotes, is included in the Fund's Annual Report to
Shareholders for the fiscal year ended September 30, 1999. The Annual Report is
available from the Distributor upon request.
FOR THE YEAR ENDED
SEPTEMBER 30, 1999(1)
---------------------
Net Asset Value, Beginning of Period $ 10.00
Investment Operations:
Net investment loss (0.17)
Net realized and unrealized gain on investments 2.20
---------
Total from investment operations 2.03
---------
Net Asset Value, End of Period $ 12.03
=========
Total Return 20.30%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $ 1,126
Ratio of expenses to average net assets:
Before expense reimbursement 2.95%(2)
After expense reimbursement 2.54%(2)
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement (1.94%)(2)
After expense reimbursement (1.53%)(2)
Portfolio turnover rate 183.71%
- ------------------------------------
(1) The Avalon Capital Appreciation Fund commenced operations on October 2,
1998.
(2) Annualized
23
<PAGE>
FOR MORE INFORMATION
Additional information about the Fund is available in the Fund's Annual
Report to Shareholders for the fiscal year ended September 30, 1999 and the
Fund's Statement of Additional Information ("SAI"). In the Fund's Annual Report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance during its first fiscal year
of operations.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
AND ANNUAL REPORT BY MAIL:
The SAI and Annual Report contain more The Avalon Fund of Maryland, Inc.
detailed Information on all aspects of the c/o Declaration Service Company
Fund. A current SAI, dated February 1, 555 North Lane, Suite 6160
2000, and Annual Report have been filed Conshohocken, PA 19428
with the SEC and are incorporated by
reference into (are legally a part of) this
prospectus.
BY PHONE: 1-877-228-2566
To request a free copy of the SAI, or the Or you may view or obtain these
Fund's latest Annual Report, please contact documents from the SEC. the Fund.
IN PERSON: At the SEC's Public
Reference Room in Washington, D.C.
BY PHONE: 1-800-SEC-0330
BY MAIL: Public Reference Section,
Securities and Exchange Commission,
Washington, D.C. 20549-6009
(duplicating fee required)
ON THE INTERNET: www.sec.gov
Investment Company Act No.
811-08773
24
