As filed with the Securities and Exchange Commission on April 9, 1999
File Nos. 333-70061
811-09185
================================================================================
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. __
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 2
ALLEGIANCE INVESTMENT TRUST
(Exact Name of Registrant as Specified in its Charter)
800 North Brand Boulevard, Suite 800
Glendale, California 91203
(Address of Principal Executive Office)
(800) 247-5331
(Registrant's Telephone Number, Including Area Code)
RICHARD A. SNYDERS, PRESIDENT AND CHIEF EXECUTIVE OFFICER
800 North Brand Boulevard, Suite 800
Glendale, California 91203
(Name and Address of Agent for Service)
----------
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date hereof.
----------
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to Rule 485(b)
[ ] on _____________ pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] on ______________ pursuant to Rule 485(a)
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
================================================================================
<PAGE>
ALLEGIANCE INVESTMENT TRUST
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:
Facing Sheet
Contents of Registration Statement
Part A - Combined Prospectus for
Allegiance American Value Fund
Allegiance Intermediate-Term Bond Fund
Allegiance California Tax-Free Intermediate Bond Fund
Part B - Combined Statement of Additional Information for
Allegiance American Value Fund
Allegiance Intermediate-Term Bond Fund
Allegiance California Tax-Free Intermediate Bond Fund
Part C - Other Information
Signature Page
<PAGE>
----------------------------------------------------
PART A
COMBINED PROSPECTUS
---------------------------------------------------
<PAGE>
[LOGO / SERVICE MARK]
BOND AND TAX-EXEMPT INCOME FUNDS
Allegiance Intermediate-Term Bond Fund
Allegiance California Tax-Free Intermediate Bond Fund
STOCK FUND
Allegiance American Value Fund
AS WITH ALL MUTUAL FUNDS, 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.
APRIL __, 1999
<PAGE>
TABLE OF CONTENTS
Page
ALLEGIANCE INTERMEDIATE-TERM BOND FUND...................................... 1
What Is The Fund's Goal?........................................... 1
What Are The Fund's Main Investment Strategies?.................... 1
What Are The Primary Risks of Investing in The Fund?............... 2
Who May Want to Invest?............................................ 3
How Has The Fund Performed?........................................ 3
What Are The Fees And Expenses of The Fund?........................ 3
Example of Fund Expenses........................................... 4
ALLEGIANCE CALIFORNIA
TAX-FREE INTERMEDIATE BOND FUND.................................... 5
What Is the Fund's Goal?........................................... 5
What Are the Fund's Main Investment Strategies?.................... 5
What Are The Primary Risks of Investing The Fund?.................. 6
Who May Want to Invest?............................................ 7
How Has The Fund Performed?........................................ 7
What Are the Fees and Expenses of the Fund?........................ 8
Example of Fund Expenses........................................... 8
ALLEGIANCE AMERICAN VALUE FUND.............................................. 9
What Is the Fund's Goal?........................................... 9
What Are the Fund's Main Investment Strategies?.................... 9
What Are The Primary Risks of Investing in The Fund?............... 10
Who May Want to Invest?............................................ 11
How Has The Fund Performed?........................................ 11
What Are The Fees And Expenses of The Fund?........................ 11
Example of Fund Expenses........................................... 12
MANAGEMENT.................................................................. 13
The Adviser........................................................ 13
Portfolio Managers................................................. 13
SHAREHOLDER SERVICES........................................................ 14
How to Reach The Funds............................................. 14
Types of Accounts.................................................. 14
How to Open an Account............................................. 15
How to Purchase Shares............................................. 15
How to Sell Shares................................................. 17
Shareholder Services And Policies.................................. 19
PRICING OF FUND SHARES...................................................... 21
DISTRIBUTIONS............................................................... 21
Bond and Tax-Exempt Income Funds.................................. 21
Stock Fund......................................................... 21
i
<PAGE>
All Funds.......................................................... 21
INCOME TAX CONSIDERATIONS.................................................. 22
MORE ABOUT THE FUNDS........................................................ 23
Principal Investment Strategies.................................... 23
Year 2000.......................................................... 23
OTHER INFORMATION CONCERNING THE FUNDS...................................... 24
Distribution Arrangements.......................................... 24
Shareholder Servicing Agents....................................... 24
Administrative Services............................................ 25
ii
<PAGE>
ALLEGIANCE INTERMEDIATE-TERM BOND FUND
WHAT IS THE FUND'S GOAL?
The Fund's goal is to provide investors with high current income and, as a
secondary goal, to preserve investors' capital.
The Fund seeks to achieve its goal by investing primarily in BONDS. What is a
BOND? A BOND, which is also called a DEBT SECURITY or DEBT OBLIGATION, is like a
loan. The issuer of the bond, which could be the U.S. government, a corporation,
or a city or state, borrows money from investors and agrees to pay back the loan
amount (the PRINCIPAL) on a certain date (the MATURITY DATE). Usually, the
issuer also agrees to pay interest on certain dates during the period of the
loan. Some bonds, such as ZERO COUPON BONDS, do not pay interest, but instead
pay back more at maturity than the original loan. Most bonds pay a fixed rate of
interest (or income), but some bonds' interest rates may change based on market
or other factors.
What does it mean to "PRESERVE CAPITAL"? CAPITAL, also called PRINCIPAL, refers
to the amount of money that you invest in the Fund. If you choose to have your
dividends and other distributions reinvested in additional shares of the Fund,
the amount of the dividends or other distributions will be added to your initial
investment to increase the amount of your CAPITAL. If the price of the Fund's
shares or net asset value (NAV) increases because of increases in the value of
the securities in the Fund, your CAPITAL will also increase. If, however, the
value of the Fund's investments go down and the price of the Fund's shares
decreases, you will lose some of your CAPITAL. A fund that seeks to PRESERVE
CAPITAL or PRINCIPAL tries to avoid decreases in its share price so that you do
not lose money.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests at least 65% of its total assets in investment-grade debt
securities including U.S. government bonds, corporate bonds and mortgage-related
securities, asset-backed securities -- bonds backed by the income stream from
sources such as car loans or credit-card payments -- and money market
securities.
Investment-grade bonds are those rated within the four highest grades by rating
agencies such a Standard & Poor's (at least BBB), Moody's (at least BAA) or
Fitch (at least BAA), although there is always a risk of default. From time to
time, the Fund may also invest in unrated bonds that the portfolio manager
believes are comparable to investment-grade securities.
The Fund may invest in Yankee bonds which are dollar-denominated bonds issued in
the U.S. by foreign borrowers. Yankee bonds may offer higher income than bonds
issued by U.S. borrowers. The Fund may also invest in bonds issued by non-U.S.
issuers and payable in foreign currencies.
The Fund may include bonds of any maturity, but generally the portfolio's
dollar-weighted average maturity is normally expected to be between five and ten
years. Typically, a lower maturity means that the bond or portfolio has less
sensitivity to interest rates. The Fund invests in bonds that the portfolio
manager believes offer attractive yields and are undervalued relative to issues
of similar credit quality and interest rate sensitivity.
Although the Fund does not normally expect to hedge its investments, it may also
invest, as an occasional hedging strategy, in a limited amount of futures
contracts or options on futures contracts. The Fund may use futures contracts
and options on futures contracts only in an effort to offset unfavorable
1
<PAGE>
changes in the value of securities held by the Fund for investment purposes.
These efforts may not protect the Fund from those unfavorable changes in value.
WHAT ARE THE PRIMARY RISKS OF INVESTING IN THE FUND?
The primary risks of investing in the Fund and the factors most likely, in the
opinion of the Adviser, to adversely affect your investment are described below.
As with any mutual fund (other than a money market fund), the share price of the
Fund and its yield will change daily because of changes in interest rates and
other market conditions and factors. You may lose money if you invest in this
Fund. Please note that there are many other factors not listed here that could
reduce the value of your investment, and that could prevent the Fund from
achieving its objectives. The primary risks of investing in the Fund are:
* Interest Rate Risk: Bond prices usually rise when interest rates fall
and fall when interest rates rise. Longer term bonds and zero coupon
bonds are generally more sensitive to (that is, their value is more
affected by) interest rate changes than shorter term bonds. Generally,
the longer the average maturity of the bonds in the Fund, the more the
Fund's share price will fluctuate in response to interest rate
changes.
* Credit Risk: Although the Fund invests primarily in investment-grade
securities, these securities may have some credit risk. Some issuers
may not make payments on debt securities held by the Fund. Or, an
issuer may also suffer deterioration in its financial condition that
could lower the credit quality of a security, leading to greater
volatility in the price of the security and in shares of the Fund. A
decrease in the quality rating of a bond can affect the bond's
liquidity and make it more difficult for the Fund to sell the bond at
what the Adviser believes is a fair price.
* Prepayment Risk: The issuers of securities held by the Fund may be
able to prepay principal due on the securities, particularly during
periods of declining interest rates. Securities subject to prepayment
risk generally offer less potential for gains when interest rates
decline, and may offer a greater potential for loss when interest
rates rise. In addition, rising interest rates may cause prepayments
to occur at a slower than expected rate, thereby effectively
lengthening the maturity of the security, and making the security more
sensitive to interest rate changes. Prepayment risk is a major risk of
mortgage-backed securities.
* Special Risks Associated with Mortgage-Backed Securities: The Fund
will receive payments on its mortgage-backed securities that are part
interest and part return of principal. These payments may vary based
on the rate at which homeowners pay off their loans. When a homeowner
makes a prepayment, the Fund receives a larger portion of its
principal investment back, which means that there will be a decrease
in monthly interest payments. Some mortgage securities may have
structures that make their reaction to interest rates and other
factors difficult to predict, making their prices very volatile.
* Foreign Securities: Investments in foreign securities may involve
risks in addition to those of U.S. investments, including increased
political and economic risk and exposure to currency fluctuations.
* Futures and Options on Futures: Although the Fund will use futures and
options on futures for hedging purposes only, the hedging strategy may
2
<PAGE>
not be successful if the portfolio manager is unable to accurately
predict movements in the prices of individual securities held by the
Fund, or if the strategy does not correlate well with the Fund's
investments. The use of futures and options on futures, which are
commonly referred to as derivatives, may produce a loss for the Fund,
even when used only for hedging purposes.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.
WHO MAY WANT TO INVEST?
This Fund may be appropriate for investors who are:
* seeking a higher level of current income than is available from a
money market fund;
* able to tolerate moderate risk and some fluctuations in value; and
* not seeking absolute principal stability like a money market fund
could offer.
HOW HAS THE FUND PERFORMED?
The Fund is new and does not have a full calendar year of investment returns as
of the date of this Prospectus.
WHAT ARE THE FEES AND EXPENSES OF THE FUND?
The Table below describes the fees and expenses that you may pay if you buy and
hold shares of this Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases NONE
Maximum Deferred Sales Charge (Load) NONE
Maximum Sales Charge (Load) Imposed on Reinvested NONE
Dividends
Redemption Fee NONE
Exchange Fee NONE
3
<PAGE>
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets). Because
this Fund is a new fund, the following percentages reflect expenses that are
expected to be incurred by the Fund and deducted from Fund assets.
Management Fees 0.30%
Distribution (12b-1) Fees 0.25%
Administrative Services Fees 0.10%*
Other Expenses None
Total Annual Operating Expenses 0.65%
* The Administrative Services Fee compensates the Adviser for retaining
other service providers needed by the Fund and paying all operating
costs of the Fund, regardless whether those costs are more or less
than this Fee.
EXAMPLE OF FUND EXPENSES
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. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years
------ -------
$66 $208
4
<PAGE>
ALLEGIANCE CALIFORNIA
TAX-FREE INTERMEDIATE BOND FUND
WHAT IS THE FUND'S GOAL?
The Fund's goal is to provide investors with high current income exempt from
both federal and California personal income taxes while striving to preserve
investors' capital.
The Fund seeks to achieve its goal by investing at least 80% of its net assets
in MUNICIPAL SECURITIES that pay interest free from federal income tax and the
alternative minimum tax, and at least 65% of its total assets IN CALIFORNIA
MUNICIPAL SECURITIES that pay interest free from California personal income tax.
What are MUNICIPAL SECURITIES? MUNICIPAL SECURITIES are DEBT OBLIGATIONS of
states, cities, towns, and other political subdivisions, agencies or public
authorities that pay interest that is exempt from federal income tax. MUNICIPAL
SECURITIES are often issued to raise money for public services and projects such
as schools, hospitals and public transportation systems. Some MUNICIPAL
SECURITIES (for example, INDUSTRIAL DEVELOPMENT BONDS) may be backed by private
companies and used to provide financing for corporate facilities or other
private projects. MUNICIPAL SECURITIES issued by entities within California are
also exempt from California's personal income taxes. MUNICIPAL SECURITIES may be
in the form of BONDS, NOTES and COMMERCIAL PAPER, may have a fixed or floating
rate of interest, or be issued as ZERO COUPON BONDS.
What does it mean to "PRESERVE CAPITAL"? CAPITAL, also called PRINCIPAL, refers
to the amount of money that you invest in the Fund. If you choose to have your
dividends and other distributions reinvested in additional shares of the Fund,
the amount of the dividends or other distributions will be added to your initial
investment to increase the amount of your CAPITAL. If the price of the Fund's
shares or net asset value (NAV) increases because of increases in the value of
the securities in the Fund, your CAPITAL will also increase. If, however, the
value of the Fund's investments go down and the price of the Fund's shares
decreases, you will lose some of your CAPITAL. A fund that seeks to PRESERVE
CAPITAL or PRINCIPAL tries to avoid decreases in its share price so that you do
not lose money.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund, in an effort to preserve capital and lessen credit risk, invests at
least 80% of its total assets in intermediate-term, investment-grade municipal
bonds. Issuers of these securities are generally located in California.
Investment-grade bonds are those rated within the four highest grades by rating
agencies such as Standard and Poor's (at least BBB), Moody's (BAA) or Fitch (at
least BAA), although there is always a risk of default. From time to time, the
Fund may also invest in unrated bonds that the portfolio manager believes are
comparable to investment-grade securities. Certain securities held by the Fund
may be covered by municipal bond insurance.
The Fund may include bonds of any maturity, but generally the portfolio's
dollar-weighted average maturity is normally expected to be between five and ten
years. Typically, a lower maturity means that the bond or portfolio has less
sensitivity to interest rates. The Fund invests in bonds that the portfolio
manager believes offer attractive yields and are undervalued relative to issues
of similar credit quality and interest rate sensitivity.
5
<PAGE>
The investment percentages noted above permit the Fund to invest in limited
amounts of municipal securities that are exempt from federal income tax, but not
exempt from California income taxes, as well as taxable debt securities such as
U.S. government obligations, corporate bonds, money market instruments and
repurchase agreements.
Although the Fund does not normally expect to hedge its investments, it may also
invest, as an occasional hedging strategy, in a limited amount of futures
contracts or options on futures contracts. The Fund may use futures contracts
and options on futures contracts only in an effort to offset unfavorable changes
in the value of securities held by the Fund for investment purposes. These
efforts may not protect the Fund from those unfavorable changes in value.
WHAT ARE THE PRIMARY RISKS OF INVESTING THE FUND?
The primary risks of investing in the Fund and the factors most likely, in the
opinion of the Adviser, to adversely affect your investment are described below.
As with any mutual fund (other than a money market fund), the share price of the
Fund and its yield will change daily based on changes in interest rates and
other market conditions and factors. You may lose money if you invest in the
Fund. Please note that there are many other factors not listed here that could
reduce the value of your investment, and that could prevent the Fund from
achieving its objectives. The primary risks of investing in the Fund are:
* INTEREST RATE RISK: The prices of municipal securities and other debt
securities usually rise when interest rates fall and fall when
interest rates rise. Longer term bonds and zero coupon bonds are
generally more sensitive to (that is, their value is more affected by)
interest rate changes than shorter term bonds. Generally, the longer
the average maturity of the bonds in the Fund, the more the Fund's
share price will fluctuate in response to interest rate changes.
* CREDIT RISK: Although the Fund invests primarily in investment-grade
securities, these securities may have some credit risk. Some issuers
may not make payments on the municipal or other debt securities held
by the Fund. For example, Orange County declared bankruptcy in
December 1994. Or, an issuer may suffer deterioration in its financial
condition that could lower the credit quality of a security, leading
to greater volatility in the price of the security and in shares of
the Fund. As further examples, several regions of California are
highly vulnerable to earthquakes, which could strike and create
financial stress for a municipality. California's economic dependence
on trade with weakened Asian countries could also result in municipal
financial problems. A decrease in the quality rating of a bond can
affect the bond's liquidity and make it more difficult for the Fund to
sell the bond at what the Adviser believes in a fair price.
* MUNICIPAL MARKET RISK: There are special factors that may affect the
value of municipal securities and, as a result, the Fund's share
price. These factors include political or legislative changes,
uncertainties related to the tax status of the securities or the
rights of investors in the securities. California also has several
Constitutional and statutory limits on municipal taxing powers that
can restrict the ability of municipal authorities to generate revenue
to pay interest due on bonds.
* PREPAYMENT RISK: The issuers of securities held by the Fund may be
able to prepay principal due on the securities, particularly during
periods of declining interest rates. Securities subject to prepayment
risk generally offer less potential for gains when interest rates
decline, and may offer a greater potential for loss when interest
rates rise. In addition, rising interest rates may cause prepayments
6
<PAGE>
to occur at a slower than expected rate, thereby effectively
lengthening the maturity of the security, and making the security more
sensitive to interest rate changes.
* LACK OF DIVERSIFICATION: The Fund is not diversified, which means it
may invest a relatively high percentage of its assets in the
obligations of a limited number of issuers. As a result, the Fund may
be more susceptible to any single economic, political or regulatory
occurrence. The Fund is also particularly susceptible to events
affecting issuers in California. In particular, the Fund will be
vulnerable to any development in California's economy that may weaken
or jeopardize the ability of California municipal-bond issuers to pay
interest and principal on their bonds. As a result, the Fund's shares
may fluctuate more widely in value than those of a fund investing in
municipal bonds from a number of different states. You should consider
the greater risk of investing in a single state fund compared to more
diversified mutual funds.
* FUTURES AND OPTIONS ON FUTURES: Although the Fund will use futures and
options on futures for hedging purposes only, the hedging strategy may
not be successful if the portfolio manager is unable to accurately
predict movements in the prices of individual securities held by the
Fund, or if the strategy does not correlate well with the Fund's
investments. The use of futures and options on futures, which are
commonly referred to as derivatives, may produce a loss for the Fund,
even when used only for hedging purposes.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.
WHO MAY WANT TO INVEST?
The Fund may be appropriate for investors who are:
* seeking current income that is exempt from federal income tax and
California personal income taxes;
* seeking a higher tax-equivalent yield than is available from
shorter-term tax-exempt securities or money market funds;
* able to tolerate moderate risk and some fluctuations in value; and
* not seeking absolute principal stability like a money market fund
could offer.
THE FUND IS NOT AN APPROPRIATE INVESTMENT FOR TAX-SHELTERED ACCOUNTS
SUCH AS IRAS. THE FUND ALONE DOES NOT PROVIDE A BALANCED INVESTMENT
PLAN.
HOW HAS THE FUND PERFORMED?
The Fund is new and does not have a full calendar year of investment returns as
of the date of this Prospectus.
7
<PAGE>
WHAT ARE THE FEES AND EXPENSES OF THE FUND?
The Table below describes the fees and expenses that you may pay if you buy and
hold shares of this Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases NONE
Maximum Deferred Sales Charge (Load) NONE
Maximum Sales Charge (Load) Imposed on Reinvested NONE
Dividends
Redemption Fee NONE
Exchange Fee NONE
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets). Because
this Fund is a new fund, the following percentages reflect expenses that are
expected to be incurred by the Fund and deducted from Fund assets.
Management Fees 0.30%
Distribution (12b-1) Fees 0.25%
Administrative Services* 0.10%*
Other Expenses None
Total Annual Operating Expenses 0.65%
* The Administrative Services Fee compensates the Adviser for retaining
other service providers needed by the Fund and paying all operating
costs of the Fund, regardless whether those costs are more or less
than this Fee.
EXAMPLE OF FUND EXPENSES
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. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years
------ -------
$66 $208
8
<PAGE>
ALLEGIANCE AMERICAN VALUE FUND
WHAT IS THE FUND'S GOAL?
The Fund's goal is to provide investors with long-term growth of capital and
above average current income with investments primarily in equity securities of
U.S. companies.
A fund that seeks long-term GROWTH OF CAPITAL seeks to increase the value of
your investment over a period of three to seven years. CAPITAL, also called
PRINCIPAL, refers to the amount of money that you invest in a fund. If the price
of the Fund's shares or net asset value (NAV) goes up because of an increase in
the value of the securities in the Fund, your CAPITAL will also grow or
appreciate. If, however, the price of the Fund's shares decreases because of a
decline in the value of securities in the Fund, you will lose some of your
CAPITAL. If you choose to have your dividends and other distributions reinvested
in additional shares of the Fund, the amount of the dividends or other
distributions will be added to your initial investment and increase the amount
of your CAPITAL.
WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund seeks to achieve its goal by investing at least 65% of its total assets
in equity securities of companies based in the U.S.
The Adviser will try to identify equity securities that it believes are
undervalued relative to each company's asset value and its potential earnings
and dividends. There can be no assurance, however, that the Adviser's judgment
about the higher potential value of an equity security will ever be reflected in
the market price of that security.
The Fund seeks to provide a greater yield (or current income) than the average
yield of Standard and Poor's 500 Composite Index stocks by investing in
dividend-paying U.S. companies. This Fund will typically invest in companies
with a market capitalization of at least $200 million. From time to time, the
Fund may also invest in companies with smaller capitalizations. In addition to
common stocks, the Fund may invest in other securities including convertible
debt securities and preferred stock.
What is CAPITALIZATION? CAPITALIZATION or MARKET CAPITALIZATION is the total
value of a company's stock in the marketplace or on a stock exchange. For
example, a company that has issued one million shares that are currently selling
for $50 per share would have a CAPITALIZATION of $50 million.
In selecting investments for the Fund, the Adviser generally seeks companies it
believes exhibit characteristics of financial soundness and are undervalued by
the market. In seeking to identify financially sound companies, the Fund's
Adviser looks for companies with strongly capitalized balance sheets, an ability
to generate substantial cash flow, relatively low levels of leverage, an ability
to meet debt service requirements and a history of paying dividends. In seeking
to identify undervalued companies, the Adviser looks for companies with
substantial tangible assets such as land, timber, oil and other natural
resources, or important brand names, patents, franchises or other intangible
assets which may have greater value than what is reflected in the company's
financial statements. The Fund's Adviser will often select investments for the
Fund which are considered to be unattractive by other investors or are unpopular
with the financial press.
9
<PAGE>
WHAT ARE THE PRIMARY RISKS OF INVESTING IN THE FUND?
By investing in stocks, the Fund may expose you to certain market risks that
could cause you to lose money, particularly a sudden decline in a holding's
share price or an overall decline in the stock market. As with any stock fund,
the value of your investment will fluctuate on a day-to-day basis with movements
in the stock market, as well as in response to activities of individual
companies. Although the Fund seeks to provide a consistent level of income to
shareholders, its yield may fluctuate significantly in the short term.
The primary risks of investing in the Fund are:
+ MARKET RISK: This is the risk that the price of a security will rise
or fall because of changing economic, political or market conditions,
or because of a company's individual situation. Additional
market-related risks for this Fund include the risk that:
* Value stocks continue to fall out of favor
* The market continues indefinitely to undervalue the stocks in the
Fund's portfolio
* The stocks in the Fund's portfolio turn out to be undervalued
because the Adviser's initial evaluation of the stock was
mistaken
+ SMALLER COMPANIES: The securities of smaller companies may have more
risks than those of larger companies -- they may be more susceptible
to market downturns, and their prices may be more volatile.
+ FOREIGN SECURITIES: Although the fund emphasizes investments in stocks
of U.S. companies, it also may invest up to 20% of its total assets in
foreign securities, including American Depositary Receipts (ADRs). The
Fund expects that its investments in foreign issuers, if any, will
generally be in companies that generate substantial revenues from U.S.
operations and that are listed on U.S. securities exchanges. Because
foreign securities are normally denominated and traded in foreign
currencies, the value of the Fund's foreign investments may be
influenced by currency exchange rates and exchange control
regulations. There may be less information publicly available about
foreign issuers than U.S. issuers, and they are not generally subject
to accounting, auditing and financial reporting standards and
practices comparable to those in the U.S. Foreign securities may be
less liquid and more volatile than comparable U.S. securities.
+ INTEREST RATE RISK: In general, the prices of debt securities rise
when interest rates fall and the prices of debt securities fall when
interest rates rise. However, the stock market and stocks that pay
dividends also can be affected.
+ SPECIAL CHARACTERISTICS OF CONVERTIBLE SECURITIES: Convertible
securities are subject to the market risk of stocks, while also
subject to interest rate risk and the credit risk of the issuers. Call
provisions may allow the issuer to repay the debt before it matures.
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency.
10
<PAGE>
WHO MAY WANT TO INVEST?
This Fund may be appropriate for investors who are:
* seeking long-term capital appreciation while also desiring a minimal
level of current income;
* willing to leave their money invested in the Fund for at least three
years;
* able to tolerate a substantial loss in the value of their investment;
o not seeking absolute principal stability.
THE FUND ALONE DOES NOT PROVIDE A BALANCED INVESTMENT PLAN.
HOW HAS THE FUND PERFORMED?
The Fund is new and does not have a full calendar year of investment returns as
of the date of this Prospectus.
WHAT ARE THE FEES AND EXPENSES OF THE FUND?
The Table below describes the fees and expenses that you may pay if you buy and
hold shares of this Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases NONE
Maximum Deferred Sales Charge (Load) NONE
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends NONE
Redemption Fee NONE
Exchange Fee NONE
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets). Because
this Fund is a new fund, the following percentages reflect expenses that are
expected to be incurred by the Fund and are deducted from Fund assets.
Management Fees 0.70%
Distribution (12b-1) Fees 0.25%
Administrative Services Fees* 0.35%*
Other Expenses None
Total Annual Operating Expenses 1.30%
* The Administrative Services Fee compensates the Adviser for retaining
other service providers needed by the Fund and paying all operating
costs of the Fund, regardless whether those costs are more or less
than this Fee.
11
<PAGE>
EXAMPLE OF FUND EXPENSES
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. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years
------ -------
$132 $411
12
<PAGE>
MANAGEMENT
THE ADVISER
The investment adviser for the Funds is Van Deventer & Hoch (the "Adviser"). The
Adviser serves as the investment adviser under an Investment Advisory Agreement
and has overall responsibility for investment decisions of the Funds, subject to
the oversight of the Board of Trustees. For more than a quarter century, Van
Deventer & Hoch has provided investment management and related services to
individuals, institutions, and charitable organizations. As of December 31,
1998, Van Deventer & Hoch managed approximately $1.5 billion on behalf of
individual and institutional investors. Van Deventer & Hoch is one of fewer than
200 registered investment advisers admitted to the Investment Counsel
Association of America, which mandates strict requirements for professional and
financial responsibility.
The Adviser is an SEC-registered investment adviser. The Adviser is 50% owned by
certain principals of Putnam, Lovell, de Guardiola & Thornton and 50% by members
of the Adviser's management team. The Adviser is headquartered at 800 North
Brand Boulevard, Suite 300, Glendale, California 91203.
The following chart shows the expected investment management fees to be paid by
each Fund.
Management fees paid
(expressed as an annual
percentage of average net
assets)
-------------------------
Intermediate-Term Bond Fund .30%
California Tax-Free Intermediate Bond Fund .30%
American Value Fund .70%
PORTFOLIO MANAGERS
INTERMEDIATE BOND FUND AND CALIFORNIA TAX-FREE FUND. Celia R. Vorsanger, who has
been a Portfolio Manager with the Adviser since 1990, is responsible for the
day-to-day management of these Funds' portfolios. Before joining Van Deventer &
Hoch in 1990, Mr. Vorsanger was an Investment Portfolio Manager with Security
Pacific Bank in Los Angeles for over 19 years. She earned an undergraduate
degree from Cal State University Long Beach and a graduate degree in business
management from the Claremont Graduate School.
AMERICAN VALUE FUND. Russell D. Kartub, who joined the Adviser in 1984, is
responsible for the day-to-day management of this Fund's portfolio. Since
joining Van Devener & Hoch, Mr. Kartub has enjoyed increasingly senior positions
and since 1997 has served as a Senior Vice President and the Director of
Research. From 1995 until 1997, he was a Senior Vice President and the Director
of Information Systems, and from 1991 until 1995 he was an Assistant Vice
President and then a Vice President. He earned an undergraduate degree from
Occidental College in Los Angeles and then an economics diploma from the London
School of Economics.
13
<PAGE>
SHAREHOLDER SERVICES
This section describes how to do business with the Funds and the services that
are available to shareholders.
HOW TO REACH THE FUNDS
BY TELEPHONE 1.800.548.7787
Call for account or Fund information
Monday through Friday
[7:00 a.m. to 4:00 p.m.] (Pacific time)
BY REGULAR MAIL Allegiance Investment Trust
c/o National Financial Data Services
P.O. Box 419372
Kansas City, MO 64141-6372
BY OVERNIGHT COURIER Allegiance Investment Trust
c/o National Financial Data Services
330 West 9th Street
Kansas City, MO 64105
TYPES OF ACCOUNTS
If you are investing in the Funds for the first time, you will need to establish
an account. You may establish the following types of accounts by completing an
account application. To obtain an application, call 1.800.548.7787.
* INDIVIDUAL OR JOINT OWNERSHIP. Individual accounts are owned by one
person. Joint accounts have two or more owners.
* GIFT OR TRANSFER TO MINOR (UGMA OR UTMA). A UGMA (Uniform Gifts to
Minors Act) or UTMA (Uniform Transfers to Minors Act) account is an
account maintained by a custodian for the benefit of a minor. To open
a UGMA or UTMA account, you must include the minor's social security
number on the application.
* TRUST. A trust can open an account. The name of each trustee, the name
of the trust and the date of the trust agreement must be included on
the application.
* CORPORATIONS, PARTNERSHIPS AND OTHER LEGAL ENTITIES. Corporations,
partnerships and other legal entities may also open an account. The
application and resolution form must be signed by a general partner of
the partnership or an authorized officer of the corporation or other
legal entity.
* RETIREMENT. If you are eligible, you may set up your account under a
tax-sheltered retirement plan, such as an Individual Retirement
Account. Call 1.800.548.7787 for more information.
14
<PAGE>
HOW TO OPEN AN ACCOUNT
Complete and sign the appropriate account application. Please be sure to provide
your social security or taxpayer identification number on the application. Make
your check payable to Allegiance Investment Trust. Send all items to the
following address:
BY REGULAR MAIL Allegiance Investment Trust
c/o National Financial Data Services
P.O. Box 419372
Kansas City, MO 64141-6372
BY OVERNIGHT COURIER Allegiance Investment Trust
c/o National Financial Data Services
330 West 9th Street
Kansas City, MO 64105
You may also purchase shares through certain financial institutions. These
institutions may have their own procedures for buying and selling shares, and
may charge fees. Contact your financial institution for more information.
HOW TO PURCHASE SHARES
Shares of the Funds are sold on a continuous basis and may be purchased from the
Distributor or a broker-dealer or financial institution that has an agreement
with the Distributor. Purchases may be made Monday through Friday, except on
certain holidays.
Each Fund's share price, called net asset value per share, is calculated every
business day. Each Fund's shares are sold without a sales charge. Shares are
purchased at net asset value the next time it is calculated after your
investment is received and accepted by the Distributor. Purchase orders though
securities brokers, dealers and other financial intermediaries are effected at
the next-determined net asset value after receipt of the order by such agent
before each Fund's daily cutoff time. Orders received after that time will be
purchased at the next-determined net asset value. To the extent that these
agents perform shareholder servicing activities for the Funds, they may receive
fees from the Funds for such services. For information on how shares are priced,
please see "Pricing of Fund Shares" below.
NEW PURCHASES. If you are new to the Funds, complete and sign an account
application and mail it along with your check. To establish the telephone
purchase option on your new account, complete the "Telephone Transfer
Authorization" section on the application and attach a check or savings
withdrawal slip from your bank account which you have "voided" by the word
"VOID" across the front.
If you wish to open an account by debiting your checking or savings account,
please attach a "voided" check or savings withdrawal slip, and complete the
"Bank Wire and Electronic Transfer" section of the application.
If you are investing through a tax-sheltered retirement plan for the first time,
you will need a special application. Retirement investing also involves its own
investment procedures. Call 1.800.548.7787 for more information.
15
<PAGE>
ADDITIONAL PURCHASES. If you already have money invested in a Fund, you can
invest additional money in that Fund in the following ways:
BY MAIL. Complete the remittance slip attached at the bottom of your
confirmation statement. If your investment is in a retirement account,
please indicate whether the purchase is a rollover or a current or prior
year contribution. Send your check and remittance slip or written
instructions to one of the addresses listed above under "How To Open An
Account."
BY TELEPHONE. This service allows you to purchase additional shares quickly
and conveniently through an electronic transfer of money. When you make an
additional purchase by telephone, the Funds will automatically deduct money
from your predesignated bank account for the desired amount. If you have
not established the telephone purchase option, call 1.800.548.7787 to
request the appropriate form. BY WIRE. Purchases may also be made by wiring
money from your bank account to your Allegiance Fund account. Each time you
wish to send a wire, you must call 1.800.548.7787 before you send money to
receive wiring instructions.
AUTOMATIC INVESTMENT PROGRAM. Automatic investing is an easy way to add to
your account on a regular basis. Allegiance Investment Trust offer an
automatic investment plan to help you achieve your financial goals as
simply and conveniently as possible. Please note that there is a $100
minimum investment. Call the Transfer Agent at 1.800.548.7787 for
information.
PAYING FOR SHARES. Please note the following:
* Purchases may be made by check, wire transfer and electronic transfer.
When purchases are made by check, redemptions will not be allowed
until the check clears, which may take 15 calendar days or longer. In
addition, the redemption shares purchased through Automated Clearing
House ("ACH") will not be allowed until your payment clears, which may
take seven business days or longer.
* All purchases must be made in U.S. dollars.
* Checks must be drawn on U.S. banks and must be payable to Allegiance
Investment Trust. Checks that are not made payable directly to
Allegiance Investment Trust ("third party checks") are not accepted.
* Cash and credit card checks are not accepted.
* If a check does not clear your bank, the Funds reserve the right to
cancel the purchase.
* If the Funds are unable to debit your predesignated bank account on
the day you purchase shares, they may make additional attempts or
cancel the purchase.
If your purchase is canceled, you will be responsible for any losses or fees
imposed by your bank and losses that may be incurred as a result of any decline
in the value of the canceled purchase. The Funds have the authority to redeem
shares in your account(s) to cover any losses due to changes in share price. The
Funds reserve the right to reject any specific purchase or exchange request.
16
<PAGE>
MINIMUM INVESTMENTS. The following minimums apply unless they are waived by the
Distributor.
To open an account $2,500
For tax-sheltered retirement plans 1,000
To add to an account 100
Through automatic investment plans 100
Minimum account balance 500
For tax-sheltered retirement plans 500
HOW TO SELL SHARES
Selling your shares in a Fund is called a "redemption" because the Fund buys
back its shares. On any business day, you may sell (redeem) all or a portion of
your shares. If the shares being sold were recently purchased by check,
telephone or through an automatic investment program, the Funds may delay the
mailing of your redemption check for up to ten business days after purchase to
allow the purchase to clear.
Your transaction will be processed at net asset value the next time it is
calculated after the Funds receive your redemption request in good order. You
may gain or lose money when you redeem your shares. Please note that a
redemption is treated as a sale for tax purposes, and could result in taxable
gain or loss in a non-tax-sheltered account.
BY MAIL. To redeem all or part of your shares by mail, please send your request
in writing to the address listed above under "How To Open An Account" and
include the following information (please refer to "Signature Guarantees" below
if your redemption request is over $100,000):
* the name of the Fund(s),
* the account number(s),
* the amount of money or number of shares being redeemed,
* the name(s) on the account,
* the signature(s) of all registered account owners, and
* your daytime telephone number.
Signature requirements vary based on the type of account you have:
* INDIVIDUAL, JOINT TENANTS, TENANTS-IN-COMMON: Written instructions
must be signed by each shareholder exactly as the names appear on the
account.
* UGMA OR UTMA: Written instructions must be signed by the custodian as
it appears on the account.
* SOLE PROPRIETOR, GENERAL PARTNER: Written instructions must be signed
by an authorized individual as it appears on the account.
* CORPORATION, ASSOCIATION: Written instructions must be signed by the
person(s) authorized to act on the account. A certified copy of the
corporate resolution, authorizing the signer to act, must accompany
the request.
17
<PAGE>
* TRUST: Written instructions must be signed by the trustee(s). If the
name of the current trustee(s) does not appear on the account, a
certified certificate of incumbency dated within 60 days must also be
submitted.
* RETIREMENT: Written instructions must be signed by the account owner.
Call the Transfer Agent at 1.800.548.7787 for more information.
BY TELEPHONE. If you selected this option on your account application, you may
make redemptions from your account by calling the Transfer Agent at
1.800.548.7787 unless you have notified the Transfer Agent of an address change
within the preceding 30 days. Telephone redemption in excess of $25,000 will
only be made by wire to a bank account on record with the Funds. Unless an
investor indicates otherwise on the account application, the Funds will be
authorized to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as his or her
representative, who can provide the Funds with his or her account registration
and address as its appears on the Funds' records. The Funds require that
requests for redemptions of over $100,000 be in writing with signatures
guaranteed (see below). You may not close your account by telephone.
SYSTEMATIC WITHDRAWAL PLAN. Under this plan, you may redeem $50 or more monthly,
quarterly or semi-annually. A minimum account balance of $5,000 is required to
establish an automatic withdrawal plan. For more information or to sign up for
this service, please call the Transfer Agent at 1.800.548.7787.
THROUGH YOUR INVESTMENT REPRESENTATIVE. Your investment representative must
receive your request before the close of regular trading on the New York Stock
Exchange to receive that day's net asset value. Your investment representative
will be responsible for furnishing all necessary documentation to the Transfer
Agent, and may charge you for its services.
PAYMENT OF REDEMPTION PROCEEDS. Payments may be made by check, wire transfer or
electronic transfer.
* BY CHECK. Redemption proceeds will be sent to the shareholder(s) on
our records at the address on our records within seven days after
receipt of a valid redemption request.
* BY WIRE. If you have selected this option on your application, your
redemption proceeds will be wired directly into your designated bank
account normally on the next business day after receipt of your
redemption request is received. There is no limitation on redemptions
by wire; however, there is a $12 fee for each wire and your bank may
charge an additional fee to receive the wire. If you would like to
establish this option on an existing account, please call the Transfer
Agent at 1.800.548.7787 to sign up for this service. Wire redemptions
are not available for retirement accounts.
* BY ELECTRONIC TRANSFER. If you have established this option, your
redemption proceeds will be transferred electronically to your
predesignated bank account. To establish this option on an existing
account, please call the Transfer Agent at 1.800.548.7787 to request
the appropriate form.
18
<PAGE>
SIGNATURE GUARANTEES. In addition to the signature requirements described above,
a signature guarantee is required if:
* You would like the check made payable to anyone other than the
shareholder(s) on our records.
* You would like the check mailed to an address other than the address
on our records.
* You would like the check mailed to an address on our records that has
changed in the past 30 days.
* Your redemption request is over $100,000.
The Funds may also require signature guarantees for other redemptions. A
signature guarantee assures that a signature is genuine and protects
shareholders from unauthorized account transfers. Banks, savings and loan
associations, trust companies, credit unions, broker-dealers and member firms of
a national securities exchange may guarantee signatures. Call your financial
institution to determine if it has this capability.
SHAREHOLDER SERVICES AND POLICIES
EXCHANGES. On any business day, you may exchange all or a portion of your shares
into any other fund in the Allegiance Investment Trust family. To make
exchanges, please follow the procedures under "How To Sell Shares." Exchanges
are processed at the net asset value next calculated after an exchange request
in good order is received and approved. Please read the prospectus for the Fund
into which you are exchanging. The Funds reserve the right to reject any
exchange request or to change or terminate the exchange privilege at any time.
An exchange is the sale of shares of one Fund and purchase of shares of another,
and could result in taxable gain or loss in a non-tax-sheltered account.
REDEMPTION PROCEEDS. The Funds' policy is to pay redemption proceeds in cash,
but the Funds reserve the right to change this policy and to pay in-kind in
certain cases by delivering to you investment securities equal to the redemption
price. In these cases, you might have to pay brokerage costs when converting the
securities to cash. The right of any shareholder to receive redemption proceeds
may be suspended, or payment may be postponed, in certain circumstances. These
circumstances include any period the New York Stock Exchange is closed (other
than weekends or holidays) or trading on the Exchange is restricted, any period
when an emergency exists and any time the Securities and Exchange Commission
allows mutual funds to delay payments for the protection of investors.
TAXPAYER IDENTIFICATION NUMBER. On the account application or other appropriate
form, you will be asked to certify that your social security or taxpayer
identification number is correct and that you are not subject to backup
withholding for failing to report income to the IRS. If you are subject to
backup withholding or you did not certify your taxpayer identification number,
the IRS requires the Funds to withhold 31% of any dividends and redemption or
exchange proceeds. The Funds reserve the right to reject any application that
does not include a certified social security or taxpayer identification number.
SHARE OWNERSHIP. The Funds keep a record of the ownership of their shares and
share certificates are not issued.
19
<PAGE>
INVOLUNTARY REDEMPTIONS. If your account balance falls below $500 due to
redemption, exchanges, or if you purchase through the Automatic Investment Plan
and fail to meet the Fund's investment minimum within a twelve-month period, you
will be given at least 30 days to re-establish the minimum balance.
If you do not, your account may be closed and the proceeds sent to you.
TELEPHONE TRANSACTIONS. You may buy, sell or exchange shares by telephone if you
selected this option on your account application. If you wish to establish this
option on an existing account, please call 1.800.548.7787 to request the
appropriate form. The Funds and their agents will not be responsible for any
losses that may result from acting on wire or telephone instructions that it
reasonably believes to be genuine. The Funds and their agents will each follow
reasonable procedures to confirm that instructions received by telephone are
genuine, which may include taping telephone conversations. It may be difficult
to reach the Funds by telephone during periods of unusual market activity.
ADDRESS CHANGES. To change the address on your account, call 1.800.548.7787 or
send a written request signed by all account owners. Include the name of your
Fund(s), the account numbers(s), the name(s) on the account and both the old and
new addresses.
NAME/ACCOUNT OWNERSHIP CHANGES. To change the name on an account, the shares are
generally transferred to a new account. In some cases, certain legal documents
may be required. For more information, call 1.800.548.7787. If your shares are
held by a financial institution, contact that financial institution for
ownership changes.
STATEMENTS AND REPORTS. The Funds will send you a confirmation statement after
every transaction that affects your account balance or your account
registration. If you are enrolled in an automatic investment program and invest
on a monthly basis, you will receive quarterly confirmations. Information about
the tax status of income dividends and capital gains distributions will be
mailed to shareholders early each year.
Financial reports for the Funds, which include a list of the Funds' portfolio
holdings, will be mailed twice each year to all shareholders.
20
<PAGE>
PRICING OF FUND SHARES
The net asset value per share (NAV) of each Fund is calculated on each day the
New York Stock Exchange is open. The NAV is the value of a single share of a
Fund. Each of these Funds' NAV is calculated at the close of business of the New
York Stock Exchange, normally 4:00 p.m. Eastern time. The NAV is generally based
on the market value of the securities held in the Fund, or, if market values are
not available, the fair value of securities is determined using procedures that
the Board of Trustees has approved.
Foreign securities are valued based on quotations from the primary market in
which they are traded, and are converted from the local currency into U.S.
dollars using current exchange rates. Foreign securities may trade in their
primary markets on weekends or other days when the Fund does not price its
shares. Therefore, the NAV of any Fund holding foreign securities may change on
days when shareholders will not be able to buy or sell their Fund shares.
DISTRIBUTIONS
As a Fund shareholder, you are entitled to your share of the Fund's net income
and gains on its investments. Each Fund passes substantially all of its earnings
along to its investors as distributions. When a Fund earns dividends from stocks
and interest from bonds and other debt securities and distributes these earnings
to shareholders, it is called a DIVIDEND DISTRIBUTION. A Fund realizes capital
gains when it sells securities for a higher price than it paid. When these gains
are distributed to shareholders, it is called a CAPITAL GAIN DISTRIBUTION.
Dividend distributions may be made several times a year, while capital gain
distributions are generally made annually.
BOND AND TAX-EXEMPT INCOME FUNDS
Your dividend distributions are declared each day, starting the day after you
purchase your shares, although they are paid to your account on the first
business day of each month that you are a shareholder. Distributions of capital
gains, if any, are paid after the end of these Funds' October 31st fiscal year
end.
STOCK FUND
If you are a shareholder in the American Value Fund, your distributions of
dividends and capital gains, if any, are paid once annually, usually after the
end of the Fund's October 31st fiscal year end.
ALL FUNDS
You will receive distributions from a Fund in additional shares of that Fund
unless you choose to receive your distributions in cash. If you wish to change
the way in which you receive dividends, you should call the Transfer Agent at
1.800.548.7787 for instructions.
If you have elected to receive dividends and/or distributions in cash, and the
postal or other delivery service returns your check to the Funds as
undeliverable, you will not receive interest on amounts represented by the
uncashed checks.
21
<PAGE>
INCOME TAX CONSIDERATIONS
Your investment in a Fund will have tax consequences that you should consider.
Some of the more common federal tax consequences are described here, but you
should consult your tax adviser about your own particular situation.
TAXES ON DISTRIBUTIONS. You will generally have to pay federal income tax on all
Fund distributions except for certain dividend distributions from the California
Tax-Free Intermediate Bond Fund (the "California Fund"). Your distributions will
be taxed in the same manner whether you receive the distributions in cash or
additional shares of the Fund. Distributions that are derived from net long-term
capital gains generally will be taxed as long-term capital gains. The rate of
tax will generally depend on how long the Fund held the securities on which it
realized the gains. All other distributions, including short-term capital gains,
generally will be taxed as ordinary income.
The Bond Fund expects that its distributions will consist primarily of ordinary
income. The American Value Fund expects that its distributions will consist of
both net long-term capital gains and ordinary income
The California Fund intends to pay what the IRS calls "exempt-interest
dividends" to shareholders by maintaining, as of the close of each quarter of
its taxable year, at least 50% of the value of its assets in municipal bonds. If
the California Fund satisfies this requirement, dividends paid by the California
Fund and derived from interest on obligations which (when held by an individual)
pay interest excludable from California personal income under California law
will be exempt from the California personal income tax (although not from the
California franchise tax). To the extent a portion of the dividends is derived
from interest on debt obligations other than those described directly above,
that portion will be subject to the California personal income tax even though
it may be excludable from gross income for federal income tax purposes. In
addition, distributions of short-term capital gains will be taxable as long-term
gains to the shareholders regardless of how long they held their shares. Under
California law, ordinary income and capital gains currently are taxed at the
same rate. With respect to non-corporate shareholders, California does not treat
tax-exempt interest as a tax preference item for purposes of its alternative
minimum tax. To the extent a corporate shareholder receives dividends that are
exempt from California taxation, a portion of those dividends may be subject to
the alternative minimum tax. You generally are required to report all Fund
distributions, including exempt-interest dividends, on your federal income tax
return.
TAXES ON SALE OR EXCHANGE. If you sell your shares of a Fund (including the
California Fund), or exchange them for shares of another Fund, you generally
will be subject to tax on any taxable gain. Your taxable gain is computed by
subtracting your tax basis in the shares from the redemption proceeds (in the
case of a sale) or the value of the shares received (in the case of an
exchange). Because your tax basis depends on the original purchase price and on
the price at which any dividends may have been reinvested, you should be sure to
keep your account statements so that you or your tax preparer will be able to
determine whether a sale or exchange will result in a taxable gain.
"BUYING A DIVIDEND". If you buy shares in the American Value Fund just before
the Fund makes any distribution, or if you buy shares in the Bond Fund or
California Fund just before a capital gain distribution, you will receive some
of the purchase price back in the form of a taxable distribution.
LOAN INTEREST. If you borrow money to purchase or hold shares of the California
Fund, interest on your loan may not be deductible.
22
<PAGE>
TAX WITHHOLDING. If you are not a U.S. citizen or resident, or if you are
subject to "backup withholding," the Funds may be required to withhold a portion
of your distributions and, in some cases, redemption proceeds, as a payment of
federal income tax.
The above is only a summary of certain federal income tax consequences of
investing in the Funds. You should consult your tax adviser to determine the
precise effect of an investment in the Funds on your particular tax situation
(including possible liability for state and local taxes and, for foreign
shareholders, U.S. withholding taxes).
MORE ABOUT THE FUNDS
PRINCIPAL INVESTMENT STRATEGIES
The principal investment strategies of the Funds are strategies that, in the
opinion of the Adviser, are most likely to be important in trying to achieve the
Funds' investment objectives. Of course, there can be no assurance that a Fund
will achieve its investment objective. Please note that the Funds may also use
strategies and invest in securities that are not described in this Prospectus,
but which are described in the Statement of Additional Information.
Investors should note that during periods of unusual economic or market
conditions or for temporary defensive purposes or liquidity, a Fund may invest
without limit in cash and in U.S. dollar-denominated high-quality money market
instruments and other short-term securities. These investments may result in a
lower yield and have less potential for capital appreciation than would be
available from investments typically held by a Fund and may prevent the Fund
from achieving its investment objective.
Each Fund is actively managed, and the portfolio managers may trade securities
frequently, resulting, from time to time, in an annual portfolio turnover rate
of over 100%. Trading securities may produce capital gains, which are taxable to
shareholders when distributed. Active trading may also increase the amount of
mark-ups and fees to broker-dealers that a Fund pays when it buys and sells
securities.
YEAR 2000
The date-related computer issue known as the "Year 2000 problem" could have an
adverse impact on the quality of services provided to the Funds and their
shareholders. However, the Funds understand that their key service providers --
including the Adviser and its affiliates -- are taking steps to address the
issue. In addition, the Year 2000 problem may adversely affect the issuers in
which the Funds invest. For example, issuers may incur substantial costs to
address the problem. They may also suffer losses caused by corporate and
governmental data processing errors. The Funds and their Adviser will continue
to monitor developments relating to this issue.
23
<PAGE>
OTHER INFORMATION CONCERNING THE FUNDS
DISTRIBUTION ARRANGEMENTS
The Funds' distributor is First Fund Distributors, Inc. (the "Distributor"), an
affiliate of Investment Company Administration , L.L.C., the Funds'
sub-administrator. The Distributor's principal place of business is located at
4455 East Camelback Road, Suite 261E, Phoenix, Arizona 85018.
The Funds do not charge any sales loads, deferred sales loads or other fees in
connection with the purchase of shares. Each Fund has adopted a plan under Rule
12b-1 ("Plan"). The Plan allows a Fund to use part of the Fund's assets (up to
.25% of its average daily net assets) for the sale and distribution of its
shares, including advertising, marketing and other promotional activities.
Expenses permitted to be paid by the Funds under their Plan include:
preparation, printing and mailing prospectuses; shareholder reports such as
semi-annual and annual reports, performance reports and newsletters; sales
literature and other promotional material to prospective investors; direct mail
solicitation; advertising; public relations; compensation of sales personnel;
advisers or other third parties for their assistance with respect to the
distribution of the Funds' shares; payments to financial intermediaries for
shareholder support; administrative and accounting services with respect to the
shareholders of the Funds; and such other expenses as may be approved from time
to time by the Board of Trustees.
Because these fees are paid out of assets of the Funds, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
The Plan allows excess distribution expenses to be carried forward by the
Adviser, as Distribution Coordinator, and resubmitted in a subsequent fiscal
year provided that (i) distribution expenses cannot be carried forward for more
than three years following initial submission; (ii) the Board of Trustees has
made a determination at the time of initial submission that the distribution
expenses are appropriate to be carried forward; and (iii) the Board of Trustees
makes a further determination, at the time any distribution expenses which have
been carried forward are resubmitted for payment, to the effect that payment at
the time is appropriate, consistent with the objectives of the Plan and the
current best interest of shareholders.
SHAREHOLDER SERVICING AGENTS
The Funds has entered into shareholder servicing agreement with certain
shareholder servicing agents (including the Adviser) under which the shareholder
servicing agents have agreed to provide certain support services to their
customers who beneficially own shares of the Funds. These services include
assisting with purchase and redemption transactions, maintaining shareholder
accounts and records, furnishing customer statements, transmitting shareholder
reports and communications to customers and other similar shareholder liaison
services. For performing these services, each shareholder servicing agent
receives a fee based on the average daily net assets of shares of the Funds held
by investors for whom the servicing agent maintains a servicing relationship.
Shareholder servicing agents may subcontract with other parties for shareholder
support services.
Shareholder servicing agents may offer additional services to their customers,
such as pre-authorized or systematic purchase and redemption plans. Each
shareholder servicing agent may establish its own terms and conditions,
including limitations on the amounts of subsequent transactions, with respect to
such services. Certain shareholder servicing agents may (although they are not
required by the Funds to do so) credit to the accounts of their customers from
24
<PAGE>
whom they are already receiving other fees an amount not exceeding such other
fees or the fees for their services as shareholder servicing agents.
The Adviser and certain broker-dealers and other shareholder servicing agents
may, at their own expense, provide gifts, such as computer software packages,
guides and books related to investment or additional Fund shares valued up to
$100 to their customers who invest in the Funds.
The Adviser may, from time to time, at its own expense out of compensation
retained by it from the Funds or other sources available to it, make additional
payments to certain selected dealers or other shareholder servicing or
soliciting agents for performing administrative and other services . This
compensation does not represent an additional expense to the Fund or its
shareholders because it will be paid by the Adviser.
ADMINISTRATIVE SERVICES
The Adviser has retained Investment Company Administration , L.L.C. (" ICA") to
prepare various federal and state regulatory filings, reports and returns for
the Funds, to prepare reports and materials to be supplied to Trustees, to
monitor the activities of the Funds' custodian, shareholder servicing agent and
accountants, and to coordinate the preparation and payment of Fund expenses and
review the Funds' expense accruals. The Adviser pays ICA's fees out of the
Administrative Services Fee.
United Missouri Bank, N.A. acts as the Funds' custodian and National Financial
Data Services acts as the Funds' transfer agent. The Adviser also pays the
custodian's and transfer agent's fees out of the Administrative Services Fee.
The Adviser pays the other expenses incurred in the Funds' operations out of the
Administrative Services Fee. These expenses include registration fees; expenses
of the Funds' custodian for all services to the Funds, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
preparing and mailing reports to investors and to government offices and
commissions; expenses of meetings of investors; fees and expenses of independent
accountants, of legal counsel and of the transfer agent, registrar or dividend
disbursing agent of the Funds; insurance premiums; and expenses of calculating
the net asset value of, and the net income on, shares of the Funds. The Funds
remain responsible for their proportionate share of the compensation paid to the
disinterested Trustees, interest and taxes.
25
<PAGE>
Allegiance Investment Trust
800 North Brand Boulevard, Suite 800
Glendale, CA 91203
You can find more information about the Funds' investment policies in the
Statement of Additional Information (SAI), incorporated by reference in this
prospectus, which is available free of charge.
To request a free copy of the SAI, call us at 1.800.547.7787. If you have access
to the Internet, you can view the SAI at the Security and Exchange Commission's
(SEC's) Web site at WWW.SEC.GOV. You may also visit the SEC's Public Reference
Room by calling 800.SEC.0330 or request a copy by writing to the Public
Reference Section of the SEC, Washington, D.C., 20549-6009. The SEC charges a
duplicating fee for this service.
You can find further information about the Funds in our annual and semiannual
shareholder reports, which discuss the market conditions and investment
strategies that significantly affected each Fund's performance during the
previous fiscal period. To request a free copy of the most recent annual or
semiannual report, please call us at 1.800.547.7787.
26
<PAGE>
---------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
---------------------------------------------------
<PAGE>
Statement of
Additional Information
APRIL __, 1999
ALLEGIANCE INVESTMENT TRUST
Allegiance American Value Fund
Allegiance Intermediate-Term Bond Fund
Allegiance California Tax-Free Intermediate Bond Fund
This Statement of Additional Information provides information regarding
the activities and operations of the mutual funds listed above, and should be
read together with the Funds' Prospectus dated April __, 1999. You may obtain a
Prospectus without charge by calling 1.800.547.7787.
Certain financial information included in the Annual Report to
shareholders is incorporated by reference into this Statement of Additional
Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS ONLY IF PRECEDED
OR ACCOMPANIED BY A CURRENT PROSPECTUS.
<PAGE>
TABLE OF CONTENTS
Page
----
TRUST HISTORY................................................................ 1
DESCRIPTION OF THE TRUST AND ITS INVESTMENTS AND RISKS....................... 1
CLASSIFICATION...................................................... 1
INVESTMENT STRATEGIES AND RISKS..................................... 2
FUND POLICIES....................................................... 23
TEMPORARY DEFENSIVE POSITION........................................ 26
PORTFOLIO TURNOVER.................................................. 26
MANAGEMENT................................................................... 26
TRUSTEES ........................................................... 26
MANAGEMENT INFORMATION.............................................. 27
COMPENSATION........................................................ 27
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.......................... 28
PRINCIPAL HOLDERS................................................... 28
INVESTMENT ADVISORY AND OTHER SERVICES....................................... 28
INVESTMENT ADVISER.................................................. 28
SERVICE MARKS....................................................... 29
DISTRIBUTOR......................................................... 29
ADMINISTRATIVE SERVICES............................................. 30
COUNSEL AND INDEPENDENT ACCOUNTANTS................................. 32
BROKERAGE ALLOCATION AND OTHER PRACTICES..................................... 32
BROKERAGE TRANSACTIONS.............................................. 32
BROKERAGE SELECTION................................................. 33
DESCRIPTION OF SHARES; VOTING RIGHTS AND LIABILITIES......................... 34
PURCHASE, REDEMPTION AND PRICING OF SHARES................................... 35
DETERMINATION OF NET ASSET VALUE.................................... 35
PURCHASE AND REDEMPTION OF SHARES................................... 38
SYSTEMATIC WITHDRAWAL PLAN.......................................... 38
REDEMPTION IN KIND.................................................. 39
TAXES .................................................................... 39
TAX STATUS OF THE FUNDS............................................. 39
TAXATION OF FUND DISTRIBUTIONS...................................... 40
i
<PAGE>
ADDITIONAL INFORMATION FOR SHAREHOLDERS OF THE TAX-FREE FUND........ 44
ADDITIONAL INFORMATION RELATING TO FUND INVESTMENTS................. 44
ADDITIONAL INFORMATION RELATING TO FOREIGN INVESTMENTS.............. 45
FOREIGN SHAREHOLDERS......................................................... 45
BACKUP WITHHOLDING.................................................. 46
PERFORMANCE INFORMATION...................................................... 46
CALCULATION OF YIELD................................................ 46
CALCULATION OF TOTAL RETURN......................................... 47
FINANCIAL STATEMENTS......................................................... 49
Appendix A: Certain Information concerning California
Appendix B: Description of Securities Ratings
ii
<PAGE>
TRUST HISTORY
ALLEGIANCE INVESTMENT TRUST (the "Trust") is an open-end management
investment company established under Delaware law (under its predecessor name,
Van Deventer & Hoch Funds) as a Delaware business trust on October 15, 1997. Its
name was changed to Allegiance Investment Trust on September 2, 1998.
DESCRIPTION OF THE TRUST AND ITS INVESTMENTS AND RISKS
CLASSIFICATION
The Agreement and Declaration of Trust, which is the governing document
for the Trust, permits the Trust to offer separate portfolios, or funds, with
shares of beneficial interest and different classes of shares of each fund. The
Trust currently has three active series (the "Funds"). Each Fund (other than the
Allegiance California Tax-Free Intermediate Bond Fund) is a diversified mutual
fund.
This Statement of Additional Information relates to the following
Funds:
* Allegiance American Value Fund (the "American Fund" or the "Stock
Fund")
* Allegiance Intermediate-Term Bond Fund (the "Bond Fund")
* Allegiance California Tax-Free Intermediate Bond Fund (the
"Tax-Free Fund")
Van Deventer & Hoch (the "Adviser") is the investment adviser for each
Fund. First Fund Distributors, Inc. (the "Distributor") is the distributor of
shares of each Fund.
As required by law, the Trust, the Adviser, the Distributor, and the
Trust's administrator each has adopted codes of ethics concerning certain
activities of officers, trustees or directors and employees. Copies of these
codes of ethics have been filed with the Securities and Exchange Commission (the
"SEC").
The Trust has reserved the right to create and issue additional series
and classes. Each share of a series of class represents an equal proportionate
interest in that series of class with each other share of that series or class.
The share of each series or class participate equally in the earnings, dividends
and assets of the particular series or class. Shares have no preemptive or
conversion rights. Shares when issued are fully paid and non-assessable, except
as set forth below. Shareholders are entitled to one vote for each dollar of net
asset value of shares held, and each fractional share shall be entitled to a
proportionate fractional vote.
The business and affairs of the Trust are managed under the general
direction and supervision of its Board of Trustees. The Trust is not required to
hold annual meetings of shareholders but will hold special meetings of
shareholders of all series or classes when in the judgment of the Trustees it is
-1-
<PAGE>
necessary or desirable to submit matters for a shareholder vote. The Trustees
will promptly call a meeting of shareholders to remove a trustee(s) when
requested to do so in writing by record holders of not less than 10% of all
outstanding shares of the Trust.
INVESTMENT STRATEGIES AND RISKS
The principal investment policies and strategies of each Fund are
described in the Prospectus by which shares of that Fund are offered. The
achievement of each Fund's investment objective will depend upon market
conditions generally and on the Adviser's analytical and portfolio management
skills. The permitted investments and investment techniques described below, in
alphabetical order, supplements the information contained in the Prospectus.
SPECIAL INVESTMENT STRATEGIES AND RISKS
The TAX-FREE FUND has a fundamental policy of investing at least 80
percent of its net assets under normal market conditions in obligations issued
by or on behalf of the State of California, the interest on which, in the
opinion of counsel for the issuer, is exempt from federal income tax and not
included as a preference item under the alternative minimum tax. The Tax-Free
Fund may comply with this policy, or with any of its other policies as to
investing in securities the interest on which is exempt from taxation in
California, by investing in a partnership, trust, regulated investment company
or other entity which invests in such municipal securities. If so, the Tax-Free
Fund's investment in such entity shall be deemed an investment in the underlying
municipal securities in the same proportion as such entity's investment in such
municipal securities bears to its net assets. The Tax-Free Fund is not suitable
for investors who cannot benefit from the tax-exempt character of its dividends,
such as IRAs, qualified retirement plans or tax-exempt entities.
Appendix A contains information concerning California. The Tax-Free
Fund is particularly susceptible to events affecting issuers in California.
Appendix B describes the ratings assigned to securities by certain
securities rating organizations.
PORTFOLIO SECURITIES
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITARY RECEIPTS
American Depositary Receipts ("ADRs") are securities, typically issued
by a U.S. financial institution, that evidence ownership interests in a security
or a pool of securities issued by a foreign issuer. European Depositary Receipts
("EDRs"), which are sometimes referred to as Continental Depositary Receipts
("CDRs"), are securities, typically issued by a non-U.S. financial institution,
-2-
<PAGE>
that evidence ownership interests in a security or a pool of securities issued
by either a U.S. or foreign issuer. ADRs, EDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all the costs of the
unsponsored facility and the depositary of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
issuer of the deposited security or to pass voting rights through to the holders
of the receipts in respect to the deposited securities.
ASSET-BACKED SECURITIES
In addition to mortgage-backed securities, the Funds may invest in
asset-backed securities including company receivables, truck and auto loans,
leases, and credit card receivables. These issues may be traded over-the-counter
and typically have a short to intermediate maturity structure depending on the
paydown characteristics of the underlying financial assets which are passed
through to the security holder. The Bond Fund will normally limit its
investments in asset-backed securities to 25% of its total assets and the other
Funds will limit their investments to 5% of their total assets.
Asset-backed securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there would be a risk that the purchaser
would acquire an interest superior to that of the holders of the related
automobile receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have a proper
security interest in all of the obligations backing such receivables. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities. The underlying
assets (E.G., loans) are also subject to prepayments which shorten the
securities' weighted-average life and may lower their return.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
-3-
<PAGE>
letters of credit obtained by the issuer or sponsor from third parties. A Fund
will not pay any additional or separate fees for credit support. The degree of
credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the return on an investment in such a
security.
BANK OBLIGATIONS
Bank obligations include certificates of deposit, time deposits
(including Eurodollar time deposits), and bankers' acceptances and other
short-term debt obligations issued by domestic banks, foreign subsidiaries or
foreign branches of domestic banks, domestic and foreign branches of foreign
banks, domestic savings and loan associations, and other banking institutions.
The Funds have established certain minimum credit quality standards for bank
obligations in which they invest.
The Funds are not prohibited from investing in obligations of banks
that are clients of the Distributor. However, the purchase of shares of the
Funds by such banks or by their customers will not be a consideration in
determining which bank obligations the Funds will purchase.
BANKERS' ACCEPTANCES
A banker's acceptance is a bill of exchange or time draft drawn on and
accepted by a commercial bank. It is used by corporations to finance the
shipment and storage of goods and to furnish dollar exchange. Maturities are
generally six months or less.
CERTIFICATES OF DEPOSIT
A certificate of deposit is a negotiable interest-bearing instrument
with a specific maturity. Certificates of deposit are issued by banks and
savings and loan institutions in exchange for the deposit of funds and normally
can be traded in the secondary market before maturity.
COMMERCIAL PAPER
Commercial paper is the term used to designate unsecured short-term
promissory notes issued by corporations and other entities. Maturities on these
issues vary from one to 270 days.
COMMON AND PREFERRED STOCK
Common stocks are generally more volatile than other securities.
Preferred stocks share some of the characteristics of both debt and equity
investments and are generally preferred over common stocks with respect to
dividends and in liquidation.
-4-
<PAGE>
CONVERTIBLE SECURITIES
Convertible securities have characteristics similar to both fixed
income and equity securities. Because of the conversion feature, the market
value of convertible securities tends to move together with the market value of
the underlying stock. The value of convertible securities is also affected by
prevailing interest rates, the credit quality of the issuer, and any call
provisions. Convertible securities include both debt obligations and preferred
stock.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
Because investments in foreign companies usually involve currencies of
foreign countries, the value of the assets of a Fund with investments in foreign
companies as measured in U.S. dollars may be affected favorably or unfavorably
by changes in foreign currency exchange rates and exchange control regulations.
Although such Fund's assets are valued daily in terms of U.S. dollars, the Fund
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. A Fund may conduct its foreign currency exchange transactions
on a spot basis or for settlement on a future date (i.e., a "forward foreign
currency" contract or "forward" contract). A Fund may convert currency on a spot
basis from time to time, and investors should be aware of the costs of currency
conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer. The Funds do not currently intend to speculate in
foreign currency exchange rates or forward contracts.
FOREIGN SECURITIES
Each Fund, except for the Tax-Free Fund, may invest in certain
obligations or securities of foreign issuers. Permissible investments include
obligations of foreign branches of U.S. banks and of foreign banks, including
certificates of deposit and time deposits (including Eurodollar time deposits).
Investing in securities issued by companies whose principal business
activities are outside the United States may involve significant risks not
present in domestic investments. For example, the value of securities
denominated in foreign currencies and of dividends and interest paid with
respect to those securities, will fluctuate based on the relative strength of
the U.S. dollar. In addition, there is generally less publicly available
information about foreign companies, particularly those not subject to the
disclosure and reporting requirements of the U.S. securities laws. Foreign
issuers are generally not bound by uniform accounting, auditing and financial
reporting requirements comparable to those applicable to domestic issuers.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitation on the removal of funds or other assets of a
Fund, political or financial instability or diplomatic and other developments
-5-
<PAGE>
which would affect such investments. Further, economies of particular countries
or areas of the world may differ favorably or unfavorably from the economy of
the U.S.
It is anticipated that in most cases the best available market for
foreign securities would be on exchanges or in over-the-counter markets located
outside the U.S. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the U.S., and
securities of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
U.S. companies. Foreign security trading practices, including those involving
securities settlement where a Fund's assets may be released prior to receipt of
payment, may expose a Fund to increased risk in the event of a failed trade or
the insolvency of a foreign broker-dealer. In addition, foreign brokerage
commissions are generally higher than commissions on securities traded in the
U.S. and may be non-negotiable. In general, there is less overall governmental
supervision and regulation of foreign securities exchanges, brokers and listed
companies than in the U.S.
A Fund may invest in foreign securities markets that impose
restrictions on transfer of the proceeds from that market to the United States
or to United States persons. Although securities subject to these transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities that are not subject to such restrictions.
Foreign issuers of securities or obligations are often subject to
accounting treatment and engage in business practices different from those
respecting domestic issuers of similar securities or obligations. Foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.
The Stock Fund and the Bond Fund may invest in securities issued by
entities based in developing countries throughout the world. All of the risks of
investing in securities of foreign issuers are heightened for securities of
issuers in developing countries, and extreme volatility can be associated with
these investments. Such investments may also entail higher custodial fees and
sales commissions than domestic investments.
FORWARD COMMITMENTS OR PURCHASES ON A WHEN-ISSUED BASIS
Each Fund may invest up to 25 percent of its assets in forward
commitments or commitments to purchase securities on a when-issued basis.
Forward commitments or purchases of securities on a when-issued basis are
transactions where the price of the securities is fixed at the time of the
commitment and delivery and payment normally take place beyond conventional
settlement time after the date of commitment to purchase. The Funds will make
commitments to purchase obligations on a when-issued basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date. The when-issued securities are subject to market fluctuation,
and no interest accrues on the security to the purchaser during this period. The
payment obligation and the interest rate that will be received on the securities
are each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
-6-
<PAGE>
actually be higher than those obtained in the transaction itself. In that case,
there could be an unrealized loss at the time of delivery.
While awaiting delivery of securities purchased on a when-issued basis,
a Fund will establish a segregated account consisting of liquid securities equal
to the amount of the commitments to purchase securities on such basis. If the
value of these assets declines, the Fund will place additional liquid assets in
the account on a daily basis so that the value of the assets in the account is
equal to the amount of the commitments.
FUTURES CONTRACTS
Subject to applicable laws, each Fund may enter into bond and interest
rate futures contracts. The Funds intend to use futures contracts only for bona
fide hedging purposes. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specified
security at a specified future time and at a specified price. A "sale" of a
futures contract entails a contractual obligation to deliver the underlying
securities called for by the contract, and a "purchase" of a futures contract
entails a contractual obligation to acquire such securities, in each case in
accordance with the terms of the contract. Futures contracts must be executed
through a futures commission merchant, or brokerage firm, which is a member of
an appropriate exchange designated as a "contract market" by the Commodity
Futures Trading Commission ("CFTC").
When a Fund purchases or sells a futures contract, the Trust must
allocate assets of that Fund as an initial deposit on the contract. The initial
deposit may be as low as approximately 5 percent or less of the value of the
contract. The futures contract is marked to market daily thereafter and the Fund
may be required to pay or entitled to receive additional "variation margin,"
based on decrease or increase in the value of the futures contract.
Futures contracts call for the actual delivery or acquisition of
securities, or in the case of futures contracts based on indices, the making or
acceptance of a cash settlement at a specified future time. However, the
contractual obligation is usually fulfilled before the date specified in the
contract by closing out the futures contract position through the purchase or
sale, on a commodities exchange, of an identical futures contract. Positions in
futures contracts may be closed out only if a liquid secondary market for such
contract is available, and there can be no assurance that such a liquid
secondary market will exist for any particular futures contract.
A Fund's ability to hedge effectively through transactions in futures
contracts depends on, among other factors, the Adviser's judgment as to the
expected price movements in the securities underlying the futures contracts. In
addition, it is possible in some circumstances that a Fund would have to sell
securities from its portfolio to meet "variation margin" requirements at a time
when it may be disadvantageous to do so.
-7-
<PAGE>
GUARANTEED INVESTMENT CONTRACTS (GIC)
A GIC is a contract between an insurance company and, generally, an
institutional investor that guarantees the investor a specified interest rate
for a specific period and the return of the investor's principal.
LOAN PARTICIPATIONS
Loan participations are interests in loans which are administered by
the lending bank or agent for a syndicate of lending banks, and sold by the
lending bank or syndicate member. The Funds may purchase interests only in loan
participations issued by a bank in the United States with assets exceeding $1
billion and for which the underlying loan is issued by borrowers in whose
obligations the Funds may invest. Because the intermediary bank does not
guarantee a loan participation in any way, a loan participation is subject to
the credit risk generally associated with the underlying corporate borrower. In
addition, in the event the underlying corporate borrower defaults, a Fund may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation (such as
commercial paper) of the borrower. Under the terms of a loan participation, the
purchasing Fund may be regarded as a creditor of the intermediary bank so that
the Fund may also be subject to the risk that the issuing bank may become
insolvent.
MONEY MARKET FUNDS
A money market fund is an investment company that limits its
investments to high quality money market instruments with a weighted-average
maturity of 90 days or less. Each of the Funds may invest in money market funds,
but not more than 5 percent of its assets in any one money market fund or more
than 10 percent of its assets in other investment companies, including money
market funds. When a Fund invests in a money market fund, a shareholder bears
not only his or her proportionate share of the Fund's expenses, but also
indirectly his or her share of the expenses of the money market fund, including
management fees.
MORTGAGE "DOLLAR ROLL" TRANSACTIONS
The Bond Fund may enter into mortgage "dollar roll" transactions
pursuant to which the Fund sells mortgage-backed securities for delivery in the
future and simultaneously contracts to repurchase substantially similar
securities on a specified future date. At the time the Fund enters into a dollar
roll transaction, it causes its custodian to segregate liquid assets such as
cash, U.S. Government securities or other liquid equity or debt securities
having a value equal to the purchase price for the similar security (including
accrued interest) and subsequently marks the assets to market daily to ensure
that full collateralization is maintained.
During the roll period, the Fund forgoes principal and interest paid on
the mortgage-backed securities. The Fund is compensated for the lost interest by
the difference between the current sales price and the lower price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. The Fund may also be
compensated by receipt of a commitment fee.
-8-
<PAGE>
MORTGAGE-BACKED SECURITIES
Each of the Funds may invest in mortgage-backed securities, which are
securities representing interests in pools of mortgage loans. Interests in pools
of mortgage-related securities differ from other forms of debt securities which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees or costs
which may be incurred. The market value and interest yield of these instruments
can vary due to market interest rate fluctuations and early prepayments of
underlying mortgages.
The principal governmental issuers or guarantors of mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA"), and Federal Home Loan Mortgage
Corporation ("FHLMC"). Obligations of GNMA are backed by the full faith and
credit of the United States Government while obligations of FNMA and FHLMC are
supported by the respective agency only. These are described below.
* GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a wholly owned
corporate instrumentality of the U.S. Government within the Department
of Housing and Urban Development. The National Housing Act of 1934, as
amended (the "Housing Act"), authorizes GNMA to guarantee the timely
payment of the principal of, and interest on, securities that are based
on and backed by a pool of specified mortgage loans. For these types of
securities to qualify for a GNMA guarantee, the underlying collateral
must be mortgages insured by the FHA under the Housing Act, or Title V
of the Housing Act of 1949, as amended ("VA Loans"), or be pools of
other eligible mortgage loans. The Housing Act provides that the full
faith and credit of the U.S. Government is pledged to the payment of
all amounts that may be required to be paid under any guarantee. In
order to meet its obligations under a guarantee, GNMA is authorized to
borrow from the U.S. Treasury with no limitations as to amount.
GNMA pass-through securities may represent a proportionate interest in
one or more pools of the following types of mortgage loans: (1)
fixed-rate level payment mortgage loans; (2) fixed-rate graduated
payment mortgage loans; (3) fixed-rate growing equity mortgage loans;
(4) fixed-rate mortgage loans secured by manufactured (mobile) homes;
(5) mortgage loans on multifamily residential properties under
construction; (6) mortgage loans on completed multifamily projects; (7)
fixed-rate mortgage loans as to which escrowed funds are used to reduce
the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or
in other payment terms of the mortgage loans; and (9) mortgage-backed
serial notes.
-9-
<PAGE>
* FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a federally chartered
and privately owned corporation established under the Federal National
Mortgage Association Charter Act. FNMA was originally organized in 1938
as a U.S. Government agency to add greater liquidity to the mortgage
market. FNMA was transformed into a private sector corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. FNMA acquires funds
to purchase loans from investors that may not ordinarily invest in
mortgage loans directly, thereby expanding the total amount of funds
available for housing.
Each FNMA pass-through security represents a proportionate interest in
one or more pools of FHA Loans, VA Loans or conventional mortgage loans
(that is, mortgage loans that are not insured or guaranteed by any U.S.
Government agency). The loans contained in those pools consist of one
or more of the following: (1) fixed-rate level payment mortgage loans;
(2) fixed-rate growing equity mortgage loans; (3) fixed-rate graduated
payment mortgage loans; (4) variable-rate mortgage loans; (5) other
adjustable-rate mortgage loans; and (6) fixed-rate mortgage loans
secured by multifamily projects.
* Federal Home Loan Mortgage Corporation. FHLMC is a corporate
instrumentality of the United States established by the Emergency Home
Finance Act of 1970, as amended. FHLMC was organized primarily for the
purpose of increasing the availability of mortgage credit to finance
needed housing. The operations of FHLMC currently consist primarily of
the purchase of first lien, conventional, residential mortgage loans
and participation interests in mortgage loans and the resale of the
mortgage loans in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically consist of
fixed-rate or adjustable-rate mortgage loans with original terms to
maturity of between 10 and 30 years, substantially all of which are
secured by first liens on one-to-four-family residential properties or
multifamily projects. Each mortgage loan must include whole loans,
participation interests in whole loans and undivided interests in whole
loans and participation in another FHLMC security.
Even if the U.S. government or one of its agencies guarantees principal
and interest payments of a mortgage-backed security, the market price of a
mortgage-backed security is not insured and may be subject to market volatility.
When interest rates decline, mortgage-backed securities experience higher rates
of prepayment because the underlying mortgages are refinanced to take advantage
of the lower rates. The prices of mortgage-backed securities may not increase as
much as prices of other debt obligations when interest rates decline, and
mortgage-backed securities may not be an effective means of locking in a
particular interest rate. In addition, any premium paid for a mortgage-backed
security may be lost when it is prepaid. When interest rates go up,
mortgage-backed securities experience lower rates of prepayment. This has the
effect of lengthening the expected maturity of a mortgage-backed security. As a
-10-
<PAGE>
result, prices of mortgage-backed securities may decrease more than prices of
other debt obligations when interest rates go up.
Each of the Funds may also invest in mortgage-backed securities which
are rated in one of the four top categories by Standard and Poor's Rating
Services ("S&P"), Moody's Investors Service, Inc. ("Moody's") or Fitch IBCA,
Inc. ("Fitch IBCA"), or, if not rated by S&P, Moody's or Fitch IBCA, of
comparable quality as determined by the Adviser to the Fund. Two principal types
of mortgage-backed securities are collateralized mortgage obligations ("CMOs")
and real estate mortgage investment conduits ("REMICs"). REMICs, which were
authorized under the Tax Reform Act of 1986, are private entities formed for the
purpose of holding a fixed pool of mortgages secured by an interest in real
property. REMICs are similar to CMOs in that they issue multiple classes of
securities.
CMOs are securities collateralized by mortgages, mortgage pass-through
certificates, mortgage pay-through bonds (bonds representing an interest in a
pool of mortgages where the cash flow generated from the mortgage collateral
pool is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.
Each class of a CMO is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the collateral pool may cause the various classes of a CMO to be retired
substantially earlier than their stated maturities or final distribution dates.
The principal of and interest on the collateral pool may be allocated among the
several classes of a CMO in a number of different ways. Generally, the purpose
of the allocation of the cash flow of a CMO to the various classes is to obtain
a more predictable cash flow to some of the individual tranches than exists with
the underlying collateral of the CMO. As a general rule, the more predictable
the cash flow is on a CMO tranche, the lower the anticipated yield will be on
that tranche at the time of issuance relative to prevailing market yields on
mortgage-related securities. Certain classes of CMOs may have priority over
others with respect to the receipt of prepayments on the mortgages.
Investors purchasing such CMOs in the shortest maturities receive or
are credited with their pro rata portion of the scheduled payments of interest
and principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligations is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-through certificates to be prepaid prior to
their stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-through certificates issued or guaranteed by
U.S. Government agencies or instrumentalities, the CMOs themselves are not
generally guaranteed.
-11-
<PAGE>
A Fund may invest in, among other things, "parallel pay" CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class which, like the other CMO
structures, must be retired by its stated maturity date or final distribution
date, but may be retired earlier. PAC Bonds are parallel pay CMOs that generally
require payments of a specified amount of principal on each payment date; the
required principal payment on PAC Bonds have the highest priority after interest
has been paid to all classes.
OPTIONS
The Stock Fund and the Bond Fund may, for hedging purposes and in order
to generate additional income, write call options on a covered basis, provided
that the aggregate value of such options may not exceed 10 percent of the Fund's
net assets as of the time the Fund enters into such options.
The purchaser of a call option has the right to buy, and the writer (in
this case a Fund) of a call option has the obligation to sell, an underlying
security at a specified exercise price during a specified option period. The
advantage to a Fund of writing covered calls is that the Fund receives a premium
for writing the call, which is additional income. However, if the security rises
in value and the call is exercised, the Fund may not participate fully in the
market appreciation of the security.
During the option period, a covered call option writer may be assigned
an exercise notice by the broker/dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time at which the writer effects a closing purchase
transaction.
A closing purchase transaction is one in which a Fund, when obligated
as a writer of an option, terminates its obligation by purchasing an option of
the same series as the option previously written. A closing purchase transaction
cannot be effected with respect to an option once the Fund writing the option
has received an exercise notice for such option. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security or to enable a Fund to write another call option on the
underlying security with either a different exercise price or different
expiration date or both. The Fund may realize a net gain or loss from a closing
purchase transaction depending upon whether the net amount of the original
premium received on the call option is more or less than the cost of effecting
the closing purchase transaction. Any loss incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
sale of a different call option on the same underlying security. Such a loss may
also be wholly or partially offset by unrealized appreciation in the market
value of the underlying security. Conversely, a gain resulting from a closing
-12-
<PAGE>
purchase transaction could be offset in whole or in part by a decline in the
market value of the underlying security.
If a call option expires unexercised, a Fund will realize a short-term
capital gain in the amount of the premium on the option, less the commission
paid. Such a gain, however, may be offset by depreciation in the market value of
the underlying security during the option period. If a call option is exercised,
the Fund will realize a gain or loss from the sale of the underlying security
equal to the difference between (a) the cost of the underlying security and (b)
the proceeds of the sale of the security, plus the amount of the premium on the
option, less the commission paid.
The market value of a call option generally reflects the market price
of the underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
The Stock Fund and the Bond Fund will write call options only on a
covered basis, which means that the Fund will own the underlying security
subject to a call option at all times during the option period. Unless a closing
purchase transaction is effected, the Fund would be required to continue to hold
a security which it might otherwise wish to sell, or deliver a security it would
want to hold. Options written by a Fund will normally have expiration dates
between one and nine months from the date written. The exercise price of a call
option may be below, equal to or above the current market value of the
underlying security at the time the option is written.
A Fund may also purchase put and call options. Put options are
purchased to hedge against a decline in the value of securities held in the
Fund's portfolio. If such a decline occurs, the put options will permit the Fund
to sell the securities underlying such options at the exercise price, or to
close out the options at a profit. The premium paid for a put or a call option
plus any transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option, and, unless the price of the underlying security
rises or declines sufficiently, the option may expire worthless to the Fund. In
addition, in the event that the price of the security in connection with which
an option was purchased moves in a direction favorable to the Fund, the benefits
realized by the Fund as a result of such favorable movement will be reduced by
the amount of the premium paid for the option and related transaction costs.
OPTIONS ON FUTURES CONTRACTS
The Funds may also, subject to any applicable laws, purchase and write
options on futures contracts for hedging purposes only. The holder of a call
option on a futures contract has the right to purchase the futures contract, and
the holder of a put option on a futures contract has the right to sell the
futures contract, in either case at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on a stated date. Options on
futures contracts, like futures contracts, are traded on contract markets.
-13-
<PAGE>
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities deliverable on exercise
of the futures contract. A Fund will receive an option premium when it writes
the call, and, if the price of the futures contract at expiration of the option
is below the option exercise price, the Fund will retain the full amount of this
option premium, which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. Similarly, the writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the securities deliverable upon exercise of the futures contract. If a
Fund writes an option on a futures contract and that option is exercised, the
Fund may incur a loss, which loss will be reduced by the amount of the option
premium received, less related transaction costs. A Fund's ability to hedge
effectively through transactions in options on futures contracts depends on,
among other factors, the degree of correlation between changes in the value of
securities held by the Fund and changes in the value of its futures positions.
This correlation cannot be expected to be exact, and the Fund bears a risk that
the value of the futures contract being hedged will not move in the same amount,
or even in the same direction, as the hedging instrument. Thus it may be
possible for a Fund to incur a loss on both the hedging instrument and the
futures contract being hedged.
The ability of a Fund to engage in options and futures strategies
depends also upon the availability of a liquid market for such instruments.
There can be no assurance that such a liquid market will exist for such
instruments.
OPTIONS ON STOCK INDICES
The Stock Fund may engage in transactions involving options on stock
indices. A stock index assigns relative values to the common stocks included in
the index, and the index fluctuates with changes in the market values of the
underlying common stocks. The Stock Fund will not engage in transactions in
options on stock indices for speculative purposes but only to protect
appreciation attained, to offset capital losses and to take advantage of the
liquidity available in the option markets. The aggregate premium paid on all
options on stock indices will not exceed 5 percent of the total assets of the
Stock Fund.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or make
delivery of the underlying stock at a specified price. A stock index option
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
option premium received, to make delivery of this amount. Gain or loss to the
Fund on transactions in stock index options will depend on price movements in
-14-
<PAGE>
the stock market generally (or in a particular industry or segment of the
market) rather than price movements of individual securities.
As with stock options, the Fund may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the stock
included in the index. Some stock index options are based on a broad market
index such as the Standard & Poor's 500 or the New York Stock Exchange Composite
Index, or a narrower market index such as the Standard & Poor's 100. Indices are
also based on an industry or market segment such as the AMEX Oil and Gas Index
or the Computer and Business Equipment Index. Options on stock indices are
currently traded on the following exchanges, among others: The Chicago Board
Options Exchange, New York Stock Exchange and American Stock Exchange.
A Fund's ability to hedge effectively all or a portion of its
securities through transactions in options on stock indices depends on the
degree to which price movements in the underlying index correlate with price
movements in the securities held by the Fund. Since the Fund will not duplicate
all of the components of an index, the correlation will not be exact.
Consequently, the Fund bears the risk that the prices of the securities being
hedged will not move in the same amount as the hedging instrument. It is also
possible that there may be a negative correlation between the index or other
securities underlying the hedging instrument and the hedged securities which
would result in a loss on both such securities and the hedging instrument.
Positions in stock index options may be closed out only on an exchange
which provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option. Thus, it may
not be possible to close such an option. The inability to close options
positions could have an adverse impact on a Fund's ability to effectively hedge
its securities. The Fund will enter into an option position only if there
appears to the Adviser of such Fund, at the time of investment, to be a liquid
secondary market for such options.
OTHER INVESTMENT COMPANIES
Subject to applicable statutory and regulatory limitations, assets of
each Fund may be invested in shares of other investment companies (such as
mutual funds) and foreign investment trusts. Those investment companies and
investment trusts must invest in securities in which the Funds can invest in a
manner consistent with the Funds' investment objectives. A Fund's purchase of
investment company securities may result in the duplication of management fees
and expenses.
-15-
<PAGE>
RECEIPTS
Receipts are interests in separately traded interest and principal
component parts of U.S. Treasury obligations that are issued by banks and
brokerage firms and are created by depositing U.S. Treasury obligations into a
special account at a custodian bank. The custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
or receipts. Receipts include Treasury Receipts ("TRs"), Treasury Investment
Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury Securities
("CATS"). TRS, TIGRs and CATS are sold as zero coupon securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. A Fund's repurchase
agreements will generally involve a short-term investment in a U.S. Government
security or other high-grade liquid debt security, with the seller (a primary
securities dealer recognized by the Federal Reserve Bank of New York or a
national member bank as defined in Section 3(d)(1) of the Federal Deposit
Insurance Act, as amended) of the underlying security agreeing to repurchase it
at a mutually agreed-upon time and price (including principal and interest). The
repurchase price is generally higher than the purchase price, the difference
being interest income to that Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to a Fund together
with the repurchase price on the date of repurchase. In either case, the income
to a Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to maintain the
value of the securities subject to the repurchase agreement at not less than
their repurchase price. The Adviser, acting under the supervision of the Board,
reviews on a periodic basis the suitability and creditworthiness, and the value
of the collateral, of those sellers with whom the Funds enter into repurchase
agreements to evaluate potential risk. All repurchase agreements will be made
pursuant to procedures adopted and regularly reviewed by the Board.
The Funds generally will enter into repurchase agreements of short
maturities, from overnight to one week, although the underlying securities will
generally have longer maturities. The Funds regard repurchase agreements with
maturities in excess of seven days as illiquid. A Fund may not invest more than
15% of the value of its net assets in illiquid securities, including repurchase
agreements with maturities greater than seven days.
For purposes of the Investment Company Act of 1940 ("Investment Company
Act"), a repurchase agreement is deemed to be a collateralized loan from a Fund
to the seller of the security subject to the repurchase agreement. It is not
clear whether a court would consider the security acquired by a Fund subject to
a repurchase agreement as being owned by that Fund or as being collateral for a
loan by that Fund to the seller. If bankruptcy or insolvency proceedings are
commenced with respect to the seller of the security before its repurchase, a
Fund may encounter delays and incur costs before being able to sell the
security. Delays may involve loss of interest or a decline in price of the
security. If a court characterizes such a transaction as a loan and a Fund has
not perfected a security interest in the security, that Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor. As such, a Fund would be at risk of losing some or all of the
-16-
<PAGE>
principal and income involved in the transaction. As with any unsecured debt
instrument purchased for a Fund, the Adviser seeks to minimize the risk of loss
through repurchase agreements by analyzing the creditworthiness of the seller of
the security.
Apart from the risk of bankruptcy or insolvency proceedings, a Fund
also runs the risk that the seller may fail to repurchase the security. However,
each Fund always requires collateral for any repurchase agreement to which it is
a party in the form of securities acceptable to it, the market value of which is
equal to at least 100% of the amount invested by the Fund plus accrued interest,
and each Fund makes payment against such securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian bank. If the
market value of the security subject to the repurchase agreement becomes less
than the repurchase price (including interest), a Fund, pursuant to its
repurchase agreement, may require the seller of the security to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement equals or exceeds the repurchase price (including interest)
at all times.
RESTRICTED SECURITIES
Restricted securities are securities that may not be sold to the public
without registration under the Securities Act of 1933 (the "1933 Act") absent an
exemption from registration. Many restricted securities are illiquid but the
Adviser may determine that at the time of investment such securities are not
illiquid (generally, an illiquid security is one that cannot be disposed of
within seven days in the ordinary course of business at its full value), based
on guidelines which are the responsibility of and are periodically reviewed by
the Board of Trustees. Under these guidelines, the Adviser will consider the
frequency of trades and quotes for the security, the number of dealers in, and
potential purchasers for, the securities, dealer undertakings to make a market
in the security, and the nature of the security and of the marketplace trades.
In purchasing such restricted securities, the intention of the Adviser is to
rely upon the exemption from registration provided by Rule 144A promulgated
under the 1933 Act. Restricted securities not determined to be liquid may be
purchased subject to each Fund's limitation on all illiquid securities (15
percent of net assets of the Funds).
A Fund may purchase restricted securities that are not registered for
sale to the general public if it is determined that there is a dealer or
institutional market in the securities. In that case, the securities will not be
treated as illiquid for purposes of the Fund's investment limitation described
above. The Trustees will review these determinations. These securities are known
as "Rule 144A securities" because they are traded under Rule 144A of the 1933
Act among qualified institutional buyers.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve the sale of securities held by a
Fund and the agreement by the Fund to repurchase the securities at an
agreed-upon price, date and interest payment. When a Fund enters into reverse
repurchase transactions, securities of a dollar amount equal in value to the
securities subject to the agreement will be maintained in a segregated account
-17-
<PAGE>
with the Fund's custodian. Such assets are marked to market daily to ensure that
full collateralization is maintained. The segregation of assets could impair the
Fund's ability to meet its current obligations or impede investment management
if a large portion of the Fund's assets are involved. Reverse repurchase
agreements are considered to be a form of borrowing.
A Fund may use the proceeds of reverse purchase agreements to provide
liquidity to meet redemption requests when sale of the Fund's securities is
disadvantageous.
SECURITIES LENDING
Each Fund may lend securities pursuant to agreements requiring that the
loans be continuously secured by liquid securities, as collateral equal to 100%
of the market value at all times of the securities lent. Such loans will not be
made if, as a result, the aggregate amount of all outstanding securities loans
for the Fund exceed 30 percent of a Fund's total assets. A Fund will continue to
receive interest on the securities lent while simultaneously earning interest on
the investment of the collateral. However, a Fund will normally pay lending fees
to such broker-dealers and related expenses from the interest earned on invested
collateral. There may be risks of delay in receiving additional collateral or
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the Adviser to a Fund to be of good
standing and when, in the judgment of the Adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risk. Any
loan may be terminated by either party upon reasonable notice to the other
party. A Fund may use the Distributor or a broker/dealer affiliate of an Adviser
as a broker in these transactions.
SECURITIES RATED BAA OR BBB
The Funds may purchase the lowest categories of investment grade
securities, meaning those rated BAA by Moody's or BBB by Standard & Poor's,
which may have poor protection of payment of principal and interest.
STRIPS
Each of the Funds may invest in Separately Traded Interest and
Principal Securities ("STRIPS"), which are component parts of U.S. Treasury
Securities traded through the Federal Reserve Book-Entry System. The Adviser to
a Fund will purchase only those STRIPS that it determines are liquid or, if
illiquid, do not violate such Fund's investment policy concerning investments in
illiquid securities. While there is no limitation on the percentage of any other
Fund's assets that may be comprised of STRIPS, the Adviser to each Fund will
monitor the level of such holdings to avoid the risk of impairing shareholders'
redemption rights. The interest-only component is extremely sensitive to the
rate of principal payments on the underlying obligation. The market value of the
principal-only component generally is unusually volatile in response to changes
in interest rates.
-18-
<PAGE>
TAX-EXEMPT SECURITIES
MUNICIPAL NOTES AND BONDS
The Bond Fund and the Tax-Free Fund may invest in municipal notes,
which include but are not limited to general obligation notes, tax anticipation
notes (notes sold to finance working capital needs of the issuer in anticipation
of receiving taxes on a future date), revenue anticipation notes (notes sold to
provide needed cash prior to receipt of expected non-tax revenues from a
specific source), bond anticipation notes, certificates of indebtedness, demand
notes and construction loan notes. A Fund's investment in any of the notes
described above will be limited to those obligations which are rated (i) MIG-2
or VMIG-2 or better at the time of investment by Moody's, (ii) SP-2 or better at
the time of investment by S&P, or (iii) F-2 or better at the time of investment
by Fitch IBCA, or which, if not rated by Moody's, S&P or Fitch IBCA, are of at
least comparable quality, as determined by the Adviser to the Fund. Municipal
bonds, in which these same Funds may invest, must be rated BBB or better by S&P
or Fitch IBCA or BAA or better by Moody's at the time of investment or, if not
rated by Moody's, S&P or Fitch IBCA, must be determined by the Adviser to the
Funds to have essentially the same characteristics and quality as bonds having
the above ratings. Bonds rated BBB by S&P or Fitch IBCA or BAA by Moody's may
have speculative characteristics. The Adviser to these Funds may purchase
industrial development and pollution control bonds for these Funds if the
interest paid thereon is exempt from federal income tax. These bonds are issued
by or on behalf of public authorities to raise money to finance various
privately-operated facilities for business and manufacturing, housing, sports,
and pollution control. These bonds may also be used to finance public facilities
such as airports, mass transit systems, ports, and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.
Municipal securities also include participations in municipal leases.
These are undivided interests in a portion of an obligation in the form of a
lease or installment purchase issued by a state or local government to acquire
equipment or facilities. Municipal leases frequently have special risks not
normally associated with general obligation bonds or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations are deemed to be inapplicable because of
the inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other periodic basis. Although the
obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. In light of these concerns, the Trust has
adopted and follows procedures for determining whether municipal lease
securities purchased by a Fund are liquid and for monitoring the liquidity of
municipal lease securities held in the Fund's portfolio. The procedures require
-19-
<PAGE>
that a number of factors be used in evaluating the liquidity of a municipal
lease security, including the frequency of trades and quotes for the security,
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers, the willingness of dealers to undertake to make a
market in the security, the nature of the marketplace in which the security
trades, the credit quality of the security, and other factors which the Adviser
to the Fund may deem relevant.
Tax-exempt commercial paper in which the Tax-Free Fund may invest will
be limited to investments in obligations which are rated at least A-2 by S&P,
Prime-2 by Moody's, or F-2 by Fitch IBCA, at the time of investment or which are
of comparable quality as determined by the Adviser to the Fund.
The Tax-Free Fund may invest in floating rate notes. Investments in
such floating rate instruments will normally involve industrial development or
revenue (now known as "private activity") bonds which provide that the rate of
interest is set as a specific percentage of a designated base rate (such as the
prime rate) at a major commercial bank, and that a Fund can demand payment of
the obligation at all times or at stipulated dates on short notice (not to
exceed 30 days) at par plus accrued interest. For purposes of determining the
maturity of these obligations, the Fund may use the longer of (a) the period
required before the Fund is entitled to prepayment under such obligations or (b)
the period remaining until the next interest rate adjustment date. Such
obligations are frequently secured by letters of credit or other credit support
arrangements provided by banks. The quality of the underlying credit or of the
bank, as the case may be, must in the Adviser's opinion be equivalent to the
long-term bond or commercial paper ratings on securities in which the Fund may
invest. The Adviser to the Fund will monitor the earning power, cash flow and
liquidity ratios of the issuers of floating rate instruments and the ability of
an issuer of a demand instrument to pay principal and interest on demand. The
Adviser may also purchase other types of tax-exempt instruments for the Fund as
long as they are of a quality equivalent to the bonds or commercial paper in
which the Fund may invest.
STANDBY COMMITMENTS
Funds investing in municipal securities may acquire such securities
subject to a "standby commitment." The Adviser to these Funds has the authority
to purchase for these Funds securities at a price which would result in a yield
to maturity lower than that generally offered by the seller at the time of
purchase when they can simultaneously acquire the right to sell the securities
back to the seller, the issuer, or a third party (the "writer") at an
agreed-upon price at any time during a stated period or on a certain date. Such
a right is generally denoted as a "standby commitment" or a "put." The purpose
of engaging in transactions involving puts is to maintain flexibility and
liquidity to permit the Fund to meet redemptions and remain as fully invested as
possible in municipal securities. The Funds reserve their right to engage in put
transactions. The right to put the securities depends on the writer's ability to
pay for the securities at the time the put is exercised. Each Fund would limit
its put transactions to institutions which the Adviser to such Fund believes
present minimum credit risks. The Adviser would use its best efforts initially
-20-
<PAGE>
to determine and to continue to monitor the financial strength of the sellers of
the options by evaluating their financial statements and such other information
as is available in the marketplace. It may, however, be difficult to monitor the
financial strength of the writers because adequate current financial information
may not be available. In the event that any writer is unable to honor a put for
financial reasons, the Fund would be a general creditor (i.e., on a parity with
all other unsecured creditors) of the writer. Furthermore, particular provisions
of the contract between the Fund and the writer may excuse the writer from
repurchasing the securities. For example, a change in the published rating of
the underlying municipal securities or any similar event that has an adverse
effect on the issuer's credit or a provision in the contract that the put will
not be exercised except in certain special cases (e.g., to maintain fund
liquidity). The Fund could, however, at any time sell the underlying security in
the open market or wait until the security matures, at which time it should
realize the full par value of the security.
Municipal securities purchased subject to a put may be sold to third
persons at any time, even though the put is outstanding, but the put itself,
unless it is an integral part of the security as originally issued, may not be
marketable or otherwise assignable. Therefore, the put would have value only to
the Fund. Sale of the securities to third parties or lapse of time with the put
unexercised may terminate the right to put the securities. Prior to the
expiration of any put option, the Fund could seek to negotiate terms for the
extension of such an option. If such a renewal cannot be negotiated on terms
satisfactory to the Fund, the Fund could, of course, sell the security. The
maturity of the underlying security will generally be different from that of the
put.
For the purpose of determining the "maturity" of securities purchased
subject to an option to put, and for the purpose of determining the
dollar-weighted average maturity of a Fund including such securities, "maturity"
will be considered to be the first date on which the Fund has the right to
demand payment from the writer of the put although the final maturity of the
security
is later than such date.
TIME DEPOSITS
A time deposit is a non-negotiable receipt issued by a bank in exchange
for the deposit of funds. Like a certificate of deposit, it earns a specified
rate of interest over a definite period of time; however, it cannot be traded in
the secondary market. Time deposits with a withdrawal penalty are considered to
be illiquid securities.
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Fund may invest in variable amount master demand notes which may
or may not be backed by bank letters of credit. These notes permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to direct arrangements between the Trust, as lender, on behalf of a Fund and the
borrower. Such notes provide that the interest rate on the amount outstanding
varies on a daily, weekly or monthly basis depending upon a stated short-term
-21-
<PAGE>
interest rate index. Both the lender and the borrower have the right to reduce
the amount of outstanding indebtedness at any time. There is no secondary market
for the notes. It is not generally contemplated that such instruments will be
traded.
WARRANTS
A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's capital
stock at a set price for a specified period of time. Each of the Stock Funds may
invest up to 5% of its net assets in warrants. Included in this limitation may
be warrants not listed on the New York Stock Exchange or American Stock
Exchange.
ZERO COUPON SECURITIES
A zero coupon security pays no interest or principal to its holder
during its life. A zero coupon security is sold at a discount, frequently
substantial, and redeemed at face value at its maturity date. The market prices
of zero coupon securities are generally more volatile than the market prices of
securities of similar maturity that pay interest periodically, and zero coupon
securities are likely to react more to interest rate changes than non-zero
coupon securities with similar maturity and credit qualities.
FUND POLICIES
FUNDAMENTAL POLICIES
The following are fundamental policies of each Fund and may not be
changed without approval by holders of a majority of the outstanding voting
securities of that Fund, which as used in this Statement of Additional
Information means the vote of the lesser of (i) 67 percent or more of the
outstanding voting securities of the Fund present at a meeting at which the
holders of more than 50 percent of the outstanding voting securities of the Fund
are present or represented by proxy, or (ii) more than 50 percent of the
outstanding voting securities of the Fund. The term "voting securities" as used
in this paragraph has the same meaning as in the Investment Company Act of 1940,
as amended (the "Investment Company Act").
1. A Fund may not purchase any securities which would cause more than 25
percent of the total assets of the Fund to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry. This limitation does not apply to
investments in obligations issued or guaranteed by the U.S. Government
or its agencies and instrumentalities and repurchase agreements
involving such securities. For purposes of this limitation, (i) utility
companies will be divided according to their services; for example,
gas, gas transmission, electric and telephone will each be considered a
separate industry; (ii) financial service companies will be classified
according to the end users of their services; for example, automobile
finance, bank finance and diversified finance will each be considered a
separate industry; (iii) supranational entities will be considered to
be a separate industry; and (iv) loan participations are considered to
-22-
<PAGE>
be issued by both the issuing bank and the underlying corporate
borrower. Otherwise, for purposes of this restriction, each Fund
generally relies on the U.S. Office of Management and Budget's Standard
Industrial Classifications.
2. A Fund may not make loans, except that a Fund may (a) purchase or hold
debt instruments in accordance with its investment objective and
policies; (b) enter into repurchase agreements; and (c) engage in
securities lending as described in this Statement of Additional
Information.
3. A Fund may not acquire more than 10 percent of the voting securities of
any one issuer (except securities issued or guaranteed by the United
States, its agencies or instrumentalities and repurchase agreements
involving such securities) or invest more than 5 percent of the total
assets of the Fund in the securities of an issuer (except securities
issued or guaranteed by the United States, its agencies or
instrumentalities and repurchase agreements involving such securities);
provided, that (a) the foregoing limitation shall not apply to the
Tax-Free Fund and (b) the foregoing limitation shall not apply to 25
percent of the total assets of the Stock Fund and the Bond Fund.
4. A Fund may not borrow, except that a Fund may borrow money from banks
and may enter into reverse repurchase agreements, in either case in an
amount not to exceed 33-1/3 percent of that Fund's total assets and
then only as a temporary measure for extraordinary or emergency
purposes (which may include the need to meet shareholder redemption
requests). This borrowing provision is included solely to facilitate
the orderly sale of Fund securities to accommodate heavy redemption
requests if they should occur and is not for investment purposes. A
Fund will not purchase any securities for its portfolio at any time at
which its borrowings equal or exceed 10 percent of its total assets
(taken at market value), and any interest paid on such borrowings will
reduce income. Transactions that are fully collateralized in a manner
that does not involve the prohibited issuance of a "senior security"
within the meaning of Section 18(f) of the 1940 Act shall not be
regarded as borrowings for the purposes of this restriction.
5. A Fund may not pledge, mortgage or hypothecate assets except to secure
temporary borrowings permitted by 4 above, except as permitted with
respect to securities lending.
6. A Fund may not purchase or sell real estate, including real estate
limited partnership interests, commodities and commodities contracts,
but excluding interests in a pool of securities that are secured by
interests in real estate. However, subject to its permitted
investments, any Fund may invest in companies that invest in real
estate, commodities or commodities contracts. Each Fund may invest in
futures contracts and options thereon to the extent described in the
Prospectus and elsewhere in this Statement of Additional Information.
-23-
<PAGE>
7. A Fund may not act as an underwriter of securities of other issuers,
except as it may be deemed an underwriter under federal securities laws
in selling a security held by the Fund.
8. A Fund may not purchase securities of other investment companies except
as permitted by the Investment Company Act and the rules and
regulations thereunder. Under these rules and regulations, each Fund is
prohibited from acquiring the securities of other investment companies
if, as a result of such acquisition, (a) such Fund owns more than 3
percent of the total voting stock of the company; (b) securities issued
by any one investment company represent more than 5 percent of the
total assets of such Fund; or (c) securities (other than treasury
stock) issued by all investment companies represent more than 10
percent of the total assets of such Fund. A Fund's purchase of such
investment company securities results in the layering of expenses, such
that shareholders would indirectly bear a proportionate share of the
operating expenses of such investment companies, including advisory
fees.
It is the position of the SEC's staff that certain non-governmental
issuers of CMOs and REMICs constitute investment companies pursuant to
the Investment Company Act and either (a) investments in such
instruments are subject to the limitations set forth above or (b) the
issuers of those instruments have received orders from the Securities
and Exchange Commission exempting such instruments from the definition
of investment company.
9. A Fund may not issue senior securities, as defined in the Investment
Company Act, except that this restriction shall not be deemed to
prohibit that Fund from (a) making any permitted borrowings, mortgages
or pledges, (b) entering into permissible repurchase and dollar roll
transactions, or (c) entering other borrowings as permitted by rule,
regulation or order of the SEC.
NON-FUNDAMENTAL POLICIES
The following policies are not fundamental and may be changed by the
Board of Trustees with respect to any Fund without approval by the shareholders
of that Fund:
1. Each Stock Fund may invest in warrants in an amount not exceeding 5
percent of the Fund's net assets as valued at the lower of cost or
market value; included in these amounts may be warrants not listed on
the New York Stock Exchange or American Stock Exchange.
2. No Fund may invest in illiquid securities, including (under current SEC
interpretations) restricted securities (excluding liquid Rule
144A-eligible restricted securities as defined below), securities which
are not otherwise readily marketable, repurchase agreements that mature
in more than seven days and over-the-counter options (and securities
-24-
<PAGE>
underlying such options) in an amount exceeding, in the aggregate, 15
percent of that Fund's net assets.
The foregoing limitation does not apply to restricted securities,
including those issued pursuant to Rule 144A under the 1933 Act, if it
is determined by or under procedures established by the Board of
Trustees of the Trust that, based on trading markets for the specific
restricted security in question, such security is not illiquid.
3. A Fund may not invest in companies for the purpose of exercising
control or management of the issuers.
4. A Fund may not make short sales of securities, maintain a short
position or purchase securities on margin, except that the Trust may
obtain short-term credits as necessary for the clearance of security
transactions.
5. A Fund may not write or purchase puts, calls, or other options or
combinations thereof, except that each Fund may write covered call
options with respect to any or all of the securities it holds, subject
to any limitations described in the Prospectus or elsewhere in this
Statement of Additional Information and each Fund may purchase and sell
other options as described in the Prospectus.
The foregoing percentages will apply at the time of the purchase of a
security and shall not be considered violated unless an excess occurs
or exists immediately after and as a result of a purchase of such
security.
TEMPORARY DEFENSIVE POSITION
During periods of unusual economic or market conditions or for
temporary defensive purposes or liquidity, each Fund may invest without limit in
cash and in U.S. dollar-denominated high quality money market and short-term
instruments. These investments may result in a lower yield than would be
available from investments with a lower quality or longer term. A temporary
defensive position may also prevent a Fund from obtaining its investment
objective.
PORTFOLIO TURNOVER
The frequency of each Fund's portfolio transactions -- the portfolio
turnover rate -- will vary from year to year depending on market conditions.
Each Fund will engage in portfolio trading if the Adviser believes a
transaction, net of costs (including custodial charges), will help it achieve
its investment objective. Before the Stock Fund invests in both equity and debt
securities, this policy will apply with respect to both the equity and debt
portions of the PORTFOLIO.
-25-
<PAGE>
Below are some basic principles with respect to portfolio turnover
rate:
* A 100% turnover rate indicates that the equivalent of all of the
Fund's assets have been sold and reinvested in a year;
* The amount of brokerage commissions will tend to increase as the level
of portfolio activity increases; and
* High portfolio turnover may result in the realization of substantial
net capital gains or losses.
Because the Funds are new, portfolio turnover rate for each Fund is not
available as of the date of this Statement of Additional Information.
MANAGEMENT
TRUSTEES
The management and affairs of the Trust are supervised by the Trustees
under the laws of the Commonwealth of Delaware governing business trusts.
Subject to the provisions of the Declaration of Trust, the Trustees of the Trust
are responsible for the overall management of the Funds, including establishing
the Funds' policies, general supervision and review of their investment
activities. The officers, who administer the Funds' daily operations, are
appointed by the Board of Trustees.
-26-
<PAGE>
MANAGEMENT INFORMATION
The Trustees and executive officers of the Trust and their principal
occupations are set forth below. An asterisk indicates a Trustee who may be
deemed to be an "interested person" (as defined in the Investment Company Act)
of the Trust.
<TABLE>
<CAPTION>
Principal Occupation
Name, Address, and Age Position(s) Held With the Trust During Past 5 Years
- ---------------------- ------------------------------- -------------------
<S> <C> <C>
*RICHARD A. SNYDERS (born 1945) Chairman of the Board of Trustees, President, Van Deventer & Hoch
800 North Brand Boulevard, Suite 300 President, Chief Executive Officer, (investment adviser). Mr. Snyders
Glendale, California 91203 and Principal Executive Officer joined the firm in 1984.
*JEFFREY D. LOVELL (born 1953) Trustee Managing Director, Putnam, Lovell, de
c/o Putnam, Lovell, de Guardiola & Guardiola & Thornton, Inc. (investment
Thornton, Inc. banking and advisory services)
11150 Santa Monica Blvd., Suite 1650
Los Angeles, California 90025
MENO T. LAKE (born 1919) Trustee Retired in 1984 as Chairman and CEO
41685 Calle Pino of Occidental Insurance Co. and other
Murrieta, California 92562 Transamerica life insurance companies
DONALD E. O'CONNOR (born 1938) Trustee Retired in 1997 as Executive Vice
1700 Taylor Avenue President and Chief Operating Officer
Ft. Washington, Maryland 20744 of ICI Mutual Insurance Company
*CHARLES L. BOCK (born 1958) Secretary, Treasurer, Principal Chief Financial Officer and Compliance
800 North Brand Boulevard, Suite 300 Financial Officer and Principal Officer, Van Deventer & Hoch
Glendale, California 91203 Accounting Officer (investment adviser). Mr. Bock joined
the firm in 1988.
</TABLE>
COMPENSATION
The following table sets forth certain information regarding the
expected compensation of the Trust's Trustees for the fiscal year ending
December 31, 1999. The Trust pays the fees for unaffiliated Trustees.
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual From the Trust and
Compensation Accrued as Part of Benefits Upon the Funds Paid to
Name of Trustee From the Trust Fund Expenses Retirement Trustees
--------------- -------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
RICHARD A. SNYDERS None None None None
JEFFREY D. LOVELL None None None None
MENO T. LAKE $____ None None $____
DONALD E. O'CONNOR $____ None None $____
</TABLE>
-27-
<PAGE>
The Officers of the Trust receive no compensation from the Trust for
serving in such capacity. Compensation of officers of the Trust who are employed
by the Administrator is paid by the Administrator.
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers as described below under "Trustee and Shareholder
Liability -- Limitation of Trustees' Liability."
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
PRINCIPAL HOLDERS
The Adviser and its affiliates own substantially all of the Funds'
outstanding shares as a result of their initial investment in the Funds. For a
period several months following commencement of operations of each Fund, a
control person of or affiliate of the Fund (such as the Adviser) is expected to
own 25 percent or more of its outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
The Trust has entered into an Investment Advisory Agreement ("Advisory
Agreement") with Van Deventer & Hoch with respect to each Fund. The Advisory
Agreement with Van Deventer & Hoch for the Funds is dated as of May __, 1999.
Van Deventer & Hoch is referred to in this Statement of Additional Information
as the "Adviser."
Van Deventer & Hoch is entitled to receive investment advisory fees,
which are accrued daily and payable monthly, of 0.30% of each of the Bond and
Tax-Free Fund's average daily net assets and 0.70% of the Stock Fund's average
daily net assets. Because the Funds are new, no investment advisory fees have
been incurred as of the date of this Statement of Additional Information.
The continuance of the Advisory Agreement, after the first two years,
must be specifically approved at least annually (i) by the vote of the Trustees,
and (ii) by the vote of a majority of the Trustees who are neither parties to
the Advisory Agreement nor "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement will terminate automatically if it is assigned, and is
terminable at any time without penalty by the Trustees of the Trust or with
respect to any Fund, by a majority of the outstanding shares of that Fund, on
not less than 30 nor more than 60 days' written notice to the Adviser, or by the
Adviser on 90 days' written notice to the Trust.
The Advisory Agreement provides that neither the Adviser nor its
personnel shall be liable (1) for any error of judgment or mistake of law; (2)
for any loss arising out of any investment; or (3) for any act or omission in
the execution of security transactions for the Trust or any Fund, except that
the Adviser and its personnel shall not be protected against any liability to
-28-
<PAGE>
the Trust, any Fund or its shareholders by reason of willful misfeasance, bad
faith or gross negligence on its or their part in the performance of its or
their duties or from reckless disregard of its or their obligations or duties
thereunder.
SERVICE MARKS
The name ALLEGIANCE INVESTMENT TRUST [SERVICE MARK] is the property of
the Adviser and is used by permission of the Adviser. If the Advisory Agreement
with Van Deventer & Hoch is terminated, the Trust has agreed to discontinue use
of the servicemark and logo.
DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor") and the Trust are
parties to a distribution agreement ("Distribution Agreement"), dated as of May
__, 1999. The Distributor has its principal business offices at 4455 East
Camelback Road, Suite 261E, Phoenix, Arizona 85018.
The Trust has adopted a distribution plan dated as of May __, 1999 (the
"Plan") with respect to the Stock Fund, the Bond Fund and the Tax-Free Fund. The
Plan has been adopted pursuant to Rule 12b-1 under the Investment Company Act.
The Distribution Agreement and the Plan provide that the Trust will pay
the Adviser, as the Distribution Coordinator, a fee calculated daily and paid
monthly at an annual rate of 0.25% of the average daily net assets of each of
the Stock Fund, the Bond Fund and the Tax-Free Fund. The Adviser can use these
fees to compensate broker/dealers and service providers (including each Adviser
and its affiliates) which provide administrative and/or distribution services to
holders of these shares or their customers who beneficially own these shares.
Because the Funds are new, no fees have been paid to the Adviser as provided by
the Plan.
The Distribution Agreement is renewable annually and may be terminated
by the Distributor, by the Trustees of the Trust who are not interested persons
and have no financial interest in the Plans or any related agreement ("Qualified
Trustees"), or with respect to any particular Fund or class of shares, by a
majority vote of the outstanding shares of that Fund or such class of shares, as
applicable, for which the Distribution Agreement is in effect upon not more than
60 days' written notice by either party.
The Trust has adopted the Plan in accordance with the provisions of
Rule 12b-1 under the Investment Company Act, which regulates circumstances under
which an investment company may, directly or indirectly, bear expenses relating
to the distribution of its shares. Continuance of the Plan must be approved
annually by a majority of the Trustees of the Trust and by a majority of the
Qualified Trustees. The Plan requires that quarterly written reports of money
spent under such Plan and of the purposes of such expenditures be furnished to
and reviewed by the Trustees. Expenditures may include (1) the cost of
prospectuses, reports to shareholders, sales literature and other materials for
potential investors; (2) advertising; (3) expenses incurred in connection with
the promotion and sale of the Trust's shares, including the Adviser's expenses
for travel, communication, and compensation and benefits for sales personnel;
-29-
<PAGE>
and (4) any other expenses reasonably incurred in connection with the
distribution and marketing of the shares subject to approval of a majority of
the Qualified Trustees. The Plan may not be amended to materially increase the
amount that may be spent under the Plan without approval by a majority of the
outstanding shares of the Funds or the class of shares which are subject to such
Plan. All material amendments of the Plan require approval by a majority of the
Trustees of the Trust and of the Qualified Trustees.
From time to time, the Adviser may provide incentive compensation to
its own employees and employees of banks, broker-dealers and investment
counselors in connection with the sale of shares of the funds. Promotional
incentives such as cash or other compensation, including merchandise, airline
vouchers, trips and vacation packages will be offered uniformly to all program
participants and may be predicated upon the amount of shares of the Funds sold
by the participant, subject to applicable legal requirements.
ADMINISTRATIVE SERVICES
The Trust, on behalf of the Funds, has entered into an Administrative
Services Agreement with the Adviser, dated May __, 1999 (the "Administrative
Services Agreement"). Each Fund pays the Adviser an Administrative Services Fee,
accrued daily and paid monthly at the following annual rates: the Stock Fund
(0.35%); the Bond Fund (0.10); and the Tax-Free Fund (0.10). The fee payable to
the Adviser by each Fund under the Administrative Services Agreement is the only
fee or expense payable by the fund for the following ordinary services: all
administrative services, primarily by retaining the Subadministrator, as
described below, custody and transfer agency services by retaining the Custodian
and Transfer Agent named below, and all other ordinary services and operating
expenses (other than brokerage commissions, dealer mark-ups, taxes, interest and
extraordinary items).
The Administrative Services Fee paid to the Adviser effectively limits
each Fund's operating expenses. The Adviser may potentially earn greater profits
under the Administrative Services Agreement if assets of the Funds grow
sufficiently large to reduce actual operating expenses to less than the
Adviser's Administrative Services Fee. The Board of Trustees will consider the
level of profitability of the Administrative Services Fee in its decision to
renew the Advisory Agreement.
THE ADMINISTRATOR
The Adviser and Investment Company Administration, L.L.C. (the
"Subadministrator") are parties to a subadministration agreement (the
"Subadministration Agreement") with respect to the Funds. The Subadministration
Agreement provides that the Subadministrator shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the matters to which the Subadministration Agreement relates,
except a loss that results from willful misfeasance, bad faith or gross
negligence on the part of the Subadministrator in the performance of its duties
or from reckless disregard by it of its duties and obligations under the
Subadministration Agreement. The Subadministration Agreement renews each year
unless terminated according to its terms. The Adviser pays the
Subadministrator's fee out of the Administrative Services Fee.
-30-
<PAGE>
Under the Subadministration Agreement, the Subadministrator provides
administrative and fund accounting services to the Funds, including, among other
responsibilities, coordinating the negotiation of contracts and fees with, and
the monitoring of performance and billing of, the Funds' independent contractors
and agents; preparation for signature by an officer of the Trust of all
documents required to be filed for compliance by the Trust and the Funds with
applicable laws and regulations excluding those of the securities laws of
various states; arranging for the computation or performance of data, including
net asset value and yield; responding to shareholder inquiries; and arranging
for the maintenance of books and records of the Funds, and providing, at its own
expense, office facilities, equipment and personnel necessary to carry out its
business. In this capacity, the Subadministrator does not have any
responsibility or authority for the management of the Funds, the determination
of investment policy, or for any matter pertaining to the distribution of Fund
shares.
Because the Funds are new, no fees have been paid to the
Subadministrator.
DIVIDEND DISBURSING AGENT AND TRANSFER AGENT
National Financial Data Services, 330 West 9th Street, Kansas City, MO
64105 is the Funds' dividend disbursing and payment agent, and the transfer
agent. The Adviser pays the dividend disbursing and transfer agent out of the
Administrative Services Fee.
CUSTODIAN
Pursuant to a Custodian Agreement, United Missouri Bank, N.A., 928
Grand Boulevard, Kansas City, MO 64106, acts as custodian of the Funds' assets
(the "Custodian"). The Custodian's responsibilities include holding and
administering the Funds' cash and securities, handling the receipt and delivery
of securities, furnishing a statement of all transactions and entries for the
account of each Fund, and furnishing the Funds with such other reports covering
securities held by it or under its control as may be agreed upon from time to
time. The Custodian and its agents (including foreign sub-custodians) may make
arrangements with the Depository Trust Company and other foreign or domestic
depositories or clearing agencies, including the Federal Reserve Bank and any
foreign depository or clearing agency, whereby certain securities may be
deposited for the purpose of allowing transactions to be made by bookkeeping
entry without physical delivery of such securities, subject to such restrictions
as may be agreed upon by the Custodian and the Funds. Fund securities may be
held by a sub-custodian bank approved by the Trustees. The Custodian does not
determine the investment policies of the Funds or decide which securities the
Funds will buy or sell. The Adviser pays the Custodian's fees out of the
Administrative Services Fee.
-31-
<PAGE>
COUNSEL AND INDEPENDENT ACCOUNTANTS
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San
Francisco, California 94104, is counsel for the Funds. McGladrey & Pullen LLP,
555 Fifth Avenue, 8th Floor, New York, New York 10017-2416, serves as
independent auditor for each Fund providing audit and accounting services
including: (i) examination of the annual financial statements, (ii) assistance
and consultation with respect to the preparation of filings with the Securities
and Exchange Commission, and (iii) preparation of annual income tax returns.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE TRANSACTIONS
Specific decisions to purchase or sell securities for a Fund are made
by a portfolio manager who is an employee of the Adviser, and who is appointed
and supervised by the senior officers of the Adviser. A portfolio manager may
serve other clients of the Adviser or of an affiliate of the Adviser in a
similar capacity.
Subject to policies established by the Trustees, the Adviser to a Fund
is responsible for placing the orders to execute transactions for such Fund. In
placing orders, it is the policy of the Trust for the Adviser to seek to obtain
the best net results taking into account such factors as price (including the
applicable dealer spread), the size, type and difficulty of the transaction
involved, the firm's general execution and operational facilities, and the
firm's risk in positioning the securities involved. While the Adviser seeks
reasonably competitive spreads or commissions, the Trust will not necessarily be
paying the lowest spread or commission available.
Bonds and debentures are usually traded over-the-counter, but may be
traded on an exchange. Where possible, the Adviser will deal directly with the
dealers who make a market in the securities involved except in those
circumstances where the Adviser believes better prices and execution are
available elsewhere. Such dealers usually are acting as principal for their own
account. On occasion, securities may be purchased directly from the issuer. The
cost of executing transactions for the Funds will primarily consist of dealer
spreads and brokerage and underwriting commissions.
BROKERAGE SELECTION
The Adviser selects brokers or dealers to execute transactions for the
purchase or sale of securities for the Funds on the basis of the Adviser's
judgment of their professional capability to provide the service. The primary
consideration is to have brokers or dealers execute transactions at the best
price and execution. Best price and execution refers to many factors, including
the price paid or received for a security, the commission charged, the
promptness and reliability of execution, the confidentiality and placement
accorded the order and other factors affecting the overall benefit obtained by
the account on the transaction. The Adviser's determination of what are
reasonably competitive rates is based upon the professional knowledge of the
Adviser's portfolio managers as to rates paid and charged for similar
transactions throughout the securities industry. In some instances, a Fund pays
-32-
<PAGE>
a minimal share transaction cost when the transaction presents no difficulty.
Some trades are made on a net basis where a Fund either buys securities directly
from the dealer or sells them to the dealer. In these instances, there is no
direct commission charged but there is a spread (the difference between the buy
and sell price) which is the equivalent of a commission.
The Adviser may allocate, out of all commission business generated by
the funds and accounts under its management, brokerage business to brokers or
dealers who provide brokerage and research services. These research services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends; assisting in
determining portfolio strategy; providing computer software used in securities
analyses; and providing fund performance evaluation and technical market
analyses. Such services are used by the Adviser in connection with its
investment decision-making process with respect to one or more portfolios under
its management and may not be used exclusively with respect to the fund or
account generating the brokerage. Not all brokerage and research services are
useful or of value in advising any particular Fund.
As provided in the Securities Exchange Act of 1934 (the "1934 Act"),
higher commissions may be paid to broker/dealers who provide brokerage and
research services than to broker/dealers who do not provide such services if
such higher commissions are deemed reasonable in relation to the value of the
brokerage and research services provided. Although transactions are directed to
broker/dealers who provide such brokerage and research services, the commissions
paid to such broker/dealers are not, in general, expected to be higher than
commissions that would be paid to broker/dealers not providing such services.
Further, in general, any such commissions are reasonable in relation to the
value of the brokerage and research services provided. Unless otherwise directed
by the Trust, a commission higher than one charged elsewhere will not be paid to
a broker/dealer solely because it provided research services to the Adviser.
Investment decisions for the Funds are made independently from those of
other client accounts of the Adviser or its affiliates, and suitability is
always a paramount consideration. Nevertheless, it is possible that at times the
same securities will be acceptable for one or more Funds and for one or more of
such client accounts. The Adviser and its personnel may have interests in one or
more of those client accounts, either through direct investment or because of
management fees based on gains in the account. The Adviser has adopted
allocation procedures to ensure the fair allocation of securities and prices
between the Funds and the Adviser's various other accounts. These procedures
emphasize the desirability of bunching trades and price averaging (see below) to
achieve objective fairness among clients advised by the same portfolio manager
or portfolio team. Where trades cannot be bunched, the procedures specify
alternatives designed to ensure that buy and sell opportunities are allocated
fairly and that, over time, all clients are treated equitably. The Adviser's
trade allocation procedures also seek to ensure reasonable efficiency in client
transactions, and they provide portfolio managers with reasonable flexibility to
-33-
<PAGE>
use allocation methodologies that are appropriate to their investment discipline
on client accounts.
To the extent any of the Adviser's client accounts and a Fund seek to
acquire the same security at the same general time (especially if that security
is thinly traded or is a small-cap stock), that Fund may not be able to acquire
as large a portion of such security as it desires, or it may have to pay a
higher price or obtain a lower yield for such security. Similarly, a Fund may
not be able to obtain as high a price for, or as large an execution of, an order
to sell any particular security at the same time. If one or more of such client
accounts simultaneously purchases or sells the same security that a Fund is
purchasing or selling, each day's transactions in such security generally will
be allocated between that Fund and all such client accounts in a manner deemed
equitable by the Adviser, taking into account the respective sizes of the
accounts, the amount being purchased or sold and other factors deemed relevant
by the Adviser. In many cases, a Fund's transactions are bunched with the
transactions for other client accounts. It is recognized that in some cases this
system could have a detrimental effect on the price or value of the security
insofar as that Fund is concerned. In other cases, however, it is believed that
the ability of the Fund to participate in volume transactions may produce better
executions for that Fund.
Consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, the
Adviser may place orders for a Fund with broker/dealers who have agreed to
defray certain Trust expenses such as custodian fees, and may, at the request of
the Distributor, give consideration to sales of shares of the Trust as a factor
in the selection of brokers and dealers to execute Fund transactions.
DESCRIPTION OF SHARES; VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trust to offer separate
portfolios, or funds, of shares of beneficial interest. The Declaration of Trust
authorizes the issuance of an unlimited number of shares of each series and
authorizes the division of shares of each series into classes. Each share of
each series represents an equal proportionate interest in that series, with each
other share of that class. Shareholders of each series are entitled, upon
liquidation or dissolution, to a pro rata share in the net assets of that series
that are available for distribution to shareholders, except to the extent of
different expenses borne by different classes as noted above. Shareholders have
no preemptive right or other right to receive, purchase or subscribe for any
additional shares or other securities issued by the Trust. Currently, the Trust
has three active series of shares, each of which is a Fund, par value $0.01 per
share. All consideration received by the Trust for shares of any series and all
assets in which such consideration is invested belong to that series and are
subject to the liabilities related thereto. Share certificates will not be
issued.
Shares of each series of the Trust are entitled to vote separately to
approve advisory agreements or changes in investment policies, but shares of all
series of the Trust vote together in the election or selection of Trustees and
accountants.
-34-
<PAGE>
The Declaration of Trust may be amended as authorized by vote of
shareholders of the Trust. Matters not affecting all series or classes of shares
shall be voted on only by the shares of the series or classes affected. Shares
of the Trust may be voted in person or by proxy, and any action taken by
shareholders may be taken without a meeting by written consent of a majority of
shareholders entitled to vote on the matter.
The Trust is an entity of the type commonly known as a "Delaware
business trust." The Declaration of Trust expressly states that neither the
Trust nor its officers or Trustees have the power to bind any shareholder
personally.
The Declaration of Trust provides that the Trustees shall not be
responsible or liable in any event for any neglect or wrongdoing of any officer,
agent, employee, investment adviser or administrator, principal underwriter or
custodian, nor shall any Trustee be responsible for the act or omission of any
other Trustee, and no Trustee shall be liable to the Trust or any Shareholder.
The Declaration of Trust also provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with actual or threatened litigation in which they may be involved because of
their offices with the Trust unless it is determined, in the manner provided in
the Declaration of Trust, that they have not acted in good faith in the
reasonable belief that their actions were in the best interests of the Trust.
However, nothing in the Declaration of Trust shall protect or indemnify a
Trustee against any liability for his or her willful misfeasance, bad faith,
gross negligence or reckless disregard of his or her duties.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE
The net asset value per share of a Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which include accrued but undistributed income; the resulting net assets are
divided by the number of shares of that Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
The net asset value of the shares of each Fund is determined on each
day on which the New York Stock Exchange ("NYSE") is open. This determination is
made once during each such day, as of 4:00 P.M.(Eastern Time) or earlier when
trading closes earlier with respect to each Fund. It is expected that the NYSE
will be closed on Saturdays and Sundays and for New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas. The Tax-Free and Bond Funds will not
determine their net asset values on bank holidays. The national bank holidays,
in addition to the days listed above, include January 2, Columbus Day, Veteran's
Day and December 26. The Funds may, but do not expect to, determine the net
asset values of their shares on any day when the NYSE is not open for trading if
there is sufficient trading in their portfolio securities on such days to affect
materially the per-share net asset value.
-35-
<PAGE>
Generally, trading in and valuation of foreign securities is
substantially completed each day at various times prior to the close of the
NYSE. In addition, trading in and valuation of foreign securities may not take
place on every day in which the NYSE is open for trading. Furthermore, trading
takes place in various foreign markets on days in which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated.
Occasionally, events affecting the values of such securities in U.S. dollars on
a day on which a Fund calculates its net asset value may occur between the times
when such securities are valued and the close of the NYSE that will not be
reflected in the computation of that Fund's net asset value unless the Board or
its delegates deem that such events would materially affect the net asset value,
in which case an adjustment would be made.
Generally, the Funds' investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Adviser pursuant to procedures approved by or under the direction of the Board.
The Funds' securities, including ADRs, EDRs and CDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Adviser to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to a Fund if
acquired within 60 days of maturity or, if already held by a Fund on the 60th
day, based on the value determined on the 61st day.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Funds are valued on the basis of valuations provided by
dealers in those instruments, by an independent pricing service, approved by the
appropriate Board, or at fair value as determined in good faith by procedures
approved by the Board. Any such pricing service, in determining value, will use
information with respect to transactions in the securities being valued,
quotations from dealers, market transactions in comparable securities, analyses
and evaluations of various relationships between securities and
yield-to-maturity information.
An option that is written by a Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by a Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. The value of a
futures contract equals the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract if the securities
-36-
<PAGE>
underlying the futures contract experience significant price fluctuations after
the determination of the settlement price. When a settlement price cannot be
used, futures contracts will be valued at their fair market value as determined
by or under the direction of the Board.
If any securities held by a Fund are restricted as to resale or do not
have readily available market quotations, the Adviser determines their fair
value, following procedures approved by the Board. The Trustee periodically
reviews such valuations and valuation procedures. The fair value of such
securities is generally determined as the amount which a Fund could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by a Fund in connection with such disposition). In addition, specific
factors are also generally considered, such as the cost of the investment, the
market value of any unrestricted securities of the same class (both at the time
of purchase and at the time of valuation), the size of the holding, the prices
of any recent transactions or offers with respect to such securities and any
available analysts' reports regarding the issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
All other assets of the Funds are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are sold on a continuous basis and may be purchased
from the Distributor or a broker-dealer or financial institution that has an
agreement with the Distributor. Purchases may be made Monday through Friday,
except on certain holidays. Shares are purchased at net asset value the next
time it is calculated after your investment is received and accepted by the
Distributor.
On any business day, shareholders may redeem all or a portion of their
shares. If the shares being redeemed were purchased by check, telephone or
through an automatic investment program, the Funds may delay the mailing of the
redemption check for up to 10 business days after purchase to allow the purchase
to clear. The redemption will be processed at net asset value the next time it
is calculated after the redemption request in good order is received. A
-37-
<PAGE>
redemption is treated as a sale for tax purposes, and could result in taxable
gain or loss in a non-tax-sheltered account.
The Trust reserves the right to suspend the right of redemption and/or
to postpone the date of payment upon redemption for any period on which trading
on the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the Securities and Exchange Commission by rule or
regulation upon application by a Fund pursuant to Section 22(e) of the
Investment Company Act) as a result of which disposal or valuation of a Fund's
securities is not reasonably practicable, or for such other periods as the
Securities and Exchange Commission has permitted by order. The Trust also
reserves the right to suspend sales of shares of any Fund for any period during
which the New York Stock Exchange, the Adviser, the Administrator or the
Custodian is not open for business.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may direct the shareholder servicing agent to send him or
her regular monthly, quarterly, or semi-annual payments, as designated on the
Account Application and based upon the value of his or her account. Each payment
under a Systematic Withdrawal Plan ("SWP") must be at least $50, except in
certain limited circumstances. Such payments are drawn from the proceeds of the
redemption of shares held in the shareholder's account (which would be a return
of principal and, if reflecting a gain, would be taxable). To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce, and may eventually exhaust, the
number of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be reinvested in additional full
and fractional shares of the applicable Fund at the net asset value in effect at
the close of business on the record date for such distributions.
To initiate a SWP, shares having an aggregate value of at least $5,000
must be held on deposit by the shareholder servicing agent. The shareholder, by
written instruction to the shareholder servicing agent, may deposit into the
account additional shares of the applicable Fund, change the payee, or change
the dollar amount of each payment. The shareholder servicing agent may charge
the account for services rendered and expenses incurred beyond those normally
assumed by the applicable Fund with respect to the liquidation of shares.
No charge is currently assessed against the account, but one could be
instituted by the shareholder servicing agent on 60 days' notice in writing to
the shareholder in the event that the applicable Fund ceases to assume the cost
of these services. Any Fund may terminate any SWP for an account if the value of
the account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP) or an exchange of shares of the Fund for shares of another
Fund. Any such plan may be terminated at any time by either the shareholder or
the applicable Fund.
-38-
<PAGE>
REDEMPTION IN KIND
It is currently the Trust's policy to pay for the redemptions of shares
of the Funds in cash. The Trust retains the right, however, subject to the Rule
18f-1 notice described below, to alter this policy to provide for redemptions in
whole or in part by a distribution in kind of securities held by the Funds, in
lieu of cash. Shareholders may incur brokerage charges and tax liabilities on
the sale of any such securities so received in payment of redemptions.
The Trust filed a Notification of Election pursuant to Rule 18f-1 under
the Investment Company Act with the Securities and Exchange Commission which
commits the Funds to pay in cash all requests for redemptions by any shareholder
of record, limited in amount with respect to each shareholder during any 90-day
period to the lesser of: (i) $250,000, or (ii) one percent of the net asset
value of the Fund at the beginning of such period.
TAXES
TAX STATUS OF THE FUNDS
Each Fund is organized as a series of a Delaware business trust and is
treated as a separate entity for federal income tax purposes under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"). Each Fund has
elected to be treated, and intends to qualify each year, as a "regulated
investment company" under Subchapter M by meeting all applicable requirements of
Subchapter M.
In order to qualify as a regulated investment company under Subchapter
M, each Fund must, among other things, (a) derive at least 90% of its gross
income each year from dividends, interest, payments with respect to loans of
stock and securities, gains from the sale or other disposition of stock or
securities or foreign currency gains related to investments in stocks or other
securities, or other income (generally including gains from options, futures or
forward contracts) derived with respect to the business of investing in stock,
securities or currency; and (b) diversify its holdings so that, at the end of
each fiscal quarter, (i) at least 50% of the market value of its assets is
represented by cash, cash items, U.S. Government securities, securities of other
regulated investment companies and other securities limited, for purposes of
this calculation, in the case of other securities of any one issuer to an amount
not greater than 5% of that Fund's assets or 10% of the voting securities of the
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies). As such, and by complying
with the applicable provisions of the Code, a Fund will not be subject to
federal income tax on taxable income (including realized capital gains) that is
distributed to shareholders in accordance with the timing requirements of the
Code. If a Fund is unable to meet certain requirements of the Code, it may be
subject to taxation as a corporation.
Because each Fund intends to distribute all of its net investment
income and net realized capital gains to shareholders in accordance with the
timing requirements imposed by the Code, it is not expected that the Funds will
be required to pay any federal income or excise taxes, although a Fund's
-39-
<PAGE>
foreign-source income may be subject to foreign taxes. If a Fund should fail to
qualify as a "regulated investment company" in any year, the Fund would incur a
regular corporate federal income tax upon its taxable income and the Fund's
distributions would generally be taxable as ordinary dividend income to its
shareholders.
No Fund will be subject to any Delaware income or excise taxes as long
as it qualifies as a separate regulated investment company under the Code.
TAXATION OF FUND DISTRIBUTIONS
DISTRIBUTIONS -- GENERAl. The Funds intend to declare and pay dividends
and other distributions, as stated in the Prospectus. In order to avoid the
payment of any federal excise tax based on net income, each Fund must declare on
or before December 31 of each year, and pay on or before January 31 of the
following year, distributions at least equal to 98% of its ordinary income for
that calendar year and at least 98% of the excess of any capital gains over any
capital losses realized in the one-year period ending October 31 of that year,
together with any undistributed amounts of ordinary income and capital gains (in
excess of capital losses) from the previous calendar year.
Any Fund dividend that is declared in October, November, or December of
a calendar year, that is payable to shareholders of record in such a month, and
that is paid the following January will be treated as if received by the
shareholders on December 31 of the year in which the dividend is declared. Each
Fund will notify shareholders regarding the federal tax status of distributions
after the end of each calendar year. Dividends and other distributions will be
reinvested in additional shares of the applicable Fund unless the shareholder
has otherwise indicated. Investors have the right to change their elections with
respect to the reinvestment of dividends and distributions by notifying the
Transfer Agent in writing, but any such change will be effective only as to
dividends and other distributions for which the record date is seven or more
business days after the Transfer Agent has received the written request.
The Funds receive income in the form of dividends and interest earned
on their investments in securities. This income, less the expenses incurred in
their operations, is the Funds' net investment income, substantially all of
which will be declared as dividends to the Funds' shareholders. Shareholders of
Funds other than the Tax-Free Fund will have to pay federal income taxes and may
be subject to state or local income taxes on the dividends and capital gain
distributions they receive from those Funds. Dividends from ordinary income and
any distributions from net short-term capital gains are taxable to shareholders
as ordinary income for federal income tax purposes, whether paid in cash or in
additional shares. Distributions of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), whether paid in
cash or in additional shares, are taxable to shareholders as long-term capital
gains for federal income tax purposes without regard to the length of time the
shareholders have held their shares. Such capital gains will generally be
taxable to shareholders as if the shareholders had directly realized gains from
the same sources from which they were realized by the Funds.
-40-
<PAGE>
Because the Bond Fund and the Tax-Free Fund do not expect to earn any
dividend income, it is expected that none of their distributions will qualify
for the dividends received deduction for corporations. A portion of the Stock
Funds' ordinary income dividends (but none of their capital gain distributions)
is normally eligible for the dividends received deduction for corporations if
the recipient otherwise qualifies for that deduction with respect to its holding
of Fund shares. Availability of the deduction for particular corporate
shareholders is subject to certain limitations, and deducted amounts may be
subject to the alternative minimum tax or result in certain basis adjustments.
Distributions of net capital gains and net short-term capital gains
from the Bond Fund or Tax-Free Fund, and any distributions from the Stock Fund,
will reduce the distributing Fund's net asset value per share. Shareholders who
buy shares just before the record date for any such distribution may pay the
full price for the shares and then effectively receive a portion of the purchase
price back as a taxable distribution.
Distributions of a Fund that are derived from interest on obligations
of the U.S. Government and certain of its agencies and instrumentalities (but
generally not from capital gains realized upon the disposition of such
obligations) may be exempt from state and local taxes. Each Fund intends to
advise shareholders of the extent, if any, to which their respective
distributions consist of such interest. Shareholders are urged to consult their
tax advisers regarding the possible exclusion of such portion of their dividends
for state and local income tax purposes.
DISTRIBUTIONS BY THE TAX-FREE FUND. The portion of the Tax-Free Fund's
distributions of net investment income that is attributable to interest from
tax-exempt securities will be designated by that Fund as an "exempt-interest
dividend" under the Code and will generally be exempt from federal income tax in
the hands of shareholders so long as at least 50% of the total value of the
Fund's assets consists of tax-exempt securities at the close of each quarter of
the Fund's taxable year. However, distributions of tax-exempt interest earned
from certain securities may be treated as an item of tax preference for
shareholders under the federal alternative minimum tax, and all exempt-interest
dividends may increase a corporate shareholder's alternative minimum tax. The
percentage of income designated as tax-exempt will be applied uniformly to all
distributions by the Tax-Free Fund of net investment income made during each
fiscal year of the Fund and may differ from the percentage of distributions
consisting of tax-exempt interest in any particular month. Shareholders are
required to report exempt-interest dividends received from the Tax-Exempt-Income
Fund on their federal income tax returns.
Shareholders of the Tax-Free Fund will have to pay federal income taxes
and may be subject to state or local income taxes on the non exempt-interest
dividends (including dividends from earnings from taxable securities and
repurchase transactions) and capital gain distributions they receive from the
Fund under rules corresponding to those set forth in the preceding section. The
exemption of exempt-interest dividends for federal income tax purposes does not
necessarily result in exemption under the tax laws of any state or local taxing
authority.
-41-
<PAGE>
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Tax-Free Fund is not deductible for federal
income tax purposes. Under regulations used by the IRS for determining when
borrowed funds are considered used for the purposes of purchasing or carrying
particular assets, the purchase of shares may be considered to have been made
with borrowed funds even though the borrowed funds are not directly traceable to
the purchase of shares of the Fund. California personal income tax law restricts
the deductibility of interest on indebtedness incurred by a shareholder to
purchase or carry shares of a fund paying dividends exempt from California
personal income tax, as well as the allowance of losses realized upon a sale or
redemption of shares, in substantially the same manner as federal tax law.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. It can be expected that similar proposals may
be introduced in the future. Proposals by members of state legislatures may also
be introduced which could affect the state tax treatment of the Tax-Free Fund's
distributions. If such proposals were enacted, the availability of municipal
securities for investment by the Fund and the value of its portfolios would be
affected. In such event, the Fund would reevaluate its investment objectives and
policies.
CALIFORINA TAXATION. The State of California has adopted legislation
incorporating the federal provisions relating to regulated investment companies
effective as of January 1, 1998. Thus, to the extent the Tax-Free Fund
distributes its income annually, the Tax-Free Fund will be exempt from the
California franchise and corporate income tax as a regulated investment company
under Section 24871 of the California Revenue and Taxation Code.
As a regulated investment company, the Tax-Free Fund may distribute
dividends ("California exempt-interest dividends") that are exempt from the
California personal income tax to its individual shareholders, provided 50% or
more of the value of the total assets of the Tax-Free Funds at the close of each
quarter of its taxable year consists of obligations the interest on which (when
held by an individual) is exempt from personal income taxation under California
law. The Tax-Free Fund intends to satisfy this requirement so that it can
distribute California exempt-interests dividends. If the Tax-Free Fund fails to
so qualify, no part of its dividends will be exempt from the California personal
income tax.
The portion of dividends constituting California exempt-interest
dividends is that portion derived from interest on obligations of California and
its municipalities and localities that pay interest excludable from income under
California law. Distributions from the Tax-Free Fund that are attributable to
sources other than those described in the preceding sentence generally will be
taxable to such shareholders as ordinary income. In addition, distributions
other than exempt-interest dividends to such shareholders are includable in
income that may be subject to the California franchise or corporate income tax
will be taxed as ordinary dividends to such shareholders. The total amount of
California exempt-interest dividends paid by the Tax-Free Fund to all of its
individual shareholders with respect to any taxable year cannot exceed the
amount of interest received by the Fund during such year on California municipal
obligations less any expenses and expenditures (including any dividends paid to
corporate shareholders) deemed to have been paid from such interest.
-42-
<PAGE>
Because, unlike federal law, California law does not impose personal
income tax on an individual's Social Security benefits, the receipt of
California exempt-interest dividends will have no effect on an individual's
California personal income tax.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of the Tax-Free Fund will not generally be deductible for California
income tax purposes. If the shareholders of the Tax-Free Fund receive any
California exempt-interest dividends and sell their shares within six months of
their acquisition, then any loss, to the extent of the amount of exempt-interest
dividends received on the sale, will be disallowed. Any loss realized upon the
redemption of shares within thirty days before or after the acquisition of other
shares of the same series may be disallowed under the "wash sale" rules.
With respect to individual shareholders, California does not treat
tax-exempt interest as a tax preference item for purposes of its alternative
minimum tax. Distributions other than exempt-interest dividends are includable
in income subject to the California alternative minimum tax.
The foregoing is only a summary of some of the important California
personal income tax considerations generally affecting the Tax-Free Fund and its
shareholders. No attempt is made to present a detailed explanation of the
California personal income tax treatment of the Fund or its shareholders, and
this discussion is not intended as a substitute for careful planning.
Accordingly, potential investors in the Tax-Free Fund should consult their tax
advisers with respect to the application of California taxes to the receipt of
the Tax-Free Fund's dividends and to their own California tax situation.
DISPOSITION OF SHARES. In general, any gain or loss realized upon a
taxable disposition of shares of a Fund by a shareholder that holds such shares
as a capital asset will be treated as long-term capital gain or loss if the
shares have been held for more than twelve months and otherwise as short-term
capital gain or loss. In the case of the Tax-Free Fund, any loss realized upon a
disposition of shares held for six months or less will be disallowed to the
extent of any exempt-interest dividends received with respect to those shares.
In the case of all the Funds, any loss realized upon the disposition of shares
in a Fund held for six months or less will (if not disallowed as described in
the preceding sentence) be treated as a long-term capital loss to the extent of
any distributions of net capital gain made with respect to those shares. Any
loss realized upon a disposition of shares may also be disallowed under rules
relating to wash sales.
ADDITIONAL INFORMATION FOR SHAREHOLDERS OF THE TAX-FREE FUND
Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Tax-Free Fund will not be deductible for federal income tax
purposes. Exempt-interest dividends are taken into account in calculating the
amount of social security and railroad retirement benefits that may be subject
to federal income tax. Up to 85% of social security or railroad retirement
benefits may be included in federal (but not California) taxable income for
benefit recipients whose adjusted gross income (including income from tax-exempt
sources such as tax-exempt bonds and the Tax-Free Fund) plus 50% of their
-43-
<PAGE>
benefits exceeding certain base amounts. Income from the Fund is included in the
calculation of whether a recipient's income exceeds these base amounts, but is
not taxable directly.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by private activity bonds should
consult their tax advisers before purchasing shares of the Tax-Free Fund.
ADDITIONAL INFORMATION RELATING TO FUND INVESTMENTS
The Funds' current dividend and accounting policies will affect the
amount, timing, and character of distributions to shareholders, and may make an
economic return of capital taxable to shareholders. Any investment by a Fund in
zero-coupon bonds, certain stripped securities including STRIPS, and certain
securities purchased at a market discount will cause the Fund to recognize
income prior to the receipt of cash payments with respect to those securities.
In order to distribute this income and avoid a tax on the Fund, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss to
the Fund.
An investment by a Fund in residual interests of a CMO that has elected
to be treated as a REMIC can create complex tax problems, especially if the Fund
has state or local governments or other tax-exempt organizations as
shareholders.
Fund transactions in options, futures contracts, forward contracts,
short sales "against the box," swaps and related transactions will be subject to
special tax rules that may affect the amount, timing, and character of Fund
income and distributions to shareholders. For example, certain positions held by
a Fund on the last business day of each taxable year will be marked to market
(treated as if closed out) on that day, and any gain or loss associated with the
positions will be treated as 60% long-term and 40% short-term capital gain or
loss. Certain positions held by a Fund that substantially diminish its risk of
loss with respect to other positions in its portfolio may constitute
"straddles," and may be subject to special tax rules that would cause deferral
of Fund losses, adjustments in the holding periods of Fund securities, and
conversion of short-term into long-term capital losses. Certain tax elections
exist for straddles that may alter the effects of these rules. The Funds will
limit their activities in options, futures contracts, forward contracts, swaps
and related transactions to the extent necessary to meet the requirements of
Subchapter M of the Code.
ADDITIONAL INFORMATION RELATING TO FOREIGN INVESTMENTS
Special tax considerations apply with respect to a Fund's foreign
investments. Investment income received by a Fund from sources within foreign
countries may be subject to foreign taxes. The Funds do not expect to be able to
pass through to shareholders foreign tax credits or deductions with respect to
such foreign taxes. The United States has entered into tax treaties with many
-44-
<PAGE>
foreign countries that may entitle the Funds to a reduced rate of tax or an
exemption from tax on such income. The Funds intend to qualify for treaty
reduced rates where available. It is not possible, however, to determine a
Fund's effective rate of foreign tax in advance since the amount of the Fund's
assets to be invested within various countries is not known.
Foreign exchange gains and losses realized by a Fund will generally be
treated as ordinary income and losses. Use of foreign currencies for non-hedging
purposes may be limited in order to avoid a tax on the applicable Fund.
Occasionally, a Fund may invest in stock of foreign issuers deemed to be
"passive foreign investment companies" for U.S. tax purposes. Any Fund making
such an investment may be liable for U.S. income taxes on certain distributions
and realized capital gains from stock of such issuers. Any Fund making such an
investment also may elect to mark to market its investments in "passive foreign
investment companies" on the last day of each taxable year, which may cause the
Fund to recognize ordinary income prior to the receipt of cash payments with
respect to those investments. In order to distribute that income and avoid a tax
on the Fund, such a Fund may be required to liquidate portfolio securities that
it might otherwise have continued to hold.
FOREIGN SHAREHOLDERS
Taxable dividends and certain other payments to persons who are not
citizens or residents of the United States or U.S. entities ("Non-U.S. Persons")
are generally subject to U.S. tax withholding at a rate of 30%, although the 30%
rate may be reduced to the extent provided by an applicable tax treaty. The
Funds intend to withhold tax payments at the rate of 30% (or the lower treaty
rate) on taxable dividends and other payments to Non-U.S. Persons that are
subject to such withholding. Any amounts withheld in excess of a person's actual
tax liability may be recovered by that person by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate for such
claims. Distributions received from the Funds by Non-U.S. Persons also may be
subject to tax under the laws of their own jurisdictions.
BACKUP WITHHOLDING
The Funds or any securities dealer effecting a redemption of the Funds'
shares by a shareholder will be required to file information reports with the
IRS with respect to distributions and payments made to the shareholder. In
addition, the Funds will be required to withhold federal income tax at the rate
of 31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders (including a Non-U.S. Person) who
have not furnished their correct taxpayer identification numbers and made
certain required certifications on the Account Application Form or with respect
to which a Fund or the securities dealer has been notified by the IRS that the
number furnished is incorrect or that the account is otherwise subject to
withholding. Backup withholding will not, however be applied to payments that
have been subject to 30% withholding.
-45-
<PAGE>
PERFORMANCE INFORMATION
CALCULATION OF YIELD
The Bond Fund and the Tax-Free Fund. From time to time, the Trust may
advertise a 30-day yield for these Funds. These figures will be based on
historical earnings and are not intended to indicate future performance. The
yield of these Funds refers to the annualized net investment income per share
generated by an investment in the Funds over a specified 30-day period. The
yield is calculated by assuming that the income generated by the investment
during that 30-day period is generated over one year and is shown as a
percentage of the investment. In particular, yield will be calculated according
to the following formula prescribed by the SEC:
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; and
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchases by these Funds at a discount or
premium, the formula generally calls for amortization of the discount or
premium. The amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest
rates, these Funds' yields will tend to be somewhat higher than prevailing
market rates and, in periods of rising interest rates, will tend to be somewhat
lower. In addition, when interest rates are falling, monies received by these
Funds from the continuous sale of their shares will likely be invested in
instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Fund. The Trust may also advertise a tax-equivalent yield
for the Tax-Free Fund. The tax-equivalent yield is determined by calculating the
rate of return that would have to be achieved on a fully-taxable investment to
produce the after-tax equivalent of a Fund's yield, assuming certain tax
brackets for a shareholder. The tax-equivalent yield quotation of a Fund will be
calculated by dividing that portion of the Fund's yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's yield that is not tax-exempt. The tax-equivalent effective yield
is determined by dividing that portion of the Fund's effective yield that is
tax-exempt by 1 minus a stated income tax rate and adding the quotient to that
portion, if any, of the Fund's effective yield that is not tax-exempt. SEE
Appendix C for taxable equivalent yields.
-46-
<PAGE>
Because the Funds are new, no yield data are available as of the date
of this Statement of Additional Information.
CALCULATION OF TOTAL RETURN
Average Annual Total Return. From time to time, the Trust may advertise
total return for a Fund. The total return of a Fund refers to the average
compounded rate of return on a hypothetical investment for designated time
periods (including, but not limited to, the period from which the Fund commenced
operations through the specified date), and assumes that the entire investment
is redeemed at the end of each period. Any statements of total return for a Fund
will be accompanied by information on that Fund's average annual compounded rate
of return over the most recent four calendar quarters and the period from that
Fund's inception of operations. The Funds may also advertise aggregate and
average total return information over different periods of time. A Fund's
"average annual total return" figures are computed according to a formula
prescribed by the SEC expressed as follows:
n
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or
10-year period at the end of each respective period
(or fractional portion thereof), assuming reinvestment
of all dividends and distributions and complete
redemption of the hypothetical investment at the end
of the measuring period.
Aggregate Total Return. A Fund's "aggregate total return" figure
represents the cumulative change in the value of an investment in that Fund for
the specified period and are computed by the following formula prescribed by the
SEC:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a l-, 5- or
10-year period at the end of a l-, 5- or 10-year
period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions and
complete redemption of the hypothetical investment at
the end of the measuring period.
-47-
<PAGE>
Each Fund's performance will vary from time to time depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of that Fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in that Fund with certain bank deposits or
other investments that pay a fixed yield for a stated period of time. Investors
comparing that Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
A Fund's performance may from time to time be compared to that of other
mutual funds tracked by mutual fund rating services, broad groups of comparable
mutual funds or unmanaged indices, which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs. In
reports and other communications to shareholders or in advertising and sales
literature. The Funds may also show the historical performance of other
investment vehicles or groups of other mutual funds, and may compare tax
equivalent yields to taxable yields. Any given "performance" or performance
comparison should not be considered as representative of any performance in the
future. In addition, there may be differences between the Funds and the various
indexes and reporting services which may be quoted by the Funds.
Because the Funds are new, no total return data are available as of the
date of this Statement of Additional Information.
FINANCIAL STATEMENTS
The Statement of Assets and Liabilities for the Tax-Free Fund at April
__, 1999, together with notes thereto and Report of Independent Auditors, are
attached to this Statement of Additional Information.
-48-
<PAGE>
APPENDIX A
CERTAIN INFORMATION CONCERNING CALIFORNIA
The information set forth below is a general summary intended to give a
recent historical description. It is not a discussion of any specific factors
that may affect any particular issuer of California Municipal Securities. The
information is not intended to indicate continuing or future trends in the
condition, financial or otherwise, of California. Such information is derived
from official statements utilized in connection with securities offerings of the
State of California that have come to the attention of the Trust and were
available prior to the date of this Statement of Additional Information. Such
information has not been independently verified by the Tax-Free Fund.
Because the Tax-Free Fund expects to invest substantially all of its
assets in California Municipal Securities, the Fund will be susceptible to a
number of complex factors affecting the issuers of California Municipal
Securities, including national and local political, economic, social,
environmental and regulatory policies and conditions. The Fund cannot predict
whether or to what extent such factors or other factors may affect the issuers
of California Municipal Securities, the market value or marketability of such
securities or the ability of the respective issuers of such securities acquired
by the Fund to pay interest on, or principal of, such securities. The
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and there is no responsibility on the part of the State of
California to make payments on such local obligations. There may be specific
factors that are applicable in connection with investment in the obligations of
particular issuers located within California, and it is possible the Fund will
invest in obligations of particular issuers as to which such specific factors
are applicable.
From mid-1990 to late 1993, California suffered the most severe
recession in the State since the 1930s. Construction, manufacturing (especially
aerospace), exports and financial services, among other industries, have been
severely affected. Since the start of 1994, however, California's economy has
been on a steady recovery. The rate of economic growth in California in 1997, in
terms of job gains, exceeded that of the rest of the United States. The State
added nearly 430,000 non-farm jobs during 1997. In 1996, California surpassed
its pre-recession employment peak of 12.7 million jobs. The unemployment rate,
while still higher than the national average, fell to an average of 5.9% in
1998, compared to over 10 percent during the recession. Many of the new jobs
were created in such industries as computer services, software design, motion
pictures and high technology manufacturing. Business services, export trade and
other manufacturing also experienced growth. All major economic regions of the
State grew. The rate of employment growth for the Los Angeles region indicates
that its growth has almost caught up with that in the San Francisco bay region
on a population share basis. The unsettled financial situation occurring in
certain Asian economies and its spillover effect elsewhere may adversely affect
the State's export-related industries and, therefore, the State's rate of
economic growth.
-49-
<PAGE>
The recession severely affected State revenues while the State's health
and welfare costs were increasing. Consequently, the State had a lengthy period
of budget imbalance. The State's accumulated budget deficit approached $2.8
billion at its peak at June 30, 1993. A consequence of the large budget deficits
has been that the State depleted its available cash resources and had to
use a series of external borrowings to meet its cash needs.
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years .
The economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2 billion
in 1995-96 , $1.6 billion in 1996-97 and $2.2 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The California Department of Finance estimates that the State's
budget reserve ("SFEU") totaled $639.8 million as of June 30, 1997 and $1.782
billion at June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large increase
in funding for K-14 education under Proposition 98, reflecting strong revenues
which exceeded initial budgeted amounts. Part of the nearly $1.75 billion in
increased spending was allocated to prior fiscal years. Funds were provided to
fully pay for the cost-of-living increase component of Proposition 98, and to
extend the class size reduction and reading initiatives.
2. The Budget Act reflected payment of $1.228 billion to satisfy a
court judgment in a lawsuit regarding payments to the State pension fund, and
brought funding of the State's pension contribution back to the quarterly basis
which existed prior to the deferral actions which were invalidated by the
courts.
3. Funding from the General Fund for the University of California and
California State University was increased by about 6 percent ($121 million and
$107 million, respectively), and there was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs were contained, continuing generally the
grant levels from prior years.
-50-
<PAGE>
6. Unlike prior years, this Budget Act did not depend on uncertain
federal budget actions. About $300 million in federal funds, already included in
the federal FY 1997 and 1998 budgets, was included in the Budget Act, to offset
incarceration costs for undocumented immigrants.
7. The Budget Act contained no tax increases, and no tax reductions.
The Renters Tax Credit was suspended for another year, saving approximately $500
million.
The Governor signed the 1998-99 Budget Act on August 21, 1998. The
1998-99 Budget Act is based on projected General Fund revenues and transfers of
$57.0 billion (after giving effect to various tax reductions enacted in 1997 and
1998), a 4.2% increase from the revised 1997-98 figures. Special Fund revenues
were estimated at $14.3 billion. The revenue projections were based on the
Governor's May Revision to the 1998-99 Budget and may be overstated in light of
the possible effect on California's economic growth of worsening economic
problems in various international markets.
The Budget Act provides authority for expenditures of $57.3 billion
from the General Fund (a 7.3% increase from 1997-98), $14.7 billion from Special
Funds, and $3.4 billion from bond funds. The Budget Act projects a balance in
the SFEU at June 30, 1999 of $1.255 billion, a little more than 2% of General
Fund revenues. The Budget Act assumes the State will carry out its normal
intra-year cash flow borrowing in the amount of $1.7 billion of revenue
anticipation notes issued in October, 1998.
The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill which provides
for a phased-in reduction of the Vehicle License Fee ("VLF"). Since the VLF is
currently transferred to cities and counties, the bill provides for the General
Fund to replace the lost revenues. Starting on January 1, 1999, the VLF will be
reduced by 25%, at a cost to the General Fund of approximately $500 million in
the 1998-99 Fiscal Year and about $1 billion annually thereafter.
The Governor's proposed budget for fiscal year 1999-2000 proposes total
State spending of $76.2 billion (excluding the expenditure of federal funds and
selected bond funds), which is up 4.1% from the 1998-1999 budget. This total
includes $60.5 billion in General Fund spending (a 3.8% increase) and $15.7 in
special funds spending. The Governor's proposed budget anticipates a $415
million reserve by the close of the fiscal year. The proposed budget addresses
an anticipated funding shortfall of $2.3 billion (which includes funds to
rebuild the reserve) through a combination of new state and federal resources,
the rescheduling of certain expenditures, under budgeting certain expenditures,
spending cutbacks, and savings assumptions. The budget must be approved by a
two-thirds vote of the State Senate and Assembly. The Governor may exercise a
line-item veto .
As of November 1, 1998, the State had over $18.6 billion aggregate
amount of its general obligation bonds outstanding. General obligation bond
authorizations in an aggregate amount of approximately $5.7 billion remained
unissued as of November 1, 1998. At the November 3, 1998 election voters
approved a bond measure totaling $9.2 billion for public school construction
-51-
<PAGE>
and renovation, and for higher education facilities. The State also builds and
acquires capital facilities through the use of lease purchase borrowing. As of
November 1, 1998, the State had approximately $6.5 billion of outstanding
Lease-Purchase Debt.
In addition to the general obligation bonds, State agencies and
authorities had approximately $24.6 billion aggregate principal amount of
revenue bonds and notes outstanding as of September 30, 1998. Revenue bonds
represent both obligations payable from State revenue-producing enterprises and
projects, which are not payable from the General Fund, and conduit obligations
payable only from revenues paid by private users of facilities financed by such
revenue bonds. Such enterprises and projects include transportation projects,
various public works and exposition projects, educational facilities (including
the California State University and University of California systems), housing,
health facilities, and pollution control facilities.
Because of the State of California's budget problems, the State's
General Obligation bonds were downgraded in July 1994 to A1 from Aa by Moody's,
to A from A+ by S&P, and to A from AA by Fitch. Moody's, Fitch and S&P expressed
uncertainty in the State's ability to balance its budget by 1996. However, in
1996, citing California's improving economy and budget situation, both Fitch and
S&P raised their ratings from A to A+. In October, 1997, Fitch raised its rating
from A+ to AA- referring to the State's fundamental strengths, the extent of its
economic recovery and the return of financial stability. In October 1998,
Moody's raised its rating from A1 to Aa3 citing the State's continuing economic
recovery and a number of actions taken to improve the State's credit condition,
including the rebuilding of cash and budget reserves.
The State is a party to numerous legal proceedings, many of which
normally occur in governmental operations and which, if decided against the
State, might require the State to make significant future expenditures or impair
future revenue sources.
In October 1997, the Governor issued Executive Order W-163-97 stating
that Year 2000 solutions would be a State priority and requiring each agency of
the State, no later than December 31, 1998, to address Year 2000 problems in
their essential systems and protect those systems from corruption by
non-compliant systems, in accordance with the Department of Information
Technology's California 2000 Program. There can be no assurance that steps being
taken by state or local government agencies with respect to the Year 2000
problem will be sufficient to avoid any adverse impact upon the budgets or
operations of those agencies or upon the California Trust.
Constitutional and Statutory Limitations. Article XIII A of the
California Constitution (which resulted from the voter approved Proposition 13
in 1978) limits the taxing powers of California public agencies. With certain
exceptions, the maximum AD VALOREM tax on real property cannot exceed one
percent of the "full cash value" of the property. Article XIII A also
effectively prohibits the levying of any other AD VALOREM property tax for
general purposes. One exception to Article XIII A permits an increase in AD
VALOREM taxes on real property in excess of one percent for certain bonded
-52-
<PAGE>
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness. The "full cash value" of property may be adjusted annually to
reflect increases (not to exceed two percent) or decreases, in the consumer
price index or comparable local data, or to reflect reductions in property value
caused by substantial damage, destruction or other factors, or when there is a
"change in ownership" or "new construction."
Constitutional challenges to Article XIII A to date have been
unsuccessful. In 1992, the United States Supreme Court ruled that
notwithstanding the disparate property tax burdens that Proposition 13 might
place on otherwise comparable properties, those provisions of Proposition 13 do
not violate the Equal Protection Clause of the United States Constitution. In
response to the significant reduction in local property tax revenue caused by
the passage of Proposition 13, the State enacted legislation to provide local
governments with increased expenditures from the General Fund. This fiscal
relief has ended, however.
Article XIII B of the California Constitution generally limits the
amount of appropriations of the State and of local governments to the amount of
appropriations of the entity for such prior year, adjusted for changes in the
cost of living, population and the services that the government entity has
financial responsibility for providing. To the extent the "proceeds of taxes" of
the State and/or local government exceed its appropriations limit, the excess
revenues must be rebated. Certain expenditures, including debt service on
certain bonds and appropriations for qualified capital outlay projects, are not
included in the appropriations limit.
In 1986, California voters approved an initiative statute known as
Proposition 62. This initiative further restricts the ability of local
governments to raise taxes and allocate approved tax receipts. While some
decisions of the California Courts of Appeal have held that portions of
Proposition 62 are unconstitutional, the California Supreme Court upheld
Proposition 62's requirement that special taxes be approved by a two-thirds vote
of the voters voting in an election on the issue. This recent decision may
invalidate other taxes that have been imposed by local governments in California
and make it more difficult for local governments to raise taxes.
In 1988 and 1990, California voters approved initiatives known as
Proposition 98 and Proposition 111, respectively. These initiatives changed the
State's appropriations limit under Article XIII B to (i) require that the State
set aside a prudent reserve fund for public education, and (ii) guarantee a
minimum level of State funding for public elementary and secondary schools and
community colleges.
In November 1996, California voters approved Proposition 218. The
initiative applied the provisions of Proposition 62 to all entities, including
charter cities. It requires that all taxes for general purposes obtain a simple
majority popular vote and that taxes for special purposes obtain a two-thirds
majority vote. Prior to the effectiveness of Proposition 218, charter cities
could levy certain taxes such as transient occupancy taxes and utility user's
taxes without a popular vote. Proposition 218 will also limit the authority of
local governments to impose property-related assessments, fees and charges,
requiring that such assessments be limited to the special benefit conferred and
prohibiting their use for general governmental services. Proposition 218 also
-53-
<PAGE>
allows voters to use their initiative power to reduce or repeal
previously-authorized taxes, assessments, fees and charges.
The effect of constitutional and statutory changes and of budget
developments on the ability of California issuers to pay interest and principal
on their obligations remains unclear, and may depend on whether a particular
bond is a general obligation or limited obligation bond (limited obligation
bonds being generally less affected). There is no assurance that any California
issuer will make full or timely payments of principal or interest or remain
solvent. For example, in December 1994, Orange County filed for bankruptcy.
Certain tax-exempt securities in which the Tax-Free Intermediate Bond
Fund may invest may be obligations payable solely from the revenues of specific
institutions, or may be secured by specific properties, which are subject to
provisions of California law that could adversely affect the holders of such
obligations. For example, the revenues of California health care institutions
may be subject to state laws, and California law limits the remedies of a
creditor secured by a mortgage or deed of trust on real property.
In addition, it is impossible to predict the time, magnitude, or
location of a major earthquake or its effect on the California economy. In
January 1994, a major earthquake struck the Los Angeles area, causing
significant damage in a four-county area. The possibility exists that another
such earthquake could create a major dislocation of the California economy.
The Tax-Free Fund's concentration in California Municipal Securities
provides a greater level of risk than a fund that is diversified across numerous
states and municipal entities.
-54-
<PAGE>
APPENDIX B
DESCRIPTION OF SECURITIES RATINGS 1/
The ratings of Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Rating Services ("S&P"), and Fitch IBCA, Inc. ("Fitch IBCA") represent
their opinions as to the quality of various debt securities, and are not
absolute standards of quality. Debt securities with the same maturity, coupon
and rating may have different yields, while debt securities of the same maturity
and coupon with different ratings may have the same yield. The ratings below are
as described by the rating agencies. Ratings are generally given to securities
at the time of issuance. While the rating agencies may, from time to time,
revise such ratings, they undertake no obligation to do so.
1/ As described by the rating agencies. Ratings are generally given to
securities at the time of issuance. While the rating agencies may, from
time to time, revise such ratings, they undertake no obligation to do
so.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
FOUR HIGHEST BOND RATINGS
AAA Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and generally are referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investments attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA Bonds which are rated Baa are considered as medium grade
obligations, since they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any greater length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
-55-
<PAGE>
Note: Those bonds in the Aa, A and Baa categories which Moody's believes
possess the strongest credit attributes are designated by the symbols
Aa1, A1 and Baa1.
DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
FOUR HIGHEST BOND RATINGS
AAA. An obligation rated AAA has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA. An obligation rated AA differs from the highest rated issues only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is still strong.
A. An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB. An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Plus (+) or minus (-): The ratings from AA to BBB may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF FITCH IBCA, INC.'S
FOUR HIGHEST INTERNATIONAL LONG-TERM CREDIT RATINGS
When assigning ratings, Fitch IBCA considers the historical and
prospective financial condition, quality of management, and the operating
performance of the issuer and of any guarantor, any special features of a
specific issue or guarantee, the issue's relationship to other obligations of
the issuer, as well as developments in the economic and political environment
that might affect the issuer's financial strength and credit quality.
Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as "AAA/F1+." The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.
AAA Highest credit quality. "AAA" ratings denote the lowest expectation
of credit risk. They are assigned only in the case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
-56-
<PAGE>
A High credit quality. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently
a low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
A plus (+) or minus (-) may be appended to a rating to denote relative
status within major rating categories. Such suffixes are not added to the "'AAA"
long-term category.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES
Moody's ratings for state and municipal short-term obligations are
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk, such
as long-term secular trends, may be less important over the short run.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES
An S&P note rating reflects the liquidity factors and market access
risks unique to notes. Notes maturing in three years or less will likely receive
a note rating. Notes maturing beyond three years most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
Amortization schedule -- the larger the final maturity relative to
other maturities, the more likely it will be treated as a note.
Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
-57-
<PAGE>
Note rating symbols are as follows:
SP-1. Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
RATINGS OF TAX-EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all debt issues that have a put or demand
feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for
example, "AAA/A-1+"). With short-term demand debt, note rating symbols are used
with the commercial paper rating symbols (for example, "SP-1+/A-1+").
DESCRIPTION OF FITCH IBCA, INC.'S
TWO HIGHEST INTERNATIONAL SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
TWO HIGHEST SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually short-term senior debt obligations having an original
maturity not in excess of one year.
PRIME-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: (1) leading market positions in well-established industries;
(2) high rates of return on funds employed; (3) conservative capitalization
structure with moderate reliance on debt and ample asset protection; (4) broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; and (5) well-established access to a range of financial markets and
assured sources of alternate liquidity.
-58-
<PAGE>
PRIME-2. Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S RATING SERVICES
TWO HIGHEST COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.
A-1. A short-term obligation rated A-1 is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligations is still strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2. A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
-59-
<PAGE>
INVESTMENT ADVISERS ALLEGIANCE INVESTMENT TRUST
Van Deventer & Hoch Allegiance American Value Fund
800 North Brand Boulevard, Suite 300 Allegiance Intermediate-Term Bond Fund
Glendale, California 91203 Allegiance California Tax-Free
Intermediate Bond Fund
DISTRIBUTOR
First Fund Distributors, Inc.
4455 East Camelback Road, Suite 261E
Phoenix, Arizona 85018
ADMINISTRATOR
Investment Company Administration, L.L.C.
2020 E. Financial Way, Suite 100
Glendora, California 91741
LEGAL COUNSEL
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
INDEPENDENT ACCOUNTANTS
McGladrey & Pullen LLP
555 Fifth Avenue, 8th Floor
New York, New York 10017-2416 STATEMENT OF ADDITIONAL INFORMATION
CUSTODIAN
United Missouri Bank, N.A. April ___, 1999
928 Grand Boulevard
Kansas City, Missouri 64106
- ----------
Allegiance Funds [SERVICE MARK]:
* are not insured by the FDIC or any other governmental agency;
* are not guaranteed by Van Deventer & Hoch or any of its
affiliates; and
* involve investment risks, including possible loss of
principal.
-60-
<PAGE>
---------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
ALLEGIANCE INVESTMENT TRUST
--------------
FORM N-1A
--------------
PART C
--------------
ITEM 23. EXHIBITS
(a) Articles of Incorporation: Agreement and Declaration of Trust
dated September 2, 1998.1
(b) By-Laws: By-Laws dated September 2, 1998.1
(c) Instruments Defining Rights of Security Holder: Not applicable.
(d) Investment Advisory Contracts: Form of Investment Advisory
Agreement.1
(e) Underwriting Contracts: Form of Distribution Agreement.
(f) Bonus or Profit Sharing Contracts: Not applicable.
(g) Custodian Agreements: Form of Custody Agreement.
(h) Other Material Contracts:
(i) Form of Administrative Services Agreement.(1)
(ii) Form of Sub-Administration Agreement.
(i) Legal Opinion: Consent and Opinion of Counsel as to legality of
shares.
(j) Other Opinions: Independent Auditors' Consent: Not applicable.
(k) Omitted Financial Statements: Not applicable.
(l) Initial Capital Agreements: Form of Subscription Agreement for
initial shares .
(m) Rule 12b-1 Plan: Form of Share Marketing Plan (Rule 12b-1 Plan).
(n) Financial Data Schedule: Not applicable.
(o) 18f-3 Plan: Not applicable.
- ----------
(1) Incorporated by reference to the initial filing of this
Registration Statement on Form N-1A on December 31, 1998.
C-1
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Van Deventer & Hoch (the "Manager") is a partnership controlled by VDH
Holdings, Inc. ("VDH, Inc.") and Crestline Capital Partners, L.P. ("CCP"),
as general partners. Controlling shareholders of VDH, Inc. also serve as
officers of the Manager, including Richard A. Snyders, John L. Hoch,
Richard D. Trautwein, Allen H. Van Deventer, Donald F. Grannis and Jeff W.
Arnett. Highline Capital Advisors II, L.P. holds a majority limited partner
interest in CCP and is controlled by Donald H. Putnam, Jeffrey D. Lovell,
Mary Pat Thornton and Richard I. Morris, Jr.
ITEM 25. INDEMNIFICATION
Article VII of the Agreement and Declaration of Trust empowers the
Trustees of the Trust, to the full extent permitted by law, to purchase
with Trust assets insurance for indemnification from liability and to pay
for all expenses reasonably incurred or paid or expected to be paid by a
Trustee or officer in connection with any claim, action, suit or proceeding
in which he or she becomes involved by virtue of his or her capacity or
former capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made a
party to any proceeding by reason of the fact that such person is and other
amounts or was an agent of the Trust, against expenses, judgments, fines,
settlement and other amounts actually and reasonable incurred in connection
with such proceeding if that person acted in good faith and reasonably
believed his or her conduct to be in the best interests of the Trust.
Indemnification will not be provided in certain circumstances, however,
including instances of willful misfeasance, bad faith, gross negligence,
and reckless disregard of the duties involved in the conduct of the
particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
the Trustees, officers and controlling persons of the Registrant pursuant
to the foregoing provisions or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933 Act and
is, therefore, unenforceable in the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a Trustee, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such Trustee, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the 1933 Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
See information in Part A (Prospectus) and Part B (Statement of
Additional Information) for information on Messrs. Snyders and Bock.
Messrs. Putnam, Lovell, Morris and Ms. Thornton, who are indirect owners of
the Manager (through their interests in a limited partner of a general
partner of the Manager), also are principals in the investment banking firm
of Putnam, Lovell, de Guardiola & Thornton, which specializes in the
investment management industry.
C-2
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITER
(a) First Fund Distributors, Inc. currently serves as primary distributor of
the shares of:
Advisors Series Trust
Al Frank Fund (The)
American Trust Allegiance Fund
Avatar Advantage Balanced Fund (The) Avatar Advantage
Equity Allocation Fund (The) Avatar Advantage
International Equity Allocation Fund (The) Chase
Growth Fund Edgar Lomax Value Fund Information Tech
100 Mutual Fund Kaminski Poland Fund Rockhaven Fund
Rockhaven Premier Dividend Fund Van Deventer & Hoch
American Value Fund
Brandes Investment Trust
RNC Mutual Value Group, Inc.
PIC Investment Trust
Professionally Managed Portfolios
Academy Value Fund
Avondale Total Return Fund
Boston Balanced Fund
Osterweis Fund
Perkins Discovery Fund
Perkins Opportunity Fund
ProConscience Women's Equity Mutual Fund
Trent Equity Fund
Leonetti Balanced Fund
Lighthouse Contrarian Fund
U.S. Global Leaders Growth Fund
Harris Bretall Sullivan & Smith Growth Equity Fund
Pzena Focused Value Fund
Titan Financial Services Fund
PGP Korea Growth Fund
PGP Asia Growth Fund
Guinness Flight Investment Funds
Jurika & Voyles Fund Group
Masters Select Investment Trust
Kayne Anderson Mutual Funds
O'Shaughnessy Funds, Inc.
Fleming Capital Mutual Fund Group, Inc.
Fremont Mutual Funds, Inc.
Rainier Investment Management Mutual Funds
The Purisima Funds
UBS Private Investor Funds
C-3
<PAGE>
(b) The officers of First Fund Distributors, Inc. are:
Robert H. Wadsworth President and Treasurer
Eric Banhazl Vice President
Steven J. Paggioli Vice President and Secretary
Each officer's business address with the Distributor is 4455 E.
Camelback Rd., Suite 261-E, Phoenix, AZ 85018
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules
promulgated thereunder are in the possession of the Registrant, at the
Registrant's corporate offices, except (1) records held and maintained by
United Missouri Bank, N.A. relating to its functions as custodian and (2)
records held and maintained by Investment Company Administration, L.L.C.,
as sub-administrator and fund accountant and, (3) records held and
maintained by National Financial Data Services relating to its functions as
transfer agent. The address for United Missouri Bank, N.A. (custodian) is
928 Grand Boulevard, Kansas City, MO 64106. The address for Investment
Company Administration, L.L.C. (sub-administrator and fund accountant) is
2020 E. Financial Way, Suite 100, Glendora, CA 91741. The address for
National Financial Data Services (transfer agent) is 330 West 9th Street,
Kansas City, MO 64105.
ITEM 29. MANAGEMENT SERVICES.
All management-related service contracts are discussed in Parts A and
B.
ITEM 30. UNDERTAKINGS.
(a) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's last annual
report to shareholders, upon request and without charge.
(b) Registrant has undertaken to comply with Section 16(a) of the
Investment Company Act which requires the prompt convening of a
meeting of shareholders to elect trustees to fill existing vacancies
in the Registrant's Board of Trustees if less than a majority of the
trustees has been elected to such position by shareholders. Registrant
has also undertaken promptly to call a meeting of shareholders for the
purpose of voting on the question of removal of any Trustee or
Trustees when requested in writing to do so by the record holders of
not less than 10 percent of the Registrant's outstanding shares and to
assist its shareholders in communicating with other shareholders in
accordance with the requirements of Section 16(c) of the Investment
Company Act.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Pre-Effective Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Glendale, the State of California, on
the 7th day of April, 1999.
ALLEGIANCE INVESTMENT TRUST
By: /s/ Richard A. Snyders*
-------------------------------------
Richard A. Snyders
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to this Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
/s/ Richard A. Snyders Sole Trustee April 7, 1999
- --------------------------
Richard A. Snyders
/s/ Charles L. Bock Treasurer and April 7, 1999
- -------------------------- Secretary (Principal
Charles L. Bock Financial and Accounting
Officer)
*/s/ David A. Hearth
- -------------------------
by David A. Hearth,
pursuant to Power of
Attorney previously filed
C-5
<PAGE>
File Nos. 811-09185
333-70061
ALLEGIANCE INVESTMENT TRUST
LIST OF EXHIBITS
----------------
23(e) Underwriting Contract: Form of Distribution Agreement
23(g) Custodian Agreement: Form of Custody Agreement
23(h)(ii) Other Material Contracts: Form of Sub-Administration Agreement
23(i) Legal Opinion: Consent and Opinion of Counsel as to Legality
of Shares.
23(l) Initial Capital Agreement: Form of Subscription Agreement
23(m) Rule 12b-1 Plan: Form of Share Marketing Plan (Rule 12b-1 Plan)
DISTRIBUTION AGREEMENT
This Agreement made this day of May, 1999 by and between
ALLEGIANCE INVESTMENT TRUST, a Delaware business trust (the "Trust"), and FIRST
FUND DISTRIBUTORS, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H:
WHEREAS, the Trust is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act");
and it is in the interest of the Trust to
offer its shares for sale continuously; and
WHEREAS, the Distributor is registered as a broker-dealer
under the Securities Exchange Act of 1934 (the "1934 Act") and is a member in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD"); and
WHEREAS, the Trust and the Distributor wish to enter into an
agreement with each other with respect to the continuous offering of the shares
of each existing and future series (the
"Shares") of the Trust;
NOW, THEREFORE, the parties agree as follows:
1. APPOINTMENT OF DISTRIBUTOR. The Trust hereby appoints the
Distributor as exclusive agent to sell and to arrange for the sale of the
Shares, on the terms and for the period set forth in this Agreement, and the
Distributor hereby accepts such appointment and agrees to act hereunder directly
and/or through the Trust's transfer agent in the manner set forth in the
Prospectuses (as defined below). It is understood and agreed that the services
of the Distributor hereunder are not exclusive, and the Distributor may act as
principal underwriter for the shares of any other registered investment company.
2. SERVICES AND DUTIES OF THE DISTRIBUTOR.
(a) The Distributor agrees to sell the Shares, as
agent for the Trust, from time to time during the term of this Agreement upon
the terms described in a Prospectus. As used in this Agreement, the term
"Prospectus" shall mean a prospectus and statement of additional information
included as part of the Trust's Registration Statement, as such prospectus and
statement of additional information may be amended or supplemented from time to
time, and the term "Registration Statement" shall mean the Registration
Statement most recently filed from time to time by the Trust with the Securities
and Exchange Commission ("SEC") and effective under the Securities Act of 1933
(the "1933 Act") and the 1940 Act, as such Registration Statement is amended by
any amendments thereto at the time in effect. The Distributor shall not be
obligated to sell any certain number of Shares.
<PAGE>
(b) Upon commencement of operations of the series,
the Distributor will hold itself available to receive orders, satisfactory to
the Distributor, for the purchase of the Shares and will accept such orders and
will transmit such orders and funds received by it in payment for such Shares as
are so accepted to the Trust's transfer agent or custodian, as appropriate, as
promptly as practicable. Purchase orders shall be deemed accepted and shall be
effective at the time and in the manner set forth in the series' Prospectuses.
The Distributor shall not make any short sales of Shares.
( c) The offering price of the Shares shall be the
net asset value per share of the Shares, plus the sales charge, if any,
(determined as set forth in the Prospectuses). The Trust shall furnish the
Distributor, with all possible promptness, an advice of each computation of net
asset value and offering price.
(d) The Distributor shall have the right to enter
into selected dealer agreements with securities dealers of its choice ("selected
dealers") for the sale of Shares. Shares sold to selected dealers shall be for
resale by such dealers only at the offering price of the Shares as set forth in
the Prospectuses. The Distributor shall offer and sell Shares only to such
selected dealers as are members in good standing of the NASD.
3. DUTIES OF THE TRUST.
(a) MAINTENANCE OF FEDERAL REGISTRATION. The Trust
shall, at its expense, take, from time to time, all necessary action and such
steps, including payment of the related filing fees, as may be necessary to
register and maintain registration of a sufficient number of Shares under the
1933 Act. The Trust agrees to file from time to time such amendments, reports
and other documents as may be necessary in order that there may be no untrue
statement of a material fact in a Registration Statement or Prospectus, or
necessary in order that there may be no omission to state a material fact in the
Registration Statement or Prospectus which omission would make the statements
therein misleading.
(b) MAINTENANCE OF "BLUE SKY" QUALIFICATIONS. The
Trust shall, at its expense, use its best efforts to qualify and maintain the
qualification of an appropriate number of Shares for sale under the securities
laws of such states as the Distributor and the Trust may approve, and, if
necessary or appropriate in connection therewith, to qualify and maintain the
qualification of the Trust or the series as a broker or dealer in such states;
provided that the Trust shall not be required to amend its Agreement and
Declaration of Trust or By-Laws to comply with the laws of any state, to
maintain an office in any state, to change the terms of the offering of the
Shares in any state, to change the terms of the offering of the Shares in any
state from the terms set forth in Prospectuses, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering and sale of the Shares.
The Distributor shall furnish such information and other material relating to
its affairs and activities as may be required by the Trust or its series in
connection with such qualifications.
(c) COPIES OF REPORTS AND PROSPECTUSES. The Trust
shall, at its expense, keep the Distributor fully informed with regard to its
affairs and in connection therewith shall furnish to the Distributor copies of
all information, financial statements and other papers which the Distributor may
2
<PAGE>
reasonably request for use in connection with the distribution of Shares,
including such reasonable number of copies of Prospectuses and annual and
interim reports as the Distributor may request and shall cooperate fully in the
efforts of the Distributor to sell and arrange for the sale of the Shares and in
the performance of the Distributor under this Agreement.
4. CONFORMITY WITH APPLICABLE LAW AND RULES. The Distributor
agrees that in selling Shares hereunder it shall conform in all respects with
the laws of the United States and of any state in which Shares may be offered,
and with applicable rules and regulations of the NASD.
5. INDEPENDENT CONTRACTOR. In performing its duties hereunder,
the Distributor shall be an independent contractor and neither the Distributor,
nor any of its officers, directors, employees, or representatives is or shall be
an employee of the Trust in the performance of the Distributor's duties
hereunder. The Distributor shall be responsible for its own conduct and the
employment, control, and conduct of its agents and employees and for injury to
such agents or employees or to others through its agents or employees. The
Distributor assumes full responsibility for its agents and employees under
applicable statutes and agrees to pay all employee taxes thereunder.
6. INDEMNIFICATION.
(a) INDEMNIFICATION OF TRUST. The Distributor agrees
to indemnify and hold harmless the Trust and each of its present or former
Trustees, officers, employees, representatives and each person, if any, who
controls or previously controlled the Trust within the meaning of Section 15 of
the 1933 Act against any and all losses, liabilities, damages, claims or
expenses (including the reasonable costs of investigating or defending any
alleged loss, liability, damage, claims or expense and reasonable legal counsel
fees incurred in connection therewith) to which the Trust or any such person may
become subject under the 1933 Act, under any other statute, at common law, or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by the Distributor or any of the
Distributor's directors, officers, employees or representatives, or (ii) may be
based upon any untrue statement or alleged untrue statement of a material fact
contained in a Registration Statement, Prospectus, shareholder report or other
information covering Shares filed or made public by the Trust or any amendment
thereof or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and in conformity with information furnished to the Trust by the
Distributor. In no case (i) is the Distributor's indemnity in favor of the
Trust, or any person indemnified to be deemed to protect the Trust or such
indemnified person against any liability to which the Trust or such person would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Trust's or such person's duties or by
reason of reckless disregard of the Trust's or such person's obligations and
duties under this Agreement or (ii) is the Distributor to be liable under its
indemnity agreement contained in this Paragraph with respect to any claim made
against the Trust or any person indemnified unless the Trust or such person, as
the case may be, shall have notified the Distributor in writing of the claim
within a reasonable time after the summons or other first written notification
giving information of the nature of the claim shall have been served upon the
3
<PAGE>
Trust or upon such person (or after the Trust or such person shall have received
notice of such service on any designated agent). However, failure to notify the
Distributor of any such claim shall not relieve the Distributor from any
liability which the Distributor may have to the Trust or any person against whom
such action is brought otherwise than on account of the Distributor's indemnity
agreement contained in this Paragraph.
The Distributor shall be entitled to participate, at its own
expense, in the defense, or, if the Distributor so elects, to assume the defense
of any suit brought to enforce any such claim, but, if the Distributor elects to
assume the defense, such defense shall be conducted by legal counsel chosen by
the Distributor and satisfactory to the Trust, and to the persons indemnified as
defendant or defendants, in the suit. In the event that the Distributor elects
to assume the defense of any such suit and retain such legal counsel, the Trust,
and the persons indemnified as defendant or defendants in the suit, shall bear
the fees and expenses of any additional legal counsel retained by them. If the
Distributor does not elect to assume the defense of any such suit, the
Distributor will reimburse the Trust and the persons indemnified defendant or
defendants in such suit for the reasonable fees and expenses of any legal
counsel retained by them. The Distributor agrees to promptly notify the Trust of
the commencement of any litigation of proceedings against it or any of its
officers, employees or representatives in connection with the issue or sale of
any Shares.
(b) INDEMNIFICATION OF THE DISTRIBUTOR. The Trust
agrees to indemnify and hold harmless the Distributor and each of its present or
former directors, officers, employees, representatives and each person, if any,
who controls or previously controlled the Distributor within the meaning of
Section 15 of the 1933 Act against any and all losses, liabilities, damages,
claims or expenses (including the reasonable costs of investigating or defending
any alleged loss, liability, damage, claim or expense and reasonable legal
counsel fees incurred in connection therewith) to which the Distributor or any
such person may become subject under the 1933 Act, under any other statute, at
common law, or otherwise, arising out of the acquisition of any Shares by any
person which (i) may be based upon any wrongful act by the Trust or any of the
Trust's Trustees, officers, employees or representatives, or (ii) may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in a Registration Statement, Prospectus, shareholder report or other
information covering Shares filed or made public by the Trust or any amendment
thereof or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading unless such statement or omission was made in
reliance upon and in conformity with information furnished to the Trust by the
Distributor. In no case (i) is the Trust's indemnity in favor of the
Distributor, or any person indemnified to be deemed to protect the Distributor
or such indemnified person against any liability to which the Distributor or
such person would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of such person's duties or by
reason of reckless disregard of such person's obligations and duties under this
Agreement or (ii) is the Trust to be liable under their indemnity agreement
contained in this Paragraph with respect to any claim made against Distributor,
or person indemnified unless the Distributor, or such person, as the case may
be, shall have notified the Trust in writing of the claim within a reasonable
time after the summons or other first written notification giving information of
the nature of the claim shall have been served upon the Distributor or upon such
4
<PAGE>
person (or after the Distributor or such person shall have received notice of
such service on any designated agent). However, failure to notify the Trust of
any such claim shall not relieve the Trust from any liability which the Trust
may have to the Distributor or any person against whom such action is brought
otherwise than on account of the Trust's indemnity agreement contained in this
Paragraph.
The Trust shall be entitled to participate, at its own
expense, in the defense, or, if the Trust so elects, to assume the defense of
any suit brought to enforce any such claim, but if the Trust elects to assume
the defense, such defense shall be conducted by legal counsel chosen by the
Trust and satisfactory to the Distributor and to the persons indemnified as
defendant or defendants, in the suit. In the event that the Trust elects to
assume the defense of any such suit and retain such legal counsel, the
Distributor, the persons indemnified as defendant or defendants in the suit,
shall bear the fees and expenses of any additional legal counsel retained by
them. If the Trust does not elect to assume the defense of any such suit, the
Trust will reimburse the Distributor and the persons indemnified as defendant or
defendants in such suit for the reasonable fees and expenses of any legal
counsel retained by them. The Trust agrees to promptly notify the Distributor of
the commencement of any litigation or proceedings against it or any of its
Trustees, officers, employees or representatives in connection with the issue or
sale of any Shares.
7. AUTHORIZED REPRESENTATIONS. The Distributor is not
authorized by the Trust to give on behalf of the Trust any information or to
make any representations in connection with the sale of Shares other than the
information and representations contained in a Registration Statement or
Prospectus filed with the SEC under the 1933 Act and/or the 1940 Act, covering
Shares, as such Registration Statement and Prospectus may be amended or
supplemented from time to time, or contained in shareholder reports or other
material that may be prepared by or on behalf of the Trust for the Distributor's
use. This shall not be construed to prevent the Distributor from preparing and
distributing tombstone ads and sales literature or other material as it may deem
appropriate. No person other than the Distributor is authorized to act as
principal underwriter (as such term is defined in the 1940 Act) for the Trust.
8. TERM OF AGREEMENT. The term of this Agreement shall begin
on the date first above written, and unless sooner terminated as hereinafter
provided, this Agreement shall remain in effect for a period of two years from
the date first above written. Thereafter, this Agreement shall continue in
effect from year to year, subject to the termination provisions and all other
terms and conditions thereof, so long as such continuation shall be specifically
approved at least annually by (i) the Board of Trustees or by vote of a majority
of the outstanding voting securities of each series of the Trust and, (ii) by
the vote, cast in person at a meeting called for the purpose of voting on such
approval, of a majority of the Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party. The Distributor shall furnish
to the Trust, promptly upon its request, such information as may reasonably be
necessary to evaluate the terms of this Agreement or any extension, renewal or
amendment hereof.
5
<PAGE>
9. AMENDMENT OR ASSIGNMENT OF AGREEMENT. This Agreement may
not be amended or assigned except as permitted by the 1940 Act, and this
Agreement shall automatically and immediately terminate in the event of its
assignment.
10. TERMINATION OF AGREEMENT. This Agreement may be terminated
by either party hereto, without the payment of any penalty, on not more than
upon 60 days' nor less than 30 days' prior notice in writing to the other party;
provided, that in the case of termination by the Trust such action shall have
been authorized by resolution of a majority of the Trustees of the Trust who are
not parties to this Agreement or interested persons of any such party, or by
vote of a majority of the outstanding voting securities of each series of the
Trust.
11. MISCELLANEOUS. The captions in this Agreement are included
for convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same
instrument.
Nothing herein contained shall be deemed to require the Trust
to take any action contrary to its Agreement and Declaration of Trust or
By-Laws, or any applicable statutory or regulatory requirement to which it is
subject or by which it is bound, or to relieve or deprive the Board of Trustees
of the Trust of responsibility for and control of the conduct of the affairs of
the Trust.
12. DEFINITION OF TERMS. Any question of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretation thereof, if any, by the
United States courts or, in the absence of any controlling decision of any such
court, by rules, regulations or orders of the SEC validly issued pursuant to the
1940 Act. Specifically, the terms "vote of a majority of the outstanding voting
securities", "interested persons," "assignment," and "affiliated person," as
used in Paragraphs 8, 9 and 10 hereof, shall have the meanings assigned to them
by Section 2(a) of the 1940 Act. In addition, where the effect of a requirement
of the 1940 Act reflected in any provision of this Agreement is relaxed by a
rule, regulation or order of the SEC, whether of special or of general
application, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
13. COMPLIANCE WITH SECURITIES LAWS. The Trust represents that
it is registered as an open-end management investment company under the 1940
Act, and agrees that it will comply with all the provisions of the 1940 Act and
of the rules and regulations thereunder. The Trust and the Distributor each
agree to comply with all of the applicable terms and provisions of the 1940 Act,
the 1933 Act and, subject to the provisions of Section 4(d), all applicable
"Blue Sky" laws. The Distributor agrees to comply with all of the applicable
terms and provisions of the 1934 Act.
6
<PAGE>
14. NOTICES. Any notice required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, to the Distributor at 4455 E. Camelback Road, Suite 261E,
Phoenix, Arizona 85018 or to the Trust at [trust address].
15. GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of Arizona.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by their officers designated below on the date
first written above.
Allegiance Investment Trust
By:________________________________________
Name:
Title:
FIRST FUND DISTRIBUTORS, INC.
By:________________________________________
Name:
Title:
7
CUSTODY AGREEMENT
Dated ______________, 1999
Between
UMB BANK, N.A.
and
VAN DEVENTER & HOCH
<PAGE>
TABLE OF CONTENTS
Section Page
------- ----
1. Appointment of Custodian 1
2. Definitions 1
(a) Securities 1
(b) Assets 1
(c) Instructions and Special Instructions 1
3. Delivery of Corporate Documents 2
4. Powers and Duties of Custodian and Domestic Subcustodian 2
(a) Safekeeping 3
(b) Manner of Holding Securities 3
(c) Free Delivery of Assets 4
(d) Exchange of Securities 4
(e) Purchases of Assets 4
(f) Sales of Assets 5
(g) Options 5
(h) Futures Contracts 6
(i) Segregated Accounts 6
(j) Depositary Receipts 6
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 6
(l) Interest Bearing Deposits 7
(m) Foreign Exchange Transactions 7
(n) Pledges or Loans of Securities 8
(o) Stock Dividends, Rights, Etc. 8
(p) Routine Dealings 8
(q) Collections 8
(r) Bank Accounts 9
(s) Dividends, Distributions and Redemptions 9
(t) Proceeds from Shares Sold 9
(u) Proxies and Notices; Compliance with the
Shareholders Communication Act of 1985 9
(v) Books and Records 9
(w) Opinion of Fund's Independent Certified Public
Accountants 10
(x) Reports by Independent Certified Public Accountants 10
(y) Bills and Others Disbursements 10
5. Subcustodians 10
(a) Domestic Subcustodians 10
(b) Foreign Subcustodians 10
(c) Interim Subcustodians 11
(d) Special Subcustodians 11
(e) Termination of a Subcustodian 11
(f) Certification Regarding Foreign Subcustodians 11
6. Standard of Care 12
(a) General Standard of Care 12
(b) Actions Prohibited by Applicable Law, Events
Beyond Custodian's Control, Armed Conflict,
Sovereign Risk, etc. 12
(c) Liability for Past Records 12
<PAGE>
(d) Advice of Counsel 12
(e) Advice of the Fund and Others 12
(f) Instructions Appearing to be Genuine 13
(g) Exceptions from Liability 13
7. Liability of the Custodian for Actions of Others 13
(a) Domestic Subcustodians 13
(b) Liability for Acts and Omissions of Foreign
Subcustodians 13
(c) Securities Systems, Interim Subcustodians,
Special Subcustodians, Securities Depositories
and Clearing Agencies 13
(d) Defaults or Insolvency's of Brokers, Banks, Etc. 14
(e) Reimbursement of Expenses 14
8. Indemnification 14
(a) Indemnification by Fund 14
(b) Indemnification by Custodian 14
9. Advances 14
10. Liens 15
11. Compensation 15
12. Powers of Attorney 15
13. Termination and Assignment 15
14. Additional Funds 15
15. Notices 16
16. Miscellaneous 16
<PAGE>
CUSTODY AGREEMENT
This agreement made as of this day of May, 1999, between UMB Bank,
N.A., a national banking association with its principal place of business
located at Kansas City, Missouri (hereinafter "Custodian"), and Van Deventer &
Hoch (the administrator) for each of the Funds listed on Appendix B hereof,
together with such additional Funds which shall be made parties to this
Agreement by the execution of Appendix B hereto (individually, a "Fund" and
collectively, the "Funds").
WITNESSETH:
WHEREAS, each Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended; and
WHEREAS, the Administrator desires to appoint Custodian as its
custodian for the custody of Assets (as hereinafter defined) owned by the Funds
which Assets are to be held in such accounts as the Funds may establish from
time to time; and
WHEREAS, Custodian is willing to accept such appointment on the terms
and conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutually covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN.
The Administrator hereby constitutes and appoints the Custodian as
custodian of Assets belonging to each such Fund which have been or may be from
time to time deposited with the Custodian. Custodian accepts such appointment as
a custodian and agrees to perform the duties and responsibilities of Custodian
as set forth herein on the conditions set forth herein.
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the
meanings so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills, rights,
script, warrants, interim certificates and all negotiable or nonnegotiable paper
commonly known as Securities and other instruments or obligations.
(b) "Assets" shall mean Securities, monies and other property held by
the Custodian for the benefit of a Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested telex,
a written (including, without limitation, facsimile transmission) request,
direction, instruction or certification signed or initialed by or on behalf of a
Fund by an Authorized Person; (ii) a telephonic or other oral communication from
a person the Custodian reasonably believes to be an Authorized Person; or (iii)
a communication effected directly between an electro-mechanical or electronic
device or system (including, without limitation, computers) on behalf of a Fund.
Instructions in the form of oral communications shall be confirmed by the
appropriate Fund by tested telex or in writing in the manner set forth in clause
(i) above, but the lack of such confirmation shall in no way affect any action
taken by the Custodian in reliance upon such oral Instructions prior to the
Custodian's receipt of such confirmation. Each Fund authorizes the Custodian to
record any and all telephonic or other oral Instructions communicated to the
Custodian.
(c)(2) "Special Instructions", as used herein, shall mean Instructions
countersigned or confirmed in writing by the Treasurer or any Assistant
Treasurer of a Fund or any other person designated by the Treasurer of such Fund
in writing, which countersignature or confirmation shall be included on the same
instrument containing the Instructions or on a separate instrument relating
thereto.
1
<PAGE>
(c)(3) Instructions and Special Instructions shall be delivered to the
Custodian at the address and/or telephone, facsimile transmission or telex
number agreed upon from time to time by the Custodian and each Fund.
(c)(4) Where appropriate, Instructions and Special Instructions shall
be continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution
does not violate any of the provisions of its respective charter, articles of
incorporation, articles of association or bylaws and all required corporate
action to authorize the execution and delivery of this Agreement has been taken.
The administrator has furnished the Custodian with copies, properly
certified or authenticated, with all amendments or supplements thereto, of the
following documents for each of the funds:
(a) Certificate of Incorporation (or equivalent document) of the Fund
as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing the
Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statements of additional
information.
The administrator shall promptly furnish the Custodian with copies of
any updates, amendments or supplements to the foregoing documents for each Fund.
In addition, the administrator has delivered or will promptly deliver
for each Fund to the Custodian, copies of the Resolution(s) of its Board of
Directors or Trustees and all amendments or supplements thereto, properly
certified or authenticated, designating certain officers or employees of each
such Fund who will have continuing authority to certify to the Custodian: (a)
the names, titles, signatures and scope of authority of all persons authorized
to give Instructions or any other notice, request, direction, instruction,
certificate or instrument on behalf of each Fund, and (b) the names, titles and
signatures of those persons authorized to countersign or confirm Special
Instructions on behalf of each Fund (in both cases collectively, the "Authorized
Persons" and individually, an "Authorized Person"). Such Resolutions and
certificates may be accepted and relied upon by the Custodian as conclusive
evidence of the facts set forth therein and shall be considered to be in full
force and effect until delivery to the Custodian of a similar Resolution or
certificate to the contrary. Upon delivery of a certificate which deletes or
does not include the name(s) of a person previously authorized to give
Instructions or to countersign or confirm Special Instructions, such persons
shall no longer be considered an Authorized Person authorized to give
Instructions or to countersign or confirm Special Instructions. Unless the
certificate specifically requires that the approval of anyone else will first
have been obtained, the Custodian will be under no obligation to inquire into
the right of the person giving such Instructions or Special Instructions to do
so. Notwithstanding any of the foregoing, no Instructions or Special
Instructions received by the Custodian from a Fund will be deemed to authorize
or permit any director, trustee, officer, employee, or agent of such Fund to
withdraw any of the Assets of such Fund upon the mere receipt of such
authorization, Special Instructions or Instructions from such director, trustee,
officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to
Sections 5(b), (c), or (d) of this Agreement, the Custodian shall have and
perform the powers and duties hereinafter set forth in this Section 4. For
purposes of this Section 4 all references to powers and duties of the
"Custodian" shall also refer to any Domestic Subcustodian appointed pursuant to
Section 5(a).
2
<PAGE>
(a) Safekeeping.
The Custodian will keep safely the Assets of each Fund which are
delivered to it from time to time. The Custodian shall not be responsible for
any property of a Fund held or received by such Fund and not delivered to the
Custodian.
(b) Manner of Holding Securities.
(1) The Custodian shall at all times hold Securities of each Fund
either: (i) by physical possession of the share certificates or other
instruments representing such Securities in registered or bearer form; or (ii)
in book-entry form by a Securities System (as hereinafter defined) in accordance
with the provisions of sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio Securities which
have been delivered to it in physical form, by registering the same in the name
of the appropriate Fund or its nominee, or in the name of the Custodian or its
nominee, for whose actions such Fund and Custodian, respectively, shall be fully
responsible. Upon the receipt of Instructions, the Custodian shall hold such
Securities in street certificate form, so called, with or without any indication
of fiduciary capacity. However, unless it receives Instructions to the contrary,
the Custodian will register all such portfolio Securities in the name of the
Custodian's authorized nominee. All such Securities shall be held in an account
of the Custodian containing only assets of the appropriate Fund or only assets
held by the Custodian as a fiduciary, provided that the records of the Custodian
shall indicate at all times the Fund or other customer for which such Securities
are held in such accounts and the respective interests therein.
(3) The Custodian may deposit and/or maintain domestic Securities
owned by a Fund in, and each Fund hereby approves use of: (a) The Depository
Trust Company; (b) The Participants Trust Company; and (c) any book-entry system
as provided in (i) Subpart O of Treasury Circular No. 300, 31 CFR 306.115, (ii)
Subpart B of Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2, or
(iii) the book-entry regulations of federal agencies substantially in the form
of 31 CFR 306.115. Upon the receipt of Special Instructions, the Custodian may
deposit and/or maintain domestic Securities owned by a Fund in any other
domestic clearing agency registered with the Securities and Exchange Commission
("SEC") under Section 17A of the Securities Exchange Act of 1934 (or as may
otherwise be authorized by the SEC to serve in the capacity of depository or
clearing agent for the Securities or other assets of investment companies) which
acts as a Securities depository. Each of the foregoing shall be referred to in
this Agreement as a "Securities System", and all such Securities Systems shall
be listed on the attached Appendix A. Use of a Securities System shall be in
accordance with applicable Federal Reserve Board and SEC rules and regulations,
if any, and subject to the following provisions:
(i) The Custodian may deposit the Securities directly or
through one or more agents or Subcustodians which are also qualified to act as
custodians for investment companies.
(ii) The Custodian shall deposit and/or maintain the
Securities in a Securities System, provided that such Securities are represented
in an account ("Account") of the Custodian in the Securities System that
includes only assets held by the Custodian as a fiduciary, custodian or
otherwise for customers.
(iii) The books and records of the Custodian shall at all
times identify those Securities belonging to any one or more Funds which are
maintained in a Securities System.
(iv) The Custodian shall pay for Securities purchased for the
account of a Fund only upon (a) receipt of advice from the Securities System
that such Securities have been transferred to the Account of the Custodian in
accordance with the rules of the Securities System, and (b) the making of an
entry on the records of the Custodian to reflect such payment and transfer for
the account of such Fund. The Custodian shall transfer Securities sold for the
account of a Fund only upon (a) receipt of advice from the Securities System
that payment for such Securities has been transferred to the Account of the
Custodian in accordance with the rules of the Securities System, and (b) the
making of an entry on the records of the Custodian to reflect such transfer and
payment for the account of such Fund. Copies of all advices from the Securities
System relating to transfers of Securities for the account of a Fund shall be
maintained for such Fund by the Custodian. The Custodian shall deliver to a Fund
3
<PAGE>
on the next succeeding business day daily transaction reports that shall include
each day's transactions in the Securities System for the account of such Fund.
Such transaction reports shall be delivered to such Fund or any agent designated
by such Fund pursuant to Instructions, by computer or in such other manner as
such Fund and Custodian may agree.
(v) The Custodian shall, if requested by a Fund pursuant to
Instructions, provide such Fund with reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding Securities deposited in the
Securities System.
(vi) Upon receipt of Special Instructions, the Custodian shall
terminate the use of any Securities System on behalf of a Fund as promptly as
practicable and shall take all actions reasonably practicable to safeguard the
Securities of such Fund maintained with such Securities System.
(c) Free Delivery of Assets.
Notwithstanding any other provision of this Agreement and except as
provided in Section 3 hereof, the Custodian, upon receipt of Special
Instructions, will undertake to make free delivery of Assets, provided such
Assets are on hand and available, in connection with a Fund's transactions and
to transfer such Assets to such broker, dealer, Subcustodian, bank, agent,
Securities System or otherwise as specified in such Special Instructions.
(d) Exchange of Securities.
Upon receipt of Instructions, the Custodian will exchange portfolio
Securities held by it for a Fund for other Securities or cash paid in connection
with any reorganization, recapitalization, merger, consolidation, or conversion
of convertible Securities, and will deposit any such Securities in accordance
with the terms of any reorganization or protective plan.
Without Instructions, the Custodian is authorized to exchange
Securities held by it in temporary form for Securities in definitive form, to
surrender Securities for transfer into a name or nominee name as permitted in
Section 4(b)(2), to effect an exchange of shares in a stock split or when the
par value of the stock is changed, to sell any fractional shares, and, upon
receiving payment therefor, to surrender bonds or other Securities held by it at
maturity or call.
(e) Purchases of Assets.
(1) Securities Purchases. In accordance with Instructions, the
Custodian shall, with respect to a purchase of Securities, pay for such
Securities out of monies held for a Fund's account for which the purchase was
made, but only insofar as monies are available therein for such purpose, and
receive the portfolio Securities so purchased. Unless the Custodian has received
Special Instructions to the contrary, such payment will be made only upon
receipt of Securities by the Custodian, a clearing corporation of a national
Securities exchange of which the Custodian is a member, or a Securities System
in accordance with the provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, upon receipt of Instructions: (i) in connection with a repurchase
agreement, the Custodian may release funds to a Securities System prior to the
receipt of advice from the Securities System that the Securities underlying such
repurchase agreement have been transferred by book-entry into the Account
maintained with such Securities System by the Custodian, provided that the
Custodian's instructions to the Securities System require that the Securities
System may make payment of such funds to the other party to the repurchase
agreement only upon transfer by book-entry of the Securities underlying the
repurchase agreement into such Account; (ii) in the case of Interest Bearing
Deposits, currency deposits, and other deposits, foreign exchange transactions,
futures contracts or options, pursuant to Sections 4(g), 4(h), 4(l), and 4(m)
hereof, the Custodian may make payment therefor before receipt of an advice of
transaction; and (iii) in the case of Securities as to which payment for the
Security and receipt of the instrument evidencing the Security are under
generally accepted trade practice or the terms of the instrument representing
the Security expected to take place in different locations or through separate
parties, such as commercial paper which is indexed to foreign currency exchange
rates, derivatives and similar Securities, the Custodian may make payment for
such Securities prior to delivery thereof in accordance with such generally
accepted trade practice or the terms of the instrument representing such
Security.
4
<PAGE>
(2) Other Assets Purchased. Upon receipt of Instructions and
except as otherwise provided herein, the Custodian shall pay for and receive
other Assets for the account of a Fund as provided in Instructions.
(f) Sales of Assets.
(1) Securities Sold. In accordance with Instructions, the
Custodian will, with respect to a sale, deliver or cause to be delivered the
Securities thus designated as sold to the broker or other person specified in
the Instructions relating to such sale. Unless the Custodian has received
Special Instructions to the contrary, such delivery shall be made only upon
receipt of payment therefor in the form of: (a) cash, certified check, bank
cashier's check, bank credit, or bank wire transfer; (b) credit to the account
of the Custodian with a clearing corporation of a national Securities exchange
of which the Custodian is a member; or (c) credit to the Account of the
Custodian with a Securities System, in accordance with the provisions of Section
4(b)(3) hereof. Notwithstanding the foregoing, Securities held in physical form
may be delivered and paid for in accordance with "street delivery custom" to a
broker or its clearing agent, against delivery to the Custodian of a receipt for
such Securities, provided that the Custodian shall have taken reasonable steps
to ensure prompt collection of the payment for, or return of, such Securities by
the broker or its clearing agent, and provided further that the Custodian shall
not be responsible for the selection of or the failure or inability to perform
of such broker or its clearing agent or for any related loss arising from
delivery or custody of such Securities prior to receiving payment therefor.
(2) Other Assets Sold. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall receive payment for and deliver
other Assets for the account of a Fund as provided in Instructions.
(g) Options.
(1) Upon receipt of Instructions relating to the purchase of an
option or sale of a covered call option, the Custodian shall: (a) receive and
retain confirmations or other documents, if any, evidencing the purchase or
writing of the option by a Fund; (b) if the transaction involves the sale of a
covered call option, deposit and maintain in a segregated account the Securities
(either physically or by book-entry in a Securities System) subject to the
covered call option written on behalf of such Fund; and (c) pay, release and/or
transfer such Securities, cash or other Assets in accordance with any notices or
other communications evidencing the expiration, termination or exercise of such
options which are furnished to the Custodian by the Options Clearing Corporation
(the "OCC"), the securities or options exchanges on which such options were
traded, or such other organization as may be responsible for handling such
option transactions.
(2) Upon receipt of Instructions relating to the sale of a naked
option (including stock index and commodity options), the Custodian, the
appropriate Fund and the broker-dealer shall enter into an agreement to comply
with the rules of the OCC or of any registered national securities exchange or
similar organizations(s). Pursuant to that agreement and such Fund's
Instructions, the Custodian shall: (a) receive and retain confirmations or other
documents, if any, evidencing the writing of the option; (b) deposit and
maintain in a segregated account, Securities (either physically or by book-entry
in a Securities System), cash and/or other Assets; and (c) pay, release and/or
transfer such Securities, cash or other Assets in accordance with any such
agreement and with any notices or other communications evidencing the
expiration, termination or exercise of such option which are furnished to the
Custodian by the OCC, the securities or options exchanges on which such options
were traded, or such other organization as may be responsible for handling such
option transactions. The appropriate Fund and the broker-dealer shall be
responsible for determining the quality and quantity of assets held in any
segregated account established in compliance with applicable margin maintenance
requirements and the performance of other terms of any option contract.
5
<PAGE>
(h) Futures Contracts.
Upon receipt of Instructions, the Custodian shall enter into a futures
margin procedural agreement among the appropriate Fund, the Custodian and the
designated futures commission merchant (a "Procedural Agreement"). Under the
Procedural Agreement the Custodian shall: (a) receive and retain confirmations,
if any, evidencing the purchase or sale of a futures contract or an option on a
futures contract by such Fund; (b) deposit and maintain in a segregated account
cash, Securities and/or other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure such Fund's performance of its
obligations under any futures contracts purchased or sold, or any options on
futures contracts written by such Fund, in accordance with the provisions of any
Procedural Agreement designed to comply with the provisions of the Commodity
Futures Trading Commission and/or any commodity exchange or contract market
(such as the Chicago Board of Trade), or any similar organization(s), regarding
such margin deposits; and (c) release Assets from and/or transfer Assets into
such margin accounts only in accordance with any such Procedural Agreements. The
appropriate Fund and such futures commission merchant shall be responsible for
determining the type and amount of Assets held in the segregated account or paid
to the broker-dealer in compliance with applicable margin maintenance
requirements and the performance of any futures contract or option on a futures
contract in accordance with its terms.
(i) Segregated Accounts.
Upon receipt of Instructions, the Custodian shall establish and
maintain on its books a segregated account or accounts for and on behalf of a
Fund, into which account or accounts may be transferred Assets of such Fund,
including Securities maintained by the Custodian in a Securities System pursuant
to Paragraph (b)(3) of this Section 4, said account or accounts to be maintained
(i) for the purposes set forth in Sections 4(g), 4(h) and 4(n) and (ii) for the
purpose of compliance by such Fund with the procedures required by the SEC
Investment Company Act Release Number 10666 or any subsequent release or
releases relating to the maintenance of segregated accounts by registered
investment companies, or (iii) for such other purposes as may be set forth, from
time to time, in Special Instructions. The Custodian shall not be responsible
for the determination of the type or amount of Assets to be held in any
segregated account referred to in this paragraph, or for compliance by the Fund
with required procedures noted in (ii) above.
(j) Depositary Receipts.
Upon receipt of Instructions, the Custodian shall surrender or cause to
be surrendered Securities to the depositary used for such Securities by an
issuer of American Depositary Receipts or International Depositary Receipts
(hereinafter referred to, collectively, as "ADRs"), against a written receipt
therefor adequately describing such Securities and written evidence satisfactory
to the organization surrendering the same that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such Securities in the
name of the Custodian or a nominee of the Custodian, for delivery in accordance
with such instructions.
Upon receipt of Instructions, the Custodian shall surrender or cause to
be surrendered ADRs to the issuer thereof, against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the organization surrendering the same that the issuer of the ADRs has
acknowledged receipt of instructions to cause its depository to deliver the
Securities underlying such ADRs in accordance with such instructions.
(k) Corporate Actions, Put Bonds, Called Bonds, Etc.
Upon receipt of Instructions, the Custodian shall: (a) deliver
warrants, puts, calls, rights or similar Securities to the issuer or trustee
thereof (or to the agent of such issuer or trustee) for the purpose of exercise
or sale, provided that the new Securities, cash or other Assets, if any,
acquired as a result of such actions are to be delivered to the Custodian; and
(b) deposit Securities upon invitations for tenders thereof, provided that the
consideration for such Securities is to be paid or delivered to the Custodian,
or the tendered Securities are to be returned to the Custodian.
Notwithstanding any provision of this Agreement to the contrary, the
Custodian shall take all necessary action, unless otherwise directed to the
contrary in Instructions, to comply with the terms of all mandatory or
6
<PAGE>
compulsory exchanges, calls, tenders, redemptions, or similar rights of security
ownership, and shall notify the appropriate Fund of such action in writing by
facsimile transmission or in such other manner as such Fund and Custodian may
agree in writing.
The Fund agrees that if it gives an Instruction for the performance of
an act on the last permissible date of a period established by any optional
offer or on the last permissible date for the performance of such act, the Fund
shall hold the Bank harmless from any adverse consequences in connection with
acting upon or failing to act upon such Instructions.
(l) Interest Bearing Deposits.
Upon receipt of Instructions directing the Custodian to purchase
interest bearing fixed term and call deposits (hereinafter referred to,
collectively, as "Interest Bearing Deposits") for the account of a Fund, the
Custodian shall purchase such Interest Bearing Deposits in the name of such Fund
with such banks or trust companies, including the Custodian, any Subcustodian or
any subsidiary or affiliate of the Custodian (hereinafter referred to as
"Banking Institutions"), and in such amounts as such Fund may direct pursuant to
Instructions. Such Interest Bearing Deposits may be denominated in U.S. dollars
or other currencies, as such Fund may determine and direct pursuant to
Instructions. The responsibilities of the Custodian to a Fund for Interest
Bearing Deposits issued by the Custodian shall be that of a U.S. bank for a
similar deposit. With respect to Interest Bearing Deposits other than those
issued by the Custodian, (a) the Custodian shall be responsible for the
collection of income and the transmission of cash to and from such accounts; and
(b) the Custodian shall have no duty with respect to the selection of the
Banking Institution or for the failure of such Banking Institution to pay upon
demand.
(m) Foreign Exchange Transactions.
(l) Each Fund hereby appoints the Custodian as its agent in the
execution of all currency exchange transactions. The Custodian agrees to provide
exchange rate and U.S. Dollar information, in writing, to the Funds. Such
information shall be supplied by the Custodian at least by the business day
prior to the value date of the foreign exchange transaction, provided that the
Custodian receives the request for such information at least two business days
prior to the value date of the transaction.
(2) Upon receipt of Instructions, the Custodian shall settle
foreign exchange contracts or options to purchase and sell foreign currencies
for spot and future delivery on behalf of and for the account of a Fund with
such currency brokers or Banking Institutions as such Fund may determine and
direct pursuant to Instructions. If, in its Instructions, a Fund does not direct
the Custodian to utilize a particular currency broker or Banking Institution,
the Custodian is authorized to select such currency broker or Banking
Institution as it deems appropriate to execute the Fund's foreign currency
transaction.
(3) Each Fund accepts full responsibility for its use of third
party foreign exchange brokers and for execution of said foreign exchange
contracts and understands that the Fund shall be responsible for any and all
costs and interest charges which may be incurred as a result of the failure or
delay of its third party broker to deliver foreign exchange. The Custodian shall
have no responsibility or liability with respect to the selection of the
currency brokers or Banking Institutions with which a Fund deals or the
performance of such brokers or Banking Institutions.
(4) Notwithstanding anything to the contrary contained herein,
upon receipt of Instructions the Custodian may, in connection with a foreign
exchange contract, make free outgoing payments of cash in the form of U.S.
Dollars or foreign currency prior to receipt of confirmation of such foreign
exchange contract or confirmation that the countervalue currency completing such
contract has been delivered or received.
(5) The Custodian shall not be obligated to enter into foreign
exchange transactions as principal. However, if the Custodian has made available
to a Fund its services as a principal in foreign exchange transactions and
subject to any separate agreement between the parties relating to such
transactions, the Custodian shall enter into foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund, with the Custodian as principal.
7
<PAGE>
(n) Pledges or Loans of Securities.
(1) Upon receipt of Instructions from a Fund, the Custodian will
release or cause to be released Securities held in custody to the pledgees
designated in such Instructions by way of pledge or hypothecation to secure
loans incurred by such Fund with various lenders including but not limited to
UMB Bank, n.a.; provided, however, that the Securities shall be released only
upon payment to the Custodian of the monies borrowed, except that in cases where
additional collateral is required to secure existing borrowings, further
Securities may be released or delivered, or caused to be released or delivered
for that purpose upon receipt of Instructions. Upon receipt of Instructions, the
Custodian will pay, but only from funds available for such purpose, any such
loan upon re-delivery to it of the Securities pledged or hypothecated therefor
and upon surrender of the note or notes evidencing such loan. In lieu of
delivering collateral to a pledgee, the Custodian, on the receipt of
Instructions, shall transfer the pledged Securities to a segregated account for
the benefit of the pledgee.
(2) Upon receipt of Special Instructions, and execution of a
separate Securities Lending Agreement, the Custodian will release Securities
held in custody to the borrower designated in such Instructions and may, except
as otherwise provided below, deliver such Securities prior to the receipt of
collateral, if any, for such borrowing, provided that, in case of loans of
Securities held by a Securities System that are secured by cash collateral, the
Custodian's instructions to the Securities System shall require that the
Securities System deliver the Securities of the appropriate Fund to the borrower
thereof only upon receipt of the collateral for such borrowing. The Custodian
shall have no responsibility or liability for any loss arising from the delivery
of Securities prior to the receipt of collateral. Upon receipt of Instructions
and the loaned Securities, the Custodian will release the collateral to the
borrower.
(o) Stock Dividends, Rights, Etc.
The Custodian shall receive and collect all stock dividends, rights,
and other items of like nature and, upon receipt of Instructions, take action
with respect to the same as directed in such Instructions.
(p) Routine Dealings.
The Custodian will, in general, attend to all routine and mechanical
matters in accordance with industry standards in connection with the sale,
exchange, substitution, purchase, transfer, or other dealings with Securities or
other property of each Fund except as may be otherwise provided in this
Agreement or directed from time to time by Instructions from any particular
Fund. The Custodian may also make payments to itself or others from the Assets
for disbursements and out-of-pocket expenses incidental to handling Securities
or other similar items relating to its duties under this Agreement, provided
that all such payments shall be accounted for to the appropriate Fund.
(q) Collections.
The Custodian shall (a) collect amounts due and payable to each Fund
with respect to portfolio Securities and other Assets; (b) promptly credit to
the account of each Fund all income and other payments relating to portfolio
Securities and other Assets held by the Custodian hereunder upon Custodian's
receipt of such income or payments or as otherwise agreed in writing by the
Custodian and any particular Fund; (c) promptly endorse and deliver any
instruments required to effect such collection; and (d) promptly execute
ownership and other certificates and affidavits for all federal, state, local
and foreign tax purposes in connection with receipt of income or other payments
with respect to portfolio Securities and other Assets, or in connection with the
transfer of such Securities or other Assets; provided, however, that with
respect to portfolio Securities registered in so-called street name, or physical
Securities with variable interest rates, the Custodian shall use its best
efforts to collect amounts due and payable to any such Fund. The Custodian shall
notify a Fund in writing by facsimile transmission or in such other manner as
such Fund and Custodian may agree in writing if any amount payable with respect
to portfolio Securities or other Assets is not received by the Custodian when
due. The Custodian shall not be responsible for the collection of amounts due
and payable with respect to portfolio Securities or other Assets that are in
default.
8
<PAGE>
(r) Bank Accounts.
Upon Instructions, the Custodian shall open and operate a bank account
or accounts on the books of the Custodian; provided that such bank account(s)
shall be in the name of the Custodian or a nominee thereof, for the account of
one or more Funds, and shall be subject only to draft or order of the Custodian.
The responsibilities of the Custodian to any one or more such Funds for deposits
accepted on the Custodian's books shall be that of a U.S. bank for a similar
deposit.
(s) Dividends, Distributions and Redemptions.
To enable each Fund to pay dividends or other distributions to
shareholders of each such Fund and to make payment to shareholders who have
requested repurchase or redemption of their shares of each such Fund
(collectively, the "Shares"), the Custodian shall release cash or Securities
insofar as available. In the case of cash, the Custodian shall, upon the receipt
of Instructions, transfer such funds by check or wire transfer to any account at
any bank or trust company designated by each such Fund in such Instructions. In
the case of Securities, the Custodian shall, upon the receipt of Special
Instructions, make such transfer to any entity or account designated by each
such Fund in such Special Instructions.
(t) Proceeds from Shares Sold.
The Custodian shall receive funds representing cash payments received
for shares issued or sold from time to time by each Fund, and shall credit such
funds to the account of the appropriate Fund. The Custodian shall notify the
appropriate Fund of Custodian's receipt of cash in payment for shares issued by
such Fund by facsimile transmission or in such other manner as such Fund and the
Custodian shall agree. Upon receipt of Instructions, the Custodian shall: (a)
deliver all federal funds received by the Custodian in payment for shares as may
be set forth in such Instructions and at a time agreed upon between the
Custodian and such Fund; and (b) make federal funds available to a Fund as of
specified times agreed upon from time to time by such Fund and the Custodian, in
the amount of checks received in payment for shares which are deposited to the
accounts of such Fund.
(u) Proxies and Notices; Compliance with the Shareholders Communication
Act of 1985.
The Custodian shall deliver or cause to be delivered to the appropriate
Fund all forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to Securities owned by such Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Instructions, the Custodian shall execute and deliver, or
cause such Subcustodian or nominee to execute and deliver, such proxies or other
authorizations as may be required. Except as directed pursuant to Instructions,
neither the Custodian nor any Subcustodian or nominee shall vote upon any such
Securities, or execute any proxy to vote thereon, or give any consent or take
any other action with respect thereto.
The Custodian will not release the identity of any Fund to an issuer
which requests such information pursuant to the Shareholder Communications Act
of 1985 for the specific purpose of direct communications between such issuer
and any such Fund unless a particular Fund directs the Custodian otherwise in
writing.
(v) Books and Records.
The Custodian shall maintain such records relating to its activities
under this Agreement as are required to be maintained by Rule 31a-1 under the
Investment Company Act of 1940 ("the 1940 Act") and to preserve them for the
periods prescribed in Rule 31a-2 under the 1940 Act. These records shall be open
for inspection by duly authorized officers, employees or agents (including
independent public accountants) of the appropriate Fund during normal business
hours of the Custodian.
The Custodian shall provide accountings relating to its activities
under this Agreement as shall be agreed upon by each Fund and the Custodian.
9
<PAGE>
(w) Opinion of Fund's Independent Certified Public Accountants.
The Custodian shall take all reasonable action as each Fund may request
to obtain from year to year favorable opinions from each such Fund's independent
certified public accountants with respect to the Custodian's activities
hereunder and in connection with the preparation of each such Fund's periodic
reports to the SEC and with respect to any other requirements of the SEC.
(x) Reports by Independent Certified Public Accountants.
At the request of a Fund, the Custodian shall deliver to such Fund a
written report prepared by the Custodian's independent certified public
accountants with respect to the services provided by the Custodian under this
Agreement, including, without limitation, the Custodian's accounting system,
internal accounting control and procedures for safeguarding cash, Securities and
other Assets, including cash, Securities and other Assets deposited and/or
maintained in a Securities System or with a Subcustodian. Such report shall be
of sufficient scope and in sufficient detail as may reasonably be required by
such Fund and as may reasonably be obtained by the Custodian.
(y) Bills and Other Disbursements.
Upon receipt of Instructions, the Custodian shall pay, or cause to be
paid, all bills, statements, or other obligations of a Fund.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic Subcustodians, Foreign
Subcustodians, Special Subcustodians, or Interim Subcustodians (as each are
hereinafter defined) to act on behalf of any one or more Funds. A Domestic
Subcustodian, in accordance with the provisions of this Agreement, may also
appoint a Foreign Subcustodian, Special Subcustodian, or Interim Subcustodian to
act on behalf of any one or more Funds. For purposes of this Agreement, all
Domestic Subcustodians, Foreign Subcustodians, Special Subcustodians and Interim
Subcustodians shall be referred to collectively as "Subcustodians".
(a) Domestic Subcustodians.
The Custodian may, at any time and from time to time, appoint any bank
as defined in Section 2(a)(5) of the 1940 Act or any trust company or other
entity, any of which meet the requirements of a custodian under Section 17(f) of
the 1940 Act and the rules and regulations thereunder, to act for the Custodian
on behalf of any one or more Funds as a subcustodian for purposes of holding
Assets of such Fund(s) and performing other functions of the Custodian within
the United States (a "Domestic Subcustodian"). Each Fund shall approve in
writing the appointment of the proposed Domestic Subcustodian; and the
Custodian's appointment of any such Domestic Subcustodian shall not be effective
without such prior written approval of the Fund(s). Each such duly approved
Domestic Subcustodian shall be listed on Appendix A attached hereto, as it may
be amended, from time to time.
(b) Foreign Subcustodians.
The Custodian may at any time appoint, or cause a Domestic Subcustodian
to appoint, any bank, trust company or other entity meeting the requirements of
an "eligible foreign custodian" under Section 17(f) of the 1940 Act and the
rules and regulations thereunder to act for the Custodian on behalf of any one
or more Funds as a subcustodian or sub-subcustodian (if appointed by a Domestic
Subcustodian) for purposes of holding Assets of the Fund(s) and performing other
functions of the Custodian in countries other than the United States of America
(hereinafter referred to as a "Foreign Subcustodian" in the context of either a
subcustodian or a sub-subcustodian); provided that the Custodian shall have
obtained written confirmation from each Fund of the approval of the Board of
Directors or other governing body of each such Fund (which approval may be
withheld in the sole discretion of such Board of Directors or other governing
body or entity) with respect to (i) the identity of any proposed Foreign
Subcustodian (including branch designation), (ii) the country or countries in
which, and the securities depositories or clearing agencies (hereinafter
"Securities Depositories and Clearing Agencies"), if any, through which, the
Custodian or any proposed Foreign Subcustodian is authorized to hold Securities
and other Assets of each such Fund, and (iii) the form and terms of the
subcustodian agreement to be entered into with such proposed Foreign
10
<PAGE>
Subcustodian. Each such duly approved Foreign Subcustodian and the countries
where and the Securities Depositories and Clearing Agencies through which they
may hold Securities and other Assets of the Fund(s) shall be listed on Appendix
A attached hereto, as it may be amended, from time to time. Each Fund shall be
responsible for informing the Custodian sufficiently in advance of a proposed
investment which is to be held in a country in which no Foreign Subcustodian is
authorized to act, in order that there shall be sufficient time for the
Custodian, or any Domestic Subcustodian, to effect the appropriate arrangements
with a proposed Foreign Subcustodian, including obtaining approval as provided
in this Section 5(b). In connection with the appointment of any Foreign
Subcustodian, the Custodian shall, or shall cause the Domestic Subcustodian to,
enter into a subcustodian agreement with the Foreign Subcustodian in form and
substance approved by each such Fund. The Custodian shall not consent to the
amendment of, and shall cause any Domestic Subcustodian not to consent to the
amendment of, any agreement entered into with a Foreign Subcustodian, which
materially affects any Fund's rights under such agreement, except upon prior
written approval of such Fund pursuant to Special Instructions.
(c) Interim Subcustodians.
Notwithstanding the foregoing, in the event that a Fund shall invest in
an Asset to be held in a country in which no Foreign Subcustodian is authorized
to act, the Custodian shall notify such Fund in writing by facsimile
transmission or in such other manner as such Fund and the Custodian shall agree
in writing of the unavailability of an approved Foreign Subcustodian in such
country; and upon the receipt of Special Instructions from such Fund, the
Custodian shall, or shall cause its Domestic Subcustodian to, appoint or approve
an entity (referred to herein as an "Interim Subcustodian") designated in such
Special Instructions to hold such Security or other Asset.
(d) Special Subcustodians.
Upon receipt of Special Instructions, the Custodian shall, on behalf of
a Fund, appoint one or more banks, trust companies or other entities designated
in such Special Instructions to act for the Custodian on behalf of such Fund as
a subcustodian for purposes of: (i) effecting third-party repurchase
transactions with banks, brokers, dealers or other entities through the use of a
common custodian or subcustodian; (ii) providing depository and clearing agency
services with respect to certain variable rate demand note Securities, (iii)
providing depository and clearing agency services with respect to dollar
denominated Securities, and (iv) effecting any other transactions designated by
such Fund in such Special Instructions. Each such designated subcustodian
(hereinafter referred to as a "Special Subcustodian") shall be listed on
Appendix A attached hereto, as it may be amended from time to time. In
connection with the appointment of any Special Subcustodian, the Custodian shall
enter into a subcustodian agreement with the Special Subcustodian in form and
substance approved by the appropriate Fund in Special Instructions. The
Custodian shall not amend any subcustodian agreement entered into with a Special
Subcustodian, or waive any rights under such agreement, except upon prior
approval pursuant to Special Instructions.
(e) Termination of a Subcustodian.
The Custodian may, at any time in its discretion upon notification to
the appropriate Fund(s), terminate any Subcustodian of such Fund(s) in
accordance with the termination provisions under the applicable subcustodian
agreement, and upon the receipt of Special Instructions, the Custodian will
terminate any Subcustodian in accordance with the termination provisions under
the applicable subcustodian agreement.
(f) Certification Regarding Foreign Subcustodians.
Upon request of a Fund, the Custodian shall deliver to such Fund a
certificate stating: (i) the identity of each Foreign Subcustodian then acting
on behalf of the Custodian; (ii) the countries in which and the Securities
Depositories and Clearing Agencies through which each such Foreign Subcustodian
is then holding cash, Securities and other Assets of such Fund; and (iii) such
other information as may be requested by such Fund, and as the Custodian shall
be reasonably able to obtain, to evidence compliance with rules and regulations
under the 1940 Act.
11
<PAGE>
6. STANDARD OF CARE.
(a) General Standard of Care.
The Custodian shall be liable to a Fund for all losses, damages and
reasonable costs and expenses suffered or incurred by such Fund resulting from
the negligence or willful misfeasance of the Custodian; provided, however, in no
event shall the Custodian be liable for special, indirect or consequential
damages arising under or in connection with this Agreement.
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's
Control, Sovereign Risk, Etc.
In no event shall the Custodian or any Domestic Subcustodian incur
liability hereunder (i) if the Custodian or any Subcustodian or Securities
System, or any subcustodian, Securities System, Securities Depository or
Clearing Agency utilized by the Custodian or any such Subcustodian, or any
nominee of the Custodian or any Subcustodian (individually, a "Person") is
prevented, forbidden or delayed from performing, or omits to perform, any act or
thing which this Agreement provides shall be performed or omitted to be
performed, by reason of: (a) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or of
any foreign country, or political subdivision thereof or of any court of
competent jurisdiction (and neither the Custodian nor any other Person shall be
obligated to take any action contrary thereto); or (b) any event beyond the
control of the Custodian or other Person such as armed conflict, riots, strikes,
lockouts, labor disputes, equipment or transmission failures, natural disasters,
or failure of the mails, transportation, communications or power supply; or (ii)
for any loss, damage, cost or expense resulting from "Sovereign Risk." A
"Sovereign Risk" shall mean nationalization, expropriation, currency
devaluation, revaluation or fluctuation, confiscation, seizure, cancellation,
destruction or similar action by any governmental authority, de facto or de
jure; or enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting a Fund's Assets; or acts of armed conflict,
terrorism, insurrection or revolution; or any other act or event beyond the
Custodian's or such other Person's control.
(c) Liability for Past Records.
Neither the Custodian nor any Domestic Subcustodian shall have any
liability in respect of any loss, damage or expense suffered by a Fund, insofar
as such loss, damage or expense arises from the performance of the Custodian or
any Domestic Subcustodian in reliance upon records that were maintained for such
Fund by entities other than the Custodian or any Domestic Subcustodian prior to
the Custodian's employment hereunder.
(d) Advice of Counsel.
The Custodian and all Domestic Subcustodians shall be entitled to
receive and act upon advice of counsel of its own choosing on all matters. The
Custodian and all Domestic Subcustodians shall be without liability for any
actions taken or omitted in good faith pursuant to the advice of counsel.
(e) Advice of the Fund and Others.
The Custodian and any Domestic Subcustodian may rely upon the advice of
any Fund and upon statements of such Fund's accountants and other persons
believed by it in good faith to be expert in matters upon which they are
consulted, and neither the Custodian nor any Domestic Subcustodian shall be
liable for any actions taken or omitted, in good faith, pursuant to such advice
or statements.
12
<PAGE>
(f) Instructions Appearing to be Genuine.
The Custodian and all Domestic Subcustodians shall be fully protected
and indemnified in acting as a custodian hereunder upon any Resolutions of the
Board of Directors or Trustees, Instructions, Special Instructions, advice,
notice, request, consent, certificate, instrument or paper appearing to it to be
genuine and to have been properly executed and shall, unless otherwise
specifically provided herein, be entitled to receive as conclusive proof of any
fact or matter required to be ascertained from any Fund hereunder a certificate
signed by any officer of such Fund authorized to countersign or confirm Special
Instructions.
(g) Exceptions from Liability.
Without limiting the generality of any other provisions hereof, neither
the Custodian nor any Domestic Subcustodian shall be under any duty or
obligation to inquire into, nor be liable for:
(i) the validity of the issue of any Securities purchased by or
for any Fund, the legality of the purchase thereof or evidence of ownership
required to be received by any such Fund, or the propriety of the decision to
purchase or amount paid therefor;
(ii) the legality of the sale of any Securities by or for any
Fund, or the propriety of the amount for which the same were sold; or
(iii) any other expenditures, encumbrances of Securities,
borrowings or similar actions with respect to any Fund's Assets;
and may, until notified to the contrary, presume that all Instructions or
Special Instructions received by it are not in conflict with or in any way
contrary to any provisions of any such Fund's Declaration of Trust, Partnership
Agreement, Articles of Incorporation or By-Laws or votes or proceedings of the
shareholders, trustees, partners or directors of any such Fund, or any such
Fund's currently effective Registration Statement on file with the SEC.
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) Domestic Subcustodians
The Custodian shall be liable for the acts or omissions of any Domestic
Subcustodian to the same extent as if such actions or omissions were performed
by the Custodian itself.
(b) Liability for Acts and Omissions of Foreign Subcustodians.
The Custodian shall be liable to a Fund for any loss or damage to such
Fund caused by or resulting from the acts or omissions of any Foreign
Subcustodian to the extent that, under the terms set forth in the subcustodian
agreement between the Custodian or a Domestic Subcustodian and such Foreign
Subcustodian, the Foreign Subcustodian has failed to perform in accordance with
the standard of conduct imposed under such subcustodian agreement and the
Custodian or Domestic Subcustodian recovers from the Foreign Subcustodian under
the applicable subcustodian agreement.
(c) Securities Systems, Interim Subcustodians, Special Subcustodians,
Securities Depositories and Clearing Agencies.
The Custodian shall not be liable to any Fund for any loss, damage or
expense suffered or incurred by such Fund resulting from or occasioned by the
actions or omissions of a Securities System, Interim Subcustodian, Special
Subcustodian, or Securities Depository and Clearing Agency unless such loss,
damage or expense is caused by, or results from, the negligence or willful
misfeasance of the Custodian.
13
<PAGE>
(d) Defaults or Insolvency's of Brokers, Banks, Etc.
The Custodian shall not be liable for any loss, damage or expense
suffered or incurred by any Fund resulting from or occasioned by the actions,
omissions, neglects, defaults or insolvency of any broker, bank, trust company
or any other person with whom the Custodian may deal (other than any of such
entities acting as a Subcustodian, Securities System or Securities Depository
and Clearing Agency, for whose actions the liability of the Custodian is set out
elsewhere in this Agreement) unless such loss, damage or expense is caused by,
or results from, the negligence or willful misfeasance of the Custodian.
(e) Reimbursement of Expenses.
Each Fund agrees to reimburse the Custodian for all out-of-pocket
expenses incurred by the Custodian in connection with this Agreement, but
excluding salaries and usual overhead expenses.
8. INDEMNIFICATION.
(a) Indemnification by Fund.
Subject to the limitations set forth in this Agreement, each Fund
agrees to indemnify and hold harmless the Custodian and its nominees from all
losses, damages and expenses (including attorneys' fees) suffered or incurred by
the Custodian or its nominee caused by or arising from actions taken by the
Custodian, its employees or agents in the performance of its duties and
obligations under this Agreement, including, but not limited to, any
indemnification obligations undertaken by the Custodian under any relevant
subcustodian agreement; provided, however, that such indemnity shall not apply
to the extent the Custodian is liable under Sections 6 or 7 hereof.
If any Fund requires the Custodian to take any action with respect to
Securities, which action involves the payment of money or which may, in the
opinion of the Custodian, result in the Custodian or its nominee assigned to
such Fund being liable for the payment of money or incurring liability of some
other form, such Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
(b) Indemnification by Custodian.
Subject to the limitations set forth in this Agreement and in addition
to the obligations provided in Sections 6 and 7, the Custodian agrees to
indemnify and hold harmless each Fund from all losses, damages and expenses
suffered or incurred by each such Fund caused by the negligence or willful
misfeasance of the Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing Agency
acting either directly or indirectly under agreement with the Custodian (each of
which for purposes of this Section 9 shall be referred to as "Custodian"), makes
any payment or transfer of funds on behalf of any Fund as to which there would
be, at the close of business on the date of such payment or transfer,
insufficient funds held by the Custodian on behalf of any such Fund, the
Custodian may, in its discretion without further Instructions, provide an
advance ("Advance") to any such Fund in an amount sufficient to allow the
completion of the transaction by reason of which such payment or transfer of
funds is to be made. In addition, in the event the Custodian is directed by
Instructions to make any payment or transfer of funds on behalf of any Fund as
to which it is subsequently determined that such Fund has overdrawn its cash
account with the Custodian as of the close of business on the date of such
payment or transfer, said overdraft shall constitute an Advance. Any Advance
shall be payable by the Fund on behalf of which the Advance was made on demand
by Custodian, unless otherwise agreed by such Fund and the Custodian, and shall
accrue interest from the date of the Advance to the date of payment by such Fund
to the Custodian at a rate agreed upon in writing from time to time by the
Custodian and such Fund. It is understood that any transaction in respect of
which the Custodian shall have made an Advance, including but not limited to a
foreign exchange contract or transaction in respect of which the Custodian is
not acting as a principal, is for the account of and at the risk of the Fund on
14
<PAGE>
behalf of which the Advance was made, and not, by reason of such Advance, deemed
to be a transaction undertaken by the Custodian for its own account and risk.
The Custodian and each of the Funds which are parties to this Agreement
acknowledge that the purpose of Advances is to finance temporarily the purchase
or sale of Securities for prompt delivery in accordance with the settlement
terms of such transactions or to meet emergency expenses not reasonably
foreseeable by a Fund. The Custodian shall promptly notify the appropriate Fund
of any Advance. Such notification shall be sent by facsimile transmission or in
such other manner as such Fund and the Custodian may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to
secure payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any purpose
or in the event that the Bank or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of its duties hereunder, except such as may arise from its or
its nominee's negligent action, negligent failure to act or willful misconduct,
any Property at any time held for the Custody Account shall be security therefor
and the Fund hereby grants a security interest therein to the Bank. The Fund
shall promptly reimburse the Bank for any such advance of cash or securities or
any such taxes, charges, expenses, assessments, claims or liabilities upon
request for payment, but should the Fund fail to so reimburse the Bank, the Bank
shall be entitled to dispose of such Property to the extent necessary to obtain
reimbursement. The Bank shall be entitled to debit any account of the Fund with
the Bank including, without limitation, the Custody Account, in connection with
any such advance and any interest on such advance as the Bank deems reasonable.
11. COMPENSATION.
Each Fund will pay to the Custodian such compensation as is agreed to
in writing by the Custodian and each such Fund from time to time. Such
compensation, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 7(e), shall be billed to each such Fund
and paid in cash to the Custodian.
12. POWERS OF ATTORNEY.
Upon request, each Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
Any Fund or the Custodian may terminate this Agreement by notice in
writing, delivered or mailed, postage prepaid (certified mail, return receipt
requested) to the other not less than 90 days prior to the date upon which such
termination shall take effect. Upon termination of this Agreement, the
appropriate Fund shall pay to the Custodian such fees as may be due the
Custodian hereunder as well as its reimbursable disbursements, costs and
expenses paid or incurred. Upon termination of this Agreement, the Custodian
shall deliver, at the terminating party's expense, all Assets held by it
hereunder to the appropriate Fund or as otherwise designated by such Fund by
Special Instructions. Upon such delivery, the Custodian shall have no further
obligations or liabilities under this Agreement except as to the final
resolution of matters relating to activity occurring prior to the effective date
of termination.
This Agreement may not be assigned by the Custodian or any Fund without
the respective consent of the other, duly authorized by a resolution by its
Board of Directors or Trustees.
14. ADDITIONAL FUNDS.
An additional Fund or Funds may become a party to this Agreement after
the date hereof by an instrument in writing to such effect signed by such Fund
or Funds and the Custodian. If this Agreement is terminated as to one or more of
the Funds (but less than all of the Funds) or if an additional Fund or Funds
shall become a party to this Agreement, there shall be delivered to each party
an Appendix B or an amended Appendix B, signed by each of the additional Funds
(if any) and each of the remaining Funds as well as the Custodian, deleting or
adding such Fund or Funds, as the case may be. The termination of this Agreement
as to less than all of the Funds shall not affect the obligations of the
15
<PAGE>
Custodian and the remaining Funds hereunder as set forth on the signature page
hereto and in Appendix B as revised from time to time.
15. NOTICES.
As to each Fund, notices, requests, instructions and other writings
delivered to [INSERT FUND COMPLEX ADDRESS], postage prepaid, or to such other
address as any particular Fund may have designated to the Custodian in writing,
shall be deemed to have been properly delivered or given to a Fund.
Notices, requests, instructions and other writings delivered to the
Securities Administration department of the Custodian at its office at 928 Grand
Blvd., 10th Floor, Attn: Ralph Santoro, Kansas City, Missouri 64106, or mailed
postage prepaid, to the Custodian's Securities Administration department, Post
Office Box 226, Attn: Ralph Santoro, Kansas City, Missouri 64141, or to such
other addresses as the Custodian may have designated to each Fund in writing,
shall be deemed to have been properly delivered or given to the Custodian
hereunder; provided, however, that procedures for the delivery of Instructions
and Special Instructions shall be governed by Section 2(c) hereof.
16. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the State of Missouri
and shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement shall be binding
upon, and inure to the benefit of, and be enforceable by the respective
successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended, modified or waived,
in any manner except in writing, properly executed by both parties hereto;
provided, however, Appendix A may be amended from time to time as Domestic
Subcustodians, Foreign Subcustodians, Special Subcustodians, and Securities
Depositories and Clearing Agencies are approved or terminated according to the
terms of this Agreement.
(d) The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of execution
hereof.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(g) The following terms are defined terms within the meaning of this
Agreement, and the definitions thereof are found in the following sections of
the Agreement:
Term Section
---- -------
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2(b)
Authorized Person 3
Banking Institution 4(1)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2(c)(1)
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(1)
Liens 10
OCC 4(g)(1)
Person 6(b)
16
<PAGE>
Term Section
---- -------
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2(a)
Securities Depositories and Clearing Agencies 5(b)
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2(c)(2)
Special Subcustodian 5(d)
Subcustodian 5
1940 Act 4(v)
(h) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid by any court of competent
jurisdiction, the remaining portion or portions shall be considered severable
and shall not be affected, and the rights and obligations of the parties shall
be construed and enforced as if this Agreement did not contain the particular
part, term or provision held to be illegal or invalid.
(i) This Agreement constitutes the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof, and accordingly
supersedes, as of the effective date of this Agreement, any custodian agreement
heretofore in effect between the Fund and the Custodian.
IN WITNESS WHEREOF, the parties hereto have caused this Custody
Agreement to be executed by their respective duly authorized officers.
VAN DEVENTER & HOCH
Attest: By:
------------------------------ -----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Date:
---------------------------------
UMB BANK, N.A.
Attest: By:
------------------------------ -----------------------------------
Name: Ralph R. Santoro
---------------------------------
Title: Senior Vice President
--------------------------------
Date:
---------------------------------
17
<PAGE>
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant Trust Company
SPECIAL SUBCUSTODIANS:
SECURITIES DEPOSITORIES
Countries Foreign Subcustodians Clearing Agencies
- --------- --------------------- -----------------
Euroclear
[INSERT MUTUAL FUND COMPLEX] UMB BANK, N.A.
By: By:
---------------------------------- -----------------------------------
Name: Name: Ralph R. Santoro
-------------------------------- ---------------------------------
Title: Title: Senior Vice President
------------------------------- --------------------------------
Date: Date:
-------------------------------- ---------------------------------
18
<PAGE>
APPENDIX B
CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are
hereby made parties to the Custody Agreement dated ______________, 199_, with
UMB Bank, n.a. ("Custodian") and _____________________________, and agree to be
bound by all the terms and conditions contained in said Agreement:
ALLEGIANCE INVESTMENT TRUST AMERICAN VALUE FUND
ALLEGIANCE INVESTMENT TRUST CALIFORNIA TAX-FREE INTERMEDIATE BOND FUND
ALLEGIANCE INVESTMENT TRUST
Attest: By:
------------------------------ -----------------------------------
Name:
---------------------------------
Title:
--------------------------------
Date:
---------------------------------
UMB BANK, N.A.
Attest: By:
------------------------------ -----------------------------------
Name: Ralph R. Santoro
---------------------------------
Title: Senior Vice President
--------------------------------
Date:
---------------------------------
19
ALLEGIANCE INVESTMENT TRUST
SUBADMINISTRATION AGREEMENT
AGREEMENT made this ___ day of May, 1999, by and between VAN DEVENTER &
HOCH (the "Administrator"), a general partnership organized under the laws of
the State of California, and INVESTMENT COMPANY ADMINISTRATION, L.L.C. (the
"Subadministrator"), an Arizona limited liability company.
WITNESSETH:
A. The Administrator serves as the administrator for Allegiance
Investment Trust (the "Trust") and all portfolios and series thereof as
indicated on Appendix A to this Agreement (a "Fund" or collectively "Funds"),
subject to the overall supervision of the Board of Trustees of the Trust for the
period and on the terms set forth in an Administrative Services Agreement.
B. That Administrative Services Agreement permits to Administrator to
retain various service providers to perform administrative services that are the
responsibility of the Administrator. The Administrator desires to retain the
Subadministrator to perform various administrative responsibilities described in
this Agreement.
In consideration of the mutual promises and agreements herein contained
and other good and valuable consideration, the receipt of which is hereby
acknowledged, it is hereby agreed by and between the parties hereto as follows:
1. In General.
The Administrator hereby appoints the Subadministrator as
subadministrator. The Subadministrator hereby accepts such appointment and
agrees during such period to render the services herein described and to assume
the obligations set forth herein, for the compensation herein provided.
References to the Trust in this Agreement shall be deemed to include the Funds
unless otherwise specifically indicated.
2. Duties and Obligations of the Subadministrator.
(a) Subject to the direction and control of the Administrator,
the Subadministrator shall be responsible for providing such services
as the Administrator may reasonably request, including but not limited
to (i) maintaining the Trust's books and records (other than financial
or accounting books and records maintained by any custodian, transfer
agent or accounting services agent); (ii) overseeing the Trust's
insurance relationships; (iii) preparing for the Trust (or assisting
counsel and/or auditors in the preparation of) all required tax
returns, proxy statements and reports to the Trust's shareholders and
Trustees and reports to and other filings with the Securities and
<PAGE>
Exchange Commission and any other governmental agency (the Trust
agreeing to supply or cause to be supplied to the Subadministrator all
necessary financial and other information in connection with the
foregoing); (iv) preparing such applications and reports as may be
necessary to make notice filings or maintain the Trust's qualification
or the qualification of its shares under the securities or "blue sky"
laws of the various states selected by the Trust (the Administrator
agreeing to pay all filing fees or other similar fees in connection
therewith); (v) responding to all inquiries or other communications of
shareholders, if any, which are directed to the Subadministrator, or if
any such inquiry or communication is more properly to be responded to
by the Trust's custodian, transfer agent or accounting services agent,
overseeing their response thereto; (vi) overseeing all relationships
between the Trust and any custodian(s), transfer agent(s) and
accounting services agent(s), including the negotiation of agreements
and the supervision of the performance of such agreements; and (vii)
authorizing and directing any of the Subadministrator's directors,
officers and employees who may be elected as officers of the Trust or
Administrator to serve in the capacities in which they are elected. All
services to be furnished by the Subadministrator under this Agreement
may be furnished through the medium of any such directors, officers or
employees of the Subadministrator.
(b) In the absence of willful misfeasance, bad faith,
negligence or reckless disregard of obligations or duties ("disabling
conduct") hereunder on the part of the Subadministrator (and its
officers, directors, agents, employees, controlling persons,
shareholders and any other person or entity affiliated with the
Subadministrator) the Subadministrator shall not be subject to
liability to the Administrator, the Trust or to any shareholder of the
Trust for any act or omission in the course of, or connected with,
rendering services hereunder, including, without limitation, any error
of judgment or mistake of law or for any loss suffered by any of them
in connection with the matters to which this Agreement relates, except
to the extent specified in Section 36(b) of the Investment Company Act
of 1940 (the "Act") concerning loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for
services. Except for such disabling conduct, the Administrator and/or
the Trust shall indemnify the Subadministrator (and its officers,
directors, agents, employees, controlling persons, shareholders and any
other person or entity affiliated with the Subadministrator) from any
liability arising from the Subadministrator's conduct under this
Agreement to the extent permitted by the Trust's Declaration of Trust
and applicable law.
(c) It is agreed that the Subadministrator shall have no
responsibility or liability for the accuracy or completeness of the
Trust's Registration Statement under the Act except for information
supplied by the Subadministrator for inclusion therein.
2
<PAGE>
3. Allocation of Expenses.
The Subadministrator agrees that it will furnish the Trust, at the
Subadministrator's expense, with all office space and facilities, and equipment
and clerical personnel necessary for carrying out its duties under this
Agreement. The Subadministrator will also pay all compensation of all Trustees,
officers and employees of the Trust who are affiliated persons of the
Subadministrator. All costs and expenses not expressly assumed by the
Subadministrator under this Agreement shall be paid by the Administrator or the
Trust, as appropriate, including, but not limited to (i) interest and taxes;
(ii) brokerage fees and commissions; (iii) insurance premiums; (iv) compensation
and expenses of the Trust's Trustees other than those affiliated with the
Administrator or the Subadministrator; (v) legal and auditing fees and expenses;
(vi) fees and expenses of the Trust's custodian, transfer agent and accounting
services agent; (vii) expenses incident to the issuance of the Trust's shares,
including issuance on the payment of, or reinvestment of, dividends; (viii) fees
and expenses incident to the required notice filings under federal or state
securities laws of the Trust or its shares; (ix) expenses of preparing, printing
and mailing reports and notices and proxy material to shareholders of the Trust;
(x) all other expenses incidental to holding meetings of the Trust's
shareholders; (xi) dues or assessments of or contributions to the Investment
Company Institute or any successor; (xii) such non-recurring expenses as may
arise, including litigation affecting the Trust and the legal obligations which
the Trust may have to indemnify its officers and Trustees with respect thereto;
and (xiii) organization costs of the Trust.
4. Compensation of the Subadministrator.
The Administrator agrees to pay the Subadministrator and the
Subadministrator agrees to accept as full compensation for all services rendered
by the Subadministrator as such, an annual fee, payable monthly, computed on the
value of the net assets of the Trust as of the close of business each business
day at the annual rate indicated on Appendix B to this Agreement.
5. Duration and Termination.
(a) This Agreement shall become effective on the date set
forth above and shall remain in force until terminated pursuant to the
provisions of paragraph (b) hereof.
(b) This Agreement may be terminated by the Subadministrator
at any time without penalty upon giving the Administrator not less than
sixty (60) days' written notice (which notice may be waived by the
Administrator) and may be terminated by the Administrator at any time
without penalty upon giving the Subadministrator not less than sixty
(60) days' written notice (which notice may be waived by the
Subadministrator).
6. Governing Law.
This Agreement constitutes the entire agreement and understanding
between the parties hereto, and it shall be governed and construed in accordance
with the laws of the State of Arizona (without regard to conflicts of law).
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by duly authorized persons and their seals to be
hereunto affixed, all as of the day and year first above written.
VAN DEVENTER & HOCH
By____________________________________
INVESTMENT COMPANY
ADMINISTRATION, L.L.C.
By____________________________________
4
<PAGE>
Appendix A
ALLEGIANCE INVESTMENT TRUST
Funds/Portfolios of the Trust Subject to the Agreement
Fund Effective Date
- ---- --------------
Allegiance American Value Fund ________, 1999
Allegiance California Tax-Free Intermediate Bond Fund ________, 1999
Allegiance Intermediate-Term Bond Fund ________, 1999
5
<PAGE>
Appendix B
ALLEGIANCE INVESTMENT TRUST
Compensation of Subadministrator Under Section 4 of the Agreement
[List applicable fee rates for the Funds]
6
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, CA 94104
Telephone (415) 835-1600
Facsimile (415) 217-5333
Internet: www.phjw.com
April 7, 1999
Allegiance Investment Trust
800 North Broad Boulevard, Suite 300
Glendale, CA 91203
Re: Allegiance American Value Fund
Allegiance Intermediate-Term Bond Fund
Allegiance California Tax-Free Intermediate Bond Fund
Ladies and Gentlemen:
We have acted as counsel to Allegiance Investment Trust, a Delaware
business trust (the "Trust"), in connection with the Trust's Registration
Statement on Form N-1A filed on December 31, 1998, and subsequent amendments
filed with the Securities and Exchange Commission (the "Pre-Effective
Amendments"), and relating to the issuance by the Trust of an indefinite number
of $0.01 (one-cent) par value shares of beneficial interest (the "Shares") by
three series of the Trust: the Allegiance American Value Fund, the Allegiance
Intermediate-Term Bond Fund, and the Allegiance California Tax-Free Intermediate
Bond Fund (collectively the "Funds").
In connection with this opinion, we have assumed the authenticity of
all records, documents and instruments submitted to us as originals, the
genuineness of all signatures, the legal capacity of all natural persons, and
the conformity to the originals of all records, documents, and instruments
submitted to us as copies. We have based our opinion on the following:
(a) the Trust's Agreement and Declaration of Trust dated September
2, 1998 (the "Declaration of Trust"); and the Trust's
Certificate of Trust dated October 12, 1997, as amended August
27, 1998 (as filed with the Delaware Secretary of State on
October 15, 1997 and September 2, 1998), as certified to us by
an officer of the Trust as being true and complete and in
effect on the date hereof;
(b) the Bylaws of the Trust dated September 2, 1998, certified to
us by an officer of the Trust as being true and complete and
in effect on the date hereof;
1
<PAGE>
(c) resolutions of the Sole Trustee of the Trust adopted by
written consent on September 2, 1998, authorizing the
establishment of the Funds and the issuance of the Shares;
(d) the Pre-Effective Amendments; and
(e) a certificate of an officer of the Trust as to certain factual
matters relevant to this opinion.
Our opinion below is limited to the federal law of the United States of
America and the business trust law of the State of Delaware. We are not licensed
to practice law in the State of Delaware, and we have based our opinion below
solely on our review of Chapter 38 of Title 12 of the Delaware Code and the case
law interpreting such Chapter as reported in Delaware Laws Annotated (Aspen Law
& Business, supp. 1998) as updated on Lexis through April 6, 1999. We have not
undertaken a review of other Delaware law or of any administrative or court
decisions in connection with rendering this opinion. We disclaim any opinion as
to any law other than that of the United States of America and the business
trust law of the State of Delaware as described above, and we disclaim any
opinion as to any statute, rule, regulation, ordinance, order or other
promulgation of any regional or local governmental authority.
Based on the foregoing and our examination of such questions of law as
we have deemed necessary and appropriate for the purpose of this opinion, and
assuming that (i) all of the Shares will be issued and sold for cash at the
per-share public offering price on the date of their issuance in accordance with
statements in the Trust's Prospectus included in the Pre-Effective Amendments,
and in accordance with the Declaration of Trust, (ii) all consideration for the
Shares will be actually received by the Trust, and (iii) all applicable
securities laws will be complied with, it is our opinion that, when issued and
sold by the Trust, the Shares will be legally issued, fully paid and
nonassessable.
This opinion is rendered to you in connection with the Pre-Effective
Amendments and is solely for your benefit. This opinion may not be relied upon
by you for any other purpose or relied upon by any other person, firm,
corporation or other entity for any purpose, without our prior written consent.
We disclaim any obligation to advise you of any developments in areas covered by
this opinion that occur after the date of this opinion.
We hereby consent to (i) the reference to our firm as Legal Counsel in
the Prospectus and Statement of Additional Information included in the
Pre-Effective Amendments, and (ii) the filing of this opinion as an exhibit to
the Pre-Effective Amendments.
Sincerely yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
2
<PAGE>
ALLEGIANCE INVESTMENT TRUST
OFFICER'S CERTIFICATE
The undersigned officer of Allegiance Investment Trust (the "Trust"),
in connection with the opinion to be rendered by Paul, Hastings, Janofsky &
Walker LLP ("PHJ&W"), in connection with the Trust's filing of Pre-Effective
Amendment(s) with respect to three of its series: the Allegiance American Value
Fund, the Allegiance Intermediate-Term Bond Fund, and the Allegiance California
Tax-Free Intermediate Bond Fund (collectively the "Funds") with the Securities
and Exchange Commission, hereby certifies, represents, and covenants to PHJ&W
that:
1. The undersigned is an officer of the Trust and is authorized
to execute this certificate on behalf of the Trust.
2. The undersigned has furnished PHJ&W with a true and complete
copy of the Trust's Agreement and Declaration of Trust dated
September 2, 1998; and the Trust's Certificate of Trust dated
October 12, 1997, as amended August 27, 1998 (as filed with
the Delaware Secretary of State on October 15, 1997 and
September 2, 1998).
3. The undersigned has furnished PHJ&W with a true and complete
copy of the Trust's Bylaws dated September 2, 1998. The Bylaws
without amendment are in full force and effect on the date
hereof.
4. To the best knowledge of the undersigned, no action or
proceeding seeking to revoke, terminate, wind-up, or dissolve
the Trust or the Funds has been taken or commenced.
5. The resolutions of the Sole Trustee adopted by written consent
on September 2, 1998, authorizing the establishment of the
Funds and the issuance of their shares remains in full force
and effect without amendment or modification through the date
hereof.
6. No shareholder of the Trust has agreed to pay anything to or
on behalf of the Trust with respect to the Trust's shares
other than the public offering price therefor.
Dated: April 7, 1999 By: /s/ Charles L. Bock
----------------------------------
Charles L. Bock
Treasurer and Secretary
Allegiance Investment Trust
3
Allegiance Investment Trust
800 North Brand Boulevard, Suite 800
Glendale, California 91203
Ladies and Gentleman:
The undersigned hereby subscribes for the purchase of ____________ shares of
beneficial interest (the "Shares") of Allegiance California Tax-Free
Intermediate Bond Fund (the "Fund"), a separate series of Allegiance Investment
Trust (the "Trust"), at $____ per share for a total investment of $___________.
In connection with said subscription, the undersigned hereby represents that:
1. There is no present reason to anticipate any change in
circumstances or any other occasion or event that would cause
the undersigned to sell or redeem the Shares shortly after the
purchase thereof.
2. There are no agreements or arrangements between the
undersigned and the Trust, or any of its officers, trustees,
employees or investment manager of the Fund, or any affiliated
persons thereof with respect to the resale, future
distribution or redemption of the Shares.
3. The sale of the Shares will only be made by redemption to the
Fund and not by transfer to any third party without the
consent of the Trust.
4. The undersigned is aware that in issuing and selling these
Shares, the Fund and the Trust are relying upon the
aforementioned representations.
Dated: [_________, 1999] By: ______________________________
ALLEGIANCE INVESTMENT TRUST
SHARE MARKETING PLAN
(Rule 12b-1 Plan)
This Share Marketing Plan (the "Plan") is adopted in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "Act"), by ALLEGIANCE INVESTMENT TRUST, a Delaware
business trust (the "Trust"), with respect to each series of its shares named on
Exhibit A hereto (each such series, a "Fund"). The Plan has been approved by a
majority vote of the Trust's Board of Trustees, including a majority vote of the
Trustees who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan (the "Independent
Trustees"), cast in person at a meeting called for the purpose of voting on the
Plan.
In reviewing the Plan, the Board of Trustees considered the
proposed range and nature of payments and terms of the Investment Management
Agreement between the Trust on behalf of each Fund and Van Deventer & Hoch (the
"Adviser") and the nature and amount of other payments, fees and commissions
that may be paid to the Adviser, its affiliates and other agents of the Trust.
The Board of Trustees, including the Independent Trustees, concluded that the
proposed overall compensation of the Adviser and its affiliates is fair and not
excessive.
In its considerations, the Board of Trustees also recognized
that uncertainty may exist from time to time with respect to whether payments to
be made by the Trust to the Adviser, as the initial "distribution coordinator,"
or other firms under agreements with respect to a Fund may be deemed to
constitute impermissible distribution expenses. As a general rule, an investment
company may not finance any activity primarily intended to result in the sale of
its shares, except pursuant to the Rule. Accordingly, the Board of Trustees
determined that the Plan also should provide that payments by the Trust and
expenditures made by others out of monies received from the Trust which are
later deemed to be for the financing of any activity primarily intended to
result in the sale of Fund shares shall be deemed to have been made pursuant to
the Plan.
The approval of the Board of Trustees included a determination
that in the exercise of the Trustees' reasonable business judgment and in light
of their fiduciary duties, there is a reasonable likelihood that the Plan will
benefit the Trust, the Fund to which the Plan applies and its shareholders.
The provisions of the Plan are:
1. ANNUAL FEE. The Trust will pay to Adviser, as the Funds'
distribution coordinator, an annual fee for the Adviser's services in such
capacity including its expenses in connection with the promotion and
distribution of the Fund's shares and related shareholder servicing
(collectively, "Distribution Expenses"). The annual fee paid to Adviser under
-1-
<PAGE>
the Plan will be calculated daily and paid monthly by each Fund on the first day
of each month based on the average daily net assets of each Fund, as follows:
an annual rate of up to 0.25%
2. DISTRIBUTION EXPENSES IN EXCESS OF OR LESS THAN AMOUNT OF
FEE. All Distribution Expenses in excess of the fee rates provided for in this
Plan may be carried forward and resubmitted in a subsequent fiscal year provided
that (i) Distribution Expenses cannot be carried forward for more than three
years following initial submission; and (ii) the Trust's Board of Trustees has
made a determination at the time of initial submission that the Distribution
Expenses are appropriate to be reimbursed. The fees paid by the Trust on behalf
of each Fund shall be refundable if in any given year the fees are greater than
the Distribution Expenses for that year. Distribution expenses will be paid on a
first-in, first-out basis.
3. EXPENSES COVERED BY THE PLAN. The fee paid under Section 1
of the Plan may be used to pay for any expenses primarily intended to result in
the sale of the Fund's shares ("distribution services"), including, but not
limited to: (a) costs of payments, including incentive compensation, made to
agents for and consultants to Adviser, any affiliate of the Adviser or the
Trust, including pension administration firms that provide distribution and
shareholder related services and broker-dealers that engage in the distribution
of the Fund's shares; (b) payments made to, and expenses of, persons who provide
support services in connection with the distribution of a Fund's shares and
servicing of a Fund's shareholders, including, but not limited to, personnel of
Adviser, office space and equipment, telephone facilities, answering routine
inquiries regarding the Fund, processing shareholder transactions and providing
any other shareholder services not otherwise provided by the Trust's transfer
agency or other servicing arrangements; (c) all payments made pursuant to the
form of Distribution Agreement attached hereto as Exhibit B; (d) costs relating
to the formulation and implementation of marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising; (e) costs of printing and
distributing prospectuses, statements of additional information and reports of
the Fund to prospective shareholders of the Fund; (f) costs involved in
preparing, printing and distributing sales literature pertaining to the Fund;
and (g) costs involved in obtaining whatever information, analyses and reports
with respect to marketing and promotional activities that the Trust may, from
time to time, deem advisable. Such expenses shall be deemed incurred whether
paid directly by Adviser as distribution coordinator or by a third party to the
extent reimbursed therefor by Adviser.
4. WRITTEN REPORTS. Adviser shall furnish to the Board of
Trustees of the Trust, for its review, on a quarterly basis, a written report of
the monies paid to it under the Plan with respect to each Fund, and shall
furnish the Board of Trustees of the Trust with such other information as the
Board of Trustees may reasonably request in connection with the payments made
under the Plan in order to enable the Board of Trustees to make an informed
determination of whether the Plan should be continued as to each Fund.
5. TERMINATION. The Plan may be terminated as to any Fund at
any time, without penalty, by vote of a majority of the outstanding voting
securities of a Fund or by the vote of a majority of the Independent Trustees,
and any Distribution Agreement under the Plan may be likewise terminated on not
more than sixty (60) days' written notice. Once terminated, no further payments
-2-
<PAGE>
shall be made under the Plan notwithstanding the existence of any unreimbursed
current or carried forward Distribution Expenses.
6. Amendments. The Plan and any Distribution Agreement may not
be amended to materially increase the amount to be spent for distribution and
servicing of Fund shares pursuant to Section 1 hereof without approval by a
majority of the outstanding voting securities of a Fund. All material amendments
to the Plan and any Distribution Agreement entered into with third parties shall
be approved by the Independent Trustees by votes cast in person at a meeting
called for the purpose of voting on any such amendment. The Adviser may assign
its responsibilities and liabilities under the Plan to another party who agrees
to act as "distribution coordinator" for the Trust with the consent of a
majority of the Independent Trustees.
7. Selection of Independent Trustees. So long as the Plan is
in effect, the selection and nomination of the Trust's Independent Trustees
shall be committed to the discretion of such Independent Board of Trustees.
8. Effective Date of Plan. The Plan shall take effect at such
time as it has received requisite Trustee and shareholder approval and, unless
sooner terminated, shall continue in effect for a period of more than one year
from the date of its execution only so long as such continuance is specifically
approved at least annually by the Board of Trustees of the Trust, including the
approval by a majority vote of the Independent Trustees, cast in person at a
meeting called for the purpose of voting on such continuance.
9. Preservation of Materials. The Trust will preserve copies
of the Plan, any agreements relating to the Plan and any report made pursuant to
Section 5 above, for a period of not less than six years (the first two years in
an easily accessible place) from the date of the Plan, agreement or report.
10. Meanings of Certain Terms. As used in the Plan, the terms
"interested person" and "majority of the outstanding voting securities" will be
deemed to have the same meaning that those terms have under the Act and the
rules and regulations under the Act, subject to any exemption that may be
granted to the Trust under the Act by the Securities and Exchange Commission.
-3-
<PAGE>
This Plan and the terms and provisions thereof are hereby
accepted and agreed to by the Trust and Adviser, as distribution coordinator, as
evidenced by their execution hereof, as of this [__]st day of [May 1999].
ALLEGIANCE INVESTMENT TRUST
By:__________________________________________
Title:_______________________________________
VAN DEVENTER & HOCH
as Distribution Coordinator
By:__________________________________________
Title:_______________________________________
-4-
<PAGE>
Exhibit A
MAXIMUM EFFECTIVE
NAME OF FUND FEE DATE
Allegiance American Value Fund 0.25% May __, 1999
Allegiance Intermediate-Term Bond Fund 0.25% May __, 1999
Allegiance California Tax-Free Intermediate Bond Fund 0.25% May __, 1999
ALLEGIANCE INVESTMENT TRUST
By:__________________________________________
Title:_______________________________________
VAN DEVENTER & HOCH
as Distribution Coordinator
By:__________________________________________
Title:_______________________________________
-5-
<PAGE>
Exhibit B
ALLEGIANCE INVESTMENT TRUST
Share Marketing Agreement
EXHIBIT ONLY
___________________________________
___________________________________
___________________________________
___________________________________
Ladies and Gentlemen:
This Share Marketing Agreement has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Company
Act"), by ALLEGIANCE INVESTMENT TRUST, a Delaware business trust (the "Trust"),
on behalf of various series of the Trust (each series, a "Fund"), as governed by
the terms of a Share Marketing Plan (Rule 12b-1 Plan) (the "Plan").
The Plan has been approved by a majority vote of the Trustees
who are not interested persons of the Trust or the Funds and who have no direct
or indirect financial interest in the operation of the Plan (the "Independent
Trustees"), cast in person at a meeting called for the purpose of voting on such
Plan. Such approval included a determination that in the exercise of the
reasonable business judgment of the Board of Trustees and in light of the
Trustees' fiduciary duties, there is a reasonable likelihood that the Plan will
benefit each Fund and its shareholders.
1. To the extent you provide eligible shareholder services of
the type identified in the Plan to the Funds identified in the attached Schedule
(the "Schedule"), we shall pay you a monthly fee based on the average net asset
value of Fund shares during any month which are attributable to customers of
your firm, at the rate set forth on the Schedule.
2. In no event may the aggregate annual fee paid to you
pursuant to the Schedule exceed [____] percent of the value of the net assets of
each Fund held in your
-6-
<PAGE>
customers' accounts which are eligible for payment pursuant to this Agreement
(determined in the same manner as the Fund uses to compute its net assets as set
forth in its then effective Prospectus), without approval by a majority of the
outstanding shares of each Fund.
3. You shall furnish us and the Trust with such information as
shall reasonably be requested by the Trust's Board of Trustees with respect to
the services performed by you and the fees paid to you pursuant to the Schedule.
4. We shall furnish to the Board of Trustees of the Trust, for
its review, on a quarterly basis, a written report of the amounts expended under
the Plan by us with respect to each Fund and the purposes for which such
expenditures were made.
5. You agree to make shares of the Funds available only (a) to
your customers or entities that you service at the net asset value per share
next determined after receipt of the relevant purchase instruction or (b) to
each such Fund itself at the redemption price for shares, as described in each
Fund's then-effective Prospectus.
6. No person is authorized to make any representations
concerning a Fund or shares of a Fund except those contained in each Fund's
then-effective Prospectus or Statement of Additional Information and any such
information as may be released by a Fund as information supplemental to such
Prospectus or Statement of Additional Information.
7. Additional copies of each such Prospectus or Statement of
Additional Information and any printed information issued as supplemental to
each such Prospectus or Statement of Additional Information will be supplied by
each Fund to you in reasonable quantities upon request.
8. In no transaction shall you have any authority whatever to
act as agent of the Funds and nothing in this Agreement shall constitute you, or
the Fund, the agent of the other. You are not authorized to act as an
underwriter of shares of the Funds or as a dealer in shares of the Funds.
9. All communications to the Funds shall be sent to: Van
Deventer & Hoch, 800 North Brand Boulevard, Suite 800, Glendale, California
91203, as Distribution Coordinator for the Funds. Any notice to you shall be
duly given if mailed or telegraphed to you at your
address as indicated in this Agreement.
10. This Agreement may be terminated by us or by you, by the
vote of a majority of the Trustees of the Trust who are Independent Trustees, or
by a vote of a majority of the outstanding shares of a Fund, on sixty (60) days'
written notice, all without payment of any penalty. It shall also be terminated
automatically by any act that terminates the Plan.
11. The provisions of the Plan between the Trust and us,
insofar as they relate to you, are incorporated herein by reference.
This Agreement shall take effect on the date indicated below,
and the terms and provisions thereof are hereby accepted and agreed to by us as
evidenced by our execution hereof.
-7-
<PAGE>
VAN DEVENTER & HOCH,
Distribution Coordinator
By: EXHIBIT ONLY
------------------------------------
Authorized Officer
Dated:
---------------------------------
Agreed and Accepted:
- -------------------------------
(Name)
By:
----------------------------
(Authorized Officer)
-8-
<PAGE>
ALLEGIANCE INVESTMENT TRUST
--------------------
SCHEDULE TO SHARE MARKETING AGREEMENT
BETWEEN VAN DEVENTER & HOCH
AS DISTRIBUTION COORDINATOR
AND
____________________
(Name)
Pursuant to the provisions of the Share Marketing Agreement
between the above parties with respect to Allegiance Investment Trust, Van
Deventer & Hoch, as Distribution Coordinator, shall pay a monthly fee to the
above-named party based on the average net asset value of shares of each Fund
during the previous calendar month the sales of which are attributable to the
above-named party, as follows:
FUND FEE
-9-
