INVESTMENT ADVISOR: THE COMMUNITY REINVESTMENT
CRAFund Advisors, Inc. ACT QUALIFIED INVESTMENT FUND
1751 West Cypress Creek Road
Fort Lauderdale, FL 33309 THE FUND'S INVESTMENT OBJECTIVE IS TO
PROVIDE FINANCIAL INSTITUTIONS WITH (1)
ADMINISTRATOR: A HIGH LEVEL OF CURRENT INCOME AND (2)
Declaration Service Company INVESTMENTS THAT WILL BE DEEMED TO BE
555 North Lane, Suite 6160 QUALIFIED UNDER THE COMMUNITY
Conshohocken, PA 19428 REINVESTMENT ACT OF 1977.
LEGAL COUNSEL:
Drinker Biddle & Reath LLP PROSPECTUS
18th and Cherry Streets
Philadelphia, PA 19103-6996 June 8, 1999
(as revised December 10, 1999)
INDEPENDENT AUDITORS:
KPMG LLP THE SECURITIES AND EXCHANGE COMMISSION
1600 Market Street HAS NOT APPROVED OR DISAPPROVED THE
Philadelphia, PA 19103 FUND'S SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. IT
CUSTODIAN: IS A CRIMINAL OFFENSE TO STATE
First Union National Bank OTHERWISE.
1339 Chestnut Street
Philadelphia, PA 19101-7618
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TABLE OF CONTENTS
PAGE
RISK/RETURN SUMMARY............................................................1
Investment Objective...........................................................1
Principal Investment Strategy..................................................1
Principal Risks................................................................1
Fees and Expenses..............................................................3
INVESTMENT OBJECTIVE AND POLICIES..............................................4
Investment Objective...........................................................4
Principal Investment Strategy..................................................4
Community Reinvestment Act of 1977.............................................4
Investment Policies............................................................6
FUND INVESTMENTS...............................................................7
RISK FACTORS...................................................................8
FEDERAL TAXES..................................................................9
PRICING OF FUND SHARES........................................................10
PURCHASING SHARES.............................................................10
Purchase Inquiries............................................................10
Exchange of Securities........................................................10
Purchases By Wire Transfer....................................................11
Purchases by Check............................................................11
REDEEMING SHARES..............................................................12
DIVIDENDS AND DISTRIBUTIONS...................................................13
INVESTMENT ADVISOR............................................................13
DISTRIBUTION PLAN.............................................................13
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RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide financial institutions with (1) a
high level of current income and (2) investments that will be deemed to be
qualified under the Community Reinvestment Act of 1977, as amended (the "CRA").
PRINCIPAL INVESTMENT STRATEGY
The Fund's principal investment strategy is to invest in mortgage-related and
other debt securities that will cause shares of the Fund to be deemed to be
qualified under the CRA, so that financial institutions that are subject to the
CRA may receive investment test or similar credit under the CRA with respect to
shares of the Fund held by them.
PRINCIPAL RISKS
There is no assurance that shares of the Fund will be deemed to be qualified
investments under the CRA. The Fund's investment adviser, CRAFund Advisors, Inc.
(the "Advisor"), believes that shares of the Fund will be deemed qualified
investments under the CRA and will cause financial institutions to receive CRA
credit with respect to shares of the Fund owned by them. This judgment is based
on written responses that the Office of the Comptroller of the Currency (the
"OCC") has provided to other pooled investment vehicles, and other interpretive
pronouncements of the Federal Financial Institutions Examination Council. The
Advisor believes that these responses and interpretations have established that
interests in a pooled or commingled investment fund may be deemed qualified
under the CRA if the fund holds underlying investments that would be so
qualified. In light of these pronouncements and interpretations, an opinion of
legal counsel has not been obtained as to whether shares of the Fund would be
deemed to be qualified under the CRA. The Fund believes that it is the first
pooled investment vehicle to register under the Securities Act of 1933 and make
a public offering of shares to financial institutions to provide them with CRA
credit.
The Fund's goal of holding securities that will allow shares of the Fund to be
deemed qualified under the CRA will cause the Advisor to take this factor into
account in determining which securities the Fund will purchase and sell.
Accordingly, portfolio decisions will not be exclusively based on the investment
characteristics of the securities, which may or may not have an adverse effect
on the Fund's investment performance. For example, the Fund may hold short-term
investments that produce relatively low yields pending the selection of
long-term investments believed to be CRA-qualified. In addition, the Fund may
sell securities for CRA purposes at times when such sales may not be desirable
for investment purposes. Such sales
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could occur, for example, if a financial institution redeems its shares of the
Fund, or if investments that have been designated to specific shareholders for
CRA-qualifying purposes are ultimately determined not to be, or to have ceased
to be, CRA-qualifying. See "INVESTMENT OBJECTIVE AND POLICIES - Community
Reinvestment Act of 1977."
The Fund was recently formed and began its public offering on June 8, 1999. The
Advisor is also new, having been organized to provide investment advice to the
Fund. Its associated personnel have substantial experience in fixed income and
CRA-qualifying investments, but have no experience in managing a mutual fund.
All mutual funds are affected by changes in the economy and swings in investment
markets. You could lose money if the Fund's investments fall in value.
The prices of fixed income debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the prices of debt
securities tend to fall. When rates are falling, the prices of debt securities
tend to rise.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer cannot meet its payment
obligations or if its credit rating is lowered, the value of its debt securities
will fall. The ability of a state or local government issuer to make payments
can be affected by many factors, including economic conditions, the flow of tax
revenues and changes in the level of federal, state or local aid. Some municipal
obligations are payable only from limited revenue sources or private entities.
Prepayments of principal on mortgage-backed securities may tend to increase due
to refinancing of mortgages as interest rates decline. When this occurs, the
Fund may lose a portion of its principal investment to the extent the Fund paid
any premium for a security. In addition, the Fund's yield may be affected by
reinvestment of prepayments at lower rates than the original investment.
The Fund is a non-diversified investment company. Compared to a diversified
investment company, the Fund may invest a greater percentage of its assets in
the securities of a particular issuer. A change in value of such securities will
affect the value of the Fund's portfolio more than it would affect a diversified
investment company.
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FEES AND EXPENSES
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases NONE
Maximum Deferred Sales Charge (Load) NONE
Maximum Sales Charge (Load) Imposed on Reinvested Dividends NONE
Redemption Fee (as a percentage of amount redeemed) 1.00%
Exchange Fee NONE
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees 0.50%
Distribution (12b-1) Fees 0.25%*
Other Expenses** 0.19%
Total Annual Fund Operating Expenses 0.94%
* If you hold your shares for a substantial period of time, distribution fees
may total more than the economic equivalent of the maximum front-end sales
charge currently allowed by the Conduct Rules of the National Association
of Securities Dealers, Inc.
** Based on estimated amounts for the current fiscal year.
Example: This example is intended to help you compare the costs of investing in
the Fund with the costs 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 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:
One Year* Three Years*
--------- ------------
$194 $382
* Includes the imposition of a 1% redemption fee.
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You would pay the following expenses if you did not redeem your shares at the
end of each period:
One Year* Three Years*
--------- ------------
$94 $282
Actual annual returns may be greater or less than the annual 5% return assumed
in the Example.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
- --------------------
The Fund's investment objective is to provide financial institutions with (1) a
high level of current income and (2) investments that will be deemed to be
qualified under the CRA. The Fund's Board of Trustees may change the investment
objective without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
- -----------------------------
The Fund's principal investment strategy is to invest in mortgage-related and
other debt securities that will cause shares of the Fund to be qualified under
the CRA, so that financial institutions that are subject to the CRA may receive
investment test or similar credit under the CRA with respect to shares of the
Fund held by them. The Advisor believes that securities held by the Fund will
provide returns that are competitive with those of similar securities that are
not CRA-qualified.
COMMUNITY REINVESTMENT ACT OF 1977
- ----------------------------------
The CRA requires the federal bank regulatory agencies to encourage most banks
and similar institutions that are insured by the Federal Deposit Insurance
Corporation to help meet the credit needs of their local communities, including
low and moderate income neighborhoods. Larger retail institutions receive an
overall CRA rating based on their evaluated performance in three areas: lending,
service and investments. For an institution with $250 million or more in assets
or for an institution whose holding company has $1 billion or more in assets,
the investment test comprises 25% of the overall CRA rating. While smaller banks
are subject only to a lending test, they can use their qualified investments to
enhance their overall rating. Banks that are designated as limited purpose or
wholesale banks for CRA purposes can elect to be evaluated partially or totally
on their qualified investment performance.
In most cases, qualified investments are required to be responsive to the credit
and community development needs of a financial institution's assessment
(geographical) area or a broader statewide or regional area that includes the
institution's assessment area. For such a financial institution to receive CRA
investment test credit with respect to the Fund's shares, the Fund must hold
CRA-qualifying investments that relate to the financial institution's assessment
(geographical) area. Institutions that have been designated by their regulators
as "wholesale" or
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"limited purpose" under the CRA may receive credit for qualified investments
wholly outside of their assessment (geographical) area, provided they have
otherwise adequately addressed their assessment area needs. Although each
shareholder of the Fund will indirectly own an undivided interest in all the
Fund's investments, the Fund will designate specific securities to specific
shareholders for CRA-qualifying purposes.
Investments are not designated as CRA-qualifying at the time of issuance by any
governmental agency. Accordingly, the Advisor must evaluate whether each
potential investment may be CRA-qualifying with respect to a specific
shareholder. The final determinations of whether securities are CRA-qualifying
are made by the federal bank regulatory agencies during their periodic
examinations of these institutions. There is no assurance that the agencies will
concur with the Advisor's evaluation of securities as CRA-qualifying. Securities
that are determined to qualify at the time of an examination may not qualify in
subsequent examinations. If the Advisor became aware that a security acquired
for CRA-qualifying purposes was not likely to produce CRA investment test
credit, for example due to a change in circumstances pertaining to the security,
ordinarily the Fund would sell that security and attempt to acquire a
replacement security that the Advisor deemed to be CRA-qualifying.
In determining whether a particular investment is a qualified investment, the
Advisor will consider whether the investment has as its primary purpose
community development. The Advisor will consider whether such investment (1)
provides affordable housing for low-or-moderate income individuals, (2) provides
community services targeted to low-or-moderate income individuals, (3) funds
activities that (a) finance businesses or farms that meet the size eligibility
standards of the Small Business Administration's Development Company or Small
Business Investment Company programs or have annual revenues of $1 million or
less and (b) promote economic development, or (4) funds activities that
revitalize or stabilize low-or-moderate income areas. An activity may be deemed
to promote economic development if it supports permanent job creation,
retention, and/or improvement for persons who are currently low-or-moderate
income, or supports permanent job creation, retention, and/or improvement in
low-or-moderate income areas targeted for redevelopment by federal, state, local
or tribal governments. The Advisor maintains documentation, readily available to
a financial institution or an examiner, supporting its judgment that a security
would be a qualifying investment for CRA investment test credit purposes.
The Fund will require time after selling shares to acquire a significant volume
of investments in particular geographic areas relevant to shareholders. The
length of time will depend upon the depth of the market for CRA-qualified
investments in the relevant areas. In some cases, the Advisor expects that
CRA-qualified investments will be immediately available. In others, it may take
weeks or months - in rare cases, as long as two or three years - to acquire a
significant volume of CRA-qualified investments in a particular area. The
Advisor believes that investments in the Fund during these time periods will be
considered CRA-qualified provided the purpose of the Fund includes serving the
investing institution's assessment area(s) and the Fund is likely to achieve a
significant volume of investments in the region after a reasonable period of
time. As the Fund continues to operate, it may dispose of securities that were
acquired for CRA-
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qualifying purposes, in which case the Advisor will normally attempt to acquire
a replacement security that would be CRA-qualifying.
INVESTMENT POLICIES
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Under normal circumstances, the Fund will invest primarily in securities which
have a rating in the highest category assigned by a nationally recognized
statistical rating organization ("Rating Agency"), for example, AAA by Standard
& Poor's Ratings Group and/or Aaa by Moody's Investors Services, Inc., or which
are deemed by the Advisor to be of comparable quality to securities so rated, or
which are credit-enhanced by one or more entities with one of the above credit
ratings.
The Fund may also invest up to 25% of its net assets in investment grade
securities that are rated in the second or third highest rating categories
assigned by a Rating Agency, or which are deemed by the Advisor to be of
comparable quality to securities so rated, or which are credit-enhanced by one
or more entities with one of the above credit ratings.
Under normal circumstances, the Fund will invest at least 90% of its net assets
in CRA-qualifying securities. Such securities would include single-family,
multi-family and economic development loan-backed securities. As a result, the
Fund will invest primarily in securities issued by the Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), and
Government National Mortgage Association ("GNMA").
The Fund may also invest in taxable municipal bonds whose primary purpose is
community development.
The Fund may invest in certificates of deposit that are insured by the Federal
Deposit Insurance Corporation ("FDIC") and are issued by financial institutions
that are (1) certified as Community Development Financial Institutions, or (2)
minority- or women-owned and primarily lend or facilitate lending in low- or
moderate-income areas or to low- or moderate-income individuals to promote
community development. The Fund may also invest in certain securities issued by
the Small Business Administration.
The Fund may temporarily hold investments that are not part of its principal
investment strategy to try to avoid losses during unfavorable market conditions
or pending the acquisition of investments believed to be CRA-qualified. These
investments may include cash (which will not earn any income), money market
instruments, debt securities issued or guaranteed by the U.S. Government or its
agencies and repurchase agreements. This strategy could prevent the Fund from
achieving its investment objective and could reduce the Fund's return and affect
its performance during a market upswing.
The Fund may sell securities that it has held for less than one year. When it
does so, the Fund may realize short-term capital gains, which are taxed at
higher rates than long-term capital gains.
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FUND INVESTMENTS
GNMA securities and U.S. Treasury bills, notes and bonds are direct obligations
of the U.S. Government and are backed by the full faith and credit of the U.S.
Government. Accordingly, these securities carry minimal credit risk.
FNMA and FHLMC securities are issued by U.S. Government-sponsored enterprises.
These securities are not backed by the full faith and credit of the U.S.
Government, but generally enjoy a very high level of creditworthiness.
Taxable municipal bonds are rated as to their creditworthiness by various Rating
Agencies. The Fund will invest only in these securities if they conform to the
credit qualifications described above under "INVESTMENT OBJECTIVE AND POLICIES -
Investment Policies."
The Fund may invest in mortgage-backed securities ("MBSs"), such as those issued
by GNMA, FHLMC and FNMA, which generally pay monthly payments consisting of both
interest and principal. The value of MBSs are based on the underlying pools of
mortgages that serve as the asset base for the securities. The value of MBSs
will be significantly influenced by changes in interest rates because mortgage
backed pool valuations fluctuate with interest rate changes. Specifically, when
interest rates decline, many borrowers refinance existing loans, resulting in
principal prepayments which leads to early payment of the securities. Prepayment
of an investment in MBSs can result in a loss to the Fund to the extent of any
premium paid for MBSs. In addition, a decline in interest rates that leads to
prepayment of MBSs may result in a reinvestment requirement at a time when the
interest rate environment presents less attractive investment alternatives.
Certificates of deposit ("CDs") are promissory notes issued by banks and other
financial institutions for fixed periods of time at fixed rates of interest. The
Fund may invest in CDs issued by Community Development Financial Institutions or
other eligible depositories. Early withdrawal of CDs may result in penalties
being assessed against the holder of the CD.
The Fund may invest in repurchase agreements with broker-dealers, banks and
other financial institutions, provided that the Fund's custodian always has
possession of the securities serving as collateral for the repurchase agreements
or has proper evidence of book entry receipt of said securities. In a repurchase
agreement, the Fund purchases securities subject to the seller's simultaneous
agreement to repurchase those securities from the Fund at a specified time
(usually one day) and price. The repurchase price reflects an agreed-upon
interest rate during the time of investment. All repurchase agreements entered
into by the Fund must be collateralized by U.S. Government securities, the
market values of which equal or exceed 102% of the principal amount of the
Fund's investment. If an institution with whom the Fund has entered into a
repurchase agreement enters insolvency proceedings, the resulting delay, if any,
in the Fund's ability to liquidate the securities serving as collateral could
cause the Fund some loss if the securities declined in value prior to
liquidation. To minimize the risk of such loss, the Fund will enter into
repurchase agreements only with institutions and dealers the Advisor considers
creditworthy under guidelines approved by the Fund's Board of Trustees.
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The Fund may also engage in reverse repurchase transactions in which the Fund
sells its securities and simultaneously agrees to repurchase the securities at a
specified time and price. Reverse repurchase transactions are considered to be
borrowings by the Fund.
The Fund may purchase securities on a when-issued basis, and it may purchase or
sell securities for delayed-delivery. These transactions occur when securities
are purchased or sold by the Fund with payment and delivery taking place at some
future date. The Fund may enter into such transactions when, in the Advisor's
opinion, doing so may secure an advantageous yield and/or price to the Fund that
might otherwise be unavailable. The Fund has not established any limit on the
percentage of assets it may commit to such transactions, but the Fund will
maintain a segregated account with its custodian consisting of cash, cash
equivalents, U.S. Government securities or other high-grade liquid debt
securities in an amount equal to the aggregate fair market value of its
commitments to such transactions. A risk of investing in this manner is that the
yield or price obtained in a transaction may be less favorable than the yield or
price available in the market when the security delivery takes place.
For further information concerning the Fund's investment policies and
restrictions, see "Investment Policies and Restrictions" in the Fund's Statement
of Additional Information.
RISK FACTORS
The following information supplements the information set forth in "RISK/RETURN
SUMMARY - Principal Risks" and "FUND INVESTMENTS" above.
Your investment in the Fund is not a deposit or obligation of, or insured or
guaranteed by, any entity or person, including the U.S. Government and the FDIC.
The Fund may be particularly appropriate for banks and other financial
institutions that are subject to the CRA. The value of the Fund's investments
will vary from day-to-day, reflecting changes in market conditions, interest
rates and other political and economic factors. There is no assurance that the
Fund can achieve its investment objective, since all investments are inherently
subject to market risk. There also can be no assurance that the Fund's
investments will receive investment test credit under the CRA with respect to
the Fund's shares.
Changes in laws, regulations or the interpretation of laws and regulations could
pose risks to the successful realization of the Fund's investment objectives. It
is not known what changes, if any, will be made to the CRA over the life of the
Fund. CRA regulations play an important part in influencing the readiness and
capacities of financial institutions to originate CRA-qualifying securities.
Changes in the CRA might impact upon Fund operations and might pose a risk to
the successful realization of the Fund's investment objectives.
Many investments purchased by the Fund will have one or more forms of credit
enhancement. An investor in a credit enhanced debt instrument typically relies
upon the credit rating of the credit enhancer to evaluate an issue's credit
quality and appropriate pricing level. There can be no assurance that the credit
rating of a public or private entity used as a credit enhancer on a
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Fund investment will remain unchanged over the period of the Fund's ownership of
that investment.
As with other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Advisor and the Fund's other service providers don't properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000" or "Y2K" problem. The Advisor
is taking steps to address the Y2K problem with respect to the computer systems
that it uses and to obtain assurances that comparable steps are being taken by
the Fund's other major service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on the
Fund. The Advisor will also consider the Y2K problem in evaluating securities
that the Fund holds or may acquire.
FEDERAL TAXES
The Fund intends to qualify each year as a regulated investment company under
applicable federal tax provisions. In any fiscal year in which the Fund
qualifies as a regulated investment company and distributes to shareholders all
of its net investment income and net capital gains, the Fund generally will not
have to pay any federal tax.
Generally, all ordinary and capital gains distributions to you will be taxable
whether they are reinvested or received in cash, unless you are exempt from
taxation or entitled to a tax deferral. Early each calendar year, you will be
notified as to the amount and federal tax status of all distributions paid to
you from the prior year. Such distributions may also be subject to state or
local taxes.
The Fund's investment strategies will generally cause its annual distributions
to consist primarily of ordinary income. You will generally not be eligible for
any dividends received deduction with respect to Fund distributions.
You may recognize gain or loss on redemptions of Fund shares based on the
difference between your redemption proceeds and your basis in the shares.
Certain restrictions on loss recognition may apply, however, such as the "wash
sale" limitation, which disallows a loss on a sale of stock or securities if
substantially identical stock or securities are purchased within 30 days before
or after the sale.
You should note that if you purchase Fund shares just prior to a capital gain
distribution, the purchase price will reflect the amount of the upcoming
distribution, but you will be taxable on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of capital. This is known as "buying into a dividend."
This is a brief summary of the tax laws that affect your investment in the Fund.
Please see the section entitled "Tax Information" in the Statement of Additional
Information for more information, and consult with your own tax advisor, since
every investor's tax situation is unique.
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PRICING OF FUND SHARES
The price of the Fund's shares is based on the Fund's net asset value (NAV). The
NAV per share is determined as of the close of trading (normally 4:00 p.m.
Eastern Time) every day the New York Stock Exchange is open for trading. The
Fund will not price its shares on national holidays or other days when the New
York Stock Exchange is closed for trading. NAV per share is calculated by
dividing the total value of the Fund's assets after subtracting liabilities by
the number of shares outstanding. The Fund's portfolio securities are valued at
market value based on dealer bid quotations. Securities for which quotations are
not available and any other assets are valued at fair value as determined in
good faith by the Advisor, subject to the review and supervision of the Fund's
Board of Trustees.
PURCHASING SHARES
Shares of the Fund are sold at the NAV per share next determined after receipt
of a purchase order by the Fund. See "Purchases By Wire Transfer" and "Purchases
By Check" below. The minimum initial investment is $250,000. There is no minimum
requirement for subsequent purchases. Shares are sold without any front-end
sales charge, which means that the full amount of your purchase price will be
invested in Fund shares. The Fund imposes no deferred sales charges; however,
the Fund will charge a 1% fee for redemptions of shares. See "REDEEMING SHARES"
below.
PURCHASE INQUIRIES. If you are considering investing in the Fund, contact Neil
M. Solomon at the Fund's distributor, SunCoast Capital Group, Ltd. ("SunCoast"),
toll-free at 1-800-733-5933. Mr. Solomon will provide information concerning
your investment options and can provide all materials and procedures required to
open an account. New accounts can be opened through an exchange of securities,
by wire transfer, or by check purchase. These options also are available to
existing shareholders and are discussed further below.
EXCHANGE OF SECURITIES. The Fund may issue its shares in exchange for securities
owned by an investor. The Fund will issue its shares only in exchange for
securities that the Advisor believes are CRA-qualified and that the Fund intends
to hold. To determine the number of Fund shares that will be issued in the
exchange, the investor's securities will be valued at the mean between their bid
and asked quotations, which differs from the method used for valuing the Fund's
portfolio securities. See "PRICING OF FUND SHARES" above. This method of valuing
exchanged securities benefits both existing shareholders and the investor
exchanging the securities ("Purchaser"). The Purchaser will receive a greater
number of Fund shares by exchanging securities at the mean between the bid price
and asked price than it would if it liquidated the securities at the lower bid
price and then purchased Fund shares with the cash proceeds. This benefit may
provide the Purchaser with an incentive to go through the additional procedures
associated with an exchange. On the other hand, if the Fund purchased the same
type of securities with cash, it would pay the higher asked price. In either
case, the Fund must value the securities for purposes of determining the NAV per
share in accordance with its valuation policies. See "PRICING OF FUND SHARES"
above. Thus, the Purchaser benefits by receiving a greater number of Fund shares
while the existing shareholders benefit from the Fund's
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acquisition of securities at a lower price than it would otherwise pay. In
addition, both the Purchaser and the Fund avoid incurring any brokerage
transaction costs.
To discuss arrangements for purchasing Fund shares in exchange for your
securities, contact Neil M. Solomon at SunCoast toll-free at 1-800-733-5933.
PURCHASES BY WIRE TRANSFER. You may purchase shares by making a wire transfer of
federal funds to Declaration Service Company, the Fund's servicing agent. You
must include the full name in which your account is registered and the Fund
account number, and should address the wire transfer as follows:
First Union National Bank
ABA # 031201467
For Account of The Community Reinvestment Act Qualified Investment Fund
Acct. # 2000003245873
For further credit (Your Name)
Acct. # (Your Acct. No.)
Before making an initial investment by wire transfer, you must first call Neil
M. Solomon at SunCoast at 1-800-733-5933 to request an account number and
furnish the Fund with your taxpayer identification number. In addition, you must
promptly forward a completed new account application with signature(s) of
authorized officer(s) and appropriate corporate resolutions or other evidence of
authority to: Neil M. Solomon, SunCoast Capital Group, Ltd., 1751 West Cypress
Creek Road, Fort Lauderdale, FL 33309. The Fund will not be responsible for the
consequence of delays in the wire transfer system. See "Purchase Inquiries"
above.
PURCHASES BY CHECK. You can purchase shares by sending a check to The Community
Reinvestment Act Qualified Investment Fund, c/o SunCoast Capital Group, Ltd.,
1751 West Cypress Creek Road, Fort Lauderdale, FL 33309, Attention: Neil M.
Solomon, including the name in which the account is registered and the account
number. Initial share purchases must be accompanied by a completed new account
application with signature(s) of authorized officer(s) and appropriate corporate
resolutions or other evidence of authority. See "Purchase Inquiries" above.
Checks are accepted subject to collection. If shares are purchased by check and
redeemed within seven business days of purchase, the Fund may hold redemption
proceeds until the purchase check has cleared, a period of up to fifteen days.
You will receive a statement showing the number of shares purchased, the net
asset value at which your shares were purchased, and the new balance of Fund
shares owned each time you purchase shares of the Fund. The Fund does not issue
share certificates. All full and fractional shares will be carried on the books
of the Fund.
All applications to purchase shares of the Fund are subject to acceptance by
authorized officers of the Fund and are not binding until accepted. The Fund
reserves the right to reject purchase orders.
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REDEEMING SHARES
You may redeem your shares in the Fund at any time and for any reason. Upon
receipt by the Fund of a redemption request and any other required documents in
proper form, your shares of the Fund will be redeemed at their next determined
NAV, less a redemption fee equal to 1% of the NAV of the redeemed shares. The
redemption fee is not a sales charge. It is retained by the Fund and is not paid
to the Advisor or the Fund's distributor. The purpose of the redemption fee is
to allocate transaction costs associated with redemptions to investors making
those redemptions, thus protecting shareholders who hold their shares for longer
periods. These costs include, among others, those additional expenses that may
be incurred in selling CRA-qualified securities related specifically to the
redeeming shareholder's geographical area.
Redemption requests must be in writing and sent to The Community Reinvestment
Act Qualified Investment Fund, c/o SunCoast Capital Group, Ltd., 1751 West
Cypress Creek Road, Fort Lauderdale, FL 33309, Attention: Neil M. Solomon. To be
in proper form, your redemption request must:
o Specify the number of shares or dollar amount to be redeemed, if less
than all shares are to be redeemed; and
o Be signed by the authorized representative(s) exactly as their names
appear on the account.
The Fund will not process a redemption request unless it has received a
completed new account application and other documentation described in
"PURCHASING SHARES - Purchases by Wire Transfer" and "PURCHASING SHARES
Purchases by Check" above. Further documentation may be requested to evidence
the authority of the person or entity making the redemption request.
When you redeem your shares, they may be worth more or less than you paid for
them, depending upon the value of the Fund's portfolio securities at the time of
redemption.
Payment for shares redeemed is made within seven days after receipt by the Fund
of a request for redemption in proper form. The Fund will normally pay
redemption proceeds in cash but reserves the right to deliver securities owned
by the Fund instead of cash. The Fund reserves the right to suspend or postpone
redemptions during any period when (a) trading on any of the major U.S. stock
exchanges is restricted, as determined by the Securities and Exchange Commission
("SEC"), or that the major exchanges are closed for other than customary weekend
and holiday closings, (b) the SEC has by order permitted such suspension, or (c)
an emergency, as determined by the SEC, exists making disposal of portfolio
securities or valuation of net assets of the Fund not reasonably practicable.
The Fund may redeem all shares held by a shareholder whose account value is less
than the minimum initial investment as a result of redemptions.
12
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare and pay dividends from net investment income
monthly. The Fund intends to make distributions of capital gains, if any, at
least annually, usually in December. Dividends and distributions are reinvested
in additional shares unless you indicate in the account application or otherwise
in writing that you want to have dividends and distributions paid in cash.
INVESTMENT ADVISOR
CRAFund Advisors, Inc. is a registered investment adviser founded in November
1998, with headquarters at 1751 West Cypress Creek Road, Fort Lauderdale,
Florida 33309.
The Advisor was organized to provide investment advice to the Fund. It currently
has no other clients. Its personnel are employees of the Fund's distributor or
SunCoast Capital Group, Inc., which is the principal stockholder of the Fund's
distributor. Todd J. Cohen, Peter Cooper and David A. Zwick collectively own all
of the outstanding stock of SunCoast Capital Group, Inc. and 75% of the
outstanding stock of the Advisor. The Fund's distributor may act as broker for
the Fund and will receive payments pursuant to the Fund's distribution plan. See
"DISTRIBUTION PLAN" below.
Todd J. Cohen is the Fund's portfolio manager and will choose the securities to
purchase for the Fund. Mr. Cohen is President of SunCoast. He oversees
SunCoast's fixed income securities trading operations. Although Mr. Cohen has
substantial experience in trading fixed income securities, managing a mutual
fund is a new position for him.
Under the terms of an investment advisory agreement, the Advisor, subject to the
supervision of the Fund's Board of Trustees, will manage the investment
operations of the Fund in accordance with the Fund's investment policies. The
Fund will pay to the Advisor monthly a fee equal to an annual rate of 0.50% of
the Fund's average daily net assets.
DISTRIBUTION PLAN
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended. The distribution plan allows the
Fund to pay fees for the sale and distribution of its shares. Because they are
paid from Fund assets on an on-going basis, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges. Under the distribution plan, the Fund will pay SunCoast up to
0.25% per year of the Fund's average daily net assets for activities primarily
intended to result in sales of the Fund's shares.
13
<PAGE>
WHERE TO FIND MORE INFORMATION
You will find more information about the Fund in the following documents:
Annual and semi-annual reports
The Fund will prepare annual and semi-annual reports to shareholders. Such
reports will contain more information about the Fund and a discussion about the
market conditions and investment strategies that had a significant effect on the
Fund's performance during the last fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Fund and its policies. By law,
it is incorporated by reference into (considered to be part of) this prospectus.
You can get a free copy of these documents, request other information about the
Fund and make shareholder inquiries by calling Neil M. Solomon at the Fund
toll-free at 1-800-733-5933 or writing to:
The Community Reinvestment Act Qualified Investment Fund
c/o SunCoast Capital Group, Ltd.
1751 West Cypress Creek Road
Fort Lauderdale, FL 33309
Attention: Neil M. Solomon
or on the Internet at www.CRAFUND.com
You can write to the SEC Public Reference Section and ask them to mail you
information about the Fund, including the SAI. The SEC will charge you a
duplicating fee for this service. You can also visit the Public Reference Room
to review and copy the documents. For information about the operation of the
Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-6009
1-800-SEC-0330
Reports and other information about the Fund are also available on the SEC's
website at www.sec.gov.
The Fund's Investment Company Act File No. is 811-09221.
<PAGE>
THE COMMUNITY REINVESTMENT ACT QUALIFIED INVESTMENT FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT RELATES TO
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE COMMUNITY
REINVESTMENT ACT QUALIFIED INVESTMENT FUND, DATED JUNE 8, 1999, AS REVISED
DECEMBER 10, 1999. YOU MAY OBTAIN A COPY OF THE PROSPECTUS, FREE OF CHARGE, BY
WRITING TO THE COMMUNITY REINVESTMENT ACT QUALIFIED INVESTMENT FUND, C/O
SUNCOAST CAPITAL GROUP, LTD., 1751 WEST CYPRESS CREEK ROAD, FORT LAUDERDALE, FL
33309, ATTENTION: NEIL M. SOLOMON, BY TOLL-FREE PHONE REQUEST AT 1-800-733-5933,
OR ON THE INTERNET AT WWW.CRAFUND.COM.
STATEMENT OF ADDITIONAL INFORMATION
June 8, 1999
(as revised December 10, 1999)
<PAGE>
TABLE OF CONTENTS
PAGE
DEFINED TERMS..................................................................1
THE FUND AND ITS SHARES........................................................1
INVESTMENT POLICIES AND RESTRICTIONS...........................................2
Investment Quality.............................................................2
U.S. Government Agency Securities..............................................2
Zero Coupon Bonds..............................................................3
Repurchase Agreements and Reverse Repurchase Agreements........................3
Taxable Municipal Bonds........................................................3
Other Securities...............................................................4
Securities Lending.............................................................4
Liquidity......................................................................4
Illiquid Securities............................................................5
Investment Restrictions........................................................5
INVESTMENT ADVISOR.............................................................7
TRUSTEES AND OFFICERS..........................................................8
PERFORMANCE INFORMATION.......................................................10
TAX INFORMATION...............................................................12
PORTFOLIO TRANSACTIONS........................................................12
DISTRIBUTOR...................................................................13
DISTRIBUTION PLAN.............................................................13
CUSTODIAN.....................................................................14
SERVICING AGENT...............................................................15
COUNSEL.......................................................................15
FINANCIAL STATEMENTS..........................................................15
APPENDIX A...................................................................A-1
i
<PAGE>
DEFINED TERMS
In this Statement of Additional Information, the terms listed below have the
following meanings:
Advisor - CRAFund Advisors, Inc., investment adviser to the Fund.
- -------
CRA - The Community Reinvestment Act of 1977, as amended.
- ---
Fund - The Community Reinvestment Act Qualified Investment Fund.
- ----
Investment Company Act - The Investment Company Act of 1940, as amended.
- ----------------------
Prospectus - The prospectus for the Fund as described on the front cover page of
- ----------
this Statement of Additional Information.
THE FUND AND ITS SHARES
The Fund was organized on January 15, 1999, as a business trust under the laws
of the State of Delaware. The Fund is registered as an open-end, management
investment company under the Investment Company Act.
The Fund offers a single class of shares of beneficial interest. Shares when
issued will be fully paid and nonassessable. All shares represent an equal
proportionate interest in the assets belonging to the Fund (subject to the
Fund's liabilities). Shareholders have no preemptive or other similar rights to
subscribe to any additional shares of the Fund or other securities issued by the
Fund or the Fund's Trustees.
Shareholders have the power to vote only: (a) for the election of one or more
Trustees in order to comply with the provisions of the Investment Company Act;
(b) with respect to any contract required by the Investment Company Act to be
approved by shareholders; (c) with respect to termination of the Fund to the
extent required by applicable law; (d) with respect to any plan adopted pursuant
to Rule 12b-1 under the Investment Company Act, and related matters, to the
extent required by the Investment Company Act; and (e) with respect to such
additional matters relating to the Fund as may be required by the Fund's
Agreement and Declaration of Trust, the Fund's bylaws or as the Trustees may
consider necessary or desirable. Each whole share is entitled to one vote and
each fractional share is entitled to a proportionate fractional vote. There is
no cumulative voting in the election of Trustees. Shares may be voted in person
or by proxy.
All dividends and other distributions will be distributed pro rata to the Fund's
shareholders in proportion to the number of shares they held on the record date
established for payment of the dividend or other distribution. In the event of a
liquidation of the Fund, shareholders will be entitled to distribution of Fund
assets remaining after the payment of all Fund liabilities. Such assets will be
distributed to shareholders in proportion to the number of shares held by them.
<PAGE>
The Fund reserves the right to pay redemption proceeds wholly or partly in
securities or other assets. The Fund may postpone the payment of redemption
proceeds and may suspend the right of redemption during any period or at any
time when and to the extent permissible under the Investment Company Act. The
Fund may redeem shares involuntarily if the Trustees determine that failure to
do so may have materially adverse consequences to shareholders. In the event of
an involuntary redemption, shareholders would have no further rights other than
to receive the redemption price. In addition, the Fund may redeem some or all
shares held by:
(1) a shareholder whose account value is less than the minimum required
investment amount as a result of redemptions;
(2) all shareholders of the Fund if the value of all shares is less than
the minimum amount established by the Board of Trustees; or
(3) any shareholder to reimburse the Fund for any loss or expense it has
sustained or incurred resulting from:
(a) the shareholder's failure to make full payment for share
purchases;
(b) any defective redemption request;
(c) indebtedness incurred in connection with facilitating (i) requests
pending receipt of collected funds from investments sold on the date of the
shareholder's redemption request, (ii) redemption requests when the
shareholder has also notified the Fund of its intention to deposit funds in
its account on the date of the redemption request, or (iii) the purchase of
investments pending receipt of collected funds when the shareholder has
notified the Fund of its intention to deposit funds in its accounts on the
date of the purchase of the investments; or
(d) a transaction effected for the benefit of the shareholder.
INVESTMENT POLICIES AND RESTRICTIONS
The following investment information supplements that set forth in the
Prospectus, which describes the Fund's principal investment strategies and the
types of securities in which the Fund primarily invests.
INVESTMENT QUALITY. The Fund invests primarily in securities rated in the
highest rating category assigned by a nationally recognized statistical rating
organization ("Rating Agency"), e.g., AAA by Standard & Poor's Ratings Group
and/or Aaa by Moody's Investor Services, Inc. The Fund may also invest up to 25%
of its net assets in other "investment grade" securities that are rated in the
second or third highest rating category assigned by a Rating Agency. See
Appendix A for more information on the ratings of Rating Agencies.
U.S. GOVERNMENT AGENCY SECURITIES. The Fund invests primarily in securities
issued by the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association
2
<PAGE>
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). GNMA obligations
are guaranteed by GNMA and are backed by the full faith and credit of the U.S.
Treasury. FNMA obligations are guaranteed by FNMA and are supported by FNMA's
ability to borrow directly from the U.S. Treasury. FHLMC obligations are
guaranteed by FHLMC and are supported by FHLMC's ability to borrow directly from
the U.S. Treasury.
ZERO COUPON BONDS. The Fund may invest in zero coupon bonds. Zero coupon bonds
do not make interest payments; instead, they are sold at a discount from their
face value and are redeemed at face value when they mature. Because zero coupon
bonds do not pay current income, their prices can be very volatile when interest
rates change. In calculating its dividend, the Fund takes into account as income
a portion of the difference between a zero coupon bond's purchase price and its
face value.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Unless a repurchase
agreement has a remaining maturity of seven days or less or may be terminated on
demand upon notice of seven days or less, the repurchase agreement will be
considered illiquid and will be subject to the Fund's 15% limit on investments
in illiquid securities as stated below. Repurchase agreements are considered to
be loans under the Investment Company Act.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price. The Fund
would pay interest on amounts obtained pursuant to a reverse repurchase
agreement. Whenever the Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account liquid assets such as cash or liquid
portfolio securities until the repurchase date that are equal in value to the
repurchase price (including accrued interest). The Fund will monitor the account
to ensure such equivalent value is maintained. Reverse repurchase agreements are
considered to be borrowings by the Fund under the Investment Company Act.
TAXABLE MUNICIPAL BONDS. The Fund may invest in taxable municipal bonds that are
designed primarily to finance community development. The two principal
classifications of taxable municipal bonds which may be held by the Fund are
"general obligation" bonds and "revenue" bonds. General obligation bonds are
generally secured by the issuer's pledge of its full faith, credit and taxing
power for the payment of principal and interest. Revenue bonds are generally
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as the user of the facility being financed.
The Fund may also invest in "moral obligation" bonds, which are normally issued
by special purpose public authorities. If the issuer of moral obligation bonds
is unable to meet its debt service obligations from current revenues, it may
draw on a reserve fund, the restoration of which is a moral commitment but not a
legal obligation of the state or municipality which created the issuer.
There are, of course, variations in the quality of taxable municipal bonds, both
within a particular category and between categories, and the yields on taxable
municipal bonds depend upon a
3
<PAGE>
variety of factors, including general market conditions, the financial condition
of the issuer, general conditions of the taxable municipal bond market, the size
of a particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of a Rating Agency represent its opinion as to the quality of
taxable municipal bonds. It should be emphasized that these ratings are general
and are not absolute standards of quality. Taxable municipal bonds with the same
maturity, interest rate and rating may have different yields. Taxable municipal
bonds of the same maturity and interest rate with different ratings may have the
same yield. Subsequent to its purchase by the Fund, an issue of taxable
municipal bonds may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Fund.
The payment of principal and interest on most taxable municipal bonds purchased
by the Fund will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities and each multistate
agency of which a state is a member is a separate "issuer" as that term is used
in this Statement of Additional Information. An issuer's obligations under its
taxable municipal bonds are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
federal Bankruptcy Code and laws, if any, which may be enacted by federal or
state legislatures extending the time for payment of principal or interest, or
both, or imposing other constraints upon enforcement of such obligations or upon
the ability of municipalities to levy taxes. The power or ability of an issuer
to meet its obligations for the payment of interest on and principal of its
taxable municipal securities may be materially adversely affected by litigation
or other conditions.
OTHER SECURITIES. As the universe of CRA-qualified securities expands, the Fund
may purchase qualified securities that the Advisor believes are consistent with
the achievement of the Fund's investment objective. The Fund and its
shareholders will bear the risks associated with investments in any such
securities. The Advisor will invest only in securities that meet the credit
standards set forth in the Prospectus and this Statement of Additional
Information and that the Advisor believes will not be inconsistent with the
Fund's objective of providing financial institutions with investment test credit
under the CRA.
SECURITIES LENDING. The Fund may lend its portfolio securities to financial
institutions such as banks and broker/dealers in accordance with the investment
limitations described below. Such loans involve risks of delay in receiving
additional collateral or in recovering the securities loaned or even loss of
rights in the collateral, should the borrower of the securities fail
financially. Any portfolio securities purchased with cash collateral will be
subject to possible depreciation in value. The Fund will continue to accrue
interest on the securities loaned and will also earn income on the loans. Any
cash collateral received by the Fund will be invested in high quality,
short-term money market instruments. Loans will generally be short term, will be
made only to borrowers that the Advisor deems to be of good standing and only
when, in the Advisor's judgment, the income to be earned from the loan justifies
the attendant risk.
LIQUIDITY. To maintain liquidity, the Fund may hold a portion of its net assets
in repurchase agreements or other short-term instruments and/or cash. Under
normal conditions, the Fund will hold no more than 10% of its net assets in such
instruments.
4
<PAGE>
ILLIQUID SECURITIES. The Fund will not invest more than 15% of the value of its
net assets in illiquid securities, including repurchase agreements with
remaining maturities in excess of seven days, time deposits with maturities in
excess of seven days, restricted securities, non-negotiable time deposits and
other securities which are not readily marketable.
Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"),
allows for a broader institutional trading market for securities otherwise
subject to restrictions on resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the Securities Act for
resales of certain securities to qualified institutional buyers. The Fund's
investment in Rule 144A securities could have the effect of increasing the level
of illiquidity of the Fund during any period that qualified institutional buyers
were no longer interested in purchasing these securities. For purposes of the
15% limitation on purchases of illiquid securities described above, Rule 144A
securities will not be considered to be illiquid if the Advisor has determined,
in accordance with guidelines established by the Fund's Board of Trustees, that
an adequate trading market exists for such securities.
INVESTMENT RESTRICTIONS. The following investment restrictions are fundamental
policies of the Fund and may be changed only with the approval of a "majority of
the outstanding voting securities" of the Fund as defined in the Investment
Company Act:
The Fund will not:
1. Make loans, except that the Fund (i) may purchase or hold debt
instruments in accordance with its investment objective and policies,
and may enter into repurchase agreements with respect to portfolio
securities, and (ii) may lend portfolio securities against collateral
consisting of cash or securities which are consistent with the Fund's
permitted investments, where the value of the collateral is equal at
all times to at least 100% of the value of the securities loaned.
2. Borrow money or issue senior securities, except that the Fund may
borrow from domestic banks for temporary purposes and may engage in
reverse repurchase transactions to the extent permitted by the
Investment Company Act; or mortgage, pledge, or hypothecate any assets
except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or, subject to any
limitations imposed by the Investment Company Act. The Fund will not
purchase securities while borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding.
3. Act as an underwriter within the meaning of the Securities Act of
1933; except insofar as the Fund might be deemed to be an underwriter
upon disposition of restricted portfolio securities; and except to the
extent that the purchase of securities directly from the issuer
thereof in accordance with the Fund's investment objective, policies
and limitations may be deemed to be underwriting.
5
<PAGE>
4. Purchase or sell real estate; except that the Fund may purchase
securities that are secured by real estate and may purchase securities
of issuers which deal in real estate or interests therein; however,
the Fund will not purchase or sell interests in real estate limited
partnerships.
5. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, although this limitation does not
apply to mortgage-backed securities; provided, however, that there is
no limitation with respect to obligations issued or guaranteed by the
U.S. Government, any state, territory or possession of the U.S.
Government, the District of Columbia or any of their authorities,
agencies, or instrumentalities (including U.S. Government-sponsored
enterprises) or political subdivisions, including municipal bonds.
6. Purchase or sell commodities or commodity contracts, or invest in
futures contracts or options related thereto.
The Fund has also adopted the following restrictions which may be changed by the
Board of Trustees without shareholder approval:
The Fund may not:
7. Invest in companies for the purpose of exercising management or
control.
8. Purchase foreign securities.
9. Invest in or sell put options, call options, straddles, spreads, or
any combination thereof.
10. Purchase securities on margin (except such short-term credits as may
be necessary for the clearance of purchases), make short sales of
securities, or maintain a short position.
11. Purchase securities of other investment companies except in connection
with a merger, consolidation, reorganization, or acquisition of
assets, or as is permitted by the Investment Company Act.
If a percentage limitation is satisfied at the time of investment, a later
increase in such percentage resulting from a change in the value of the Fund's
portfolio securities generally will not constitute a violation of the
limitation. With respect to borrowings, if a Fund's asset coverage at
6
<PAGE>
any time falls below that required by the 1940 Act, the Fund will reduce its
borrowings in the manner required by the 1940 Act to the extent necessary to
satisfy the asset coverage requirement.
INVESTMENT ADVISOR
The Advisor, located at 1751 West Cypress Creek Road, Fort Lauderdale, FL 33309,
was organized under the laws of the State of Florida as an investment advisory
corporation in 1998. The Advisor is also registered with the Securities and
Exchange Commission as an investment adviser under the Investment Advisers Act
of 1940, as amended.
The following persons are affiliated persons of both the Fund and the Advisor:
Todd J. Cohen is Trustee of the Fund and President and Director of the Advisor.
David A. Zwick is Trustee and President of the Fund and Director of the Advisor.
Neil M. Solomon is Treasurer of the Fund and Vice President, Treasurer and
Secretary of the Advisor.
The Advisor provides investment advisory services to the Fund pursuant to an
investment advisory agreement with the Fund (the "Advisory Agreement"). Under
the terms of the Advisory Agreement, the Advisor provides a continuous
investment program for the Fund, including investment research and management
with respect to all securities and investments and cash equivalents in the Fund.
The Advisor determines what securities and other investments will be purchased,
retained or sold by the Fund and implements such determinations through the
placement of orders for the execution of portfolio transactions with or through
brokers or dealers as the Advisor may select.
For the services provided and expenses assumed under the Advisory Agreement, the
Advisor is entitled to receive advisory fees, computed daily and paid monthly,
at the annual rate of 0.50% of the Fund's average daily net assets. While it is
expected that the Fund's total operating expenses will not exceed the annual
rate of 1.00% of the Fund's average daily net assets, the Advisor has
voluntarily agreed to waive advisory fees and/or reimburse other expenses to the
extent necessary to limit the total operating expenses of the Fund to this rate
in the event the Fund's expenses are higher than expected. Any waiver of fees or
reimbursement of expenses will be made on an estimated monthly basis. The
Advisor may recoup amounts previously waived or reimbursed to the extent that
actual fees and expenses for a specific month are less than the annual rate of
1.00% of the Fund's average daily net assets, but any such recoupment will be
limited to the fiscal year with respect to which the amounts were waived or
reimbursed. During the Fund's first fiscal year ending May 31, 2000, such
recoupment may include the Fund's organizational expenses to the extent that
they have been paid by the Advisor and not previously reimbursed by the Fund.
The Advisor may revise or discontinue this commitment at any time upon written
notice to the Fund's Board of Trustees. The Advisory Agreement provides that the
Advisor shall not be liable for any loss suffered by the Fund or its
shareholders as a consequence of any act or omission in connection with services
under the Advisory Agreement, except by reason of the Advisor's willful
misfeasance, bad faith, gross negligence, or reckless disregard of its
obligations and duties under the Advisory Agreement.
The Advisory Agreement has an initial term of two years and will continue in
effect from year to year as long as such continuance is approved at least
annually (i) by the vote of a majority of Trustees who are not parties to the
Advisory Agreement or interested persons (as defined in the Investment Company
Act) of any such party, cast in person at a meeting called for the purpose of
voting on such approval; and (ii) by the Board of Trustees, or by a vote of the
majority of the outstanding voting securities of the Fund (as defined in the
Investment Company Act). The
7
<PAGE>
Advisory Agreement will terminate automatically in the event of its assignment
(as defined in the Investment Company Act).
TRUSTEES AND OFFICERS
The Board of Trustees of the Fund manages the business and affairs of the Fund
in accordance with the laws of the State of Delaware and the Fund's Agreement
and Declaration of Trust and its bylaws. The Trustees and officers of the Fund
are listed below:
<TABLE>
<CAPTION>
Name, Age, Address, Position with Fund Principal Occupation for the Last Five Years
- -------------------------------------- --------------------------------------------
<S> <C>
David A. Zwick* Secretary, Treasurer and Director,
Trustee and President SunCoast Capital Group, Ltd.
c/o SunCoast Capital Group, Ltd. (broker-dealer) since December 1992;
1751 West Cypress Creek Road Director, the Advisor since November
Fort Lauderdale, FL 33309 1998.
Age 32
Todd J. Cohen* President and Director, the Advisor
Trustee since November 1998; President, SunCoast
c/o SunCoast Capital Group, Ltd. Capital Group, Ltd. (broker-dealer)
1751 West Cypress Creek Road since December 1992.
Fort Lauderdale, FL 33309
Age 33
D. Keith Cobb Retired Private Investor; Vice Chairman
Trustee and Chief Executive Officer, Alamo Rent
2521 Del Lago Drive A Car, Inc. (auto rentals), 1995-1997;
Ft. Lauderdale, FL 33316 National Managing Partner - Financial
Age 58 Services, KPMG Peat Marwick (certified
public accountants), 1993-1995;
Director, Dispatch Management Systems,
Inc.; Director, RHR International;
Director, Laundromax, Inc.; Director,
Renaissance Cruises, Inc.; Director,
Federal Reserve Bank of Atlanta, Miami
Branch.
8
<PAGE>
Burton Emmer Assistant to Chief Executive Officer,
Trustee CHS Electronics, Inc., October 1998
CHS Electronics, Inc. to present; Partner, Grant Thornton LLP
2000 NW 84th Avenue (certified public accountants), August
Miami, FL 33122 1979 to August 1998.
Age 62
Jack M. Guttentag Professor Emeritus, University of
Trustee Pennsylvania, 1996 to present; Jacob
GHR Systems, Inc. Safra Professor of International
998 Old Eagle School Road, Suite 1206 Banking, University of Pennsylvania,
Wayne, PA 19087-1861 1962 to 1996; Chairman, GHR Systems,
Age 75 Inc.
Heinz Riehl President, Riehl World Training &
Trustee Consulting, Inc. (bank consulting), 1996
Riehl World Training & Consulting, Inc. to present; Faculty Member, New York
25-13 Old Kings Highway North University, 1982 to present; Senior Vice
Darien, CT 06820 President, Citibank, until 1996; Member,
Age 62 Foreign Exchange Committee, New York
Federal Reserve Bank, 1980-1995.
John E. Taylor President and CEO, National Community
Trustee and Chairman Reinvestment Coalition, December 1993 to
National Community Reinvestment Coalition present; Director, America Works
733 15th Street, NW, Suite 540 Partnership
Washington, DC 20005
Age 49
Neil M. Solomon Vice President, Secretary and Treasurer,
Treasurer the Advisor since November 1998; Vice
c/o SunCoast Capital Group, Ltd. President and Chief Financial Officer,
1751 West Cypress Creek Road SunCoast Capital Group, Ltd.
Fort Lauderdale, FL 33309 (broker-dealer) since July 1996;
Age 28 Controller, Costa Cruise Lines, May 1994
to July 1996; Associate - Audit, Coopers
& Lybrand, May 1992 to May 1994.
Michael P. Malloy Partner, Drinker Biddle & Reath LLP (law
Secretary firm) since 1993
Drinker Biddle & Reath LLP
1345 Chestnut Street, Suite 1100
Philadelphia, PA 19107
Age 39
</TABLE>
9
<PAGE>
* May be deemed to be an "interested person" of the Fund as defined in the
Investment Company Act.
The table below sets forth the compensation that the Fund expects to pay to each
of the Trustees who are not interested persons of the Fund during the Fund's
first fiscal year. Trustees who are interested persons receive no compensation.
Aggregate Total
Compensation Compensation
Name of Person/Position from the Fund Paid to Trustees
- ----------------------- ------------- ----------------
D. Keith Cobb $12,000 $12,000
Trustee
Burton Emmer $12,000 $12,000
Trustee
Jack M. Guttentag $12,000 $12,000
Trustee
Heinz Riehl $12,000 $12,000
Trustee
John E. Taylor $12,000 $12,000
Trustee
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return" for a
period is the percentage change in value during the period of an investment in
Fund shares, including the value of shares acquired through reinvestment of all
dividends and capital gains distributions. "Average Annual Total Return" is the
average annual compounded rate of change in value represented by the Total
Return for the period.
10
<PAGE>
n
Average Annual Total Return is computed as follows: P(1+T) = ERV
Where: P = a hypothetical initial investment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at
the beginning of the applicable period
The formula for calculating Aggregate Total Return is as follows:
Aggregate Total Return = [(ERV/P) - 1]
The Fund may also advertise performance in terms of a 30-day yield quotation.
The 30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
6
Yield = 2[(a-b/cd + 1) - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
The Fund imposes no sales charges, although a 1% redemption fee will be charged
at the time shares are redeemed. The redemption fee is not reflected in the
Fund's performance calculations. Income taxes are not taken into account. The
Fund's performance is a function of conditions in the securities markets,
portfolio management, and operating expenses. Although information such as that
shown above is useful in reviewing the Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
In reports or other communications to investors or in advertising material, the
Fund may describe general economic and market conditions affecting the Fund and
may compare its performance with (1) that of other mutual funds as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds or as set forth in the
publications listed below, (2) one or more benchmark indices, or (3) other
appropriate indices of investment securities or with data developed by the
Advisor derived from such indices. Performance information may also include
evaluation of the Fund by nationally recognized ranking services and information
as reported in financial publications such as Business Week, Fortune,
Institutional Investor, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, or other national, regional or local publications.
11
<PAGE>
In reports or other communications to investors or in advertising, the Fund may
also describe the general biography or work experience of the portfolio
manager(s) of the Fund and may include quotations attributable to the portfolio
manager(s) describing approaches taken in managing the Fund's investments,
research methodology, underlying stock selection or the Fund's investment
objective. The Fund may also discuss the continuum of risk and return relating
to different investments. In addition, the Fund may from time to time compare
its expense ratios to those of investment companies with similar objective and
policies, as advertised by Lipper Analytical Services, Inc. or similar
investment services that monitor mutual funds.
TAX INFORMATION
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code, and to distribute its income to shareholders each
year, so that the Fund itself generally will be relieved of federal income and
excise taxes. If the Fund were to fail to so qualify: (1) the Fund would be
taxed at regular corporate rates without any deduction for distributions to
shareholders; and (2) shareholders would be taxed as if they received ordinary
dividends, although corporate shareholders could be eligible for the dividends
received deduction.
PORTFOLIO TRANSACTIONS
Debt securities are generally traded in the over-the-counter market. Over-the-
counter securities are generally purchased and sold directly with principal
market makers who retain the difference in their cost in the security and its
selling price (mark-up). In some instances, the Advisor feels that better prices
are available from non-principal market makers that are paid commissions
directly.
Decisions to buy and sell securities for the Fund are made by the Advisor
subject to overall review by the Fund's Board of Trustees. The Advisor places
orders pursuant to its investment determinations for the Fund either directly
with the issuer or with a broker or dealer. In executing portfolio transactions
and selecting brokers or dealers, the Advisor uses its best efforts to seek on
behalf of the Fund the best overall terms available. In assessing the best
overall terms available for any transaction, the Advisor considers all factors
that it deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. When the Fund purchases or sells
securities through brokers on an agency basis, in evaluating the best overall
terms available, and in selecting the broker to execute a particular
transaction, the Advisor may also consider the brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934) provided to the Fund and/or other accounts over which the Advisor or an
affiliate of the Advisor exercises investment discretion. The Advisor is
authorized to pay to a broker who provides such brokerage and research services
a commission for executing a portfolio transaction for the Fund which is in
excess of the amount of commission another broker would have charged for
effecting that transaction if, but only if, the Advisor determines in good faith
that such commission was reasonable in relation to the value of the brokerage
and research
12
<PAGE>
services provided by such broker, viewed in terms of that particular transaction
or in terms of the overall responsibilities of the Advisor to the Fund.
In addition, the Advisor is authorized to take into account the sale of shares
of the Fund in allocating to brokers or dealers purchase and sale orders for the
Fund's portfolio securities, provided that the Advisor believes that the quality
of the transaction and the commission are comparable to what they would be with
other qualified firms. The Advisor will make investment decisions for the Fund
independently from those of other clients of the Advisor. However, the same
security may be held in the portfolio of the Fund and one or more other clients
when the same security is believed suited for the investment objectives of the
Fund and such other client(s). Should two or more clients of the Advisor
simultaneously be engaged in the purchase or sale of the same security, to the
extent possible, the transactions will be allocated as to price and amount in a
manner fair and equitable to each client and the Fund.
The Advisor may execute portfolio transactions through SunCoast Capital Group,
Ltd. ("SunCoast"), which is the Fund's distributor and an affiliate of the
Advisor. The Advisor will do so only if it believes that SunCoast will provide
the Fund with the best available price and execution. Such transactions will be
subject to the requirements of applicable law and will be reviewed by the Fund's
Board of Trustees. SunCoast may not engage in portfolio transactions with the
Fund when it acts as principal.
DISTRIBUTOR
SunCoast, located at 1751 West Cypress Creek Road, Fort Lauderdale, FL 33309
serves as principal underwriter for the Fund's shares. The following persons are
affiliated persons (as defined in the Investment Company Act) of both the Fund
and SunCoast: David A. Zwick is Trustee and President of the Fund and Treasurer,
Secretary, Director and Shareholder of SunCoast; Todd J. Cohen is Trustee of the
Fund and President and Shareholder of SunCoast; and Neil M. Solomon is Treasurer
of the Fund and Vice President and Chief Financial Officer of SunCoast.
Shares of the Fund are sold on a continuous basis. The distribution agreement
between the Fund and SunCoast requires SunCoast to use all reasonable efforts in
connection with the distribution of the Fund's shares. However, SunCoast has no
obligation to sell any specific number of shares and will only sell shares for
orders it receives.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act. The Distribution Plan authorizes the Fund to pay
SunCoast annual fees of up to .25% of the average daily net assets of the Fund
in consideration for distribution and other services and the assumption of
related expenses. Amounts paid to SunCoast may be used to cover expenses that
are related to (a) distribution of the Fund's shares, (b) ongoing servicing
and/or maintenance of the accounts of the Fund's shareholders, (c) payments to
institutions for selling the Fund's shares, and (d) sub-transfer agency,
sub-accounting, administrative or similar services related to
13
<PAGE>
the Fund's shares. The Fund may pay SunCoast the full fee provided for by the
Distribution Plan even if SunCoast's costs for providing its services are less
than the full amount. Certain officers, directors and/or shareholders of
SunCoast are also interested persons (as defined in the Investment Company Act)
of the Fund and may be considered to have a direct or indirect financial
interest in the Distribution Plan.
The Distribution Plan has been approved by the Board of Trustees of the Fund,
including a majority of the Trustees who are not interested persons of the Fund
(as defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in any agreement
related thereto (the "Disinterested Trustees"). In approving the Distribution
Plan, the Trustees considered various factors and determined that there is a
reasonable likelihood that the Distribution Plan would benefit the Fund and its
shareholders. The Distribution Plan may be terminated by a vote of a majority of
the Disinterested Trustees. The Trustees review quarterly a written report of
the amounts expended pursuant to the Distribution Plan and the purposes for
which such expenditures were made. The Distribution Plan may be amended by a
vote of the Trustees, provided that any material amendments also require the
vote of a majority of the Disinterested Trustees. Any amendment to materially
increase the costs that the Fund's shares bear under the Distribution Plan
requires approval by a majority of the outstanding voting shares (as defined in
the Investment Company Act). For so long as the Distribution Plan is in effect,
selection and nomination of Disinterested Trustees will be committed to the
discretion of the Disinterested Trustees. Any agreement related to the
Distribution Plan may be terminated at any time without the payment of any
penalty by a vote of a majority of the Disinterested Trustees. The Distribution
Plan will continue in effect for successive one-year periods, provided that each
such continuance is specifically approved by a majority of the Board of
Trustees, including a majority of the Disinterested Trustees.
CUSTODIAN
First Union National Bank (the "Custodian"), with offices at 123 South Broad
Street, Philadelphia, PA 19109, acts as custodian for the Fund. As such, the
Custodian holds all securities and cash of the Fund, delivers and receives
payment for securities sold, receives and pays for securities purchased,
collects income from investments and performs other duties, all as directed by
officers of the Fund. The Custodian does not exercise any supervisory function
over the management of the Fund, the purchase and sale of securities or the
payment of distributions to shareholders.
14
<PAGE>
SERVICING AGENT
Declaration Service Company ("DSC"), with principal business offices at 555
North Lane, Suite 6160, Conshohocken, PA 19428, provides accounting,
administrative, transfer agency, dividend disbursing agency, and shareholder
servicing agency services for the Fund pursuant to an investment company
services agreement (the "Services Agreement"). Under the Services Agreement, DSC
is responsible for a wide variety of functions, including but not limited to:
o Fund accounting services
o Financial statement preparation
o Valuation of the Fund's portfolio securities
o Pricing the Fund's shares
o Assistance in preparing tax returns
o Preparation and filing of required regulatory reports
o Communications with shareholders
o Coordination of Board and shareholder meetings
o Monitoring the Fund's legal compliance
o Maintaining shareholder account records
Under the Services Agreement, the Fund pays DSC for Fund accounting and
administration services at the annual rate of 0.10% of the first $75 million of
average annual assets, plus 0.075% of the next $75 million of average annual
assets, plus 0.04% of the next $150 million of average annual assets, plus 0.03%
of average annual assets in excess of $300 million. The Fund also pays DSC
$10,000 per year for transfer agency and shareholder services fees. Fees payable
under the Services Agreement are subject to a minimum annual fee of $60,000
during the first year.
COUNSEL
Drinker Biddle & Reath LLP (of which Michael P. Malloy, Secretary of the Fund,
is a partner), One Logan Square, 18th and Cherry Streets, Philadelphia, PA
19103-6996, is counsel to the Fund and will pass upon certain legal matters on
its behalf.
FINANCIAL STATEMENTS
KPMG LLP, with offices at 1600 Market Street, 12th Floor, Philadelphia, PA
19103, will serve as the Fund's independent auditors for its first fiscal year.
An audited Statement of Assets and Liabilities with notes thereto for the Fund
as of June 3, 1999, and the report of KPMG LLP with respect thereto are set
forth below.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Trustees of
The Community Reinvestment Act Qualified Investment Fund
We have audited the accompanying statement of assets and liabilities of The
Community Reinvestment Act Qualified Investment Fund as of June 3, 1999 and the
related statement of operations for the period then ended. These financial
statements are the responsibility of the fund's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of cash owned with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Community Reinvestment Act
Qualified Investment Fund as of June 3, 1999, and the results of its operations
for the period then ended, in conformity with generally accepted accounting
principles.
KPMG LLP /s/
Philadelphia, Pennsylvania
June 3, 1999
16
<PAGE>
THE COMMUNITY REINVESTMENT ACT QUALIFIED INVESTMENT FUND
Statement of Assets and Liabilities
June 3, 1999
Assets:
Cash on deposit with custodian $100,000
--------
Total Assets 100,000
--------
Liabilities:
Accrued expenses _
--------
Total Liabilities _
--------
Net Assets:
Applicable to 10,000 shares, no par value $100,000
========
Net asset value per share: $ 10.00
========
See accompanying Notes to Financial Statements.
17
<PAGE>
THE COMMUNITY REINVESTMENT ACT QUALIFIED INVESTMENT FUND
Statement of Operations
For the period ended June 3, 1999
Organizational expenses $ 148,003
Expense reduction (148,003)
---------
Net income $ --
=========
See accompanying Notes to Financial Statements.
18
<PAGE>
THE COMMUNITY REINVESTMENT ACT QUALIFIED INVESTMENT FUND
Notes to Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Community Reinvestment Act Qualified Investment Fund (the Fund) was
organized as a business trust under the laws of the State of Delaware. The Fund
is registered as an open-end, management investment company under the Investment
Company Act of 1940.
The Fund offers a single class of shares of beneficial interest. Shares when
issued will be fully paid and nonassessable. All shares represent an equal
proportionate interest in the assets belonging to the Fund (subject to the
Fund's liabilities). Shareholders have no preemptive or other similar rights to
subscribe to any additional shares of the Fund or other securities issued by the
Fund.
The Fund's investment objective is to provide financial institutions with a high
level of current income and investments that will be deemed to be qualified
under the Community Reinvestment Act of 1977, as amended (the CRA).
The Fund's principal investment strategy is to invest in mortgage-related and
other debt securities that will cause shares of the Fund to be deemed to be
qualified under the CRA, so that financial institutions that are subject to the
CRA may receive investment test or similar credit under the CRA with respect to
shares of the Fund held by them.
The inception of the Fund was June 3, 1999.
FEES AND TRANSACTIONS WITH RELATED PARTIES
CRAFund Advisors, Inc. (the Advisor) is the investment adviser to the Fund. The
Advisor will receive fees at an annual rate of 0.50% of the Fund's average daily
net assets, computed daily and payable monthly.
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Distribution Plan authorizes the Fund to pay
SunCoast Capital Group, Ltd. (SunCoast) annual fees of up to 0.25% of the
average daily net assets of the Fund in consideration for distribution and other
services and the assumption of related expenses. Amounts paid to SunCoast may be
used to cover expenses that are related to distribution of the Fund's shares,
ongoing servicing and/or maintenance of the accounts of the Fund's shareholders,
payments to institutions for selling the Fund's shares, and sub-transfer agency,
sub-accounting, administrative or similar services related to the Fund's shares.
The Advisor has voluntarily agreed to waive advisory fees and/or reimburse other
expenses to the extent necessary to limit the total operating expenses of the
Fund to the annual rate of 1.00% of its average daily net assets. The Advisor
may recoup amounts previously waived or reimbursed to the extent that actual
fees and expenses for a specific month are less than the annual rate of 1.00% of
the Fund's average daily net assets, but any such recoupment will be limited to
the fiscal year with respect to which the amounts were waived or reimbursed.
During the Fund's first fiscal year ending May 31, 2000, such recoupment may
include the Fund's organizational expenses to the extent that they have been
paid by the Advisor and not previously reimbursed by the Fund. Such
organizational expenses incurred and assumed by the Advisor at the inception of
the Fund were $148,003. The Advisor may revise or discontinue this commitment at
any time upon written notice to the Fund's Board of Trustees.
Legal fees incurred will be paid to a law firm of which the Secretary of the
Fund is a partner.
19
<PAGE>
APPENDIX A
----------
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. 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
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations 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.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
A-1
<PAGE>
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." 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 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 risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment 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.
A-2
<PAGE>
"Baa" - Bonds are considered as medium-grade obligations, (i.e., 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 great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa." The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt
A-3
<PAGE>
rated "DD" is a defaulted debt obligation, and the rating "DP" represents
preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote 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.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC," "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
A-4
<PAGE>
"DDD," "DD" and "D" - Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved and "D"
represents the lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC" - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
A-5
<PAGE>
MUNICIPAL NOTE RATINGS
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"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, with margins
of protection that are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt instruments
in this category lack of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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