<PAGE> 1
As filed with the Securities and Exchange Commission on July 21, 1999
Securities Act Registration No. 33-__________
Investment Company Act Registration No. 811-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ O ]
Pre-Effective Amendment No. ______ [ ]
Post-Effective Amendment No._______ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ O ]
Amendment No. ______
AB FUNDS TRUST
(Exact Name of Registrant as Specified in Charter)
207 E. BUFFALO STREET, SUITE 400
MILWAUKEE, WISCONSIN 53202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (414) 271-5885
BARBARA A. NUGENT, ESQ.
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 ONE COMMERCE SQUARE
PHILADELPHIA, PENNSYLVANIA 19103-7098
(Name and Address of Agent for Service)
Copy to:
RANDY M. PAVLICK
207 E. BUFFALO STREET, SUITE 400
MILWAUKEE, WISCONSIN 53202
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
================================================================================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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AB FUNDS TRUST
PROSPECTUS
September 30, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
FUND OVERVIEW ................................................
AB Select Fund ............................................
AB Balanced Fund ..........................................
FUND PERFORMANCE .............................................
FUND FEES AND EXPENSES .......................................
OTHER INVESTMENT PRACTICES AND RISKS .........................
MANAGEMENT ...................................................
Investment Adviser ........................................
Portfolio Manager .........................................
BUYING, SELLING AND EXCHANGING SHARES ........................
Before You Invest .........................................
Purchasing Shares .........................................
Selling Shares ............................................
Exchanging Shares .........................................
Making Changes to Your Account ............................
SPECIAL FEATURES AND SERVICES ................................
OTHER SHAREHOLDER INFORMATION ................................
DIVIDENDS, DISTRIBUTIONS AND TAXES ...........................
<PAGE> 4
FUND OVERVIEW
AB SELECT FUND
INVESTMENT GOAL
The Fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund will invest primarily in the common stocks of established companies
that the portfolio manager believes have superior potential for earnings
growth. The Fund's portfolio will typically consist of a core of 20-30 common
stocks. The portfolio manager may purchase common stocks of companies of all
sizes.
In selecting stocks, the portfolio manager looks for reasonably priced
securities of companies that occupy a dominant position in a market due to
size, products or services, and whose growth potential is not yet fully
reflected in the company's stock price. In addition, the portfolio manager
looks for companies with conservatively financed balance sheets, strong,
capable management teams and clearly defined growth strategies. Target
companies will have a catalyst for positive earnings developments such as
evolving product cycles, special situations or changing economic conditions.
From time to time, the Fund may take substantial positions in convertible
securities, preferred stocks, government securities or other short-term
investments.
The Fund's portfolio manager will generally sell a security when it no longer
meets the manager's investment criteria or when it has met the manager's
expectations for appreciation. The portfolio manager may often sell portfolio
stocks quickly to respond to short-term market price movements, and expects to
actively trade the portfolio in pursuit of the Fund's investment goal. Due to
this and the Fund's relatively small number of holdings, the Fund's annual
portfolio turnover rate will be higher than that of many other mutual funds.
PRINCIPAL RISKS OF INVESTING
There are two basic risks for all mutual funds that invest in stocks -
management risk and market risk. Management risk means that the portfolio
manager's stock selections and other investment decisions may produce losses or
may not achieve the Fund's investment objectives. Market risk means that the
price of common stocks may move up or down in response to many factors. As a
result of these two risks, the price of the Fund's investments may go up or
down and you could lose money on your investment.
The Select Fund is a non-diversified portfolio, which means that it can invest
in the securities of fewer issuers than diversified portfolios at any one time.
As a result, the gains or losses on a single stock will have a greater impact
on the Fund's share price. In addition, the portfolio manager may often focus
the Fund's investments in a small number of business sectors. Because of these
factors, the Fund's share price may fluctuate more than most equity funds and
the market in general.
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Finally, the portfolio manager may engage in a high level of trading in seeking
to achieve the Fund's investment objective. Higher turnover rates may result
in higher brokerage costs to the Fund and in higher net taxable gains for you
as an investor.
For a more detailed discussion of these principal investment risks, as well as
additional risks that apply to the Fund, please see "Other Investment Practices
and Risks," on page ____.
AB BALANCED FUND
INVESTMENT GOALS
The Fund's investment goals are capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGIES
The Fund will invest primarily in a diverse group of domestic equity and fixed
income securities. The portfolio manager allocates the Fund's assets between
equity and fixed-income securities based upon its assessment of available
investment opportunities and relevant market, economic and financial factors.
Normally, the portfolio manager's selection will emphasize equity securities
over fixed income securities. The portfolio manager expects that the Fund's
position in equity securities will range from 45% to 65% of the Fund's total
assets. However, it is the Fund's policy to invest at least 25% of its total
assets in fixed-income securities and at least 25% in equity securities.
Equity securities: In selecting individual equity securities, the portfolio
manager looks for common stock of domestic companies that it considers to be
reasonably priced, with strong, consistent and predictable earnings growth
rates, strong management, conservatively financed balance sheets and
competitive products or services. Typically, the companies in which the Fund
invests have mid-sized to large market capitalizations.
Fixed Income Securities: The Fund may invest in a variety of income-producing
securities, such as short- to long-term corporate and government debt
securities, convertible securities, preferred stocks and mortgage- and
asset-backed securities. Except for convertible securities, the Fund will only
purchase fixed income securities that are investment grade. A fixed-income
security is considered investment grade if it has been rated in the top four
categories by at least one rating agency or, if unrated, is deemed by the
portfolio manager to be of comparable quality. The Fund may invest up to 20%
of its assets in convertible securities rated below investment grade (i.e.,
junk bonds).
The Fund's portfolio manager will generally sell a security when it no longer
meets the manager's investment criteria or when it has met the manager's
expectations for appreciation. The Fund's portfolio manager may actively trade
the equity portion of the portfolio in pursuit of the Fund's investment goal.
When this occurs, the annual portfolio turnover rate may be higher than that of
other comparable funds.
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PRINCIPAL RISKS OF INVESTING
There are two basic risks for all mutual funds that invest in stocks -
management risk and market risk. Management risk means that the portfolio
manager's stock selections and other investment decisions may produce losses or
may not achieve the Fund's investment objectives. Market risk means that the
price of common stocks may move up or down in response to many factors.
Fixed-income securities in which the Fund invests are also subject to credit
risk and interest rate risk. As a result of these risks, the price of the
Fund's investments may go down and you could lose money on your investment.
The Fund may be riskier than other balanced funds that invest more heavily in
fixed-income securities.
In addition, the Fund may invest in certain securities with unique risks, such
as mortgage- and asset-backed securities. Investment grade securities rated in
the lowest investment grade category (i.e., BBB/Baa) have speculative
characteristics. The Fund may invest up to 20% of its assets in convertible
securities rated below investment grade. Investments in securities that are
not investment grade carry greater risks than investments in investment grade
securities. In particular, issuers of lower rated bonds are less financially
secure and are more likely to be hurt by interest rate movements. When
interest rates are low, the Fund's income distributions to you may be reduced
or eliminated.
For a more detailed discussion of these principal investment risks, as well as
additional risks that apply to the Fund, please see "Other Investment Practices
and Risks," on page ____.
FUND PERFORMANCE
The Funds had not commenced operations as of the date of this prospectus and,
therefore, have no performance information to report. Information on each
Fund's performance will be included in future amendments to this prospectus and
in periodic reports to shareholders.
For the performance information of a comparable mutual fund for which the
Funds' portfolio manager previously acted as portfolio manager, please refer to
"Management" on page _____.
FUND FEES AND EXPENSES
Fees and expenses are one important consideration in choosing a mutual fund.
As an investor, you indirectly pay a share of a Fund's operating expenses.
There are no sales loads or exchange fees associated with an investment in the
Funds.
Annual fund operating expenses are the expenses that a mutual fund pays to
conduct its business, such as investment advisory fees, transfer agent fees,
administration fees, accounting and legal fees, and other fund expenses.
Annual fund operating expenses are deducted from a Fund's assets, and therefore
reduce its total return. As a shareholder, you pay for these expenses
indirectly. A Fund's operating expenses will vary from year to year.
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The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Funds.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (A) SELECT FUND BALANCED FUND
(expenses deducted directly from fund assets)
<S> <C> <C>
Management fee 1.0 % 0.75%
Distribution and Service (12b-1) fee (b) 0.25% 0.25%
Other expenses 0.94% 0.94%
Total Annual Fund Operating Expenses 2.19% 1.94%
</TABLE>
(a) Because each Fund was established on _____, 1999 and had no operating
history, the management fee is the fee to which the adviser is entitled under
its contract with each Fund, and the Distribution and Service fees are the
maximum rates that can be charged under the Distribution and Service Plan.
"Other expenses" are estimates of the other operating expenses (without taking
into account any expense limitation arrangement between the adviser and the
Funds) based on the adviser's projections of what those expenses will be in each
Fund's first fiscal year ended ____________, 2000. (b) Each Fund has adopted a
Distribution and Service Plan under Rule 12b-1 that permits the Fund to pay
distribution and shareholder servicing fees for the sale and distribution of its
shares. Because these fees are paid out of a Fund's assets on an ongoing basis,
over time these fees will increase the cost of your investment and could cost
long-term investors in the Fund more than other types of sales charges.
Example: The following example helps you compare the cost of investing in the
Funds to the cost of investing in other mutual funds. The example assumes
that:
- - You invest $10,000 for the time periods indicated, and then redeem all of
your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - Each Fund's operating expenses remain the same for each period.
Your actual costs may be higher or lower, so this example should be used for
comparison only. Based on these assumptions your cost at the end of each
period would be:
<TABLE>
<S> <C> <C>
FUND 1 YEAR 3 YEARS
- ---------------- ------ -------
Select Fund $222 $685
Balanced Fund $197 $609
</TABLE>
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OTHER INVESTMENT PRACTICES AND RISKS
The principal risks of investing in each Fund are summarized above. The
following discussion provides more detail about some of those risks. This
section also describes additional investment practices each Fund may follow in
seeking to achieve its objective, and the risks associated with those
particular practices. All of the following apply to both Funds except where
indicated.
COMMON STOCKS. The Select Fund and the Balanced Fund, to the extent the
Balanced Fund invests in common stocks, are subject to certain risks associated
with common stock investing. These include the management risk of selecting
individual stocks that do not perform as the portfolio manager anticipated, the
risk that the stock markets in which the Funds invest may experience periods of
turbulence and instability, and the general risk that domestic and global
economies may go through periods of decline and cyclical change. If the stock
market declines in value, each Fund is likely to decline in value. Many
factors affect an individual company's performance, such as the strength of its
management or the demand for its products or services. Negative performance
may affect the earnings growth potential anticipated by the portfolio manager
when the individual stock was selected for a Fund's portfolio.
FIXED-INCOME SECURITIES. To the extent that the portfolio manager invests
assets of the Funds in fixed-income securities, your investment is subject to
the following risks:
- - Credit Risk. An issuer of fixed-income securities may default on its
obligation to pay interest and repay principal. Also, changes in the
financial strength of an issuer or changes in the credit rating of a
security may affect its value.
- - Interest Rate Risk. When interest rates increase, fixed-income securities
tend to decline in value and when interest rates decrease, fixed-income
securities tend to increase in value. A change in interest rates could
cause the value of your investment to change. Fixed-income securities
with longer maturities are more susceptible to interest rate fluctuations
than those with shorter maturities. Changes in interest rates may also
extend or shorten the duration of certain types of instruments, such as
asset-backed securities, thereby affecting their value and the return on
your investment.
- - Prepayment Risk. Prepayment risk is the risk that, as interest rates
fall, borrowers are more likely to refinance their mortgages or other
debts. As a result, the principal on mortgage-backed, asset-backed or
certain other fixed income securities may be paid earlier than expected.
If portfolio securities are prepaid, the portfolio manager may have to
reinvest prepaid amounts at a relatively lower interest rate, which could
affect the return on your investment.
- - Non-investment Grade Securities. Securities rated below investment grade
are particularly subject to credit risk. These securities are considered
speculative and are commonly referred to as "junk bonds." The Funds have
no minimum quality standards for convertible securities, although they
will not invest in defaulted securities. To the extent a Fund purchases
or holds convertible or other securities that are below investment grade,
there is a greater risk that payments of principal, interest and dividends
will not be made. In addition, the value of lower quality securities is
subject to greater volatility and is generally more dependent on the
ability of the issuer to meet interest and principal payments than is the
case for higher quality
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securities. Issuers of non-investment grade securities may not be as
financially strong as those issuing bonds with higher credit ratings.
TEMPORARY DEFENSIVE STRATEGIES. Each of the Funds may, for temporary defensive
purposes, invest without limitation in cash or various short-term instruments,
including those of the U.S. Government and its agencies and instrumentalities.
This may occur, for example, when the portfolio manager is attempting to
respond to adverse market, economic, political or other conditions. Each Fund
can also hold these types of securities pending the investment of proceeds from
the sale of Fund shares or portfolio securities or to meet anticipated
redemption requests. If these temporary strategies are used for adverse
market, economic or political conditions, it is impossible to predict when or
for how long the portfolio manager may employ these strategies for the Funds.
To the extent a Fund holds cash or invests defensively in short-term
instruments, it may not achieve its investment objective.
PORTFOLIO TURNOVER. Portfolio securities will be sold without regard to the
length of time they have been held when the portfolio manager believes it is
appropriate to do so in light of a Fund's investment goal. In general, the
greater the volume of buying and selling by a mutual fund, the greater the
impact that brokerage commissions and other transaction costs will have on its
return. High portfolio turnover rates may also cause substantial net
short-term gains, and any distributions resulting from such gains will be
ordinary income to you for purposes of federal income tax. The portfolio
manager anticipates that it will actively manage both Funds' portfolios in
pursuing each Fund's investment strategy.
NON-DIVERSIFICATION (SELECT FUND). The Select Fund is a non-diversified
portfolio, which means that, at any given time, it may hold fewer securities
than funds that are diversified. Compared to the Balanced Fund and other
mutual funds, the Fund may invest a greater percentage of its assets in the
stock of a particular issuer. This increases the risk that the value of the
Select Fund could go down because of the poor performance of a single
investment. Also, the volatility of the investment performance may increase
and the Fund could incur greater losses than the Balanced Fund or other mutual
funds that invest in a greater number of companies.
SECTOR RISK (Select Fund). Companies with similar characteristics may be
grouped together in broad categories called sectors. Sector risk is the
possibility that a certain sector may underperform other sectors or the market
as a whole. As the portfolio manager allocates more of the Fund's portfolio
holdings to a particular sector, the Fund's performance will be more
susceptible to any economic, business or other developments that generally
affect that sector.
MORTGAGE- AND ASSET-BACKED SECURITIES (Balanced Fund). The Balanced Fund may
purchase residential and commercial mortgage-backed as well as other
asset-backed securities. The Fund will only invest in mortgage-backed
securities that are issued or guaranteed by the U.S. Government or its agencies
or instrumentalities, or in privately issued mortgage-backed or asset-backed
securities that are rated in the top two categories (i.e., AAA/AA) by a
nationally recognized rating agency. In addition to credit and market risk,
mortgage- and asset-backed securities involve prepayment risk because the
underlying assets (loans) may be prepaid at any time. The value of these
securities may also be changed because of actual or perceived changes in the
creditworthiness of the originator, the servicing agent, the financial
institution providing
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<PAGE> 10
the credit support, or the counterparty. Like other fixed-income securities,
when interest rates rise, the value of an asset-backed security will generally
decline. However, when interest rates decline, the value of a mortgage-backed
security with prepayment features may not increase as much as that of other
fixed-income securities. These securities are also subject to the risk that,
as interest rates rise, borrowers are less likely to refinance their mortgages
and other debts. As a result, the principal on mortgage- or asset-backed
securities may be paid later than expected, which could cause the value of the
securities to go down. In times of financial stress, the secondary market for
asset-backed securities may not be as liquid as the market for other types of
securities.
FOREIGN SECURITIES. Each Fund may invest without limit in foreign securities
in an effort to achieve its investment objective. Investing in foreign
securities involves special additional risks and considerations not typically
associated with investing in securities of U.S. companies. These include
fluctuation in value of foreign portfolio investments due to changes in
currency rates and control regulations, lack of public information about
foreign issuers, lack of uniform accounting, auditing and financial reporting
standards comparable to those applicable to domestic issuers, unstable
international and political and economic conditions and greater difficulties in
commencing lawsuits against foreign issuers. Investments in emerging markets
involve even greater risks such as immature economic structures and unfamiliar
legal systems.
INVESTMENT OBJECTIVES. The investment objective of the Select Fund is capital
appreciation. The investment objectives of the Balanced Fund are capital
appreciation and current income. The Funds' objectives may be changed by the
Funds' board of trustees without shareholder approval. You will receive
advance written notice of any material changes to your Fund's investment
objectives.
MANAGEMENT
INVESTMENT ADVISER
The Funds have entered into an investment advisory agreement with AB Advisers.
The adviser was organized on __________, 1999 as a _________ to become the
investment adviser of the Funds. Although the adviser, as a recently formed
entity, has had no experience advising a registered investment company, the
portfolio manager, who is the founder, president and a director of the adviser,
has had ___ years of experience as a portfolio manager, including ___ years of
experience as the manager of mutual funds comparable to the Funds. In addition
to the Funds, the adviser provides investment management services to private
accounts. As of _______, 1999, the adviser had approximately $_______ under
management.
Under the investment advisory agreement, the adviser manages the Funds'
investments and business affairs, subject to the supervision of the Funds'
board of trustees. The Funds have agreed to pay the adviser an annual
management fee of ___% of each Fund's average daily net assets. The advisory
fee accrues daily and is paid monthly.
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PORTFOLIO MANAGER
Mr. ____________ is the portfolio manager for each of the Funds. As portfolio
manager, he is responsible for the day to day management of the Funds and the
selection of the Funds' investments. [INSERT PORTFOLIO MANAGER BIOGRAPHY].
Prior to organizing the adviser and managing the Funds, Mr. ________ served as
the portfolio manager of the ____________ Fund (the "Prior Fund") from its
inception on December 31, 1997 until _________, 1999. As portfolio manager of
the Prior Fund, Mr. _________ was responsible for managing its investment
operations.
Average annual returns for the one year period ended _________, 1999 and for
the entire period during which the portfolio manager managed the Prior Fund,
compared with the performance of the S&P 500 Index for the same periods, were
as follows:
<TABLE>
<CAPTION>
1 YEAR ENDED DECEMBER 31, 1997
____________, 199__ THROUGH _______,1999
--------------------- ----------------------
<S> <C> <C>
Prior Fund (a),(b) ___% ___%
S&P 500 Index(R) (c) ___% ___%
</TABLE>
(a) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions, and is net of fund expenses.
(b) The total fund operating expenses for the Prior Fund were ___% for the
year ended December 31, 1998. The expense ratio of the AB Select Fund will be
capped initially at ____% through ________.
(c) The Standard & Poor's 500 Composite Stock Price Index is a broad-based,
unmanaged index of common stocks that is considered to be generally
representative of the United States stock market. The Index is adjusted to
reflect reinvestment of dividends. Investors cannot invest directly in the
Index.
The foregoing table illustrates the past performance of the portfolio manager
in managing a portfolio similar to the AB Select Fund. The performance of the
portfolio manager in managing the Prior Fund may be relevant because the
portfolio manager intends to use the same investment objectives and
substantially similar policies and restrictions for the AB Select Fund. The
Prior Fund is a separate Fund and its historical performance is not indicative
of the future performance of the AB Select Fund. Share prices and investment
returns will fluctuate depending on market conditions, as well as changes in
company-specific fundamentals of portfolio securities.
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BUYING, SELLING AND EXCHANGING SHARES
BEFORE YOU INVEST
PROSPECTUS. This prospectus contains important information about the Funds.
Please read it carefully before you decide to invest.
ACCOUNT REGISTRATION. Once you have decided which Fund or Funds to invest in,
you need to select the appropriate form of account registration. There are
many different types of mutual fund ownership. How you register your account
with the Funds can affect your legal interests, as well as the rights and
interests of your family and beneficiaries. You should always consult with
your legal and/or tax adviser to determine what form of account registration
best meets your needs.
Available forms of registration include:
- - Individual ownership. If you have reached the legal age
of majority in your state of residence, you may open an
individual account.
- - Joint ownership. Two or more individuals may open an
account together as joint tenants with right of
survivorship, tenants in common or as community property.
- - Custodial account. You may open an account for a minor
under the Uniform Gift to Minors Act/Uniform Transfers to
Minors Act for your state of residence
- - Business/trust ownership. Corporations, trusts,
charitable organizations and other businesses may open
accounts.
- - IRAs and other tax-deferred accounts. The Funds offer a
variety of retirement plans for individuals and
institutions. Please refer to "Retirement Account
Options," below, for more information about these types
of accounts.
ACCOUNT MINIMUMS. You also need to decide how much money to invest. The
following chart shows you the minimum amounts that you will need to open or add
to certain types of accounts. The Funds may waive the minimum investment
amounts at any time.
<TABLE>
<CAPTION>
ADDITIONAL MINIMUM
TYPE OF ACCOUNT INITIAL MINIMUM PURCHASE PURCHASE
- --------------- ------------------------- -------------------------
<S> <C> <C>
Regular (Individual,
joint, business or
trust) $4000 $1000
IRA (including spousal,
Roth and SEP) $4000 $1000
Gifts to Minors
(UTMA/UGMA) $1000 $1000
Automatic Investment Plan $4000 $ 250
</TABLE>
DETERMINING YOUR SHARE PRICE. The price at which you purchase and sell a
Fund's shares is called the Fund's net asset value (NAV) per share. A Fund
calculates NAV by taking the total value of its assets, subtracting its
liabilities, and dividing the total by the number of Fund shares that are
outstanding. Each Fund calculates its NAV as of the close of trading on the
New York
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Stock Exchange (usually 4:00 p.m. Eastern time) on each day the Exchange is
open for trading. The price of the shares you purchase or redeem will be the
next NAV calculated after your order is received in good order by the Funds'
transfer agent, or other financial intermediary with the authority to accept
orders on the Funds' behalf.
The value of each Fund's assets is based on the current market value of its
investments. For securities with readily available market quotations, each
Fund uses those quotations to price a security. If a security does not have a
readily available market quotation, each Fund values the security based on fair
value, as determined in good faith in accordance with the guidelines
established by the Funds' board of trustees. The Funds may use pricing
services to assist in the determination of market value.
PURCHASING SHARES
You can buy shares directly from the Funds or through a broker-dealer or other
institution that the Funds have authorized to sell shares. To open an account
or buy additional shares from the Funds, just follow these steps:
<TABLE>
TO OPEN AN ACCOUNT TO ADD AN ACCOUNT
- ----------------------------------------- -----------------
<S> <C>
BY MAIL: BY MAIL:
- - Complete and sign the account - Complete the investment slip that
application or an IRA application. If is included in your account
you don't complete the application statement, and write your account
properly, your purchase may be delayed number on your check.
or rejected. - If you no longer have your
- - Make your check payable to "The AB investment slip, please reference
Funds Trust." The Funds do not accept your name, account number and
cash, third party checks, travelers address on your check, and the name
checks or checks drawn on banks outside of the Fund(s) in which you want to
the U.S. invest.
- - For IRA accounts, please specify the - Make your check payable to "The AB
year for which the contributions is Funds Trust."
made.
MAIL YOUR APPLICATION AND CHECK TO: MAIL THE SLIP AND THE CHECK TO:
AB Funds Trust AB Funds Trust
P.O. Box ____ P.O. Box ____
Milwaukee, WI 53202 Milwaukee, WI 53202
BY OVERNIGHT COURIER, SEND TO:
AB Funds Trust
207 E. Buffalo Street
Suite ___
Milwaukee, WI 53202
</TABLE>
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<TABLE>
<S> <C>
BY TELEPHONE: BY TELEPHONE:
You may not make your initial purchase by - You automatically have the
telephone. privilege to purchase
additional shares by
telephone unless you have
declined this service on
your account application.
You may call 1-800-___-____
to purchase shares for an
existing account.
- Investments made by
electronic funds transfer
must be in amounts of at
least $250 and not greater
than $50,000.
BY WIRE: BY WIRE:
- - To purchase shares by wire, the transfer agent Send your investment to
must have received a completed application and _______ Bank by following
issued an account number to you. Call the instructions listed in
1-800-___-____ for instructions prior to wiring the column to the left.
the funds.
- - Send your investment to ____ Bank with these
instructions:
_______ Bank
ABA#________________
For Credit to the AB Funds Trust
A/C#_______________
For further credit to: investor account number;
name(s) of investor(s); SSN or TIN; name of Fund
to be purchased.
</TABLE>
If your purchase request is received by the Funds' transfer agent or other
authorized agent before close of trading on the New York Stock Exchange
(typically 4:00 p.m. Eastern time) on a business day, your request will be
executed at that day's NAV, provided that your application is in good order.
If your request is received after close of trading, it will be priced at the
next business day's NAV. Shares purchased by wire will receive the NAV next
determined after the transfer agent receives your wired funds and all required
information is provided in the wire instructions.
<TABLE>
<S> <C>
ADDITIONAL PURCHASE INFORMATION.
- - The Funds do not issue certificates for shares.
- - If your check does not clear, your purchase will be
cancelled. You will be responsible for any resulting losses
or expenses (including a $20 fee) incurred by a Fund or the
transfer agent. The Fund may redeem shares you own in this
or another identically registered AB Funds account as
reimbursement for any such losses.
- - You must provide the Funds with a Social Security Number or
Taxpayer Identification Number before your account can be
established. If you do not certify the accuracy of your
Social Security or Taxpayer Identification Number on your
account application, the Fund will be required to withhold
Federal income tax at a rate of 31% from all of your
dividends, capital gain distributions and redemptions.
- - The Funds are only offered and sold to residents of the
United States. Your application will be accepted only if it
contains a U.S. address. This prospectus should not be
considered a
</TABLE>
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<PAGE> 15
solicitation to buy or an offer to sell shares of the Funds in any
jurisdiction where it would be unlawful to do so under the securities laws
of that jurisdiction.
<TABLE>
<S> <C>
- - The Funds will not accept your application if you are investing for
another person as attorney-in-fact. The Funds will not accept
applications that list "Power of Attorney" or "POA" in the registration
section.
- - Once you place your order, you may not cancel or revoke it. The Funds may
reject a purchase order for any reason.
</TABLE>
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS. In addition to purchasing
shares from the Funds, you may invest through a financial services agent.
Financial advisers, broker-dealers and other financial service agents may
charge transaction and other fees and may set different minimum investments or
limitations on buying and selling shares, than those described in the
prospectus. In addition, these intermediaries may place limits on your ability
to use services the Funds offer.
SELLING SHARES
You may sell your shares on any day the Funds are open for business by
following the instructions below. You may elect to have redemption proceeds
sent to you by check, wire or electronic funds transfer. The Funds normally
pay redemption proceeds within two business days, but may take up to seven
days.
BY MAIL
- - Send a letter of instruction that includes your account number, the Fund
name, the dollar value or number of shares you want
to sell, and how and where to send the proceeds.
- - Sign the request exactly as the shares are registered. All account
owners must sign.
- - Include a signature guarantee, if necessary.
- - Mail your request to:
REGULAR MAIL OVERNIGHT COURIER
-------------------- --------------------
The AB Funds Trust The AB Funds Trust
P.O. Box ______ 207 East Buffalo Street, Suite ___
Milwaukee, WI 53202 Milwaukee, WI 53202
BY TELEPHONE
- ------------
- - You automatically have the privilege to redeem shares by telephone
unless you have declined this option on your account
application.
- - Call 1-800-___-____, between 8:00 a.m. and 8:00 p.m. Eastern time. You may
redeem as little as $1000 and as much as $50,000 by telephone.
Redemption requests received in proper form before close of trading on the New
York Stock Exchange (typically, 4:00 p.m. Eastern time) will be processed at
that day's NAV. "Proper form" means that all shares are paid for, and that you
have included all required documentation along with any required signature
guarantees.
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<PAGE> 16
Please note that the funds may require additional documents for redemptions by
corporations, executors, administrators, trustees and guardians. If you have
any questions about how to redeem shares, or to determine if a signature
guarantee or other documentation is required, please call 1-800-___-____.
ADDITIONAL REDEMPTION PROVISIONS
- - Once we receive your order to sell shares, you may not revoke
or cancel it. We cannot accept an order to sell that
specifies a particular date, price or any other special
conditions.
- - If you are redeeming from an IRA, please tell us the proper
tax withholding on your redemption request. If you did not
make a tax election on your IRA application, we will
automatically withhold 10% of your redemption proceeds.
- - If your redemption request exceeds the amount that you
currently have in your account, your entire account will be
redeemed. Any automatic purchase or systematic withdrawal
plan that you have initiated for the account will be
cancelled.
- - We will not pay sale proceeds until your shares have been
paid for in full. If you paid for the shares to be redeemed
with a check, the Funds may delay sending your redemption
payment for up to 15 days from the date of purchase to assure
the check you used to purchase your shares has cleared. You
can avoid this delay by purchasing shares by a federal funds
wire. Please note that this provision is intended to protect
the Funds and their shareholders from loss.
- - The Funds reserve the right to suspend the redemption of Fund
shares when the securities markets are closed, trading is
restricted for any reason, an emergency exists and disposal
of securities owned by a Fund is not reasonably practicable,
a Fund cannot fairly determine the value of its net assets or
the Securities and Exchange Commission permits the suspension
of the right of redemption or postpones the date of payment
of a redemption.
- - If the amount you redeem is large enough to affect a Fund's
operations, the Fund may pay your redemption "in kind." This
means that the Fund may pay you in portfolio securities
rather than cash. If this occurs, you may incur transaction
costs when you sell the securities you receive.
REDEEMING SHARES THROUGH THIRD PARTIES. A broker-dealer, financial institution
or other service provider may charge a fee to redeem your Fund shares. If the
service provider is the shareholder of record, the Funds may accept redemption
requests only from that provider.
TELEPHONE TRANSACTIONS
- - In times of drastic economic or market conditions, you may have
difficulty selling shares by telephone. The Funds reserve the
right to temporarily discontinue or limit the telephone purchase,
redemption or exchange privileges at any time during such periods.
- - The Funds reserve the right to refuse a telephone redemption
request if they believe it is advisable to do so. The Funds use
procedures reasonably designed to confirm that telephone
redemption instructions are genuine. These may include recording
telephone transactions, testing the identity of the caller by
asking for account information and sending prompt written
confirmations. The Funds may implement other procedures from time
to time. If these procedures are followed, the Funds and their
service providers will not be liable for any losses due to
unauthorized or fraudulent instructions.
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<PAGE> 17
SIGNATURE GUARANTEES. The Fund will require the signature guarantee of each
account owner to redeem shares in the following situations:
- - to change ownership on your account;
- - to send redemption proceeds to a different address than is currently on the
account;
- - to have the proceeds paid to someone other than the account's owner;
- - to transmit redemption proceeds by federal wire transfer or ACH to a bank
other than your bank of record;
- - if a change of address request has been received by the Transfer Agent
within the last 15 days; or
- - if your redemption is for $50,000 or more.
The Funds require signature guarantees to protect both you and the Funds from
possible fraudulent requests to redeem shares. You can obtain a signature
guarantee from most broker-dealers, national or state banks, credit unions,
federal savings and loan associations or other eligible institutions. A notary
public is not an acceptable signature guarantor.
SMALL ACCOUNTS. All AB Fund account owners share the high cost of maintaining
accounts with low balances. To reduce this cost, the Funds reserve the right
to close an account when a redemption or exchange leaves your account balance
below $4000, or you discontinue the automatic investment plan before you reach
the minimum. We will notify you in writing before we close your account, and
you will have 30 days to add additional money to bring the balance up to $4000
or to renew your automatic investment plan. This provision does not apply to
retirement plan accounts, automatic investment plans or UGMA/UTMA.
EXCHANGING SHARES
FUND TO FUND EXCHANGE. You may exchange shares in one Fund for shares in
another Fund in writing or by calling the transfer agent at 1-800-___-____
between 8:00 a.m. and 8:00 p.m. Eastern time. The minimum amount you may
exchange is $4000 for initial exchanges and $1000 for subsequent exchanges.
The following additional rules and guidelines apply:
- - Each account must be registered identically;
- - You must meet the Fund's initial and subsequent investment minimums;
- - You must obtain and read the prospectus for the Fund into which you are
exchanging;
- - You may only exchange into Funds that are legally available for sale in
your state.
If your order is received before close of trading on the New York Stock
Exchange (typically 4:00 p.m. Eastern time), it will be processed at that day's
NAV. Please note that the exchange of shares results in the sale of one Fund's
shares and the purchase of another Fund's shares. As a result, an exchange
could result in a gain or loss and become a taxable event for you.
MONEY MARKET EXCHANGE. You may exchange all or a portion of your shares in the
Funds for shares of the Northern Money Market Fund (the "Money Market Fund") at
their relative net asset values and may also exchange back into an AB Fund
without incurring any charges or fees. Exchanges into the Money Market Fund
are subject to the minimum purchase and redemption
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<PAGE> 18
amounts set forth in the prospectus for the Money Market Fund. Before
exchanging into the Money Market Fund, please read the Money Market Fund
prospectus carefully, which may be obtained by calling 1-800-___-____. The
Money Market Fund is not affiliated with the adviser or the Funds.
When you exchange from a Fund into the Money Market Fund or make an initial
purchase, dividends begin to accrue the day after the exchange or purchase.
When you exchange a partial balance out of the Money Market Fund, your proceeds
will exclude accrued and unpaid income from the Money Market Fund through the
date of exchange. When exchanging your entire balance from the Money Market
Fund, accrued income will automatically be exchanged into the Fund you
exchanged into when the income is collected and paid from the Money Market
Fund, at the end of the month.
LIMITATIONS ON EXCHANGES. The Funds believe that use of the exchange privilege
by investors utilizing market-timing strategies adversely affects the Funds and
their shareholders. Therefore, the Funds generally will not honor requests for
exchanges by shareholders who identify themselves or are identified as "market
timers." Market timers are investors who repeatedly make exchanges within a
short period of time. The Funds reserve the right to suspend, limit or
terminate the exchange privilege of any investor who uses the exchange
privilege excessively. The Funds may change or temporarily suspend the
exchange privilege during unusual market conditions.
MAKING CHANGES TO YOUR ACCOUNT
You may call or write us to make changes to your account. Common changes
include:
Name changes. If your name has changed due to marriage or divorce, send us a
letter of instruction signed with both your old and new names. Include a
certified copy of your marriage certificate or have your signatures guaranteed.
Address changes. The easiest way to notify us is to return the stub from a
recent confirmation or statement. You can also call the transfer agent with
any changes at 1-800-___-____.
Transfer of account ownership. Send us a letter including your account number,
the share class, number of shares or dollar amount that are being transferred
along with the name, address and Taxpayer Identification Number of the person
to whom the shares are being transferred. All living registered owners must
sign the letter. You will also need to include a signature guarantee.
Corporations, businesses and trusts may have to provide additional documents.
In order to avoid delays in processing account transfers, please call the
transfer agent at 1-800-___-____ to determine what additional documents are
required.
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<PAGE> 19
SPECIAL FEATURES AND SERVICES
RETIREMENT ACCOUNT OPTIONS
The Funds offer a variety of retirement accounts for individuals and
organizations. These accounts may offer you tax advantages. For information
on establishing retirement accounts, please call 1-800-___-____. You should
consult with your legal and/or tax adviser before you establish a retirement
account.
AB Funds currently accept investments from the following kinds of retirement
plans:
- - Traditional IRA (including spousal IRA)
- - "Rollover" IRA
- - Roth IRA
- - SEP-IRA
ACH TRANSACTIONS
If you would like to purchase shares electronically or have redemption proceeds
sent directly to your bank account, you must first have certain bank account
information on file with us so that funds can be transferred electronically
between your mutual fund and bank accounts. There is no charge to you for this
procedure. You can establish this privilege by filling out the appropriate
section of your account application. If you did not select the electronic
purchase or redemption options on your original application, call us at
1-800-___-____.
AUTOMATED TELEPHONE SERVICE
The Funds offer 24-hour, seven day a week access to Fund and account
information via a toll-free line. The system provides total returns, share
prices and price changes for the Funds and gives you account balances and
history (e.g., last transaction, latest dividend distribution). To access the
automated system, please call 1-800-___-____.
AUTOMATIC INVESTMENT PLAN
To make regular investing more convenient, you can open an automatic investment
plan with an initial investment of $4000 and a minimum investment of $250 per
month after you start your plan. We will automatically transfer from your
checking or savings account the amount you want to invest on the 5th, 10th,
15th, 20th, 25th or last day of each month. There is no charge for this
service, but if there is not enough money in your bank account to cover the
withdrawal you will be charged $20, your purchase will be cancelled and you
will be responsible for any resulting losses to the Funds. You can terminate
your automatic investment plan at any time by calling the Funds at least 30
days before your next scheduled withdrawal date. To implement this plan,
please fill out the appropriate area of your application, or call
1-800-___-____ for assistance.
SYSTEMATIC WITHDRAWAL PLAN (SWP)
You can have shares automatically redeemed from your account on a regular basis
by using our systematic withdrawal plan. If your account balance is $10,000 or
more, you may take systematic withdrawals of $1000 or more on a monthly or
quarterly basis. The proceeds of a withdrawal can be sent to your address of
record, sent by electronic transfer to your bank or
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<PAGE> 20
invested in another AB Fund. This plan may be useful way to deal with
mandatory withdrawals from an IRA. If you want to implement this plan, please
fill out the appropriate area of your application or call 1-800-___-____ for
assistance.
OTHER SHAREHOLDER INFORMATION
SHAREHOLDER COMMUNICATIONS
Confirmations. You will receive a confirmation each time you buy, sell or
exchange Fund shares. Automatic investment plan participants receive quarterly
confirmations of all automatic transactions. Please review your confirmation
and notify us immediately if there are any discrepancies in the information.
Quarterly and annual statements. You will receive a quarterly statement
listing all distributions, purchases and redemptions of Fund shares for the
preceding calendar quarter. Your December statement will include a listing of
all transactions for the entire year.
Semi-annual and annual reports. The Funds send semi-annual and annual reports
to their shareholders. These reports provide financial information on your
investments and give you a "snapshot" of the Funds' portfolio holdings at the
end of their semi-annual and fiscal year periods. Additionally, the annual
report discusses the factors that materially affected the Funds' performance
for their most recently completed year, including relevant market conditions
and the investment strategies and techniques that were used.
Prospectus. Each year, the Funds send all shareholders a new prospectus.
Please read the prospectus and keep it for future reference.
Form 1099. Each year you will receive a Form 1099-DIV, showing the source of
distributions for the preceding year and a Form 1099-B showing shares you sold
during the year.
Form 5498. If you contributed to an IRA during the year, you will receive a
Form 5498 verifying your contribution.
DISTRIBUTION AND SERVICE PLANS
Each Fund has adopted a plan under Rule 12b-1 that allows a Fund to pay
distribution fees for activities generally intended to result in the sale of
its shares. These activities include advertising, compensation to the
distributor and others for sales and marketing activities and materials, and
shareholder account servicing. Under the plan, each Fund may pay a fee of up
to
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<PAGE> 21
0.25% of its average daily net assets (computed on an annual basis). To the
extent these fees are paid by the Funds, the Funds' expenses will increase.
Because 12b-1 fees are paid out of a Fund's net assets on an ongoing basis,
over time these fees will increase the cost of your investment and could cost
long-term investors more than paying other types of sales charges. Each Fund
has also adopted a servicing plan that allows a Fund to pay third parties for
providing shareholder services to Fund shareholders.
MULTIPLE CLASSES
Each of the AB Funds has the authority to offer more than one class of shares.
All shares of each Fund or class have equal voting rights and will generally
vote in the aggregate and not by Fund or class. In certain situations, the law
may require that the shareholders of a particular Fund or class be permitted to
vote on matters affecting that Fund or class. Share classes may have different
sales charges and other expenses, which will affect their performance.
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS AND SUB-AGENTS
The Funds may authorize one or more brokers or other financial services agents
or sub-agents to accept purchase, redemption and exchange orders on the Funds'
behalf. In these cases, a Fund will be deemed to have received an order when
an authorized financial services agent or sub-agent accepts the order, and your
order will be priced at the Fund's NAV next computed after it is received in
good order by the financial services agent or sub-agent. Designated financial
services agents and sub-agents are responsible for transmitting accepted orders
and payment for the purchase of shares to the transfer agent within the time
period agreed upon by them. If payment is not received within the time
specified, your transaction may be cancelled, and the financial services agent
will be held responsible for any resulting fees or losses.
YEAR 2000
Like other investment companies and financial service providers, each Fund
could be adversely affected if the computer systems used by its investment
adviser and the Funds' other service providers do not properly process and
calculate date-related information beginning on January 1, 2000. This
possibility is commonly known as the "Year 2000 Problem." The Year 2000
Problem arises because most computer systems were designed only to recognize a
two-digit year, not a four-digit year. As a result, computers may interpret
"00" as the year 1900 and either stop processing date-related computations or
process them incorrectly. These failures could have a negative impact on the
Fund's securities trades, pricing and accounting services. The Funds'
investment adviser and each of its service providers are taking steps to
address the Year 2000 Problem with respect to the computer systems they use.
There can be no assurance that the steps taken by these service providers will
be successful, or that interaction with other non-complying computer systems
will not adversely impact the Funds. Also, companies in which the Funds invest
could be adversely affected by the Year 2000 Problem. It is also possible that
the normal operation of the Funds and their service providers will be
interrupted in any event by the failure of communications and public utility
companies, governmental entities, financial processors or others to perform
their services as a result of the Year 2000 Problem.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
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Each Fund intends to distribute virtually all of its net investment income and
net realized capital gains at least once a year. The Funds will automatically
reinvest your dividends and capital gain distributions in additional Fund
shares unless you elect to have them paid to you in cash. If you elect to have
your distributions paid in cash, the Funds will send a check to your address of
record.
A dividend from net investment income represents the income a Fund earns from
dividends and interest paid on its investments, after payment of the Fund's
expenses. A capital gain is the increase in the value of a security that a
Fund holds. The Fund's gain is "unrealized" until it sells a portfolio
security. Each realized capital gain is either short-term or long-term,
depending on whether the Fund held the security for one year or less or more
than one year.
Each Fund will distribute any net realized capital gains, and the Select Fund
will distribute dividends, annually, normally in December. If a Fund is not
able to correctly estimate capital gains it will make an additional capital
gains distribution in the first quarter of the next calendar year. The
Balanced Fund will distribute dividends on a quarterly basis, typically in
March, June, September and December.
Buying a dividend. Unless you invest in a tax-deferred retirement account
(such as an IRA), it is not to your advantage to buy shares of a Fund shortly
before it makes a distribution. This is known as "buying a dividend." Buying
a dividend can cost you money in taxes because you will receive, in the form of
a taxable distribution, a portion of the money you just invested (even if you
elected to have it reinvested in additional Fund shares). To avoid "buying a
dividend," check a Fund's distribution schedule before you invest by calling
1-800-___-____.
TAXES
You will be subject to income tax on all Fund distributions regardless of
whether you receive them in cash or elect to have them reinvested in Fund
shares. Dividend distributions and distributions of a Fund's net short-term
capital gains are taxable to you as ordinary income. Distributions of a Fund's
net long-term capital gains are taxable to you as long-term capital gains.
This is true regardless of how long you have held your Fund shares.
If you sell or exchange your shares, any gain or loss is a taxable event. You
may also be subject to state and local income taxes on dividends or capital
gains from the sale or exchange of Fund shares.
This tax information provides only a general overview. It does not apply if
you invest in a tax-deferred retirement account such as an IRA. Please consult
your own tax adviser about the tax consequences of an investment in the Funds.
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FOR MORE INFORMATION
For more information about the AB Funds, ask for a free copy of the following:
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information (SAI) contains more detailed
information about each Fund. It is incorporated by reference into this
prospectus, which means that it is legally part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
The annual and semi-annual reports discuss the Funds' holdings. The annual
report describes the market conditions, economic trends and investment
strategies that significantly affected the Funds' performance.
To obtain copies of the SAI, annual or semi-annual reports, or to get other
information about the Funds, please write or call us at:
AB Funds
P.O. Box___
207 E. Buffalo Street, Suite ___ (for overnight deliveries)
Milwaukee, WI 53202
1-800-___-____
You can also review and copy the SAI and other information about the Funds at
the SEC Public Reference Room in Washington, D.C., or download a free text-only
version on the SEC's website at www.sec.gov. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. For a fee, the SEC
will mail you a copy of the SAI. Send your request to: SEC Public Reference
Room, Washington,D.C. 20549-6009.
SEC File No. ________
<PAGE> 24
AB FUNDS TRUST
Prospectus
September 30, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE> 25
TABLE OF CONTENTS
FUND OVERVIEW .....................................................
AB Select Fund .................................................
AB Balanced Fund ...............................................
FUND PERFORMANCE ..................................................
FUND FEES AND EXPENSES ............................................
OTHER INVESTMENT PRACTICES AND RISKS ..............................
MANAGEMENT ........................................................
Investment Adviser .............................................
Portfolio Manager ..............................................
BUYING, SELLING AND EXCHANGING SHARES .............................
Before You Invest ..............................................
Purchasing Shares ..............................................
Selling Shares .................................................
Exchanging Shares ..............................................
Making Changes to Your Account .................................
SPECIAL FEATURES AND SERVICES .....................................
OTHER SHAREHOLDER INFORMATION .....................................
DIVIDENDS, DISTRIBUTIONS AND TAXES ................................
<PAGE> 26
FUND OVERVIEW
AB SELECT FUND
INVESTMENT GOAL
The Fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Fund will invest primarily in the common stocks of established companies
that the portfolio manager believes have superior potential for earnings
growth. The Fund's portfolio will typically consist of a core of 20-30 common
stocks. The portfolio manager may purchase common stocks of companies of all
sizes.
In selecting stocks, the portfolio manager looks for reasonably priced
securities of companies that occupy a dominant position in a market due to
size, products or services, and whose growth potential is not yet fully
reflected in the company's stock price. In addition, the portfolio manager
looks for companies with conservatively financed balance sheets, strong,
capable management teams and clearly defined growth strategies. Target
companies will have a catalyst for positive earnings developments such as
evolving product cycles, special situations or changing economic conditions.
From time to time, the Fund may take substantial positions in convertible
securities, preferred stocks, government securities or other short-term
investments.
The Fund's portfolio manager will generally sell a security when it no longer
meets the manager's investment criteria or when it has met the manager's
expectations for appreciation. The portfolio manager may often sell portfolio
stocks quickly to respond to short-term market price movements, and expects to
actively trade the portfolio in pursuit of the Fund's investment goal. Due to
this and the Fund's relatively small number of holdings, the Fund's annual
portfolio turnover rate will be higher than that of many other mutual funds.
PRINCIPAL RISKS OF INVESTING
There are two basic risks for all mutual funds that invest in stocks -
management risk and market risk. Management risk means that the portfolio
manager's stock selections and other investment decisions may produce losses or
may not achieve the Fund's investment objectives. Market risk means that the
price of common stocks may move up or down in response to many factors. As a
result of these two risks, the price of the Fund's investments may go up or
down and you could lose money on your investment.
The Select Fund is a non-diversified portfolio, which means that it can invest
in the securities of fewer issuers than diversified portfolios at any one time.
As a result, the gains or losses on a single stock will have a greater impact
on the Fund's share price. In addition, the portfolio manager may often focus
the Fund's investments in a small number of business sectors. Because of these
factors, the Fund's share price may fluctuate more than most equity funds and
the market in general.
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<PAGE> 27
Finally, the portfolio manager may engage in a high level of trading in seeking
to achieve the Fund's investment objective. Higher turnover rates may result
in higher brokerage costs to the Fund and in higher net taxable gains for you
as an investor.
For a more detailed discussion of these principal investment risks, as well as
additional risks that apply to the Fund, please see "Other Investment Practices
and Risks," on page ____.
AB BALANCED FUND
INVESTMENT GOALS
The Fund's investment goals are capital appreciation and current income.
PRINCIPAL INVESTMENT STRATEGIES
The Fund will invest primarily in a diverse group of domestic equity and fixed
income securities. The portfolio manager allocates the Fund's assets between
equity and fixed-income securities based upon its assessment of available
investment opportunities and relevant market, economic and financial factors.
Normally, the portfolio manager's selection will emphasize equity securities
over fixed income securities. The portfolio manager expects that the Fund's
position in equity securities will range from 45% to 65% of the Fund's total
assets. However, it is the Fund's policy to invest at least 25% of its total
assets in fixed-income securities and at least 25% in equity securities.
Equity securities: In selecting individual equity securities, the portfolio
manager looks for common stock of domestic companies that it considers to be
reasonably priced, with strong, consistent and predictable earnings growth
rates, strong management, conservatively financed balance sheets and
competitive products or services. Typically, the companies in which the Fund
invests have mid-sized to large market capitalizations.
Fixed Income Securities: The Fund may invest in a variety of income-producing
securities, such as short- to long-term corporate and government debt
securities, convertible securities, preferred stocks and mortgage- and
asset-backed securities. Except for convertible securities, the Fund will only
purchase fixed income securities that are investment grade. A fixed-income
security is considered investment grade if it has been rated in the top four
categories by at least one rating agency or, if unrated, is deemed by the
portfolio manager to be of comparable quality. The Fund may invest up to 20%
of its assets in convertible securities rated below investment grade (i.e.,
junk bonds).
The Fund's portfolio manager will generally sell a security when it no longer
meets the manager's investment criteria or when it has met the manager's
expectations for appreciation. The Fund's portfolio manager may actively trade
the equity portion of the portfolio in pursuit of the Fund's investment goal.
When this occurs, the annual portfolio turnover rate may be higher than that of
other comparable funds.
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<PAGE> 28
PRINCIPAL RISKS OF INVESTING
There are two basic risks for all mutual funds that invest in stocks -
management risk and market risk. Management risk means that the portfolio
manager's stock selections and other investment decisions may produce losses or
may not achieve the Fund's investment objectives. Market risk means that the
price of common stocks may move up or down in response to many factors.
Fixed-income securities in which the Fund invests are also subject to credit
risk and interest rate risk. As a result of these risks, the price of the
Fund's investments may go down and you could lose money on your investment.
The Fund may be riskier than other balanced funds that invest more heavily in
fixed-income securities.
In addition, the Fund may invest in certain securities with unique risks, such
as mortgage- and asset-backed securities. Investment grade securities rated in
the lowest investment grade category (i.e., BBB/Baa) have speculative
characteristics. The Fund may invest up to 20% of its assets in convertible
securities rated below investment grade. Investments in securities that are
not investment grade carry greater risks than investments in investment grade
securities. In particular, issuers of lower rated bonds are less financially
secure and are more likely to be hurt by interest rate movements. When
interest rates are low, the Fund's income distributions to you may be reduced
or eliminated.
For a more detailed discussion of these principal investment risks, as well as
additional risks that apply to the Fund, please see "Other Investment Practices
and Risks," on page ____.
FUND PERFORMANCE
The Funds had not commenced operations as of the date of this prospectus and,
therefore, have no performance information to report. Information on each
Fund's performance will be included in future amendments to this prospectus and
in periodic reports to shareholders.
For the performance information of a comparable mutual fund for which the
Funds' portfolio manager previously acted as portfolio manager, please refer to
"Management" on page _____.
FUND FEES AND EXPENSES
Fees and expenses are one important consideration in choosing a mutual fund.
As an investor, you indirectly pay a share of a Fund's operating expenses.
There are no sales loads or exchange fees associated with an investment in the
Funds.
Shareholder Fees are charges you pay when you buy, sell or redeem shares of one
of the Funds. In the case of purchases and exchanges, shareholder fees reduce
the amount of your payment that is invested in shares of the Fund. In the case
of redemptions, shareholder fees reduce the amount of the sale proceeds
returned to you.
Annual fund operating expenses are the expenses that a mutual fund pays to
conduct its business, such as investment advisory fees, transfer agent fees,
administration fees, accounting and legal
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<PAGE> 29
fees, and other fund expenses. Annual fund operating expenses are deducted
from a Fund's assets, and therefore reduce its total return. As a shareholder,
you pay for these expenses indirectly. A Fund's operating expenses will vary
from year to year.
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Funds.
<TABLE>
<S> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment) SELECT FUND BALANCED FUND
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of
offering price) None None
Maximum Deferred Sales Charge (Load)(as a
percentage of offering price) ____% (a) ____% (a)
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends None None
Redemption Fees None None
---- ----
Exchange Fees None None
---- ----
ANNUAL FUND OPERATING EXPENSES (b)
(expenses deducted directly from fund assets)
Management fee 1.0% 0.75%
---- ----
Distribution and Service (12b-1) fee (c) 1.0% 1.0%
---- ----
Other expenses 0.91% 0.91%
---- ----
Total Annual Fund Operating Expenses 2.91% 2.66%
---- ----
</TABLE>
(a) A contingent deferred sales charge in the amount of ___% is imposed on
redemptions of each Fund's shares if such shares are redeemed within twelve
months of purchase. These fees are paid to the selling broker-dealer, who may
use such amounts to defray the expenses associated with the
distribution-related services involved in selling the shares.
(b) Because each Fund was established on _____, 1999 and had no operating
history, the management fee is the fee to which the adviser is entitled under
its contract with each Fund, and the Distribution and Service fees are the
maximum rates that can be charged under the Distribution and Service Plan.
"Other expenses" are estimates of the other operating expenses (without taking
into account any expense limitation arrangement between the adviser and the
Funds) based on the adviser's projections of what those expenses will be in
each Fund's first fiscal year ended ____________, 2000.
(c) Each Fund has adopted a Distribution and Service Plan under Rule 12b-1
that permits the Fund to pay distribution and shareholder servicing fees for
the sale and distribution of its shares. Because these fees are paid out of a
Fund's assets on an ongoing basis, over time these fees will increase the cost
of your investment and could cost long-term investors in the Fund more than
other types of sales charges.
5
<PAGE> 30
EXAMPLE: The following example helps you compare the cost of investing in the
Funds to the cost of investing in other mutual funds. The example assumes
that:
- - You invest $10,000 for the time periods indicated, and then redeem all of
your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - Each Fund's operating expenses remain the same for each period.
Your actual costs may be higher or lower, so this example should be used for
comparison only. Based on these assumptions your cost at the end of each
period would be:
<TABLE>
<S> <C> <C>
FUND 1 YEAR 3 YEARS
- ---------------- ------ -------
Select Fund $294 $901
- ----------- ------ -------
Balanced Fund $269 $826
- ------------- ------ -------
</TABLE>
OTHER INVESTMENT PRACTICES AND RISKS
The principal risks of investing in each Fund are summarized above. The
following discussion provides more detail about some of those risks. This
section also describes additional investment practices each Fund may follow in
seeking to achieve its objective, and the risks associated with those
particular practices. All of the following apply to both Funds except where
indicated.
Common Stocks. The Select Fund and the Balanced Fund, to the extent the
Balanced Fund invests in common stocks, are subject to certain risks associated
with common stock investing. These include the management risk of selecting
individual stocks that do not perform as the portfolio manager anticipated, the
risk that the stock markets in which the Funds invest may experience periods of
turbulence and instability, and the general risk that domestic and global
economies may go through periods of decline and cyclical change. If the stock
market declines in value, each Fund is likely to decline in value. Many
factors affect an individual company's performance, such as the strength of its
management or the demand for its products or services. Negative performance
may affect the earnings growth potential anticipated by the portfolio manager
when the individual stock was selected for a Fund's portfolio.
FIXED-INCOME SECURITIES. To the extent that the portfolio manager invests
assets of the Funds in fixed-income securities, your investment is subject to
the following risks:
- - Credit Risk. An issuer of fixed-income securities may default on its
obligation to pay interest and repay principal. Also, changes in the
financial strength of an issuer or changes in the credit rating of a
security may affect its value.
- - Interest Rate Risk. When interest rates increase, fixed-income securities
tend to decline in value and when interest rates decrease, fixed-income
securities tend to increase in value. A change in interest rates could
cause the value of your investment to change. Fixed-income securities
with longer maturities are more susceptible to interest rate fluctuations
than those with shorter maturities. Changes in interest rates may also
extend or shorten the duration of
6
<PAGE> 31
certain types of instruments, such as asset-backed securities, thereby
affecting their value and the return on your investment.
- - Prepayment Risk. Prepayment risk is the risk that, as interest rates
fall, borrowers are more likely to refinance their mortgages or other
debts. As a result, the principal on mortgage-backed, asset-backed or
certain other fixed income securities may be paid earlier than expected.
If portfolio securities are prepaid, the portfolio manager may have to
reinvest prepaid amounts at a relatively lower interest rate, which could
affect the return on your investment.
- - Non-investment Grade Securities. Securities rated below investment grade
are particularly subject to credit risk. These securities are considered
speculative and are commonly referred to as "junk bonds." The Funds have
no minimum quality standards for convertible securities, although they
will not invest in defaulted securities. To the extent a Fund purchases
or holds convertible or other securities that are below investment grade,
there is a greater risk that payments of principal, interest and dividends
will not be made. In addition, the value of lower quality securities is
subject to greater volatility and is generally more dependent on the
ability of the issuer to meet interest and principal payments than is the
case for higher quality securities. Issuers of non-investment grade
securities may not be as financially strong as those issuing bonds with
higher credit ratings.
TEMPORARY DEFENSIVE STRATEGIES. Each of the Funds may, for temporary defensive
purposes, invest without limitation in cash or various short-term instruments,
including those of the U.S. Government and its agencies and instrumentalities.
This may occur, for example, when the portfolio manager is attempting to
respond to adverse market, economic, political or other conditions. Each Fund
can also hold these types of securities pending the investment of proceeds from
the sale of Fund shares or portfolio securities or to meet anticipated
redemption requests. If these temporary strategies are used for adverse
market, economic or political conditions, it is impossible to predict when or
for how long the portfolio manager may employ these strategies for the Funds.
To the extent a Fund holds cash or invests defensively in short-term
instruments, it may not achieve its investment objective.
PORTFOLIO TURNOVER. Portfolio securities will be sold without regard to the
length of time they have been held when the portfolio manager believes it is
appropriate to do so in light of a Fund's investment goal. In general, the
greater the volume of buying and selling by a mutual fund, the greater the
impact that brokerage commissions and other transaction costs will have on its
return. High portfolio turnover rates may also cause substantial net
short-term gains, and any distributions resulting from such gains will be
ordinary income to you for purposes of federal income tax. The portfolio
manager anticipates that it will actively manage both Funds' portfolios in
pursuing each Fund's investment strategy.
NON-DIVERSIFICATION (SELECT FUND). The Select Fund is a non-diversified
portfolio, which means that, at any given time, it may hold fewer securities
than funds that are diversified. Compared to the Balanced Fund and other
mutual funds, the Fund may invest a greater percentage of its assets in the
stock of a particular issuer. This increases the risk that the value of the
Select Fund could go down because of the poor performance of a single
investment. Also, the volatility of the investment performance may increase
and the Fund could incur greater losses than the Balanced Fund or other mutual
funds that invest in a greater number of companies.
7
<PAGE> 32
SECTOR RISK (Select Fund). Companies with similar characteristics may be
grouped together in broad categories called sectors. Sector risk is the
possibility that a certain sector may underperform other sectors or the market
as a whole. As the portfolio manager allocates more of the Fund's portfolio
holdings to a particular sector, the Fund's performance will be more
susceptible to any economic, business or other developments that generally
affect that sector.
MORTGAGE- AND ASSET-BACKED SECURITIES (Balanced Fund). The Balanced Fund may
purchase residential and commercial mortgage-backed as well as other
asset-backed securities. The Fund will only invest in mortgage-backed
securities that are issued or guaranteed by the U.S. Government or its agencies
or instrumentalities, or in privately issued mortgage-backed or asset-backed
securities that are rated in the top two categories (i.e., AAA/AA) by a
nationally recognized rating agency. In addition to credit and market risk,
mortgage- and asset-backed securities involve prepayment risk because the
underlying assets (loans) may be prepaid at any time. The value of these
securities may also be changed because of actual or perceived changes in the
creditworthiness of the originator, the servicing agent, the financial
institution providing the credit support, or the counterparty. Like other
fixed-income securities, when interest rates rise, the value of an asset-backed
security will generally decline. However, when interest rates decline, the
value of a mortgage-backed security with prepayment features may not increase
as much as that of other fixed-income securities. These securities are also
subject to the risk that, as interest rates rise, borrowers are less likely to
refinance their mortgages and other debts. As a result, the principal on
mortgage- or asset-backed securities may be paid later than expected, which
could cause the value of the securities to go down. In times of financial
stress, the secondary market for asset-backed securities may not be as liquid
as the market for other types of securities.
FOREIGN SECURITIES. Each Fund may invest without limit in foreign securities
in an effort to achieve its investment objective. Investing in foreign
securities involves special additional risks and considerations not typically
associated with investing in securities of U.S. companies. These include
fluctuation in value of foreign portfolio investments due to changes in
currency rates and control regulations, lack of public information about
foreign issuers, lack of uniform accounting, auditing and financial reporting
standards comparable to those applicable to domestic issuers, unstable
international and political and economic conditions and greater difficulties in
commencing lawsuits against foreign issuers. Investments in emerging markets
involve even greater risks such as immature economic structures and unfamiliar
legal systems.
INVESTMENT OBJECTIVES. The investment objective of the Select Fund is capital
appreciation. The investment objectives of the Balanced Fund are capital
appreciation and current income. The Funds' objectives may be changed by the
Funds' board of trustees without shareholder approval. You will receive
advance written notice of any material changes to your Fund's investment
objectives.
8
<PAGE> 33
MANAGEMENT
INVESTMENT ADVISER
The Funds have entered into an investment advisory agreement with AB Advisers.
The adviser was organized on __________, 1999as a _________ to become the invest
ment adviser of the Funds. Although the adviser, as a recently formed entity,
has had no experience advising a registered investment company, the portfolio
manager, who is the founder, president and a director of the adviser, has had
___ years of experience as a portfolio manager, including ___ years of
experience as the manager of mutual funds comparable to the Funds. In addition
to the Funds, the adviser provides investment management services to private
accounts. As of _______, 1999, the adviser had approximately $_______ under
management.
Under the investment advisory agreement, the adviser manages the Funds'
investments and business affairs, subject to the supervision of the Funds'
board of trustees. The Funds have agreed to pay the adviser an annual
management fee of ___% of each Fund's average daily net assets. The advisory
fee accrues daily and is paid monthly.
PORTFOLIO MANAGER
Mr. ____________ is the portfolio manager for each of the Funds. As portfolio
manager, he is responsible for the day to day management of the Funds and the
selection of the Funds' investments. [INSERT PORTFOLIO MANAGER BIOGRAPHY].
Prior to organizing the adviser and managing the Funds, Mr. ________ served as
the portfolio manager of the ____________ Fund (the "Prior Fund") from its
inception on December 31, 1997 until _________, 1999. As portfolio manager of
the Prior Fund, Mr. _________ was responsible for managing its investment
operations.
Average annual returns for the one year period ended _________, 1999 and for
the entire period during which the portfolio manager managed the Prior Fund,
compared with the performance of the S&P 500 Index for the same periods, were
as follows:
1 YEAR ENDED DECEMBER 31, 1997
____________, 199__ THROUGH _______, 1999
--------------------- -----------------------
Prior Fund (a),(b) ___% ___%
S&P 500 Index(R) (c) ___% ___%
(a) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions, and is net of fund expenses.
(b) The total fund operating expenses for the Prior Fund were ___% for the
year ended December 31, 1998. The expense ratio of the AB Select Fund will be
capped initially at ____% through ________.
(c) The Standard & Poor's 500 Composite Stock Price Index is a broad-based,
unmanaged index of common stocks that is considered to be generally
representative of the United States stock market. The Index is adjusted to
reflect reinvestment of dividends. Investors cannot invest directly in the
Index.
The foregoing table illustrates the past performance of the portfolio manager
in managing a portfolio similar to the AB Select Fund. The performance of the
portfolio manager in managing
9
<PAGE> 34
the Prior Fund may be relevant because the portfolio manager intends to use the
same investment objectives and substantially similar policies and restrictions
for the AB Select Fund. The Prior Fund is a separate Fund and its historical
performance is not indicative of the future performance of the AB Select Fund.
Share prices and investment returns will fluctuate depending on market
conditions, as well as changes in company-specific fundamentals of portfolio
securities.
BUYING, SELLING AND EXCHANGING SHARES
BEFORE YOU INVEST
PROSPECTUS. This prospectus contains important information about the Funds.
Please read it carefully before you decide to invest.
ACCOUNT REGISTRATION. Once you have decided which Fund or Funds to invest in,
you need to select the appropriate form of account registration. There are
many different types of mutual fund ownership. How you register your account
with the Funds can affect your legal interests, as well as the rights and
interests of your family and beneficiaries. You should always consult with
your legal and/or tax adviser to determine what form of account registration
best meets your needs.
Available forms of registration include:
- - Individual ownership. If you have reached the legal age
of majority in your state of residence, you may open an
individual account.
- - Joint ownership. Two or more individuals may open an
account together as joint tenants with right of
survivorship, tenants in common or as community property.
- - Custodial account. You may open an account for a minor
under the Uniform Gift to Minors Act/Uniform Transfers to
Minors Act for your state of residence
- - Business/trust ownership. Corporations, trusts,
charitable organizations and other businesses may open
accounts.
- - IRAs and other tax-deferred accounts. The Funds offer a
variety of retirement plans for individuals and
institutions. Please refer to "Retirement Account
Options," below, for more information about these types
of accounts.
Account Minimums. You also need to decide how much money to invest. The
following chart shows you the minimum amounts that you will need to open or add
to certain types of accounts. The Funds may waive the minimum investment
amounts at any time.
<TABLE>
<CAPTION>
ADDITIONAL MINIMUM
TYPE OF ACCOUNT INITIAL MINIMUM PURCHASE PURCHASE
- --------------- ------------------------- -------------------------
<S> <C> <C>
Regular (Individual,
joint, business or
trust) $4000 $1000
IRA (including spousal,
Roth and SEP) $4000 $1000
Gifts to Minors
(UTMA/UGMA) $1000 $1000
Automatic Investment Plan $4000 $ 250
</TABLE>
10
<PAGE> 35
DETERMINING YOUR SHARE PRICE. The price at which you purchase and sell a
Fund's shares is called the Fund's net asset value (NAV) per share. A Fund
calculates NAV by taking the total value of its assets, subtracting its
liabilities, and dividing the total by the number of Fund shares that are
outstanding. Each Fund calculates its NAV as of the close of trading on the
New York Stock Exchange (usually 4:00 p.m. Eastern time) on each day the
Exchange is open for trading. The price of the shares you purchase or redeem
will be the next NAV calculated after your order is received in good order by
the Funds' transfer agent, or other financial intermediary with the authority
to accept orders on the Funds' behalf.
The value of each Fund's assets is based on the current market value of its
investments. For securities with readily available market quotations, each
Fund uses those quotations to price a security. If a security does not have a
readily available market quotation, each Fund values the security based on fair
value, as determined in good faith in accordance with the guidelines
established by the Funds' board of trustees. The Funds may use pricing
services to assist in the determination of market value.
PURCHASING SHARES
You can buy shares directly from the Funds or through a broker-dealer or other
institution that the Funds have authorized to sell shares. To open an account
or buy additional shares from the Funds, just follow these steps:
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO ADD AN ACCOUNT
- ----------------------------------------- -----------------
<S> <C>
BY MAIL:
- - Complete and sign the account BY MAIL:
application or an IRA application. If - Complete the investment slip that
you don't complete the application is included in your account
properly, your purchase may be delayed statement, and write your account
or rejected. number on your check.
- - Make your check payable to "The AB - If you no longer have your
Funds Trust." The Funds do not accept investment slip, please reference
cash, third party checks, travelers your name, account number and
checks or checks drawn on banks outside address on your check, and the name
the U.S. of the Fund(s) in which you want to
- - For IRA accounts, please specify the invest.
year for which the contributions is - Make your check payable to "The AB
made. Funds Trust."
MAIL YOUR APPLICATION AND CHECK TO: MAIL THE SLIP AND THE CHECK TO:
AB Funds Trust AB Funds Trust
P.O. Box ____ P.O. Box ____
Milwaukee, WI 53202 Milwaukee, WI 53202
BY OVERNIGHT COURIER, SEND TO:
AB FUNDS TRUST
207 E. Buffalo Street
Suite ___
Milwaukee, WI 53202
</TABLE>
11
<PAGE> 36
<TABLE>
<S> <C>
BY TELEPHONE: BY TELEPHONE:
You may not make your initial purchase by - You automatically have the
telephone. privilege to purchase
additional shares by
telephone unless you have
declined this service on
your account application.
You may call 1-800-___-____
to purchase shares for an
existing account.
- Investments made by
electronic funds transfer
must be in amounts of at
least $250 and not greater
than $50,000.
BY WIRE: BY WIRE:
- - TO PURCHASE SHARES BY WIRE, THE TRANSFER AGENT Send your investment to
MUST HAVE RECEIVED A COMPLETED APPLICATION AND _______ Bank by following
ISSUED AN ACCOUNT NUMBER TO YOU. CALL the instructions listed in
1-800-___-____ FOR INSTRUCTIONS PRIOR TO WIRING the column to the left.
THE FUNDS.
- - Send your investment to ____ Bank with these
instructions:
_______ Bank
ABA#________________
For Credit to the AB Funds Trust
A/C#_______________
For further credit to: investor account number;
name(s) of investor(s); SSN or TIN; name of Fund
to be purchased.
</TABLE>
If your purchase request is received by the Funds' transfer agent or other
authorized agent before close of trading on the New York Stock Exchange
(typically 4:00 p.m. Eastern time) on a business day, your request will be
executed at that day's NAV, provided that your application is in good order.
If your request is received after close of trading, it will be priced at the
next business day's NAV. Shares purchased by wire will receive the NAV next
determined after the transfer agent receives your wired funds and all required
information is provided in the wire instructions.
ADDITIONAL PURCHASE INFORMATION.
- - The Funds do not issue certificates for shares.
- - If your check does not clear, your purchase will be
cancelled. You will be responsible for any resulting losses
or expenses (including a $20 fee) incurred by a Fund or the
transfer agent. The Fund may redeem shares you own in this
or another identically registered AB Funds account as
reimbursement for any such losses.
- - You must provide the Funds with a Social Security Number or
Taxpayer Identification Number before your account can be
established. If you do not certify the accuracy of your
Social Security or Taxpayer Identification Number on your
account application, the Fund will be required to withhold
Federal income tax at a rate of 31% from all of your
dividends, capital gain distributions and redemptions.
- - The Funds are only offered and sold to residents of the
United States. Your application will be accepted only if it
contains a U.S. address. This prospectus should not be
considered a
12
<PAGE> 37
solicitation to buy or an offer to sell shares of the Funds in any
jurisdiction where it would be unlawful to do so under the securities laws
of that jurisdiction.
- - The Funds will not accept your application if you are investing for
another person as attorney-in-fact. The Funds will not accept
applications that list "Power of Attorney" or "POA" in the registration
section.
- - Once you place your order, you may not cancel or revoke it. The Funds may
reject a purchase order for any reason.
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS. In addition to purchasing
shares from the Funds, you may invest through a financial services agent.
Financial advisers, broker-dealers and other financial service agents may
charge transaction and other fees and may set different minimum investments or
limitations on buying and selling shares, than those described in the
prospectus. In addition, these intermediaries may place limits on your ability
to use services the Funds offer.
SELLING SHARES
You may sell your shares on any day the Funds are open for business by
following the instructions below. You may elect to have redemption proceeds
sent to you by check, wire or electronic funds transfer. The Funds normally
pay redemption proceeds within two business days, but may take up to seven
days.
BY MAIL
- -------
- - Send a letter of instruction that includes your account number, the Fund
name, the dollar value or number of shares you want to sell, and how and
where to send the proceeds.
- - Sign the request exactly as the shares are registered. All account
owners must sign.
- - Include a signature guarantee, if necessary.
- - Mail your request to:
REGULAR MAIL OVERNIGHT COURIER
The AB Funds Trust The AB Funds Trust
P.O. Box ______ 207 East Buffalo Street, Suite ___
Milwaukee, WI 53202 Milwaukee, WI 53202
BY TELEPHONE
- ------------
- - You automatically have the privilege to redeem shares by telephone unless
you have declined this option on your account application.
- - Call 1-800-___-____, between 8:00 a.m. and 8:00 p.m. Eastern time. You may
redeem as little as $1000 and as much as $50,000 by telephone.
Redemption requests received in proper form before close of trading on the New
York Stock Exchange (typically, 4:00 p.m. Eastern time) will be processed at
that day's NAV. "Proper form" means that all shares are paid for, and that you
have included all required documentation along with any required signature
guarantees.
13
<PAGE> 38
PLEASE NOTE THAT THE FUNDS MAY REQUIRE ADDITIONAL DOCUMENTS FOR REDEMPTIONS BY
CORPORATIONS, EXECUTORS, ADMINISTRATORS, TRUSTEES AND GUARDIANS. IF YOU HAVE
ANY QUESTIONS ABOUT HOW TO REDEEM SHARES, OR TO DETERMINE IF A SIGNATURE
GUARANTEE OR OTHER DOCUMENTATION IS REQUIRED, PLEASE CALL 1-800-___-____.
ADDITIONAL REDEMPTION PROVISIONS
- - Once we receive your order to sell shares, you may not revoke
or cancel it. We cannot accept an order to sell that
specifies a particular date, price or any other special
conditions.
- - If you are redeeming from an IRA, please tell us the proper
tax withholding on your redemption request. If you did not
make a tax election on your IRA application, we will
automatically withhold 10% of your redemption proceeds.
- - If your redemption request exceeds the amount that you
currently have in your account, your entire account will be
redeemed. Any automatic purchase or systematic withdrawal
plan that you have initiated for the account will be
cancelled.
- - We will not pay sale proceeds until your shares have been
paid for in full. If you paid for the shares to be redeemed
with a check, the Funds may delay sending your redemption
payment for up to 15 days from the date of purchase to assure
the check you used to purchase your shares has cleared. You
can avoid this delay by purchasing shares by a federal funds
wire. Please note that this provision is intended to protect
the Funds and their shareholders from loss.
- - The Funds reserve the right to suspend the redemption of Fund
shares when the securities markets are closed, trading is
restricted for any reason, an emergency exists and disposal
of securities owned by a Fund is not reasonably practicable,
a Fund cannot fairly determine the value of its net assets or
the Securities and Exchange Commission permits the suspension
of the right of redemption or postpones the date of payment
of a redemption.
- - If the amount you redeem is large enough to affect a Fund's
operations, the Fund may pay your redemption "in kind." This
means that the Fund may pay you in portfolio securities
rather than cash. If this occurs, you may incur transaction
costs when you sell the securities you receive.
CONTINGENT DEFERRED SALES CHARGE. If you redeem your Select Fund or Balanced
Fund shares within twelve months of your purchase, you will be subject to a
contingent deferred sales charge of ___%. The contingent deferred sales charge
is based on the lesser of the net asset value of the shares on the redemption
date or the original cost of the shares being redeemed. As a result, no sales
charge is imposed on any increase in the net asset value of your shares. The
Funds will not impose a sales charge on shares purchased through reinvestment
of dividends or distributions.
When you redeem your shares, your redemption request is processed to minimize
the amount of contingent deferred sales charge that is payable. The Funds
first redeem those shares that are not subject to a sales charge (e.g., shares
acquired through reinvestment of dividends or distributions), and then redeem
those that have been held the longest.
The contingent deferred sales charge that you pay is remitted to the
broker-dealer through whom you obtained your shares, to defray the expenses
associated with the distribution-related services involved in selling the
shares.
14
<PAGE> 39
REDEEMING SHARES THROUGH THIRD PARTIES. A broker-dealer, financial institution
or other service provider may charge a fee to redeem your Fund shares. If the
service provider is the shareholder of record, the Funds may accept redemption
requests only from that provider.
TELEPHONE TRANSACTIONS
- - In times of drastic economic or market conditions, you may have
difficulty selling shares by telephone. The Funds reserve the
right to temporarily discontinue or limit the telephone purchase,
redemption or exchange privileges at any time during such periods.
- - The Funds reserve the right to refuse a telephone redemption
request if they believe it is advisable to do so. The Funds use
procedures reasonably designed to confirm that telephone
redemption instructions are genuine. These may include recording
telephone transactions, testing the identity of the caller by
asking for account information and sending prompt written
confirmations. The Funds may implement other procedures from time
to time. If these procedures are followed, the Funds and their
service providers will not be liable for any losses due to
unauthorized or fraudulent instructions.
SIGNATURE GUARANTEES. The Fund will require the signature guarantee of each
account owner to redeem shares in the following situations:
- - to change ownership on your account;
- - to send redemption proceeds to a different address than is currently on the
account;
- - to have the proceeds paid to someone other than the account's owner;
- - to transmit redemption proceeds by federal wire transfer or ACH to a bank
other than your bank of record;
- - if a change of address request has been received by the Transfer Agent
within the last 15 days; or
- - if your redemption is for $50,000 or more.
The Funds require signature guarantees to protect both you and the Funds from
possible fraudulent requests to redeem shares. You can obtain a signature
guarantee from most broker-dealers, national or state banks, credit unions,
federal savings and loan associations or other eligible institutions. A notary
public is not an acceptable signature guarantor.
SMALL ACCOUNTS. All AB Fund account owners share the high cost of maintaining
accounts with low balances. To reduce this cost, the Funds reserve the right
to close an account when a redemption or exchange leaves your account balance
below $4000, or you discontinue the automatic investment plan before you reach
the minimum. We will notify you in writing before we close your account, and
you will have 30 days to add additional money to bring the balance up to $4000
or to renew your automatic investment plan. This provision does not apply to
retirement plan accounts, automatic investment plans or UGMA/UTMA.
EXCHANGING SHARES
FUND TO FUND EXCHANGE. You may exchange shares in one Fund for shares in
another Fund in writing or by calling the transfer agent at 1-800-___-____
between 8:00 a.m. and 8:00 p.m. Eastern time. The minimum amount you may
exchange is $4000 for initial exchanges and $1000 for subsequent exchanges.
15
<PAGE> 40
The following additional rules and guidelines apply:
- - Each account must be registered identically;
- - You must meet the Fund's initial and subsequent investment minimums;
- - You must obtain and read the prospectus for the Fund into which you are
exchanging;
- - You may only exchange into Funds that are legally available for sale in
your state.
If your order is received before close of trading on the New York Stock
Exchange (typically 4:00 p.m. Eastern time), it will be processed at that day's
NAV. Please note that the exchange of shares results in the sale of one Fund's
shares and the purchase of another Fund's shares. As a result, an exchange
could result in a gain or loss and become a taxable event for you.
MONEY MARKET EXCHANGE. You may exchange all or a portion of your shares in the
Funds for shares of the Northern Money Market Fund (the "Money Market Fund") at
their relative net asset values and may also exchange back into an AB Fund
without incurring any charges or fees. Exchanges into the Money Market Fund
are subject to the minimum purchase and redemption amounts set forth in the
prospectus for the Money Market Fund. Before exchanging into the Money Market
Fund, please read the Money Market Fund prospectus carefully, which may be
obtained by calling 1-800-___-____. The Money Market Fund is not affiliated
with the adviser or the Funds.
When you exchange from a Fund into the Money Market Fund or make an initial
purchase, dividends begin to accrue the day after the exchange or purchase.
When you exchange a partial balance out of the Money Market Fund, your proceeds
will exclude accrued and unpaid income from the Money Market Fund through the
date of exchange. When exchanging your entire balance from the Money Market
Fund, accrued income will automatically be exchanged into the Fund you
exchanged into when the income is collected and paid from the Money Market
Fund, at the end of the month.
LIMITATIONS ON EXCHANGES. The Funds believe that use of the exchange privilege
by investors utilizing market-timing strategies adversely affects the Funds and
their shareholders. Therefore, the Funds generally will not honor requests for
exchanges by shareholders who identify themselves or are identified as "market
timers." Market timers are investors who repeatedly make exchanges within a
short period of time. The Funds reserve the right to suspend, limit or
terminate the exchange privilege of any investor who uses the exchange
privilege excessively. The Funds may change or temporarily suspend the
exchange privilege during unusual market conditions.
MAKING CHANGES TO YOUR ACCOUNT
You may call or write us to make changes to your account. Common changes
include:
Name changes. If your name has changed due to marriage or divorce, send us a
letter of instruction signed with both your old and new names. Include a
certified copy of your marriage certificate or have your signatures guaranteed.
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Address changes. The easiest way to notify us is to return the stub from a
recent confirmation or statement. You can also call the transfer agent with
any changes at 1-800-___-____.
Transfer of account ownership. Send us a letter including your account number,
the share class, number of shares or dollar amount that are being transferred
along with the name, address and Taxpayer Identification Number of the person
to whom the shares are being transferred. All living registered owners must
sign the letter. You will also need to include a signature guarantee.
Corporations, businesses and trusts may have to provide additional documents.
In order to avoid delays in processing account transfers, please call the
transfer agent at 1-800-___-____ to determine what additional documents are
required.
SPECIAL FEATURES AND SERVICES
RETIREMENT ACCOUNT OPTIONS
The Funds offer a variety of retirement accounts for individuals and
organizations. These accounts may offer you tax advantages. For information
on establishing retirement accounts, please call 1-800-___-____. You should
consult with your legal and/or tax adviser before you establish a retirement
account.
AB Funds currently accept investments from the following kinds of retirement
plans:
- - Traditional IRA (including spousal IRA)
- - "Rollover" IRA
- - Roth IRA
- - SEP-IRA
ACH TRANSACTIONS
If you would like to purchase shares electronically or have redemption proceeds
sent directly to your bank account, you must first have certain bank account
information on file with us so that funds can be transferred electronically
between your mutual fund and bank accounts. There is no charge to you for this
procedure. You can establish this privilege by filling out the appropriate
section of your account application. If you did not select the electronic
purchase or redemption options on your original application, call us at
1-800-___-____.
AUTOMATED TELEPHONE SERVICE
The Funds offer 24-hour, seven day a week access to Fund and account
information via a toll-free line. The system provides total returns, share
prices and price changes for the Funds and gives you account balances and
history (e.g., last transaction, latest dividend distribution). To access the
automated system, please call 1-800-___-____.
AUTOMATIC INVESTMENT PLAN
To make regular investing more convenient, you can open an automatic investment
plan with an initial investment of $4000 and a minimum investment of $250 per
month after you start your plan. We will automatically transfer from your
checking or savings account the amount you want to invest on the 5th, 10th,
15th, 20th, 25th or last day of each month. There is no charge for this
service, but if there is not enough money in your bank account to cover the
withdrawal you
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will be charged $20, your purchase will be cancelled and you will be
responsible for any resulting losses to the Funds. You can terminate your
automatic investment plan at any time by calling the Funds at least 30 days
before your next scheduled withdrawal date. To implement this plan, please
fill out the appropriate area of your application, or call 1-800-___-____ for
assistance.
SYSTEMATIC WITHDRAWAL PLAN (SWP)
You can have shares automatically redeemed from your account on a regular basis
by using our systematic withdrawal plan. If your account balance is $10,000 or
more, you may take systematic withdrawals of $1000 or more on a monthly or
quarterly basis. The proceeds of a withdrawal can be sent to your address of
record, sent by electronic transfer to your bank or invested in another AB
Fund. This plan may be useful way to deal with mandatory withdrawals from an
IRA. If you want to implement this plan, please fill out the appropriate area
of your application or call 1-800-___-____ for assistance.
OTHER SHAREHOLDER INFORMATION
SHAREHOLDER COMMUNICATIONS
Confirmations. You will receive a confirmation each time you buy, sell or
exchange Fund shares. Automatic investment plan participants receive quarterly
confirmations of all automatic transactions. Please review your confirmation
and notify us immediately if there are any discrepancies in the information.
Quarterly and annual statements. You will receive a quarterly statement
listing all distributions, purchases and redemptions of Fund shares for the
preceding calendar quarter. Your December statement will include a listing of
all transactions for the entire year.
Semi-annual and annual reports. The Funds send semi-annual and annual reports
to their shareholders. These reports provide financial information on your
investments and give you a "snapshot" of the Funds' portfolio holdings at the
end of their semi-annual and fiscal year periods. Additionally, the annual
report discusses the factors that materially affected the Funds' performance
for their most recently completed year, including relevant market conditions
and the investment strategies and techniques that were used.
Prospectus. Each year, the Funds send all shareholders a new prospectus.
Please read the prospectus and keep it for future reference.
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Form 1099. Each year you will receive a Form 1099-DIV, showing the source of
distributions for the preceding year and a Form 1099-B showing shares you sold
during the year.
Form 5498. If you contributed to an IRA during the year, you will receive a
Form 5498 verifying your contribution.
DISTRIBUTION AND SERVICE PLANS
Each Fund has adopted a plan under Rule 12b-1 that allows a Fund to pay
distribution fees for activities generally intended to result in the sale of
its shares. These activities include advertising, compensation to the
distributor and others for sales and marketing activities and materials, and
shareholder account servicing. Under the plan, each Fund may pay a fee of up
to 0.75% of its average daily net assets (computed on an annual basis). To the
extent these fees are paid by the Funds, the Funds' expenses will increase.
Because 12b-1 fees are paid out of a Fund's net assets on an ongoing basis,
over time these fees will increase the cost of your investment and could cost
long-term investors more than paying other types of sales charges. Each Fund
has also adopted a servicing plan that allows a Fund to pay a fee to third
parties for providing shareholder services to Fund shareholders of up to 0.25%
of its average daily net assets.
MULTIPLE CLASSES
Each of the AB Funds has the authority to offer more than one class of shares.
All shares of each Fund or class have equal voting rights and will generally
vote in the aggregate and not by Fund or class. In certain situations, the law
may require that the shareholders of a particular Fund or class be permitted to
vote on matters affecting that Fund or class. Share classes may have different
sales charges and other expenses, which will affect their performance.
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS AND SUB-AGENTS
The Funds may authorize one or more brokers or other financial services agents
or sub-agents to accept purchase, redemption and exchange orders on the Funds'
behalf. In these cases, a Fund will be deemed to have received an order when
an authorized financial services agent or sub-agent accepts the order, and your
order will be priced at the Fund's NAV next computed after it is received in
good order by the financial services agent or sub-agent. Designated financial
services agents and sub-agents are responsible for transmitting accepted orders
and payment for the purchase of shares to the transfer agent within the time
period agreed upon by them. If payment is not received within the time
specified, your transaction may be cancelled, and the financial services agent
will be held responsible for any resulting fees or losses.
YEAR 2000
Like other investment companies and financial service providers, each Fund
could be adversely affected if the computer systems used by its investment
adviser and the Funds' other service providers do not properly process and
calculate date-related information beginning on January 1, 2000. This
possibility is commonly known as the "Year 2000 Problem." The Year 2000
Problem arises because most computer systems were designed only to recognize a
two-digit year, not a four-digit year. As a result, computers may interpret
"00" as the year 1900 and either stop processing date-related computations or
process them incorrectly. These failures could have a negative impact on the
Fund's securities trades, pricing and accounting services. The Funds'
investment adviser and each of its service providers are taking steps to
address the Year 2000
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Problem with respect to the computer systems they use. There can be no
assurance that the steps taken by these service providers will be successful,
or that interaction with other non-complying computer systems will not
adversely impact the Funds. Also, companies in which the Funds invest could be
adversely affected by the Year 2000 Problem. It is also possible that the
normal operation of the Funds and their service providers will be interrupted
in any event by the failure of communications and public utility companies,
governmental entities, financial processors or others to perform their services
as a result of the Year 2000 Problem.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Fund intends to distribute virtually all of its net investment income and
net realized capital gains at least once a year. The Funds will automatically
reinvest your dividends and capital gain distributions in additional Fund
shares unless you elect to have them paid to you in cash. If you elect to have
your distributions paid in cash, the Funds will send a check to your address of
record.
A dividend from net investment income represents the income a Fund earns from
dividends and interest paid on its investments, after payment of the Fund's
expenses. A capital gain is the increase in the value of a security that a
Fund holds. The Fund's gain is "unrealized" until it sells a portfolio
security. Each realized capital gain is either short-term or long-term,
depending on whether the Fund held the security for one year or less or more
than one year.
Each Fund will distribute any net realized capital gains, and the Select Fund
will distribute dividends, annually, normally in December. If a Fund is not
able to correctly estimate capital gains it will make an additional capital
gains distribution in the first quarter of the next calendar year. The
Balanced Fund will distribute dividends on a quarterly basis, typically in
March, June, September and December.
Buying a dividend. Unless you invest in a tax-deferred retirement account
(such as an IRA), it is not to your advantage to buy shares of a Fund shortly
before it makes a distribution. This is known as "buying a dividend." Buying
a dividend can cost you money in taxes because you will receive, in the form of
a taxable distribution, a portion of the money you just invested (even if you
elected to have it reinvested in additional Fund shares). To avoid "buying a
dividend," check a Fund's distribution schedule before you invest by calling
1-800-___-____.
TAXES
You will be subject to income tax on all Fund distributions regardless of
whether you receive them in cash or elect to have them reinvested in Fund
shares. Dividend distributions and distributions of a Fund's net short-term
capital gains are taxable to you as ordinary income. Distributions of a Fund's
net long-term capital gains are taxable to you as long-term capital gains.
This is true regardless of how long you have held your Fund shares.
If you sell or exchange your shares, any gain or loss is a taxable event. You
may also be subject to state and local income taxes on dividends or capital
gains from the sale or exchange of Fund shares. This tax information provides
only a general overview. It does not apply if you invest in
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a tax-deferred retirement account such as an IRA. Please consult your own tax
adviser about the tax consequences of an investment in the Funds.
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FOR MORE INFORMATION
For more information about the AB Funds, ask for a free copy of the following:
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information (SAI) contains more detailed
information about each Fund. It is incorporated by reference into this
prospectus, which means that it is legally part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
The annual and semi-annual reports discuss the Funds' holdings. The annual
report describes the market conditions, economic trends and investment
strategies that significantly affected the Funds' performance.
To obtain copies of the SAI, annual or semi-annual reports, or to get other
information about the Funds, please write or call us at:
AB Funds
P.O. Box___
207 E. Buffalo Street, Suite ___ (for overnight deliveries)
Milwaukee, WI 53202
1-800-___-____
You can also review and copy the SAI and other information about the Funds at
the SEC Public Reference Room in Washington, D.C., or download a free text-only
version on the SEC's website at www.sec.gov. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. For a fee, the SEC
will mail you a copy of the SAI. Send your request to: SEC Public Reference
Room, Washington,D.C. 20549-6009.
SEC File No. ________
<PAGE> 47
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
AB FUNDS TRUST
AB SELECT FUND
AB BALANCED FUND
This Statement of Additional Information should be read in conjunction
with the Prospectus for the AB Select Fund and the AB Balanced Fund dated
______, 1999, and is incorporated by reference in its entirety into such
Prospectus. Because this Statement of Additional Information is not itself a
prospectus, you should not make an investment in shares of the AB Funds based
solely on the information contained herein. You may obtain copies of the
Prospectus for the AB Funds without charge by calling 1-800-___-____ or by
writing to AB Funds Trust, P.O. Box ____, Milwaukee, Wisconsin 53202.
This Statement of Additional Information is dated ________, 1999.
<PAGE> 48
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FUND ORGANIZATION.........................................................
INVESTMENT POLICIES AND PRACTICES.........................................
Investment Restrictions..............................................
Investment Strategies and Risks......................................
MANAGEMENT OF THE FUNDS...................................................
Trustees and Officers................................................
Control Persons and Principal Holders of Securities..................
INVESTMENT ADVISORY AND OTHER SERVICES....................................
Investment Adviser...................................................
Administration and Fund Accounting...................................
Transfer Agent and Dividend-Paying Agent.............................
Custodian............................................................
Distributor..........................................................
Legal Counsel........................................................
Independent Accountants..............................................
DISTRIBUTION OF SHARES....................................................
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................
CAPITAL STRUCTURE.........................................................
TAXES.....................................................................
General..............................................................
Original Issue Discount..............................................
Options, Futures and Foreign Currency Forward Contracts; Straddles...
Currency Fluctuations - "Section 988" Gains or Losses................
Passive Foreign Investment Companies.................................
Distributions........................................................
Disposition of Shares................................................
Back-up Withholding..................................................
Other Taxation.......................................................
PURCHASE, REDEMPTION AND PRICING OF SHARES................................
Determination of Net Asset Value.....................................
Exchanging Shares....................................................
Retirement Accounts..................................................
Suspension of Redemptions............................................
Redemptions in Kind..................................................
PERFORMANCE INFORMATION...................................................
MISCELLANEOUS.............................................................
FINANCIAL STATEMENTS......................................................
APPENDIX A (Description of Securities Ratings)............................
</TABLE>
________________
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectus in connection with the offering made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Funds. The Prospectus does not constitute an
offering by the Funds in any jurisdiction in which such offering may not
lawfully be made.
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FUND ORGANIZATION
AB Funds Trust is an open-end management investment company organized as a
Delaware business trust on July ___, 1999 (the "Trust"). The Trust is
authorized by its Declaration of Trust to issue an unlimited number of shares
of beneficial interest in series and classes. The Trust currently offers two
series of shares, the Select Fund and the Balanced Fund (individually, a
"Fund," or collectively, the "Funds").
INVESTMENT POLICIES AND PRACTICES
INVESTMENT RESTRICTIONS
Consistent with each Fund's investment objective, each Fund has adopted
certain investment restrictions. Unless otherwise noted, whenever an
investment restriction states a maximum percentage of a Fund's assets that may
be invested in any security or other asset, such percentage restriction will be
determined immediately after and as a result of a Fund's acquisition of such
security or other asset. Accordingly, any subsequent change in values, net
assets, or other circumstances will not be considered when determining whether
the investment complies with a Fund's investment limitations except with
respect to a Fund's restrictions on borrowings as set forth in restriction 7
below.
A Fund's fundamental restrictions cannot be changed without the approval
of the holders of the lesser of: (i) 67% of the Fund's shares present or
represented at a shareholders meeting at which the holders of more than 50% of
such shares are present or represented; or (ii) more than 50% of the
outstanding shares of the Fund.
The following are the Funds' fundamental investment restrictions. Except
as otherwise noted, each Fund may not:
1. Issue senior securities, except as permitted under the Investment
Company Act; provided, however, a Fund may engage in transactions involving
options, futures and options on futures contracts.
2. Lend money or securities (except by purchasing debt securities or
entering into repurchase agreements or lending portfolio securities).
3. (Does not apply to Select Fund) With respect to seventy-five percent
(75%) of its total assets, purchase (a) the securities of any issuer (except
securities of the U.S. government or any agency or instrumentality thereof), if
such purchase would cause more than five percent (5%) of the value of the
Fund's total assets to be invested in securities of any one issuer or (b) more
than ten percent (10%) of the outstanding voting securities of any one issuer.
4. Purchase the securities of any issuer if, as a result, 25% or more of
the value of its total assets, determined at the time an investment is made,
exclusive of U.S. government securities, are in securities issued by companies
primarily engaged in the same industry.
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5. Act as an underwriter or distributor of securities other than shares of
the Funds except to the extent that a Fund's participation as part of a group
in bidding or by bidding alone, for the purchase of permissible investments
directly from an issuer or selling shareholders for the Fund's own portfolio
may be deemed to be an underwriting, and except to the extent that a Fund may
be deemed an underwriter under the Securities Act, by virtue of disposing of
portfolio securities.
6. Purchase or sell real estate (but this shall not prevent the Fund from
investing in securities that are backed by real estate or issued by companies
that invest or deal in real estate or in participation interests in pools of
real estate mortgage loans exclusive of investments in real estate limited
partnerships).
7. Borrow money, except that a Fund may borrow money from a bank for
temporary or emergency purposes (not for leveraging) in an amount not exceeding
25% of the value of its total assets (including the amount borrowed) less
liabilities (other than borrowings), or pledge, mortgage or hypothecate its
assets, except to secure indebtedness, and then only if such pledging,
mortgaging or hypothecating does not exceed 25% of the Fund's total assets.
Transactions involving options, futures and options on futures, will not be
deemed to be borrowings if properly covered by a segregated account where
appropriate. A Fund will not purchase securities while its borrowings exceed
5% of its total assets.
8. Purchase or sell physical commodities or commodities contracts unless
acquired as a result of ownership of securities or other instruments (but this
shall not prevent the Fund from engaging in transactions involving foreign
currencies, futures contracts, options on futures contracts or options, or from
investing in securities or other instruments backed by physical commodities).
The Trustees have adopted additional investment restrictions for the
Funds. These restrictions are operating policies of the Funds and may be
changed by the Trustees without shareholder approval.
Each Fund may not:
1. Purchase securities of other investment companies except to the extent
permitted by the Investment Company Act and the rules and regulations
thereunder.
2. Make investments for the purpose of exercising control or management of
any company except that a Fund may vote portfolio securities in the Fund's
discretion.
3. Acquire illiquid securities if, as a result of such investments, more
than 15% of the Fund's net assets (taken at market value at the time of each
investment) would be invested in illiquid securities. "Illiquid securities"
means securities that cannot be disposed of within seven days in the normal
course of business at approximately the amount at which the Fund has valued the
securities.
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4. Purchase securities on margin (except to obtain such short-term credits
as are necessary for the clearance of purchases and sales of securities) or
participate in a joint trading account; provided, however, the Fund may (i)
purchase or sell futures contracts and options on futures, (ii) make initial
and variation margin payments in connection with purchases or sales of futures
contracts or options on futures contracts, (iii) write or invest in put or call
options on securities and indexes, and (iv) engage in foreign currency
transactions. (The "bunching" of orders for the sale or purchase of marketable
portfolio securities with other accounts under the management of the Adviser to
save brokerage costs or average prices among them is not deemed to result in a
securities trading account.)
5. Purchase or sell securities on a when-issued or delayed delivery basis,
if, as a result, more than 5% of its total assets taken at market value at the
time of purchase would be invested in such securities.
6. Purchase and sell financial futures, forward foreign currency exchange
contracts and put and call options, except for hedging purposes; provided that
no more than 5% of the Fund's net assets at the time of purchase may be
invested initial margins for financial futures transactions and premiums for
options, and provided further that the Fund may only write call options that
are covered and only up to 25% of the Fund's total assets.
In determining industry classifications with respect to the Funds, the
Adviser intends to use the industry classification titles in the Standard
Industrial Classification Manual.
A security is considered to be issued by the entity, or entities, whose
assets and revenues back the security. A guarantee of a security is not deemed
to be a security issued by the guarantor when the value of all securities
issued and guaranteed by the guarantor, and owned by a Fund, does not exceed
10% of the value of a Fund's assets.
INVESTMENT STRATEGIES AND RISKS
The Select Fund is a non-diversified fund that seeks capital appreciation.
The Balanced Fund is a diversified fund that seeks both capital appreciation
and current income. The Balanced Fund emphasizes capital appreciation, but
invests at least 25% of its total assets in fixed-income securities.
The Prospectus describes each Fund's investment objective, as well as the
principal investment strategies used to achieve that objective and the
principal risks associated with each strategy. The following information
supplements the discussion about the Funds set forth in the Prospectus under
the headings "Fund Overview" and "Other Investment Practices and Risks."
TEMPORARY DEFENSIVE MEASURES. The Funds may increase their investment in
government securities, and other short-term, interest-bearing securities
without regard to the Fund's otherwise applicable percentage limits, policies
or its normal investment emphasis, when its Advisor believes market conditions
warrant a temporary defensive position. Taking larger positions in such
short-term investments may serve as a means of preserving capital in
unfavorable market conditions. When in a defensive position, a Fund could miss
the opportunity
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<PAGE> 52
to participate in any stock or bond market advances that occur during those
periods, which the Fund might have been able to participate in if it had
remained more fully invested.
NON-DIVERSIFICATION. The Select Fund is classified as a "non-diversified"
Fund under the Investment Company Act, which means that the Fund is not limited
by that Act in the proportion of its assets that it may invest in the
securities of a single issuer. The Fund's net asset value may be more volatile
than that of a more-widely diversified fund because the Fund invests more of
its assets in a smaller number of issuers. Consequently, the Fund may be more
vulnerable to any single economic, political or regulatory occurrence, and the
gains or losses on a single stock will have a greater impact on the Fund's net
asset value.
PORTFOLIO TURNOVER RATE. The Funds may engage in a high level of trading
in seeking to achieve their investment objectives. The portfolio turnover rate
for the Funds is calculated by dividing the lesser of purchases or sales of
portfolio investments for the reporting period by the monthly average value of
the portfolio investments owned during the reporting period. A 100% portfolio
turnover rate results, for example, if the equivalent of all the securities in
a Fund's portfolio are replaced in a one year period. The calculation excludes
all securities, including options, whose maturities or expiration dates at the
time of acquisition are one year or less. Portfolio turnover may vary greatly
from year to year as well as within a particular year, and may be affected by
cash requirements for redemption of shares. The Funds are not restricted by
policy with regard to portfolio turnover and will make changes in their
investment portfolios from time to time as business and economic conditions as
well as market prices may dictate. Higher portfolio turnover rates result in
correspondingly higher brokerage costs for the Funds. Although the existence
of a higher portfolio turnover rate has no direct correlation to the tax
liability of a Fund, sales of certain stocks will result in realized gains,
and, possibly, in increased taxable distributions to shareholders.
INITIAL PUBLIC OFFERINGS. The Funds may invest in a company's securities
at the time of the company's initial public offering (IPO). Companies involved
in IPOs are often smaller and have a limited operating history, which involves
a greater risk that the value of their securities will be impaired following
the IPO. In addition, market psychology prevailing at the time of an IPO can
have a substantial and unpredictable effect on the price of an IPO security,
causing the price of a company's securities to be particularly volatile at the
time of its IPO and for a period thereafter. As a result, a Fund's Adviser
might decide to sell an IPO security more quickly than it would otherwise,
which may result in a significant gain or loss to the Fund.
U.S. GOVERNMENT OBLIGATIONS. The Balanced Fund may invest in obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
Some of the obligations purchased by the Fund, such as U.S. Treasury bills,
notes and bonds, are backed by the full faith and credit of the U.S. Government
and are guaranteed as to both principal and interest by the U.S. Treasury.
While the obligations of many of the agencies and instrumentalities of the U.S.
Government are not direct obligations of the U.S. Treasury, they are generally
backed indirectly by the U.S. Government. Some of the agencies are indirectly
backed by their right to borrow from the U.S. Government. Others are supported
solely by the credit of the agency or instrumentality itself, but are given
additional support due to the U.S. Treasury's authority to purchase their
outstanding debt obligations. However, no assurance can be given that the U.S.
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<PAGE> 53
Government would provide financial support to U.S. Government-established or
sponsored agencies where it is not obligated to do so by law. The U.S.
Government does not guarantee the market value or current yield of these
obligations, and the U.S. Government's guarantee does not extend to the Fund
itself.
FOREIGN SECURITIES. Each Fund may invest without limitation in securities
of foreign issuers which are publicly traded in the United States, either
directly or through sponsored and unsponsored American Depositary Receipts
("ADRs"). ADRs typically are issued by a U.S. bank or trust company and
evidence ownership of underlying securities issued by a foreign corporation.
Unsponsored ADRs differ from sponsored ADRs in that the establishment of
unsponsored ADRs is not approved by the issuer of the underlying securities.
As a result, available information concerning the issuer may not be as current
or reliable as the information for sponsored ADRs, and the price of unsponsored
ADRs may be more volatile.
Investments in foreign securities involve special risks and costs in
addition to those inherent in domestic investments. Political, economic or
social instability of the issuer or the country of issue, the possibility of
expropriation or confiscatory taxation, limitations on the removal of assets or
diplomatic developments, and the possibility of adverse changes in investment
or exchange control regulations are among the inherent risks. Foreign
companies are not subject to the regulatory requirements of U.S. companies and,
as such, there may be less publicly available information about such companies.
Moreover, foreign companies are not subject to uniform accounting, auditing
and financial reporting standards and requirements comparable to those
applicable to U.S. companies. Dividends and interest payable on a Fund's
foreign portfolio securities may be subject to foreign withholding taxes. To
the extent such taxes are not offset by credits or deductions allowed to
investors under U.S. federal income tax law, such taxes may reduce the net
return to shareholders. Because of these and other factors, securities of
foreign companies acquired by the Funds may be subject to greater fluctuation
than securities of domestic companies.
Changes in foreign currency exchange rates will affect the value of a
Fund's portfolio securities that are denominated or quoted in currencies other
than the U.S. dollar, as well as the unrealized appreciation or depreciation of
such investments insofar as U.S. investors are concerned. If the foreign
currency in which a security is denominated appreciates against the U.S.
dollar, the dollar value of the security will increase. Conversely, a decline
in the exchange rate of the foreign currency against the U.S. dollar would
adversely affect the dollar value of the foreign securities. Foreign currency
exchange rates are determined by forces of supply and demand on the foreign
exchange markets, which are in turn affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors.
SECURITIES OF COMPANIES WITH LIMITED OPERATING HISTORIES. Each of the
Funds may invest in securities of companies with limited operating histories.
The Funds consider these to be securities of companies with a record of less
than three years' continuous operation, including the operations of any
predecessors and parents. Because these companies have only a limited
operating history, it is more difficult for the Adviser to evaluate the
company's growth prospects. As a result, the Adviser's investment decisions
for these securities may place a greater emphasis
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<PAGE> 54
on current or planned product lines and the reputation and experience of the
company's management and less emphasis on fundamental valuation factors than
would be the case for more mature companies. In addition, many of these
companies may also be small companies and involve the risks and price
volatility associated with investments in smaller companies.
SECURITIES OF SMALLER COMPANIES. Each of the Funds may invest in
securities of companies with small or mid-sized market capitalizations. An
investment in companies with smaller capitalizations involves greater risks
than investing in larger, more established companies. Smaller company stocks
may be subject to more abrupt or erratic price movements, because the stocks
are traded in lower volumes in fewer markets and their issuers are more
sensitive to changing conditions and have less certain growth prospects.
Smaller companies in which the Funds invest may have limited product lines,
markets or financial resources, or may be dependent on a small management
group. Smaller companies also may be less significant factors within their
industries and may have difficulty withstanding competition from larger
companies. While smaller companies may be subject to these additional risks,
they may also realize more substantial growth than larger or more established
companies.
SPECIAL SITUATIONS. Each Fund may also invest in securities of companies
that have recently experienced or are anticipated to experience a significant
change in structure, management, products or services or other special
situation that may significantly affect the value of their securities.
Examples of special situations are companies being reorganized or merged,
companies emerging from bankruptcy, companies introducing unusual new products
or which enjoy particular tax advantages. Other examples include companies
experiencing changes in senior management, extraordinary corporate events,
significant changes in cost or capital structure or which are believed to be
probable takeover candidates. The opportunity to invest in special situations,
however, is limited and depends in part on the market's assessment of these
companies and their circumstances. By its nature, a "special situation"
company involves to some degree a break with the company's past experience.
This creates greater uncertainty and potential risk of loss than if the company
were operating according to long-established patterns. In addition, stocks of
companies in special situations may decline or not appreciate as expected if an
anticipated change or development does not occur or is not assessed by the
market as favorably as expected.
ILLIQUID AND RESTRICTED SECURITIES. Each of the Funds is authorized to
invest up to 15% of its net assets in securities which are illiquid or not
readily marketable because they are subject to restrictions on their resale
("restricted securities") or because, based upon their nature or the market for
such securities, no ready market is available. Investments in illiquid
securities involve certain risks to the extent that a Fund may be unable to
dispose of such a security at the time desired or at a reasonable price or, in
some cases, may be unable to dispose of it at all. In addition, in order to
resell a restricted security, a Fund might have to incur the potentially
substantial expense and delay associated with effecting registration. A Fund
may have to lower the price, sell other portfolio securities instead or forego
an investment opportunity, any of which could have a negative impact on Fund
management or performance. Because illiquid and restricted securities may be
difficult to sell at an acceptable price, they may be subject to greater
volatility and may result in a loss to a Fund.
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The Board has delegated to the Adviser the day-to-day determination of the
liquidity of a security, although it has retained oversight and ultimate
responsibility for such determinations. Although no definite quality criteria
are used. The Adviser considers such factors as (i) the nature of the market
for a security (including the institutional, private or international resale
market), (ii) the terms of these securities or other instruments allowing for
the disposition to a third party or the issuer thereof (e.g., certain
repurchase obligations and demand instruments), (iii) the availability of
market quotations (e.g., for securities quoted in PORTAL system), and (iv)
other permissible relevant factors. Certain securities are deemed illiquid by
the Securities and Exchange Commission, including repurchase agreements
maturing in more than seven days and options not listed on a securities
exchange or not issued by the Options Clearing Corporation. These securities
will be treated as illiquid and subject to the Funds' limitation on illiquid
securities. Because an active market may not exist for illiquid securities,
the Funds may experience delays and additional cost when trying to sell
illiquid securities.
Restricted securities may be sold in privately negotiated or other exempt
transactions, qualified non-U.S. transactions, such as under Regulation S, or
in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, a Fund may be
obligated to pay all or part of the registration expenses and a considerable
time may elapse between the decision to sell and the sale date. If, during
such period, adverse market conditions were to develop, a Fund might obtain a
less favorable price than prevailed when it decided to sell. Restricted
securities will be priced at fair value as determined in good faith by the
Board.
If, through the appreciation of illiquid securities or the depreciation of
liquid securities, a Fund should be in a position where more than 15% of the
value of its net assets are invested in illiquid assets, including restricted
securities which are not readily marketable, the Fund will take such steps as
it deems advisable, if any, to reduce the percentage of such securities to 15%
or less of the value of its net assets.
CONVERTIBLE SECURITIES. Each Fund may invest in convertible securities.
A convertible security may be converted either at a stated price or rate within
a specified period of time into a specified number of shares of common stock.
By investing in convertible securities, a Fund seeks the opportunity, through
the conversion feature, to participate in a portion of the capital appreciation
of the common stock into which the securities are convertible, while earning
higher current income than is available from the common stock. Convertible
securities entitle the holder to receive interest paid or accrued on debt or
the dividend paid on preferred stock until the convertible securities mature or
are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities or
preferred stocks in that they normally provide a stable stream of income with
generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure.
In selecting convertible securities for the Funds, the Adviser will
consider, among other factors, its evaluation of the creditworthiness of the
issuers of the securities; the interest or dividend income generated by the
securities; the potential for capital appreciation of the securities and the
underlying common stocks; the prices of the securities relative to other
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comparable securities and to the underlying common stocks; whether the
securities are entitled to the benefits of sinking funds or other protective
conditions; the diversification of a Fund's portfolio as to issuers; and
whether the securities are rated by a rating agency and, if so, the ratings
assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
A Fund may realize capital appreciation from an improvement in the credit
standing of an issuer whose securities are held in the Fund or from a general
lowering of interest rates, or a combination of both. Conversely, a reduction
in the credit standing of an issuer whose securities are held by a Fund or a
general increase in interest rates may be expected to result in capital
depreciation to the Fund.
NON-INVESTMENT GRADE SECURITIES. Each Fund has the authority to invest in
convertible debt securities that are of a quality less than investment grade
(so-called "junk bonds"). The Funds have no pre-established minimum quality
standards for convertible securities and may invest in convertible securities
of any quality, including lower rated or unrated securities. However, the
Funds will not invest in any securities in default at the time of purchase, and
will limit their investment in non-investment grade convertible debt securities
to less than 20% of their respective net assets at the time of purchase. In
addition, investment grade bonds in which the Funds invest may be downgraded.
If convertible securities purchased by a Fund are downgraded following
purchase, or if other circumstances cause 20% or more of a Fund's assets to be
invested in convertible securities rated below investment grade, the Trustees
of the Fund will consult with the Adviser to determine what action, if any, is
appropriate in light of all relevant circumstances.
Junk bonds, while generally offering higher yields than investment grade
securities with similar maturities, involve greater risks, including the
possibility of default or bankruptcy. They are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. The special risk considerations in connection with investments in
these securities are discussed below. Refer to Appendix A of this Statement of
Additional Information for a discussion of securities ratings.
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Effect of Interest Rates and Economic Changes. There remains some
uncertainty about the performance level of the market for lower quality
securities. A prolonged recession or economic downturn could severely disrupt
the market for and adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of junk bond securities tend to reflect individual corporate
developments to a greater extent than do higher rated securities, which react
primarily to fluctuations in the general level of interest rates. Junk bond
securities also tend to be more sensitive to economic conditions than are
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of junk bond securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The risk of loss due to default by an issuer of these
securities is significantly greater than issuers of higher-rated securities
because such securities are generally unsecured and are often subordinated to
other creditors. Further, if the issuer of a junk bond security defaulted, a
Fund might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in a Fund's net asset value.
As previously stated, the value of a junk bond security will generally
decrease in a rising interest rate market. If a Fund experiences unexpected
net redemptions in such a market, it may be forced to liquidate a portion of
its portfolio securities without regard to their investment merits. Due to the
limited liquidity of junk bond securities, a Fund may be forced to liquidate
these securities at a substantial discount. Any such liquidation would reduce
a Fund's asset base over which expenses could be allocated and could result in
a reduced rate of return for the Fund.
Payment Expectations. Junk bond securities typically contain redemption,
call or prepayment provisions that permit the issuer of such securities
containing such provisions to redeem the securities at its discretion. During
periods of falling interest rates, issuers of these securities are likely to
redeem or prepay the securities and refinance them with debt securities with a
lower interest rate. To the extent an issuer is able to refinance the
securities, or otherwise redeem them, a Fund may have to replace the securities
with a lower yielding security, which could result in a lower return for the
Fund.
Credit Ratings. Credit ratings issued by credit-rating agencies evaluate
the safety of principal and interest payments of rated securities. They do
not, however, evaluate the market value risk of junk bond securities and,
therefore may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to
reflect changes in the economy or in the condition of the issuer that affect
the market value of the security. Consequently, credit ratings are used only
as a preliminary indicator of investment quality. Investments in junk bond
securities will be more dependent on the Adviser's credit analysis than would
be the case with investments in investment grade debt securities. The Adviser
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Adviser continually
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monitors each Fund's investments and carefully evaluates whether to dispose of
or to retain junk bond securities whose credit ratings or credit quality may
have changed.
Liquidity and Valuation. A Fund may have difficulty disposing of certain
junk bond securities because there may be a thin trading market for such
securities. Because not all dealers maintain markets in all junk bond
securities, there may not be an established retail secondary market for certain
of these securities. The secondary trading market is generally not as liquid
as the secondary market for higher-rated securities, which may have an adverse
impact on the market price of the security and may also make it more difficult
for a Fund to obtain accurate market quotations for purposes of valuing the
Fund. Market quotations for certain junk bond issues may only be available
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales. During periods of thin trading, the
spread between bid and asked prices is likely to increase significantly. In
addition, adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of junk bond
securities, especially in a thinly traded market.
In general, investments in non-investment grade convertible securities are
subject to a significant risk of a change in the credit rating or financial
condition of the issuing entity. Investments in convertible securities of
medium or lower quality are also likely to be subject to greater market
fluctuations and to greater risk of loss of income and principal due to default
than investments of higher-rated fixed income securities. Such lower-rated
securities generally tend to reflect short-term corporate and market
developments to a greater extent than higher-rated securities, which react more
to fluctuations in the general level of interest rates. A Fund will generally
reduce risk to the investor by diversification, credit analysis and attention
to current developments in trends of both the economy and financial markets.
However, while diversification reduces the effect on a Fund of any single
investment, it does not reduce the overall risk of investing in lower-rated
securities.
ZEROS/STRIPS. The Funds may invest in zero coupon bonds or in strips.
Zero coupon bonds are sold at a discount from face value and do not make
regular interest payments. Such bonds pay principal and accreted discount
(representing interest accrued but not paid) at maturity. "Strips" are debt
securities that are stripped of their interest coupons after the securities are
issued, but are otherwise comparable to zero coupon bonds. These securities
are issued at a discount from their face value because interest payments are
typically postponed until maturity. The amount of discount rate varies
depending on factors including the time remaining until maturity, prevailing
interest rates, the security's liquidity and the issuer's credit quality. The
market values of zero coupon bonds and strips generally fluctuate in response
to changes in interest rates to a greater degree than do interest-paying
securities of comparable terms and quality.
REPURCHASE AGREEMENTS. Each Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Although the securities subject to a repurchase agreement may
bear maturities exceeding one year, settlement for the repurchase agreement
will never be more than one year after a Fund's acquisition of the securities
and normally will be within a shorter period of time. Neither Fund will enter
into a repurchase agreement maturing in
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more than seven days if, as a result, more than 15% of the Fund's total assets
would be invested in repurchase agreements and other illiquid securities.
Securities subject to repurchase agreements are held either by the Funds'
custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement in an amount at
least equal to the repurchase price (including accrued interest). Repurchase
agreements may be considered loans to the seller, collateralized by the
underlying securities. The risk to a Fund is limited to the ability of the
seller to pay the agreed upon sum on the repurchase date; in the event of
default, the repurchase agreement provides that a Fund is entitled to sell the
underlying collateral. If the value of the collateral declines after the
agreement is entered into, however, and if the seller defaults under a
repurchase agreement when the value of the underlying collateral is less than
the repurchase price, a Fund could incur a loss of both principal and interest.
The Adviser monitors the value of the collateral at the time the agreement is
entered into and at all times during the term of the repurchase agreement in an
effort to determine that the value of the collateral always equals or exceeds
the agreed upon repurchase price to be paid to a Fund. If the seller were to
be subject to a federal bankruptcy proceeding, the ability of a Fund to
liquidate the collateral could be delayed or impaired because of certain
provisions of the bankruptcy laws. The Adviser will acquire repurchase
agreements in accordance with procedures established by the Trust's Board of
Trustees that are designed to evaluate the creditworthiness of the other
parties to the repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. Each Fund may purchase and
sell securities on a when-issued or delayed delivery basis. However, neither
Fund currently intends to purchase or sell securities on a when-issued or
delayed delivery basis, if as a result, more than 5% of its total assets taken
at market value at the time of purchase would be invested in such securities.
When-issued or delayed delivery transactions arise when securities (normally,
obligations of issuers eligible for investment by a Fund) are purchased or sold
by the Fund with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous price or yield. However, the
yield available on a comparable security when delivery takes place may vary
from the yield on the security at the time that the when-issued or delayed
delivery transaction was entered into. Any failure to consummate a when-issued
or delayed delivery transaction may result in a Fund missing the opportunity to
obtain a price or yield considered to be advantageous. When-issued and delayed
delivery transactions may generally be expected to settle within one month from
the date the transactions are entered into, but in no event later than 90 days.
However, no payment or delivery is made by a Fund until it receives delivery
or payment from the other party to the transaction.
When a Fund purchases securities on a when-issued basis, it will maintain
in a segregated account with its Custodian cash, U.S. government securities or
other liquid assets having an aggregate value equal to the amount of such
purchase commitments, until payment is made. If necessary, additional assets
will be placed in the account daily so that the value of the account will equal
or exceed the amount of the Fund's purchase commitments.
LENDING OF PORTFOLIO SECURITIES. The Funds may lend their securities to
qualified institutional investors (such as brokers, dealers or other financial
organizations) who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding
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failures to deliver securities or completing arbitrage operations. By lending
its securities, a Fund will be attempting to generate income through the
receipt of interest on the loan which, in turn, can be invested in additional
securities to pursue the Fund's investment objective. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Fund.
Each Fund may lend its portfolio securities to qualified brokers, dealers,
banks or other financial institutions, so long as the terms, the structure and
the aggregate amount of such loans are not inconsistent with the Investment
Company Act of 1940, as amended (the "Investment Company Act"), or the rules
and regulations or interpretations of the Securities and Exchange Commission
thereunder, which currently require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, an irrevocable letter of credit or
securities issued or guaranteed by the United States government having a value
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Fund at any time, (d) the Fund receives
reasonable interest on the loan, which interest may include the Fund's
investing cash collateral in interest bearing short-term investments, and (e)
the Fund receives all dividends and distributions on the loaned securities and
any increase in the market value of the loaned securities.
The Funds bear risk of loss in the event that the other party to a
securities lending transaction defaults on its obligations and the Fund is
delayed in or prevented from exercising its rights to dispose of the
collateral, including the risk of a possible decline in the value of the
collateral securities during the period in which the Fund seeks to assert these
rights, the risk of incurring expenses associated with asserting these rights
and the risk of losing all or a part of the income from the transaction.
Neither Fund will lend its portfolio securities if, as a result, the aggregate
value of such loans would exceed 33-1/3% of the value of the Fund's total
assets. Loan arrangements made by a Fund will comply with all other applicable
regulatory requirements, including the rules of the New York Stock Exchange,
which rules presently require the borrower, after notice, to redeliver the
securities within the normal settlement time of three business days. All
relevant facts and circumstances, including creditworthiness of the broker,
dealer or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Fund's trustees.
HEDGING TRANSACTIONS. Each Fund is authorized to make limited use of
certain types of futures, forwards and/or options, but only for the purpose of
hedging, that is, to protect against market risk due to market movements that
may adversely affect the value of a Fund's securities or the price of
securities that a Fund is considering purchasing. The utilization of futures,
forwards and options is also subject to policies and procedures that may be
established by the Trustees from time to time. In addition, none of the Funds
is required to hedge. Decisions regarding hedging are subject to the Adviser's
judgment of the cost of the hedge, its potential effectiveness and other
factors the Advisor considers pertinent. No assurance can be given that any of
these instruments will be available to the Funds on a cost-effective basis,
that they will be used or, if used, will achieve the intended result.
A hedging transaction may partially protect a Fund from a decline in the
value of a particular security or its portfolio generally, although hedging may
also limit a Fund's
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opportunity to profit from favorable price movements, and the cost of the
transaction will reduce the potential return on the security or the portfolio.
Use of these instruments by a Fund involves the potential for a loss that may
exceed the amount of initial margin the Fund would be permitted to commit to
the contracts under its investment limitation, or in the case of a call option
written by the Fund, may exceed the premium received for the option. However,
a Fund is permitted to use such instruments for hedging purposes only, and only
if the aggregate amount of its obligations under these contracts does not
exceed the total market value of the assets the Fund is attempting to hedge,
such as a portion or all of its exposure to equity securities or its holding in
a specific foreign currency. To help ensure that the Fund will be able to meet
its obligations under its futures and forward contracts and its obligations
under options written by that Fund, the Fund will be required to maintain
liquid assets in a segregated account with its custodian bank or to set aside
portfolio securities to "cover" its position in these contracts.
The principal risks of a Fund utilizing futures transactions, forward
contracts and options are: (a) losses resulting from market movements not
anticipated by the Fund; (b) possible imperfect correlation between movements
in the prices of futures, forwards and options and movements in the prices of
the securities or currencies hedged or used to cover such positions; (c) lack
of assurance that a liquid secondary market will exist for any particular
futures or options at any particular time, and possible exchange-imposed price
fluctuation limits, either of which may make it difficult or impossible to
close a position when so desired; (d) lack of assurance that the counterparty
to a forward contract would be willing to negotiate an offset or termination of
the contract when so desired; and (e) the need for additional information and
skills beyond those required for the management of a portfolio of traditional
securities. In addition, when the Fund enters into an over-the-counter
contract with a counterparty, the Fund will assume counterparty credit risk,
that is, the risk that the counterparty will fail to perform its obligations,
in which case the Fund could be worse off than if the contract had not been
entered into.
Following is additional information concerning the futures, forwards and
options which the Funds may utilize, provided that no more than 5% of the
Fund's net assets at the time the contract is entered into may be used for
initial margins for financial futures transactions and premiums paid for the
purchase of options. In addition, the Funds may only write call options that
are covered and only up to 25% of the Fund's total assets.
Options. Each Fund may purchase and write (i.e. sell) put and call
options. Such options may relate to particular securities or stock indices,
and may or may not be listed on a domestic or foreign securities exchange and
may or may not be issued by the Options Clearing Corporation. Options trading
is a highly specialized activity that entails greater than ordinary investment
risk. Options may be more volatile than the underlying instruments, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying instruments
themselves.
A call option for a particular security gives the purchaser of the option
the right to buy, and the writer (seller) the obligation to sell, the
underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is in consideration for undertaking the obligation
under the option
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contract. A put option for a particular security gives the purchaser the right
to sell the security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
Stock index options are put options and call options on various stock
indexes. In most respects, they are identical to listed options on common
stocks. The primary difference between stock options and index options occurs
when index options are exercised. In the case of stock options, the underlying
security, common stock, is delivered. However, upon the exercise of an index
option, settlement does not occur by delivery of the securities comprising the
index. The option holder who exercises the index option receives an amount of
cash if the closing level of the stock index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the stock index and the exercise price of the
option expressed in dollars times a specified multiple. A stock index
fluctuates with changes in the market value of the stocks included in the
index. For example, some stock index options are based on a broad market
index, such as the Standard & Poor's 500 Index or the Value Line Composite
Index or a narrower market index, such as the Standard & Poor's 100. Indexes
may also be based on an industry or market segment, such as the AMEX Oil and
Gas Index or the Computer and Business Equipment Index. Options on stock
indexes are currently traded on the Chicago Board Options Exchange, the New
York Stock Exchange, the American Stock Exchange, the Pacific Stock Exchange,
and the Philadelphia Stock Exchange.
A Fund's obligation to sell an instrument subject to a call option written
by it, or to purchase an instrument subject to a put option written by it, may
be terminated prior to the expiration date of the option by the Fund's
execution of a closing purchase transaction, which is effected by purchasing on
an exchange an option of the same series (i.e., same underlying instrument,
exercise price and expiration date) as the option previously written. A
closing purchase transaction will ordinarily be effected to realize a profit on
an outstanding option, to prevent an underlying instrument from being called,
to permit the sale of the underlying instrument or to permit the writing of a
new option containing different terms on such underlying instrument. The cost
of such a liquidation purchase plus transactions costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer unable
to effect a closing purchase transaction will not be able to sell the
underlying instrument or liquidate the assets held in a segregated account, as
described below, until the option expires or the optioned instrument is
delivered upon exercise. In such circumstances, the writer will be subject to
the risk of market decline or appreciation in the instrument during such
period.
If an option purchased by a Fund expires unexercised, the Fund realizes a
loss equal to the premium paid. If a Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the
premium paid to purchase the option, or a loss if it is less. If an option
written by a Fund expires on the stipulated expiration date or if a Fund enters
into a closing purchase transaction, it will realize a gain (or loss if the
cost of a closing purchase transaction exceeds the net premium received when
the option is sold). If an option written by a Fund is exercised, the
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proceeds of the sale will be increased by the net premium originally received
and the Fund will realize a gain or loss.
Certain Risks Regarding Options. There are several risks associated with
transactions in options. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on an exchange, may be absent for reasons
which include the following: there may be insufficient trading interest in
certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or the Options Clearing Corporation may not at all times be
adequate to handle current trading value; or one or more exchanges could, for
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding options
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Successful use by the Funds of options on stock indexes will be subject to
the ability of the Adviser to correctly predict movements in the directions of
the stock market. This requires different skills and techniques than
predicting changes in the prices of individual securities. In addition, a
Fund's ability to effectively hedge all or a portion of the securities in its
portfolio, in anticipation of or during a market decline, through transactions
in put options on stock indexes, depends on the degree to which price movements
in the underlying index correlate with the price movements of the securities
held by a Fund. Inasmuch as a Fund's securities will not duplicate the
components of an index, the correlation will not be perfect. Consequently,
each Fund will bear the risk that the prices of its securities being hedged
will not move in the same amount as the prices of its put options on the stock
indexes. It is also possible that there may be a negative correlation between
the index and a Fund's securities which would result in a loss on both such
securities and the options on stock indexes acquired by the Fund.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be
reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. The
purchase of stock index options involves the risk that the premium and
transaction costs paid by a Fund in purchasing an option will be lost as a
result of unanticipated movements in prices of the securities comprising the
stock index on which the option is based.
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or elsewhere may exist. If
a Fund is unable to close out a call option on securities
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that it has written before the option is exercised, the Fund may be required to
purchase the optioned securities in order to satisfy its obligation under the
option to deliver such securities. If a Fund is unable to effect a closing
sale transaction with respect to options on securities that it has purchased,
it would have to exercise the option in order to realize any profit and would
incur transaction costs upon the purchase and sale of the underlying
securities.
Cover for Options Positions. Transactions using options (other than
options that a Fund has purchased) expose a Fund to an obligation to another
party. A Fund will not enter into any such transactions unless it owns either
(1) an offsetting ("covered") position in securities or other options or (2)
cash or liquid securities with a value sufficient at all times to cover its
potential obligations not covered as provided in (1) above. Each Fund will
comply with SEC guidelines regarding cover for these instruments and, if the
guidelines so require, set aside cash or liquid securities in a segregated
account with its Custodian in the prescribed amount. Under current SEC
guidelines, the Funds will segregate assets to cover transactions in which the
Funds write or sell options.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding option is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a Fund's
assets to cover or segregated accounts could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
Futures Contracts. Financial futures contracts are exchange-traded
contracts on financial instruments (such as securities and foreign currencies)
and securities indices that obligate the holder to take or make delivery of a
specified quantity of the underlying financial instrument, or the cash value of
an index, at a future date. Although futures contracts by their terms call for
the delivery or acquisition of the underlying instruments or a cash payment
based on the mark-to-market value of the underlying instruments, in most cases
the contractual obligation will be offset before the delivery date by buying
(in the case of an obligation to sell) or selling (in the case of an obligation
to buy) an identical futures contract. Such a transaction cancels the original
obligation to make or take delivery of the instruments.
The Funds may enter into contracts for the purchase or sale for future
delivery of financial instruments, such as securities and foreign currencies,
or contracts based on financial indices including indices of U.S. Government
securities, foreign government securities or equity securities. U.S. futures
contracts are traded on exchanges which have been designated "contract markets"
by the Commodity Futures Trading Commission ("CFTC") and must be executed
through a futures commission merchant (an "FCM"), or brokerage firm, which is a
member of the relevant contract market. Through their clearing corporations,
the exchanges guarantee performance of the contracts as between the clearing
members of the exchange.
Both the buyer and seller are required to deposit "initial margin" for the
benefit of the FCM when a futures contract is entered into. Initial margin
deposits are equal to a percentage of the contract's value, as set by the
exchange on which the contract is traded, and may be maintained in cash or
other liquid assets. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments to the
other party to settle
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the change in value on a daily basis. Initial and variation margin payments
are similar to good faith deposits or performance bonds or party-to-party
payments resulting from daily changes in the value of the contract, unlike
margin extended by a securities broker, and would be released or credited to
the Funds upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Unlike margin extended by a securities
broker, initial and variation margin payments do not constitute purchasing
securities on margin for purposes of a Fund's investment limitations. A Fund
will incur brokerage fees when it buys or sells futures contracts.
In the event of the bankruptcy of the FCM that holds margin on behalf of a
Fund, the Fund may be entitled to return of margin owed to the Fund only in
proportion to the amount received by the FCM's other customers. A Fund will
attempt to minimize the risk by careful monitoring of the creditworthiness of
the FCMs with which the Fund does business and by depositing margin payments in
a segregated account with the Fund's custodian for the benefit of the FCM when
practical or otherwise required by law.
Where applicable, each Fund intends to comply with guidelines of
eligibility for exclusion from the definition of the term "commodity pool
operator" with the CFTC and the National Futures Association, which regulate
trading in the futures markets. Accordingly, a Fund will not enter into any
futures contract or option on a futures contract if, as a result, the aggregate
initial margin and premiums required to establish such positions would exceed
5% of the Fund's net assets.
Although a Fund would hold cash and liquid assets in a segregated account
with a mark-to-market value sufficient to cover the Fund's open futures
obligations, the segregated assets would be available to the Fund immediately
upon closing out the futures position.
The acquisition or sale of a futures contract may occur, for example, when
a Fund is considering purchasing or holds equity securities and seeks to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Fund might
sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the portfolio by a corresponding
increase in the value of the futures contract position held by the Fund and
thereby preventing the Fund's net asset value from declining as much as it
otherwise would have. A Fund also could protect against potential price
declines by selling portfolio securities and investing in money market
instruments. However, the use of futures contracts as a hedging technique
allows a Fund to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts may be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, a Fund could take
advantage of the potential rise in the value of equity securities without
buying them until the market has stabilized. At that time, the futures
contracts could be liquidated and the Fund could buy equity securities on the
cash market.
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The ordinary spreads between prices in the cash and futures markets, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions, which could distort the normal price relationship between the
cash and futures markets. Second, the liquidity of the futures market depends
on participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced and prices in the futures
market distorted. Third, from the point of view of speculators, the margin
deposit requirements in the futures market are less than margin requirements in
the securities market. Therefore, increased participation by speculators in
the futures market may cause temporary price distortions. Due to the
possibility of the foregoing distortions, a correct forecast of general price
trends by a Fund still may not result in a successful use of futures.
Futures contracts entail additional risks. Although a Fund will only
utilize futures contracts when it believes that use of such contracts will
benefit the Fund, if the Fund's investment judgment is incorrect, the Fund's
overall performance could be worse than if the Fund had not entered into
futures contracts. For example, if the Fund has hedged against the effects of
a possible decrease in prices of securities held in the Fund's portfolio and
prices increase instead, the Fund will lose part or all of the benefit of the
increased value of these securities because of offsetting losses in the Fund's
futures positions. In addition, if the Fund has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation margin
requirements. Those sales may be, but will not necessarily be, at increased
prices which reflect the rising market and may occur at a time when the sales
are disadvantageous to the Fund. Although the buyer of an option cannot lose
more than the amount of the premium plus related transaction costs, a buyer or
seller of futures contracts could lose amounts substantially in excess of any
initial margin deposits made, due to the potential for adverse price movements
resulting in additional variation margin being required by such positions.
However, each Fund intends to monitor its investments closely and will attempt
to close its positions when the risk of loss to the Fund becomes unacceptably
high.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of futures
contracts, it is possible that the standardized futures contracts available to
a Fund will not match exactly the Fund's current or potential investments. A
Fund may buy and sell futures contracts based on underlying instruments with
different characteristics from the securities in which it typically invests --
for example, by hedging investments in portfolio securities with a futures
contract based on a broad index of securities -- which involves a risk that the
futures position will not correlate precisely with the performance of the
Fund's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments closely correlate with a Fund's
investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments and the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures prices.
Imperfect correlations between a Fund's investments and its futures positions
may also result from differing levels of
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demand in the futures markets and the securities markets, from structural
differences in how futures and securities are traded, and from imposition of
daily price fluctuation limits for futures contracts. A Fund may buy or sell
futures contracts with a value less than or equal to the securities it wishes
to hedge or is considering purchasing. If price changes in a Fund's futures
positions are poorly correlated with its other investments, its futures
positions may fail to produce desired gains or result in losses that are not
offset by the gains in the Fund's other investments.
Because futures contracts are generally settled within a day from the date
they are closed out, compared with a longer settlement period for most types of
securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance a liquid secondary
market will exist for any particular futures contract at any particular time.
In addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for a Fund to enter
into new positions or close out existing positions. If the secondary market
for a futures contract is not liquid because of price fluctuation limits or
otherwise, a Fund may not be able to promptly liquidate unfavorable futures
positions and potentially could be required to continue to hold a futures
position until the delivery date, regardless of changes in its value. As a
result, a Fund's access to other assets held to cover its futures positions
also could be impaired.
Options On Futures Contracts. The Funds may buy and write options on
futures contracts for hedging purposes. An option on a futures contract gives
a Fund the right (but not the obligation) to buy or sell a futures contract at
a specified price on or before a specified date. The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, a Fund may buy a call
option on a futures contract to hedge against a market advance, and a Fund
might buy a put option on a futures contract to hedge against a market decline.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at the expiration of the call option is below the exercise price,
a Fund will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Fund's
portfolio holdings. If a call option a Fund has written is exercised, the Fund
will incur a loss that will be reduced by the amount of the premium it
received. Depending on the degree of correlation between change in the value
of its portfolio securities and changes in the value of the futures positions,
a Fund's losses from existing options on futures may to some extent be reduced
or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
For example, a Fund may buy a put option on a futures contract to hedge the
Fund's portfolio against the risk of falling prices.
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The amount of risk a Fund assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
Forward Foreign Currency Exchange Contracts. A forward contract is a
privately negotiated agreement between two parties in which one party is
obligated to deliver a stated amount of a stated asset at a specified time in
the future and the other party is obligated to pay a specified invoice amount
for the assets at the time of delivery. The Funds currently intend that they
will only use forward contracts or commitments for hedging purposes and will
only use forward foreign currency exchange contracts, although a Fund may enter
into additional forms of forward contracts or commitments in the future if they
become available and advisable in light of the Fund's objectives and investment
policies. Forward contracts generally are negotiated in an interbank market
conducted directly between traders (usually large commercial banks) and their
customers. Unlike futures contracts, which are standardized exchange-traded
contracts, forward contracts can be specifically drawn to meet the needs of the
parties that enter into them. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated exchange.
The following discussion summarizes the Funds' possible principal uses of
forward foreign currency exchange contracts ("forward currency contracts"). A
Fund may enter into forward currency contracts with stated contract values of
up to the value of the Fund's assets. A forward currency contract is an
obligation to buy or sell an amount of a specified currency for an agreed price
(which may be in U.S. dollars or a foreign currency) on a specified date. A
Fund will exchange foreign currencies for U.S. dollars and for other foreign
currencies in the normal course of business and may buy and sell currencies
through forward currency contracts in order to fix a price (in terms of a
specified currency) for securities it has agreed to buy or sell ("transaction
hedge"). A Fund also may hedge some or all of its investments denominated in
foreign currency against a decline in the value of that currency (or a proxy
currency whose price movements are expected to have a high degree of
correlation with the currency being hedged) relative to the U.S. dollar by
entering into forward currency contracts to sell an amount of that currency
approximating the value of some or all of its portfolio securities denominated
in that currency ("position hedge") or by participating in futures contracts
(or options on such futures) with respect to the currency. A Fund also may
enter into a forward currency contract with respect to a currency where the
Fund is considering the purchase or sale of investments denominated in that
currency but has not yet selected the specific investments ("anticipatory
hedge").
These types of hedging minimize the effect of currency appreciation as
well as depreciation, but do not eliminate fluctuations in the underlying U.S.
dollar equivalent value of the proceeds of or rates of return on a Fund's
foreign currency denominated portfolio securities. The matching of the
increase in value of a forward contract and the decline in the U.S. dollar
equivalent value of the foreign currency denominated asset that is the subject
of the hedge generally will not be precise. Shifting a Fund's currency
exposure from one foreign currency to another limits that Fund's opportunity to
profit from increases in the value of the original
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currency and involves a risk of increased losses to such Fund if its investment
manager's projection of future exchange rates is inaccurate. Unforeseen
changes in currency prices may result in poorer overall performance for a Fund
than if it had not entered into such contracts.
A Fund will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in the currency underlying the forward
contract or the currency being hedged. To the extent that a Fund is not able
to cover its forward currency positions with underlying portfolio securities,
the Funds' Custodian will segregate cash or liquid assets having a value equal
to the aggregate amount of such Fund's commitments under forward contracts
entered into. If the value of the securities used to cover a position or the
value of segregated assets declines, the Fund must find alternative cover or
segregate additional cash or liquid assets on a daily basis so that the value
of the covered and segregated assets will be equal to the amount of a Fund's
commitments with respect to such contracts.
While forward contracts are not currently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such
event, the Funds' ability to utilize forward contracts may be restricted. A
Fund may not always be able to enter into forward contracts at attractive
prices and may be limited in its ability to use these contracts to hedge Fund
assets. In addition, when a Fund enters into a privately negotiated forward
contract with a counterparty, the Fund assumes counterparty credit risk, that
is, the risk that the counterparty will fail to perform its obligations, in
which case the Fund could be worse off than if the contract had not been
entered into. Unlike many exchange-traded futures contracts and options on
futures, there are no daily price fluctuation limits with respect to forward
contracts and other negotiated or over-the-counter instruments, and with
respect to those contracts, adverse market movements could therefore continue
to an unlimited extent over a period of time. However, each Fund intends to
monitor its investments closely and will attempt to renegotiate or close its
positions when the risk of loss to the Fund becomes unacceptably high.
SHORT SALES. Each Fund may seek to realize additional gains through short
sales. Short sales are transactions in which a Fund sells a security it does
not own in anticipation of a decline in the market value of that security. To
complete such a transaction, the Fund must borrow the security to make delivery
to the buyer. The Fund is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at
such time may be more or less than the price at which the security was sold by
the Fund. Until the security is replaced, the Fund is required to repay the
lender any dividends or interest which accrue during the period of the loan.
To borrow the security, the Fund also may be required to pay a premium, which
would increase the cost of the security sold. The net proceeds of the short
sale will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out. The Fund also will incur
transaction costs in effecting short sales.
A Fund will incur a loss as a result of a short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain if the price
of the security declines in price between those dates. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of the
premium, dividends or interest the Fund may be required to pay, if any, in
connection with a short sale.
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The Funds may each make short sales "against the box," i.e., when a
security identical to or convertible or exchangeable into one owned by the Fund
is borrowed and sold short.
Whenever a Fund engages in short sales, it segregates liquid securities in
an amount that, when combined with the amount of collateral deposited with the
broker in connection with the short sale, equals the current market value of
the security sold short. The segregated assets are marked to market daily.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Balanced Fund may invest
in certain mortgage-backed and asset-backed securities. Mortgage-backed
securities are securities that directly or indirectly represent a participation
in, or are secured by and payable from, mortgage loans secured by real
property. Asset-backed securities are similar, except that they are backed by
assets other than mortgages, such as motor vehicle installment sales contracts,
installment loan contracts, leases of various types of real and personal
property and receivables from revolving credit agreements (credit cards). The
Fund will only invest in mortgage-backed securities that are insured or
guaranteed by the U.S. Government or its agencies or instrumentalities, or in
privately issued mortgage-backed or asset-backed securities that are rated in
the top two investment categories by a nationally recognized rating agency.
The primary risk of any mortgage-backed or asset-backed security is the
uncertainty of the timing of cash flows from the assets underlying the
securities. See the subheading "Special Risks of Mortgage-Backed Securities"
below for more information about prepayment and extension risks. Also, see the
subheading "Asset-Backed Securities" below for more information about
asset-backed securities.
There are currently three basic types of mortgage-backed securities: (i)
those issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, such as the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC); (ii) those issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the United States Government or one of its
agencies or instrumentalities; and (iii) those issued by private issuers that
represent an interest in or are collateralized by whole mortgage loans or
mortgage-backed securities without a government guarantee but usually having
some form of private credit enhancement.
U.S. Government Mortgage-Backed Securities. The Fund may invest in
mortgage-backed securities issued or guaranteed by GNMA, FNMA and FHLMC. GNMA
certificates are backed by the "full faith and credit" of the United States.
FNMA and FHLMC certificates are not backed by the full faith and credit of the
United States, but the issuing agency or instrumentality has the right to
borrow, to meet its obligations, from an existing line of credit with the U.S.
Treasury. The U.S. Treasury has no legal obligation to provide such line of
credit and may choose not to do so. Each of GNMA, FNMA and FHLMC guarantee
timely distribution of interest to certificate holders. GNMA and FNMA also
guarantee timely distribution of scheduled principal payments. FHLMC generally
guarantees only the ultimate collection of principal of the underlying mortgage
loans.
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Collateralized Mortgage Obligations And Multiclass Pass-Through
Securities. The Balanced Fund may also invest in collateralized mortgage
obligations (CMOs). CMOs are debt obligations collateralized by mortgage loans
or mortgage pass-through securities. Typically, CMOs are collateralized by
GNMA, FNMA or FHLMC certificates, but also may be collateralized by whole loans
or private mortgage pass-through securities (such collateral is referred to in
this section as Mortgage Assets). Multiclass pass-through securities are
equity interests in a trust composed of Mortgage Assets. Payments of principal
of and interest on the Mortgage Assets, and any reinvestment income thereon,
provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multiclass pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U. S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. The Fund may invest in CMOs issued by
private entities only if the CMOs are rated at least investment grade (at least
BBB by S&P or Baa by Moody's) or, if unrated, are determined to be of
comparable quality.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semiannual basis. Certain CMOs may have variable or floating
interest rates. The principal of and interest on the Mortgage Assets may be
allocated among the several classes of a CMO series in a number of different
ways.
Generally, the purpose of the allocation of the cash flow of a CMO to the
various classes is to obtain a more predictable cash flow to the individual
tranches than exists with the underlying collateral of the CMO. As a general
rule, the more predictable the cash flow is on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on mortgage-backed securities. As part of the process
of creating more predictable cash flows on most of the tranches in a series of
CMOs, one or more tranches generally must be created that absorb most of the
volatility in the cash flows on the underlying mortgage loans. The yields on
these tranches may be higher than prevailing market yields on mortgage-backed
securities with similar maturities. As a result of the uncertainty of the cash
flows of these tranches, the market prices of and yield on these tranches
generally are more volatile.
The Fund also may invest in parallel pay CMOs and Planned Amortization
Class CMOs (PAC Bonds). Parallel pay CMOs are structured to provide payments
of principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or
final distribution date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final distribution date but may
be retired earlier. PAC Bonds generally require payments of a specified amount
of principal on each payment date. PAC Bonds always are parallel pay CMOs with
the required principal payment on such securities having the highest priority
after interest has been paid to all classes.
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The Fund may not invest in "stripped" mortgage-backed securities
(interest-only securities or principal-only securities) or in mortgage-backed
securities known as "inverse floaters."
Adjustable Rate Mortgages. The Balanced Fund may also invest in adjustable
rate mortgage securities (ARMs), which are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. ARMs, like
fixed rate mortgages, have a specified maturity date, and the principal amount
of the mortgage is repaid over the life of the mortgage. Unlike fixed rate
mortgages, the interest rate on ARMs is adjusted at regular intervals based on
a specified, published interest rate "index" such as a Treasury rate index. The
new rate is determined by adding a specific interest amount, the "margin," to
the interest rate of the index. Investment in ARM securities allows the Fund
to participate in changing interest rate levels through regular adjustments in
the coupons of the underlying mortgages, resulting in more variable current
income and lower price volatility than longer-term fixed rate mortgage
securities. ARM securities are a less effective means of locking in long-term
rates than fixed rate mortgages since the income from rate mortgages will
increase during periods of rising interest rates and decline during periods of
falling rates.
Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities are structured similarly to the GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed rate or adjustable rate
mortgage loans. Since private mortgage pass-through securities typically are
not guaranteed by an entity having the credit status of GNMA, FNMA and FHLMC,
these securities generally are structured with one or more types of credit
enhancement to make them more secure, which may be through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties, through various means of structuring the transaction or through
a combination of those approaches. The Fund may invest in private mortgage
pass-through securities only if they are rated AA/Aa (S&P/Moody's) or above.
Special Risks Of Mortgage-Backed Securities. Mortgage-backed securities
have certain different characteristics than traditional debt securities. As a
result of the risks associated with these securities, the Fund could realize a
loss by investing in them, regardless of their rating or their credit
enhancement features.
Among the major differences between mortgage-backed securities and
traditional debt securities are that on mortgage-backed securities, interest
and principal payments are made more frequently, usually monthly, and principal
may be prepaid at any time because the underlying mortgage loans or other
assets generally may be prepaid at any time, usually without penalty. Changes
in the rate of prepayments will generally affect the yield to maturity of the
security. Moreover, when the holder of the security attempts to reinvest
prepayments of principal and interest, it may receive a rate of interest that
is higher or lower than the rate on the mortgage-backed securities originally
held. To the extent that mortgage-backed securities are purchased at a
premium, mortgage foreclosures and principal prepayments may result in a loss
to the extent of the premium paid. If such securities are bought at a
discount, both scheduled payments of
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principal and unscheduled prepayments will increase current and total returns
and will accelerate the recognition of income which, when distributed to
shareholders, will be taxable as ordinary income.
Mortgage-backed securities, like all fixed-income securities, generally
decrease in value as a result of increases in interest rates. In addition,
although generally the value of fixed-income securities increases during
periods of falling interest rates and decreases during periods of rising
interest rates, as a result of prepayments and other factors, this is not
always the case with respect to mortgage-backed securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule, prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, during a
period of declining rates, the Fund is likely to have greater amounts to
reinvest as a result of prepayments and is likely to have to reinvest those
amounts at lower interest rates than during a period of rising interest rates.
Mortgage-backed securities generally decrease in value as a result of increases
in interest rates and may benefit less than other fixed-income securities from
declining interest rates because of the risk of prepayment.
The Fund may invest in mortgage derivative securities, such as CMOs, the
average life of which is determined using mathematical models that incorporate
prepayment assumptions and other factors that involve estimates of future
economic and market conditions. These estimates may vary from actual future
results, particularly during periods of extreme market volatility. In
addition, under certain market conditions, the average weighted life of
mortgage derivative securities may not accurately reflect the price volatility
of such securities. For example, in periods of supply and demand imbalances in
the market for such securities and/or in periods of sharp interest rate
movements, the prices of mortgage derivative securities may fluctuate to a
greater extent than would be expected from interest rate movements alone.
The Fund's investments in mortgage derivative securities also subject the
Fund to extension risk. Extension risk is the possibility that rising interest
rates may cause prepayments to occur at a slower than expected rate. This
particular risk may effectively change a security which was considered short or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short or intermediate-term securities.
In addition, CMOs and other mortgage-backed securities issued by private
entities are not U.S. government securities and are not guaranteed by any
government agency, although the pool of securities underlying a privately
issued mortgage-backed security may be subject to a guarantee. Therefore, if
the collateral securing a privately issued mortgage-backed security held by the
Fund, in addition to any third party credit support or guarantees, is
insufficient to make payment, the Fund could sustain a loss on its investment
in that security. However, as stated above, the Fund will invest in CMOs and
other mortgage-backed securities issued by private entities only if they are
rated AA/Aa (S&P/Moody's) or above.
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<PAGE> 74
Asset-Backed Securities. The Balanced Fund may also invest in
asset-backed securities. Asset-backed securities are securities that represent
direct or indirect participation in, or are secured by and payable from, assets
other than mortgage-backed assets, such as motor vehicle installment sales
contracts, installment loan contracts, leases of various types of real and
personal property and receivables from revolving credit agreements (credit
cards). Asset-backed securities have yield characteristics similar to those of
mortgage-backed securities and are subject to many of the same risks. See the
subheading "Special Risks of Mortgage-Backed Securities" above for a discussion
of those risks. In addition, asset-backed securities involve certain risks
that are not posed by mortgage-backed securities, since asset-backed securities
do not usually contain the complete benefit of a security interest in the
related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, including the bankruptcy laws, some of which
may reduce the ability to obtain full payment. In the case of automobile
receivables, due to various legal and economic factors, proceeds for
repossessed collateral may not always be sufficient to support payments on
these securities. New instruments and variations of existing mortgage-backed
securities and asset-backed securities continue to be developed. The Fund may
invest in any such instruments or variations as may be developed, to the extent
consistent with its investment objective and policies and applicable legal
requirements.
MANAGEMENT OF THE FUNDS
TRUSTEES AND OFFICERS
As a Delaware business trust, the business and affairs of the Trust are
managed by its officers under the direction of its Board of Trustees.
Information regarding the Board of Trustees and officers of the Funds,
including their principal business occupations during at least the last five
years, is set forth below. Each Trustee who is an "interested person," as
defined in the Investment Company Act, is indicated by an asterisk. Except
where otherwise indicated, each of the individuals below has served in his or
her present capacity with the Trust since _____, 1999.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITIONS HELD WITH TRUST PRINCIPAL OCCUPATION
- --------------------- ------------------------- --------------------
<S> <C> <C>
Randy M. Pavlick*, age 40 President, Trustee Mr. Pavlick is the
207 East Buffalo Street Vice President of
Suite 400 Sunstone Financial
Milwaukee, Wisconsin 53202 Group, Inc., the
administrator and
transfer agent of
the Funds. He has
served in such
capacity since
February, 1993.
- --------------------------------------------------------------------------------
Lesli H. McLinden*, age 37 Secretary, Treasurer, Trustee Ms. McLinden joined
207 East Buffalo Street Sunstone Financial
Suite 400 Group, Inc. as
Milwaukee, Wisconsin 53202 associate counsel in
1998. Prior to that
time, she was a
shareholder with the
law firm of Davis &
Kuelthau, S.C
- --------------------------------------------------------------------------------
To Be Determined +
- --------------------------------------------------------------------------------
To Be Determined +
- --------------------------------------------------------------------------------
</TABLE>
+ These trustees will be elected in accordance with the requirements of the
Investment Company Act to serve as "non-interested" trustees on behalf of the
AB Funds Trust. The selection of the non-interested trustees will be
completed prior to the filing of the Registrant's Pre-Effective Amendment.
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<PAGE> 75
The Trustees of the Trust who are officers of the Adviser receive no
remuneration from the Funds. Each of the other Trustees will be paid an annual
retainer of $____, fee of $____, and will be reimbursed for the expenses of
attending meetings. These fees and expenses will be paid equally by each of
the AB Funds.
COMPENSATION TABLE (a)
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM TRUST
NAME OF PERSON TRUST PAID TO TRUSTEES
- -------------- ----- ----------------
<S> <C> <C>
$____ $____
$____ $____
$____ $____
</TABLE>
(a) The information provided in the above table is based on an estimate of
payments to be made for the Funds' first fiscal year ended ________, 2000. The
Trust has not adopted any pension or retirement plans for the officers or
Trustees of the Trust. Therefore, there have been no benefits accrued as part
of Trust expenses nor are there estimated currently any annual benefits upon
retirement.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of September ____, 1999, _____________ owned all of the outstanding
shares of each of the Funds. It is contemplated that soon after the initial
public offering of shares of each Fund, ________'s ownership of the shares of
each Fund will represent less than 25% of each Fund's outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. The investment adviser to the Funds is __________ (the
"Adviser"). The Adviser was organized as a _________ on _______, 1999.
____________ is the founder and President of the Adviser and owns ____% of the
outstanding common stock of the Adviser. As such, he controls the Adviser.
Pursuant to Investment Advisory Agreements entered into between the Trust on
behalf of each of the Funds and the Adviser (the "Investment Advisory
Agreements"), the Adviser provides continuous investment advisory services to
the Funds. The Adviser also provides the Funds with office space, equipment and
personnel necessary to operate and administer the Funds' business and to
supervise the provision of services by third parties.
The Advisory Agreements are dated ________, 1999. The Investment Advisory
Agreements have an initial term of two years and thereafter are required to be
approved annually by the Board of Trustees of the Trust or by vote of a
majority of the respective Fund's outstanding voting securities (as defined in
the Investment Company Act). Each annual renewal must also be approved by the
vote of a majority of the respective Fund's Trustees who are not parties to the
Investment Advisory Agreement or interested persons of any such party, cast in
29
<PAGE> 76
person at a meeting called for the purpose of voting on such approval. Each
Investment Advisory Agreement was approved by the vote of a majority of the
Trustees who are not parties to the respective Investment Advisory Agreement or
interested persons of any such party on _____, 1999 and by the initial
shareholder of each Fund on ________, 1999. The Investment Advisory Agreements
are terminable without penalty with respect to a Fund, on 60 days' written
notice by the Trustees, by vote of a majority of a Fund's outstanding voting
securities, or by the Adviser, and will terminate automatically in the event of
their assignment.
As compensation for its services, each Fund pays to the Adviser an
advisory fee at the annual rate of ___% of its average daily net assets. The
advisory fee is accrued daily and paid monthly.
For the fiscal year ending __________, 2000, the Adviser has agreed to
waive its management fees and/or reimburse each Fund's operating expenses to
the extent necessary to ensure that the total annual operating expenses for
each Fund will not exceed ___% of its average daily net assets. After such
time, the Adviser may from time to time voluntarily waive all or a portion of
its management fee. Unless extended by the Adviser, after ______, 2000, the
waiver may be terminated at any time in the Adviser's discretion.
Reimbursement of expenses in excess of the applicable limitation will be made
on a monthly basis and will be paid to each Fund by reducing the Adviser's fee,
subject to later adjustment, month by month, for the remainder of each Fund's
fiscal year. The Adviser may from time to time voluntarily absorb expenses for
one or both Funds in addition to the reimbursement of expenses in excess of the
foregoing.
Each Investment Advisory Agreement provides that the Adviser shall not be
liable to the respective Fund or its shareholders for any error of judgment or
mistake of law or for anything other than willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties. The Investment
Advisory Agreements also provide that nothing therein shall limit the freedom
of the Adviser and its affiliates to render investment supervisory and
corporate administrative services to other investment companies, to act as
investment adviser or investment counselor to other persons, firms or
corporations, or to engage in other business activities.
Each Investment Advisory Agreement permits the Adviser to seek
reimbursement of any reductions made to its management fee and payments made to
limit expenses which are the responsibility of a Fund within the three-year
period following such reduction, subject to the Fund's ability to effect such
reimbursement and remain in compliance with applicable expense limitations.
Such reimbursement may be paid prior to the Fund's payment of current expenses
if so requested by the Adviser even if such practice may require the Adviser to
waive, reduce or absorb current Fund expenses. Any such management fee or
expense reimbursement will be accounted for on the financial statement of each
Fund as a contingent liability of the Fund until such time as it appears that
the Fund will be able to effect such reimbursement. At such time as it appears
probable that a Fund is able to effect such reimbursement, the amount of
reimbursement that the Fund is able to effect will be accrued as an expense of
the Fund for that current period.
In the Investment Advisory Agreements, the Adviser agrees that the name
"______" may be used in connection with the Funds' business on a royalty-free
basis. The Adviser has reserved
30
<PAGE> 77
the right to grant the non-exclusive right to use the name "_______" to any
other person. The Investment Advisory Agreement provides that at such time as
the Agreement is no longer in effect, the Trust on behalf of each Fund will
cease using the name "______."
ADMINISTRATION AND FUND ACCOUNTING. Sunstone Financial Group, Inc., 207
East Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202 ("Sunstone") has
agreed to provide various administrative and fund accounting services to the
Funds under an Administration and Fund Accounting Agreement dated _____, 1999
(the "Administration Agreement"). Sunstone's services include, but are not
limited to, the following: calculating daily net asset values for each Fund;
overseeing the Funds' Custodian; assist in preparing and filing all federal
income and excise tax filings (other than those to be made by the Funds'
Custodian); overseeing the Funds' fidelity insurance relationships;
participating in the preparation of the Funds' registration statement;
preparing notice and renewal securities filings pursuant to state securities
laws; compiling data for and preparing notices to the SEC; preparing financial
statements for the annual and semi-annual reports to the SEC and current
investors; monitoring the Funds' expenses; monitoring the Funds' status as a
regulated investment company under Subchapter M of the Code; monitoring
compliance with the Funds' investment policies and restrictions and generally
assisting the Funds' administrative operations.
Sunstone, at its own expense, and without reimbursement from the Funds,
furnishes office space and all necessary office facilities, equipment, supplies
and clerical and executive personnel for performing the services required to be
performed by it under the Administration Agreement. The Administration
Agreement will remain in effect until _____ (the "Initial Term") and thereafter
for successive annual periods. After the Initial Term, the Administration
Agreement may be terminated on not less than 60 days' notice, without the
payment of any penalty, by the Board of Trustees of the Trust or by Sunstone.
Under the Administration Agreement, Sunstone is not liable for any loss
suffered by the Funds or their shareholders in connection with the performance
of the Administration Agreement, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Sunstone in the
performance of its duties or reckless disregard of its obligations and duties.
The Administration Agreement also provides that Sunstone may provide similar
services to others, including other investment companies.
For the foregoing, Sunstone receives a fee on the value of each Fund
computed daily and payable monthly, at the annual rate of ____ percent (0.__%)
on the first $___ million of the average daily net assets, and decreasing as
assets reach certain levels, subject to an annual minimum fee of $_______ per
Fund, plus out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND-PAYING AGENT. Sunstone also acts as the
Funds' transfer agent and dividend-paying agent. As such, Sunstone processes
purchase and redemption requests for the securities of each Fund, keeps records
of shareholder accounts and transactions, pays dividends as declared by the
Board of Trustees and issues confirmations of transactions to shareholders.
For these services, each Fund pays Sunstone a fee based on the number of
shareholder accounts, transactions and other activities, subject to a minimum
annual fee per Fund. Sunstone does not exercise any supervisory functions over
the management of the Funds or the purchase and sale of Fund securities.
31
<PAGE> 78
From time to time, the Trust, on behalf of one or both of the Funds,
either directly or indirectly through arrangements with the Adviser, the
Distributor (as hereinafter defined) or Sunstone, in its capacity as transfer
agent, may pay amounts to third parties that provide transfer agent-type
services and other administrative services relating to the Funds to persons who
have a beneficial interest in the Funds, such as 401(k) plan participants.
These services may include, among other things, sub-accounting services,
transfer agent type activities, answering Fund-related inquiries, transmitting
proxy statements, annual reports, updated prospectuses and other communications
regarding the Funds and other related services as the Funds may request.
CUSTODIAN. _______ serves as the Custodian for the Funds. Under the
terms of the agreement, __________ is responsible for the receipt and delivery
of each Fund's securities and cash. The Custodian does not exercise any
supervisory functions over the management of the Funds or the purchase and sale
of securities.
DISTRIBUTOR. Under a distribution agreement dated ______, 1999, Sunstone
Distribution Services, LLC, 207 East Buffalo Street, Suite ___, Milwaukee,
Wisconsin 53202 (the "Distributor") acts as principal underwriter for each Fund
and acts as exclusive agent for the Funds in selling their shares to the
public. The Distributor shall offer shares of the Funds on a continuous basis
and may engage in advertising and solicitation activities in connection
therewith. The Distributor is not obligated to sell any certain number of
shares of the Funds. For marketing and distribution services provided, the
Funds pay the Distributor compensation at the annual rate of ___% of each
Fund's average daily net assets.
LEGAL COUNSEL. Stradley, Ronon, Stevens & Young, LLP, with offices at
2600 One Commerce Square, Philadelphia, Pennsylvania 19103, serves as counsel
to the Funds.
INDEPENDENT ACCOUNTANTS. ___________ are the independent accountants for
the Funds. They are responsible for performing an audit of each Fund's
year-end financial statements as well as providing accounting and tax advice to
the management of the Funds.
DISTRIBUTION OF SHARES
The Funds have adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act. The Plan authorizes payments by the
Funds in connection with the distribution of their shares at an annual rate, as
determined from time to time by the Board of Trustees, of up to 0.25% of a
Fund's average daily net assets, for each Fund's Class A shares, and up to
0.75% of a Fund's average daily net assets, for each Fund's Class C shares.
Payments may be made by each Fund under the Plan for the purpose of financing
any activity primarily intended to result in the sales of shares of the Fund
as determined by the Board of Trustees. Such activities include advertising,
shareholder account servicing, compensation to the Distributor, production and
dissemination of prospectuses and sales and marketing materials, and capital or
other expenses of associated equipment, rent, salaries, bonuses, interest and
other overhead. To the extent any activity is one that a Fund may finance
without a Plan, the Fund may also make payments to finance such activity
outside of the Plan and not be subject to its limitations. The Plan provides
for compensation to the Distributor regardless of the expenses incurred by the
Distributor.
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<PAGE> 79
The Plan was adopted in anticipation that the Funds will benefit from the
Plan through increased sales of shares of each Fund, thereby reducing each
Fund's expense ratio and providing an asset size that allows the Adviser
greater flexibility in management. The Plan may be terminated at any time by a
vote of the Trustees of the Funds who are not interested persons of the Funds
and who have no direct or indirect financial interest in the Plan or any
agreement related thereto (the "Rule 12b-1 Trustees") or by a vote of a
majority of the Trust's outstanding shares. Any change in the Plan that would
materially increase the distribution expenses of the Funds provided for in the
Plan requires approval of the shareholders and the Board of Trustees, including
the Rule 12b-1 Trustees.
While the Plan is in effect, the selection and nomination of Trustees who
are not interested persons of the Funds will be committed to the discretion of
the Trustees of the Funds who are not interested persons of the Funds. The
Board of Trustees must review the amount and purposes of expenditures pursuant
to the Plan quarterly as reported to it by the officers of the Trust. Unless
otherwise terminated, the Plan will continue in effect for as long as its
continuance is specifically approved at least annually by the Board of
Trustees, including the Rule 12b-1 Trustees. As of _________, 1999, no
payments had been made under the Plan.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for
each Fund, for the placement of its portfolio business and the negotiation of
the commissions to be paid on such transactions, subject to the supervision of
the Trust's Board of Trustees. It is the policy of the Adviser to seek the
best execution at the best security price available with respect to each
transaction, in light of the overall quality of brokerage and research services
provided to the Adviser.
The Adviser will place orders pursuant to its investment determination for
the Funds either directly with the issuer or with any broker or dealer. In
executing portfolio transactions and selecting brokers or dealers, the Adviser
will use its best effort to seek on behalf of a Fund the best overall terms
available. In selecting brokers and assessing the best overall terms available
for any transaction, the Adviser shall consider 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 reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. The most favorable price to a Fund
means the best net price without regard to the mix between purchase or sale
price and commission, if any. Over-the-counter securities are generally
purchased or sold directly with principal market makers who retain the
difference in their cost in the security and its selling price (i.e., "markups"
when the market maker sells a security and "markdowns" when the market maker
purchases a security). In some instances, the Adviser may determine that
better prices are available from non-principal market makers who are paid
commissions directly.
In evaluating the best overall terms available, and in selecting the
broker-dealer to execute a particular transaction, the Adviser may also
consider the brokerage and research
33
<PAGE> 80
services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) provided to the Funds and/or other accounts over which
the Adviser or an affiliate of the Adviser exercises investment discretion.
While the Adviser believes these services have substantial value, they are
considered supplemental to its own efforts in the performance of its duties.
Other clients of the Adviser may indirectly benefit from the availability of
these services to the Adviser, and the Funds may indirectly benefit from
services available to the Adviser as a result of transactions for other
clients. The Adviser is authorized to pay to a broker or dealer who provides
such brokerage and research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if, but only
if, the Adviser determines in good faith that such commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker or dealer viewed in terms of that particular transaction or in terms of
the overall responsibilities the Adviser has to the Funds. In no instance,
however, will portfolio securities be purchased from or sold to the Adviser, or
any affiliated person of either the Trust or the Adviser, acting as principal
in the transaction, except to the extent permitted by the Securities and
Exchange Commission through rules, regulations, decisions and no-action
letters.
The Adviser may retain advisory clients in addition to the Funds and place
portfolio transactions for these accounts. Research services furnished by
firms through which the Funds effect their securities transactions may be used
by the Adviser in servicing all of its accounts; not all of such services may
be used by the Adviser in connection with the Funds. In the opinion of the
Adviser, it will not be possible to separately measure the benefits from
research services to each of the accounts (including the Funds) to be managed
by the Adviser. Because the volume and nature of the trading activities of the
accounts will not be uniform, the amount of commissions in excess of those
charged by another broker paid by each account for brokerage and research
services will vary. However, such costs to the Funds will not, in the opinion
of the Adviser, be disproportionate to the benefits to be received by the Funds
on a continuing basis.
The Adviser intends to seek to allocate portfolio transactions equitably
among its accounts whenever concurrent decisions are made to purchase or sell
securities by a Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to a Fund. In making such allocations between a Fund and other
advisory accounts, if any, the main factors to be considered by the Adviser
will be the respective investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash for
investment, the size of investment commitments generally held, and the opinions
of the persons responsible for recommending the investment.
On occasions when the Adviser deems the purchase or sale of a security to
be in the best interests of a Fund as well as other fiduciary or agency
accounts managed by it, the Investment Advisory Agreement provides that the
Adviser, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased for such Fund with those to be
sold or purchased for such other accounts in order to obtain the best overall
terms available with respect to common and preferred stocks and the best net
price and execution with respect to other securities. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Adviser in the manner it
considers to be
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<PAGE> 81
most equitable and consistent with its fiduciary obligations to the Funds and
other accounts involved. In some instances, this procedure may adversely
affect the size of the position obtainable for the Funds or the amount of the
securities that are able to be sold for the Funds.
CAPITAL STRUCTURE
The Trust is an open-end management investment company organized as a
Delaware business trust. The Trust's Declaration of Trust authorizes the Board
of Trustees to issue an unlimited number of shares of beneficial interest in
one or more series and classes. Each Fund is currently authorized to offer two
classes of shares. Each class of shares of the Funds has equal voting,
dividend, distribution and liquidation rights; however, share classes may have
different sales charges and other expenses, which will affect their
performance.
Shares of the Trust have no preemptive rights and only such conversion or
exchange rights as the Board may grant in its discretion. The Trust's shares
will be fully paid and non-assessable when issued for payment as described in
the Prospectus. Shareholders have the right to redeem their shares at any
time, subject to any rights a Fund may have to suspend redemptions under the
Investment Company Act.
Shareholders are entitled to one vote for each full share held, and
fractional votes for fractional shares held, and will generally vote in the
aggregate and not by Fund or class. Under certain circumstances, the
Investment Company Act or applicable Delaware law may require that the
shareholders of a particular Fund or class be permitted to vote on matters
affecting that Fund or class.
Rule 18f-2 under the Investment Company Act provides that any matter
required to be submitted to the holders of the outstanding voting securities of
an investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding shares
of each Fund affected by the matter. A Fund is affected by a matter unless it
is clear that the interests of each Fund in the matter are substantially
identical or that the matter does not affect any interest of the Funds. Under
Rule 18f-2, the approval of an investment advisory agreement or 12b-1
distribution plan or any change in a fundamental investment policy would be
effectively acted upon with respect to a Fund only if approved by a majority of
the outstanding shares of such Fund. However, the rule also provides that the
ratification of independent public accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Trust voting without regard to particular Funds.
Notwithstanding any provision of Delaware law requiring for any purpose
the concurrence of a proportion greater than a majority of all votes entitled
to be cast at a meeting at which a quorum is present, the affirmative vote of
the holders of a majority of the total number of shares of the Funds
outstanding (or of a class or series of the Funds, as applicable) will be
effective, except to the extent otherwise required by the Investment Company
Act and rules thereunder. In addition, the Declaration of Trust provides that,
to the extent consistent with Delaware law and other applicable law, the
By-Laws may include further provisions relating to shareholders' votes and
related matters.
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<PAGE> 82
As a business trust, the Trust is not required to hold annual shareholder
meetings. If requested to do so by the holders of at least 10% of the Trust's
outstanding shares, the Trust will call a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee, and to assist in
communications with other shareholders as required by Section 16(c) of the
Investment Company Act.
TAXES
GENERAL. Each Fund intends to qualify for treatment as a regulated
investment company ("RIC") under Subchapter M of the Code. To so qualify, each
Fund must meet the following requirements: (1) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the sale or other disposition
of stock or securities or foreign currencies, or other income (including but
not limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or those
currencies; (2) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. government securities, securities of other RICs, and other
securities, with these other securities limited, with respect to any one
issuer, to an amount that does not exceed 5% of the value of the Fund's total
assets and that does not represent more than 10% of the issuer's outstanding
voting securities; and (3) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities or the securities of other
RICs) of any one issuer.
As a RIC, a Fund generally will not be subject to U.S. Federal income tax
on income and gains that it distributes to shareholders, if at least 90% of
each Fund's investment company taxable income (which includes, among other
items, dividends, interest and the excess of any short-term capital gains over
net long-term capital losses) for the taxable year is distributed. Each Fund
intends to distribute substantially all of such income.
If a Fund fails to qualify for treatment as a RIC in any fiscal year, it
will be treated as a corporation for federal income tax purposes. As such, the
Fund would be required to pay income taxes on its net investment income and net
realized capital gains, if any, at the rates generally applicable to
corporations. Shareholders of a Fund that did not qualify for treatment as a
RIC would not be liable for income tax on the Fund's net investment income or
net realized capital gains in their individual capacities. Distributions to
shareholders, whether from the Fund's net investment income or net realized
capital gains, would be treated as taxable dividends to the extent of current
or accumulated earnings and profits of the Fund.
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by the Funds
may be treated as debt securities that were originally issued at a discount.
Original issue discount can generally be defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income is actually received by a Fund,
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<PAGE> 83
original issue discount that accrues on a debt security in a given year is
generally treated for federal income tax purposes as interest and, therefore,
such income would be subject to the distribution requirements applicable to
regulated investment companies.
Some debt securities may be purchased by the Funds at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having
market discount generally will be treated as ordinary income to the extent it
does not exceed the accrued market discount of such debt security. Generally,
market discount accrues on a daily basis for each day the debt security is held
by a Fund at a constant rate over the time remaining to the debt security's
maturity or, at the election of a Fund, at a constant yield to maturity which
takes into account the semi-annual compounding of interest.
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD CONTRACTS; STRADDLES. A
Fund's transactions in foreign currencies, forward contracts, options and
futures contact (including options and futures contracts on foreign currencies)
will be subject to special provisions of the Code that, among other things, may
affect the character of gains and losses realized by the Fund, defer Fund
losses, and affect the determination of whether capital gains and losses are
characterized as long-term or short-term capital gains or losses. These rules
could therefore, in turn, affect the character, amount, and timing of
distributions to shareholders. These provisions also may require the Fund to
mark-to-market certain types of the positions in its portfolio (i.e., treat
them as if they were closed out), which may cause the Fund to recognize income
without receiving cash with which to make distributions in amount necessary to
satisfy its distribution requirements for relief from income and excise taxes.
Each Fund will monitor its transactions and may make such tax elections as Fund
management deems appropriate with respect to foreign currency, options, futures
contracts, forward contracts, or hedged investments. The Funds' status as
regulated investment companies may limit their transactions involving foreign
currency, futures, options, and forward contracts.
Certain option transactions have special tax results for the Funds.
Expiration of a call option written by a Fund will result in short-term capital
gain. If the call option is exercised, the Fund will realize a gain or loss
from the sale of the security covering the call option and, in determining such
gain or loss, the option premium will be included in the proceeds of the sale.
If a Fund writes options other than "qualified covered call options," as
defined in Section 1092 of the Code, or purchases puts, any losses on such
options transactions, to the extent they do not exceed the unrealized gains on
the securities covering the options, may be subject to deferral until the
securities covering the options have been sold.
In the case of transactions involving "nonequity options," as defined in
and subject to the rules of Code Section 1256, the Funds will treat any gain or
loss arising from the lapse, closing out or exercise of such positions as 60%
long-term and 40% short-term capital gain or loss as required by Section 1256
of the Code. In addition, such positions must be marked-to-market as of the
last business day of the year, and gain or loss must be recognized for federal
income tax purposes in accordance with the 60%/40% rule discussed above even
though the position has not
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been terminated. A "nonequity option" subject to the rules of Code Section
1256 includes options involving stock indexes such as the Standard & Poor's 500
and 100 indexes.
Certain transactions undertaken by a Fund may result in "straddles" for
federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by a Fund, and losses realized by the Fund on
positions that are part of a straddle may be deferred under the straddle rules,
rather than being taken into account in calculating the taxable income for the
taxable year in which the losses are realized. In addition, certain carrying
charges (including interest expense) associated with positions in a straddle
may be required to be capitalized rather than deducted currently. Certain
elections that a Fund may make with respect to its straddle positions may also
affect the amount, character and timing of the recognition of gains or losses
from the affected positions.
Under certain circumstances, the Fund may recognize gain from a
constructive sale of an "appreciated financial position" it holds if it enters
into a short sale, forward contract or other transaction that substantially
reduces the risk of loss with respect to the appreciated position. In that
event, the Fund would be treated as if it had sold and immediately repurchased
the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transaction closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
CURRENCY FLUCTUATIONS - "SECTION 988" GAINS OR LOSSES. Each Fund will
maintain accounts and calculate income by reference to the U.S. dollar for U.S.
federal income tax purposes. Some of a Fund's investments will be maintained
and income therefrom calculated by reference to certain foreign currencies, and
such calculations will not necessarily correspond to the Fund's distributable
income and capital gains for U.S. federal income tax purposes as a result of
fluctuations in currency exchange rates. Furthermore, exchange control
regulations may restrict the ability of a Fund to repatriate investment income
or the proceeds of sales of securities. These restrictions and limitations may
limit a Fund's ability to make sufficient distributions to satisfy the 90%
distribution requirement for qualification as a regulated investment company.
Even if a Fund so qualified, these restrictions could inhibit its ability to
distribute all of its income in order to be fully relieved of tax liability.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a Fund accrues income or other receivables (including
dividends) or accrues expenses or other liabilities denominated in a foreign
currency and the time a Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt securities and
certain forward contracts denominated in a foreign currency, gains or losses
attributable to fluctuations in the value of the foreign currency between the
date of the acquisition of the security or other instrument and the date of
disposition also are treated as ordinary gain or loss. These gains and losses,
referred to under the Code as "Section 988" gains and losses, increase or
decrease the
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<PAGE> 85
amount of the Funds' investment company taxable income available to be
distributed to its shareholders as ordinary income. If Section 988 losses
exceed other investment company taxable income during a taxable year, a Fund
would not be able to make any ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, or, in some cases, as capital gain, rather than as an
ordinary dividend.
PASSIVE FOREIGN INVESTMENT COMPANIES. Each Fund may invest in shares of
foreign corporations that may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is
classified as a PFIC if at least one-half if its assets constitute
investment-type assets, or 75% or more of its gross income is investment-type
income. If the Fund receives a so-called "excess distribution" with respect to
PFIC stock, the Fund itself may be subject to a tax on a portion of the excess
distribution, whether or not the corresponding income is distributed by the
Fund to shareholders. In general, under the PFIC rules, an excess distribution
is treated as having been realized ratably over the period during which the
Fund held the PFIC shares. The Fund itself will be subject to tax on the
portion, if any, of an excess distribution that is so allocated to prior Fund
taxable years and an interest factor will be added to the tax, as if the tax
had been payable in such prior taxable years. Certain distributions from PFIC
as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain distributions might have
been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of the PFIC in a five year period. If this
election were made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition, another
election would involve marking to market the Fund's PFIC shares at the end of
each taxable year, with the result that unrealized gains would be treated as
though they were realized and reported as ordinary income. Any mark-to-market
losses and any loss from an actual disposition of Fund shares would be
deductible as ordinary losses to the extent of any net mark-to-market gains
included in income in prior years.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gains, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC shares.
DISTRIBUTIONS. Distributions of investment company taxable income are
taxable to a U.S. shareholder as ordinary income, whether paid in cash or
shares. Dividends pay by a Fund to a corporate shareholder, to the extent such
dividends are attributable to dividends received from U.S. corporations by a
Fund, may qualify for the dividends received deduction. However, the revised
alternative minimum tax applicable to corporations may reduce the value of the
dividends received deduction. Distributions of net capital gains (the excess
of net long-term capital gains over net short-term capital losses), if any,
designated by a Fund as capital gain
39
<PAGE> 86
dividends, are taxable to shareholders at the applicable long-term capital
gains rate, whether paid in cash or in shares, regardless of how long the
shareholder has held a Fund's shares, and they are not eligible for the
dividends received deduction. Shareholders will be notified annual as to the
U.S. federal tax status of distributions, and shareholders receiving
distributions in the form of newly issued shares will receive a report as to
the net asset value of the shares received.
Dividends and other distributions declared by a Fund in, and payable to
shareholders of record as of a date in, October, November or December of any
year will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during January of the following calendar year. Accordingly, those
distributions will be taxed to shareholders for the year in which that December
31 falls.
If the net asset value of shares is reduced below a shareholder's cost as
the result of a distribution by a Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors also
should be aware that if shares are purchased shortly before the record date for
any distribution, the shareholder will pay full price for the shares and
receive some portion of the price back as a taxable dividend or capital gain
distribution.
Each Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute, by the end of any calendar year, substantially all of
its ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts. Each
Fund intends to declare and distribute dividends during each year sufficient to
prevent imposition of the excise tax.
DISPOSITION OF SHARES. Upon a redemption, sale or exchange of shares of a
Fund, a shareholder will realize a taxable gain or loss that will be treated as
a capital gain or loss if the shares are capital assets in the shareholder's
hands and generally will be long-term or short-term, depending upon the
shareholder's holding period for the shares. Any loss realized on a
redemption, sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including through reinvestment of dividends) within a
period of 61 days beginning 30 days before and ending 30 days after the
disposal of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss realized by a shareholder
on the disposition of a Fund's shares held by the shareholder for six months or
less will be treated for tax purposes as a long-term capital loss to the extent
of any distributions of capital gain dividends received or treated as having
been received by the shareholder with respect to such shares.
BACKUP WITHHOLDING. The Funds will be required to report to the Internal
Revenue Service (the "IRS") all distributions and gross proceeds from the
redemption of the Funds' shares, except in the case of certain exempt
shareholders. All distributions and proceeds from the redemption of a Fund's
shares will be subject to withholding of federal income tax at a rate of 31%
("backup withholding") in the case of non-exempt shareholders if (1) the
shareholder fails to furnish the Funds with a Form W-9 to certify the
shareholder's correct taxpayer identification number or social security number,
(2) the IRS notifies the shareholder or the Funds that the shareholder has
failed to report properly certain interest and dividend income to the IRS and
to respond to notices to that effect, or (3) when required to do so, that
shareholder fails to
40
<PAGE> 87
certify that he or she is not subject to backup withholding. If the
withholding provisions are applicable, any such distributions or proceeds,
whether reinvested in additional shares or taken in cash, will be reduced by
the amounts required to be withheld.
OTHER TAXATION. Distributions may also be subject to additional state,
local and foreign taxes depending on each shareholder's particular situation.
Non-U.S. shareholders may be subject to U.S. tax rules that differ
significantly from those summarized above. This discussion does not address
all of the tax consequences applicable to the Funds or shareholders, and
shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE. As set forth in the Prospectus, the net
asset value of the Funds will be determined as of the close of trading on each
day the New York Stock Exchange is open for trading. The New York Stock
Exchange is open for trading Monday through Friday except New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a Saturday, the
New York Stock Exchange will not be open for trading on the preceding Friday,
and when any such holiday falls on a Sunday, the New York Stock Exchange will
not be open for trading on the following Monday unless unusual business
conditions exist, such as the ending of a monthly or the yearly accounting
period.
In connection with the determination of the Funds' net asset values,
securities which are traded on a recognized stock exchange are valued at the
last sale price on the securities exchange on which such securities are
primarily traded. Securities traded on only over-the-counter markets are
valued on the basis of closing over-the-counter trade prices. Securities for
which there were no transactions are valued at the closing bid prices. Options
written or purchased by the Funds are valued at the last sales price if such
last sales price is between the current bid and asked prices. Otherwise,
options are valued at the mean between the current bid and asked prices. Debt
securities (other than short-term instruments) are valued at prices furnished
by a pricing service, subject to review and possible revision by the Funds'
Adviser. Any modification of the price of a debt security furnished by a
pricing service is made pursuant to procedures adopted by the Trust's Board of
Trustees. Debt instruments maturing within 60 days are valued by the amortized
cost method. Any securities for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Adviser under the supervision of the Trust's Board of Trustees.
Generally, trading in foreign securities, as well as U.S. Government
securities and certain cash equivalents and repurchase agreements, is
substantially completed each day at various times prior to the close of the New
York Stock Exchange. The values of such securities used in computing the net
asset value of the shares of the Funds are determined as of such times.
Foreign currency exchange rates are also generally determined prior to the
close of the New York Stock Exchange. Occasionally, events affecting the value
of such securities and such
41
<PAGE> 88
exchange rates may occur between the times at which they are determined and at
the close of the New York Stock Exchange, which will not be reflected in the
computation of net asset value. If during such periods, events occur which
materially affect the value of such securities, the securities will be valued
at their fair market value as determined by management and approved in good
faith by the Trustees.
For purposes of determining the net asset value per share of each Fund,
all assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the mean between the bid and offer prices of
such currencies against U.S. dollars furnished by a pricing service approved by
the Trustees.
A Fund's net asset value per share will be calculated separately from the
per share net asset value of the other fund of the Trust. "Assets belonging
to" a Fund consist of the consideration received upon the issuance of shares of
the particular Fund together will all net investment income, earnings, profits,
realized gains/losses and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of the Trust not belonging to a particular series. Each Fund will be
charged with the direct liabilities of that Fund and with a share of the
general liabilities of the Trust's funds. Subject to the provisions of the
Trust's Declaration of Trust, determinations by the Trustees as to the direct
and allocable expenses, and the allocable portion of any general assets, with
respect to a particular Fund are conclusive.
EXCHANGING SHARES. Shares of the Funds may be exchanged for shares of the
Northern Money Market Fund as provided in the Prospectus. Sunstone, the Funds'
administrator and transfer agent, receives a service fee from the Northern
Money Market Fund at the annual rate of 0.25 of 1% of the average daily net
asset value of the shares of the Fund exchanged into the Northern Money Market
Fund pursuant to the expanded exchange privilege offered by the Trust.
RETIREMENT ACCOUNTS. The Funds offer several retirement account options
to shareholders. Qualifying shareholders may establish the following tax
deferred retirement accounts: traditional IRA, spousal IRA, SEP IRA and Roth
IRA. The shareholder's employer must establish a plan before the shareholder
opens a SEP account.
A description of accounts currently offered, applicable service fees and
certain limitations on account contributions and withdrawals, as well as
application forms, are available from the transfer agent upon request at
1-800-___-____. The IRA documents contain a disclosure statement that the IRS
requires to be furnished to individuals who are adopting the IRA. Because a
retirement program involves commitments covering future years, it is important
that the investment objective of the Funds be consistent with the participant's
retirement objectives. Premature withdrawals from a retirement account will
result in adverse tax consequences. Consultation with a competent financial
and tax adviser regarding the foregoing retirement accounts is recommended.
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SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended, or
the date of payment postponed beyond the normal seven-day period by the Funds,
under the following conditions authorized by the Investment Company Act: (1)
for any period during which the New York Stock Exchange is closed, other than
customary weekend or holiday closings, or during which trading on the Exchange
is restricted; (2) for any period during which an emergency exists as the
result of which the disposal by a Fund of securities owned by it is not
reasonably practical, or it is not reasonably practical for a Fund to determine
the fair value of its net assets; or (3) for such other periods as the
Securities and Exchange Commission may by order permit for the protection of
the Funds' shareholders.
REDEMPTIONS IN KIND. It is possible that conditions may exist in the
future which would, in the opinion of the Board of Trustees, make it
undesirable for a Fund to pay for redemptions in cash. In such cases the Board
may authorize payment to be made in portfolio securities of a Fund. However,
the Funds are obligated under the Investment Company Act to redeem for cash all
shares presented for redemption by any one shareholder up to $250,000 (or 1% of
a Fund's net assets if that is less) in any 90-day period. Securities
delivered in payment of redemptions are valued at the same value assigned to
them in computing the net asset value per share. Shareholders receiving such
securities generally will incur brokerage costs when selling such securities.
PERFORMANCE INFORMATION
From time to time, the Funds may advertise their "average annual total
return" over various periods of time. An average annual total return refers to
the rate of return which, if applied to an initial investment at the beginning
of a stated period and compounded over the period, would result in the
redeemable value of the investment at the end of the stated period assuming
reinvestment of all dividends and distributions and reflecting the effect of
all recurring fees. A shareholder's investment in a Fund and its return are
not guaranteed and will fluctuate according to market conditions. When
considering "average" annual total return figures for periods longer than one
year, shareholders should note that a Fund's annual total return for any one
year in the period might have been greater or less than the average for the
entire period. Each Fund also may use "aggregate" total return figures for
various periods, representing the cumulative change in value of an investment
in a Fund for a specific period (again reflecting changes in a Fund's share
price and assuming reinvestment of dividends and distributions).
To facilitate the comparability of historical performance data from one
mutual fund to another, the Securities and Exchange Commission has developed
guidelines for the calculation of average annual total return. The average
annual total return for a Fund for a specific period is found by first taking a
hypothetical $1,000 investment ("initial investment") in the Fund's shares on
the first day of the period and computing the "redeemable value" of that
investment at the end of the period. The redeemable value is then divided by
the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested at
net asset value on the reinvestment dates during the period. This calculation
can be expressed as follows:
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<PAGE> 90
P(1 + T)N = ERV
Where: T= average annual total return.
ERV = ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the beginning
of the period.
P = hypothetical initial payment of $1,000.
N = period covered by the computation, expressed in terms of years.
Total return performance for a specific period is calculated by first
taking an investment ("initial investment") in a Fund's shares on the first day
of the period and computing the "ending value" of that investment at the end of
the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The calculation
assumes that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Total return may also be shown as the increased dollar value of the investment
over the period or as a cumulative total return which represents the change in
value of an investment over a stated period and may be quoted as a percentage
or as a dollar amount.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the period covered by
the computations.
The Funds' performance figures will be based upon historical results and
will not necessarily be indicative of future performance. The Funds' returns
and net asset value will fluctuate and the net asset value of shares when sold
may be more or less than their original cost. Any additional fees charged by a
dealer or other financial services firm would reduce a Fund's returns.
From time to time, in marketing and other literature, the Funds'
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely used
independent research firm which ranks mutual funds by overall performance,
investment objective and assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income and capital gains
dividends reinvested. Such calculations do not include the effect of any sales
charges imposed by other funds. The Funds will be compared to Lipper's
appropriate fund category, that is, by fund objective and portfolio holdings.
The Funds' performance may also be compared to the performance of other
mutual funds by Morningstar, Inc., which ranks funds on the basis of historical
risk and total return.
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<PAGE> 91
Morningstar's rankings range from five stars (highest) to one star (lowest) and
represent Morningstar's assessment of the historical risk level and total
return of a fund as a weighted average for 3, 5, and 10 year periods. Rankings
are not absolute or necessarily predictive of future performance.
Evaluations of Fund performance made by independent sources may also be
used in advertisements concerning the Funds, including reprints of or
selections from, editorials or articles about the Funds. Sources for Fund
performance and articles about the Funds may include publications such as
Money, Forbes, Kiplinger's, Financial World, Business Week, U.S. News and World
Report, the Wall Street Journal, Barron's and a variety of investment
newsletters.
The Funds may compare their performance to a wide variety of indices and
measures of inflation including the Standard & Poor's Index of 500 Stocks and
the Nasdaq Over-the-Counter Composite Index. There are differences and
similarities between the investments that the Funds may purchase for their
respective portfolios and the investments measured by these indices.
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's
net asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market as represented by the Standard & Poor's 500 Stock Index. A beta of more
than 1.00 indicates volatility greater than the market, and a beta of less than
1.00 indicates volatility less than the market. Another measure of volatility
or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares a Fund to other
AB Funds or broad categories of funds, such as money market, bond or equity
funds, in terms of potential risks and returns. Risk/return spectrums also may
depict funds that invest in both domestic and foreign securities or a
combination of bond and equity securities. Money market funds are designed to
maintain a constant $1.00 share price and have a fluctuating yield. Share
price, yield and total return of a bond fund will fluctuate. The share price
and return of an equity fund also will fluctuate. The description may also
compare a Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
MISCELLANEOUS
The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Commission under the Securities Act with respect to the securities offered by
the Funds' Prospectus. Certain portions of the Registration Statement have
been omitted from the Prospectus and this Statement of
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<PAGE> 92
Additional Information, pursuant to the rules and regulations of the
Commission. The Registration Statement including the exhibits filed therewith
may be examined at the office of the Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other documents referred to
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
FINANCIAL STATEMENTS
The following financial statement has been audited and is attached hereto:
1. Report of Independent Accountant
2. Statement of Assets and Liabilities
3. Notes to Financial Statements
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<PAGE> 93
(Firm Name)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder and Board of Trustees
of AB Funds Trust
We have audited the statements of assets and liabilities of the AB Funds Trust,
a Delaware business trust (the "Trust"), as of September ___, 1999. This
financial statement is the responsibility of the Trust's management. Our
responsibility is to express an opinion on this financial statement based upon
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 statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principals 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 statement of assets and liabilities referred to above
presents fairly, in all material respects, the net assets of the Trust as of
September ____, 1999 in conformity with generally accepted accounting
principles.
(FIRM NAME)
Rpt of Independent
Accountants
Milwaukee, Wisconsin
September ____, 1999
<PAGE> 94
AB FUNDS TRUST
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER ___, 1999
ASSETS
<TABLE>
<CAPTION>
SELECT FUND BALANCED FUND
----------- -------------
<S> <C> <C>
Cash ................................... $______ $______
Prepaid initial registration expenses .. $______ $______
TOTAL ASSETS ........................... $______ $______
LIABILITIES AND NET ASSETS
Payable to Advisor ..................... $______ $______
TOTAL LIABILITIES ...................... $______ $______
NET ASSETS ............................. $______ $______
Total Liabilities and Net Assets ....... $______ $______
NET ASSETS CONSIST OF:
Shares of beneficial interest; unlimited
authorized shares ...................... ______ ______
Net asset value, redemption price and
offering price per share ............... $10.00 $10.00
======
</TABLE>
_________________________________
The accompanying notes to the Statement of Assets and Liabilities are
an integral part of this statement.
<PAGE> 95
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER ___, 1999
Note 1-Organization and Registration
AB Funds Trust (the "Company") was established on July ___, 1999, as a
Delaware business trust and is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment
company. The Company currently offers two investment portfolios, the Select
and Balanced Funds (the "Funds"). The Funds have had no operations other than
those relating to organizational matters, including the sale of _____ shares of
beneficial interest of the Funds to capitalize the Funds ("Original Shares"),
which were sold to _______on ____________ for cash in the amount of $100,000.
Initial registration expenses of $_________ will be amortized over one year.
Note 2-Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles
("GAAP").
a. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported changes in net assets during
the reporting period. Actual results could differ from those estimates.
b. Federal Income Taxes
The Fund intends to qualify annually for treatment as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended, and, if so qualified, will not be liable for federal income taxes to
the extent earnings are distributed to shareholders on a timely basis.
Note 3-Investment Advisory and Other Agreements
AB Advisers serves as the Funds' investment adviser. As compensation
for its services to the Funds, the Adviser receives an investment advisory fee
at an annual rate of ____% of the average daily net assets of each Fund which
is accrued daily and paid monthly. The Adviser is entitled to recoup amounts
waived or reimbursed for a period of up to three years from the date such
amounts were reimbursed or waived.
The Funds have entered into an administration and fund accounting agreement and
transfer agent agreement with Sunstone Financial Group, Inc. The
administrative services agreement provides for an annual fee of ____% which
decreases as the assets of the Funds reach certain levels, subject to a minimum
annual fee of $______, plus out-of-pocket expenses. The transfer agent
agreement provides for an annual base fee per shareholder account, with a
minimum annual fee of $______. The transfer agent is also paid certain fees
related to set-up costs, processing and out-of-pocket expenses.
The Funds have entered into a distribution agreement with Sunstone Distribution
Services, LLC (the "Distributor"). Under the Distribution Agreement, the
Distributor shall offer shares of the Funds on a continuous basis and may
engage in advertising and solicitation activities in connection therewith.
Certain officers and directors of __________________ are also officers and
directors of the Funds.
Note 4-Capital Stock
The Company is authorized to issue an unlimited number of shares with no par
value. A total of _____ shares were initially sold to _________ to capitalize
the Funds.
<PAGE> 96
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. The following summarizes the rating categories used by Standard
& Poor's for commercial paper in which the Funds may invest:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper in which the Funds may invest:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
capacities: leading market positions in well-established industries; high rates
of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper in which the Funds may invest:
"Duff 1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
A-1
<PAGE> 97
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding need may
enlarge total financing requirements, access to capital markets is good.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The highest rating
category of Fitch for short-term obligations is "F-1." Fitch employs two
designations, "F-1+" and "F-1," within the highest category. The following
summarizes the rating categories used by Fitch for short-term obligations in
which the Funds may invest:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by a bank holding
company or an entity within the holding company structure. The following
summarizes the ratings used by Thomson BankWatch in which the Funds may invest:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
A-2
<PAGE> 98
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings in which the Funds may
invest:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely repayment.
Corporate Long-Term Debt Ratings
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees. The debt rating is not a recommendation to
purchase, sell, or hold a security, inasmuch as it does not comment as to
market price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws affecting
creditors' rights.
A-3
<PAGE> 99
INVESTMENT GRADE
AAA - Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The 'BB' rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
A-4
<PAGE> 100
CC - Debt rated 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C - Debt rated 'C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments 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 period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa 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 which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A 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 some time in the future.
Baa - Bonds which are rated Baa 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 - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes Bonds in this class.
A-5
<PAGE> 101
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
deterring the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature of taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
A-6
<PAGE> 102
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA.'
Because bonds rated in the 'AAA' and 'AA' categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of the issuers is generally rated 'F-1+.'
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk. Moreover, the character of the risk
factor varies from industry to industry and between corporate, health care and
municipal obligations.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
A-7
<PAGE> 103
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD
and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization
of the obligor.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important
to the analysis of a company's operating and financial constraints.
A-8
<PAGE> 104
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
RATING SCALE DEFINITION
- -------------------------------------------------------------------------------
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
- -------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are strong. Risk is
AA modest, but may vary slightly from time to time because of
AA- economic conditions.
- -------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk
A factors are more variable and greater in periods of economic
A- uncertainty.
===============================================================================
BBB+ Below average protection factors but still considered sufficient
BBB for prudent investment. Considerable variability in risk during
BBB- economic cycles.
- -------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet obligations
BB when due. Present or prospective financial protection factors
BB- fluctuate according to industry conditions or company fortunes.
Overall quality may move up or down frequently within this
category.
- -------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that obligations will
B not be met when due. Financial protection factors will fluctuate
B- widely according to economic cycles.
- -------------------------------------------------------------------------------
CCC Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be
substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
A-9
<PAGE> 105
===============================================================================
DD Default debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
- -------------------------------------------------------------------------------
A-10
<PAGE> 106
PART C
OTHER INFORMATION
ITEM 23.EXHIBITS
--------
EXHIBIT NO. EXHIBIT
- ----------- -------
(a) Declaration of Trust of AB Funds Trust dated July ___, 1999
(b) Registrant's By-Laws
(c) None
(d) (1) Investment Advisory Agreement between AB Funds Trust on
behalf of the Select Fund and _________________, dated
_______, 1999*
(2) Investment Advisory Agreement between AB Funds Trust on
behalf of the Balanced Fund and _________________, dated
_______, 1999*
(e) Distribution Agreement between AB Funds Trust and Sunstone
Distribution Services, LLC dated _______, 1999*
(f) None
(g) Custodian Agreement between AB Funds Trust and ______________
dated __________, 1999*
(h) (1) Administration and Fund Accounting Agreement between AB
Funds Trust and Sunstone Financial Group, Inc. dated _______,
1999*
(2) Transfer Agency Agreement between AB Funds Trust and
Sunstone Financial Group, Inc. dated _____, 1999*
(i) Opinion of Stradley, Ronon, Stevens & Young, LLP*
(j) Consent of Independent Accountants*
(k) None
(l) Initial Capital Agreement*
(m) Distribution Plan and form of dealer agreement*
(n) Rule 18f-3 Plan*
*To be filed by amendment
<PAGE> 107
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant neither controls any person nor is under common control with any
other person.
ITEM 25. INDEMNIFICATION
Article VII, Section 2 of the Registrant's Declaration of Trust provides that,
to the fullest extent that limitations on the liability of Trustees and officers
are permitted by the Delaware Business Trust Act, the officers and Trustees
shall not be responsible or liable in any event for any act or omission of any
agent, employee, the adviser or principal underwriter of the Registrant; or with
respect to each Trustee and officer, the act or omission of any other Trustee or
officer, respectively. The Registrant, out of its property, shall indemnify and
hold harmless each and every officer and Trustee from and against any and all
claims and demands whatsoever arising out of or related to such officer's or
Trustee's performance of his or her duties as an officer or Trustee of the
Registrant. This limitation on liability applies to events occurring at the time
a person serves as a Trustee or officer of the Registrant whether or not such
person is a Trustee or officer at the time of any proceeding in which liability
is asserted. Nothing contained in Article VII, Section 2 shall indemnify, hold
harmless or protect any officer or Trustee from or against any liability to the
Registrant or any shareholder to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office.
Section ____ of the Distribution Agreement between the Registrant and Sunstone
Distribution Services, LLC provides for indemnification of Sunstone
Distribution Services, LLC, an affiliate of Sunstone, in connection with
certain claims and liabilities to which Sunstone Distribution Services, LLC, in
its capacity as the Registrant's Distributor, may be subject. A copy of the
Distribution Agreement is incorporated by reference herein as Exhibit (e).
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant by the Registrant pursuant to the Trust Instrument or otherwise, the
Registrant is aware that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Investment Company Act and, therefore, is unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in connection with the successful defense
of any act, suit or proceeding) is asserted by such trustees, officers or
controlling persons in connection with the shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Investment Company Act and will be governed by the final
adjudication of such issues.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Adviser serves as the investment adviser for the Registrant. The business
and other connections of the Adviser are set forth in the Uniform Application
for Investment Adviser Registration ("Form ADV") of the Adviser as currently
filed with the SEC which is incorporated by reference herein.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Sunstone Distribution Services, LLC currently serves as the
distributor of the shares of Northern Funds, First Omaha Funds, Inc.,
The Marsico Investment Fund, Green Century Funds, The Haven Funds,
JohnsonFamily Funds, and La Crosse Funds.
<PAGE> 108
(b) The principal business address of Sunstone Distribution Services,
LLC, the Registrant's distributor, is 207 East Buffalo Street, Suite
315, Milwaukee, Wisconsin 53202. To the best of the Registrant's
knowledge, the following are the members and officers of Sunstone
Distribution Services, LLC:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
NAME UNDERWRITER WITH REGISTRANT
- ----------------- --------------------------------- -------------------------
<S> <C> <C>
Miriam M. Allison President, Treasurer, Member None
Daniel S. Allison Secretary and Member None
Therese A. Ladwig Vice President None
Peter Hammond Vice President None
</TABLE>
(c) None
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act and the rules promulgated thereunder, are
in the possession of the Registrant, located at ___________, other than records
held and maintained by (i) _____, the Registrant's custodian, located at
________; (ii) Sunstone Financial Group, Inc., the Trust's administrator and
fund accountant, transfer agent and dividend-paying agent and Sunstone
Distribution Services, LLC, the Registrant's distributor, each of which is
located at 207 East Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202.
ITEM 29. MANAGEMENT SERVICES
All management-related service contracts entered into by the Registrant are
discussed in Parts A and B of this Registration Statement.
ITEM 30. UNDERTAKINGS
(a) The Registrant undertakes to furnish each person to whom a prospectus is
delivered a copy of the Registrant's latest annual report to shareholders,
upon request and without charge, in the event that the information called
for by Item 5A of Form N-1A has been presented in the Registrant's latest
annual report to shareholders.
(b) The Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Trustee or Trustees
when requested to do so by the holders of at least 10% of the Registrant's
outstanding shares of beneficial interest and in connection with such
meeting to comply with the shareholders communications provisions of
Section 16(c) of the Investment Company Act.
<PAGE> 109
SIGNATURES
Pursuant to the requirement of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Milwaukee, and the State
of Wisconsin on the 21st day of July, 1999.
AB FUNDS TRUST,
a Delaware business trust
By: /s/ Randy M. Pavlick
---------------------------------
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
SIGNATURE TITLE DATE
- ----------- --------------------------- -------------
/s/ Randy M. Pavlick Trustee; President; July 21, 1999
- ---------------------------- Principal Executive
Randy M. Pavlick Officer
/s/ Lesli H. McLinden Trustee; Treasurer and July 21, 1999
- ---------------------------- Secretary; Principal
Lesli H. McLinden Financial and Accounting
Officer
<PAGE> 1
EX-99.a
Declaration of Trust
AGREEMENT AND DECLARATION OF TRUST
of
AB FUNDS TRUST
a Delaware Business Trust
July 16, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. NAME AND DEFINITIONS..............................................1
Section 1. Name........................................................1
Section 2. Registered Agent and Registered Office; Principal
Place of Business..................................................2
(a) Registered Agent and Registered Office.......................2
(b) Principal Place of Business..................................2
Section 3. Definitions.................................................2
(a) "1940 Act"...................................................2
(b) "Affiliate"..................................................2
(c) "Board of Trustees"..........................................2
(d) "By-Laws"....................................................2
(e) "Certificate of Trust".......................................2
(f) "Code".......................................................2
(g) "Commission".................................................2
(h) "DBTA".......................................................2
(i) "Declaration of Trust".......................................2
(j) "General Liabilities"........................................3
(k) "Interested Person"..........................................3
(l) "Investment Adviser" or "Adviser"............................3
(m) "National Financial Emergency"...............................3
(n) "Person".....................................................3
(o) "Principal Underwriter"......................................3
(p) "Series".....................................................3
(q) "Shares".....................................................3
(r) "Shareholder"................................................3
(s) "Trust"......................................................3
(t) "Trust Property".............................................3
(u) "Trustee" or "Trustees"......................................4
ARTICLE II. PURPOSE OF TRUST.................................................4
ARTICLE III. SHARES..........................................................8
Section 1. Division of Beneficial Interest.............................8
Section 2. Ownership of Shares.........................................9
Section 3. Investments in the Trust....................................9
Section 4. Status of Shares and Limitation of Personal Liability......10
Section 5. Power of Board of Trustees to Change Provisions Relating to
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Shares.................................................................10
Section 6. Establishment and Designation of Series....................11
(a) Assets Held with Respect to a Particular Series...............11
(b) Liabilities Held with Respect to a Particular Series..........12
(c) Dividends, Distributions, Redemptions and Repurchases.........13
(d) Voting........................................................13
(e) Equality......................................................13
(f) Fractions.....................................................14
(g) Exchange Privilege............................................14
(h) Combination of Series.........................................14
(i) Elimination of Series.........................................14
Section 7. Indemnification of Shareholders............................14
ARTICLE IV. THE BOARD OF TRUSTEES...........................................15
Section 1. Powers.....................................................15
Section 2. Payment of Expenses by the Trust...........................16
Section 3. Payment of Expenses by Shareholders........................17
Section 4. Ownership of Trust Property................................17
Section 5. Service Contracts..........................................17
Section 6. Effect of Death, Resignation, Removal, etc. of a Trustee..19
ARTICLE V. SHAREHOLDERS' VOTING POWERS......................................19
Section 1. Voting Powers and Required Vote............................19
Section 2. Additional Provisions......................................20
ARTICLE VI. NET ASSET VALUE, DISTRIBUTIONS AND REDEMPTIONS..................20
Section 1. Determination of Net Asset Value, Net Income
and Distributions..........................................20
Section 2. Redemptions at the Option of a Shareholder.................20
Section 3. Redemptions at the Option of the Trust.....................22
ARTICLE VII. COMPENSATION AND LIMITATION OF LIABILITY OF OFFICERS AND
TRUSTEES.......................................................22
Section 1. Compensation...............................................22
Section 2. Indemnification and Limitation of Liability................22
Section 3. Officers and Trustees' Good Faith Action, Expert Advice, No
Bond or Surety.............................................23
Section 4. Insurance..................................................23
ARTICLE VIII. MISCELLANEOUS.................................................24
Section 1. Liability of Third Persons Dealing with Trustees...........24
</TABLE>
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<TABLE>
<S> <C>
Section 2. Dissolution of Trust or Series.............................24
Section 3. Merger and Consolidation; Conversion.......................25
(a) Merger and Consolidation....................................25
(b) Conversion..................................................25
Section 4. Reorganization.............................................26
Section 5. Amendments.................................................26
Section 6. Filing of Copies, References, Headings.....................27
Section 7. Applicable Law.............................................27
Section 8. Provisions in Conflict with Law or Regulations.............27
Section 9. Business Trust Only........................................28
Section 10. Counterparts...............................................29
</TABLE>
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<PAGE> 5
AGREEMENT AND DECLARATION OF TRUST
OF
AB Funds Trust
AGREEMENT AND DECLARATION OF TRUST made as of this 16th day of July, 1999,
by the Trustees hereunder, and by the holders of shares of beneficial interest
to be issued hereunder as hereinafter provided. This Agreement and Declaration
of Trust shall be effective upon the filing of the Certificate of Trust in the
office of the Secretary of State of the State of Delaware.
W I T N E S S E T H:
WHEREAS this Trust has been formed to carry on the business of an
investment company; and
WHEREAS this Trust is authorized to issue its shares of beneficial
interest in separate Series, and to issue classes of Shares of any Series or
divide Shares of any Series into two or more classes, all in accordance with
the provisions hereinafter set forth; and
WHEREAS the Trustees have agreed to manage all property coming into their
hands as trustees of a Delaware business trust in accordance with the
provisions of the Delaware Business Trust Act (12 Del. C. Section 3801, et
seq.), as from time to time amended and including any successor statute of
similar import (the "DBTA"), and the provisions hereinafter set forth;
NOW, THEREFORE, the Trustees hereby declare that they will hold all cash,
securities and other assets which they may from time to time acquire in any
manner as Trustees hereunder IN TRUST to manage and dispose of the same upon
the following terms and conditions for the benefit of the holders from time to
time of shares of beneficial interest in this Trust and the Series created
hereunder as hereinafter set forth.
ARTICLE I.
Name and Definitions
Section 1. Name. This trust shall be known as "AB Funds Trust" and the
Trustees shall conduct the business of the Trust under that name, or any other
name as they may from time to time determine.
<PAGE> 6
Section 2. Registered Agent and Registered Office; Principal Place of
Business.
(a) Registered Agent and Registered Office The name of the registered agent
of the Trust and the address of the registered office of the Trust are as set
forth on the Certificate of Trust.
(b) Principal Place of Business The principal place of business of the Trust
is Denver, Colorado or such other location within or outside of the State of
Delaware as the Board of Trustees may determine from time to time.
Section 3. Definitions. Whenever used herein, unless otherwise required by
the context or specifically provided:
(a) "1940 Act"shall mean the Investment Company Act of 1940 and the rules and
regulations thereunder, all as adopted or amended from time to time.
(b) "Affiliate"shall have the meaning given to "Affiliated Person" in Section
2(a)(3) of the 1940 Act when used with reference to a specified Person.
(c) "Board of Trustees"shall mean the governing body of the Trust, which is
comprised of the Trustees of the Trust.
(d) "By-Laws"shall mean the By-Laws of the Trust, as amended from time to time
in accordance with Article X of the By-Laws, and incorporated herein by
reference.
(e) "Certificate of Trust"shall mean the certificate of trust filed with the
Office of the Secretary of State of the State of Delaware as required under the
DBTA to form the Trust.
(f) "Code"shall mean the Internal Revenue Code of 1986, and the rules and
regulations thereunder, all as adopted or amended from time to time.
(g) "Commission"shall have the meaning given to it in Section 2(a)(7) of the
1940 Act.
(h) "DBTA"shall mean the Delaware Business Trust Act, (12 Del. C. Section 3801,
et seq.), as amended from time to time.
(i) "Declaration of Trust"shall mean this Agreement and Declaration of
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<PAGE> 7
Trust, as amended or restated from time to time.
(j) "General Liabilities"shall have the meaning given it in Article III,
Section 6(b) of this Declaration Trust.
(k) "Interested Person"shall have the meaning given to it in Section 2(a)(19)
of the 1940 Act.
(l) "Investment Adviser" or "Adviser"shall mean a party furnishing services to
the Trust pursuant to any contract described in Article IV, Section 5(a)
hereof.
(m) "National Financial Emergency"shall mean the whole or any part of any
period set forth in Section 22(e) of the 1940 Act. The Board of Trustees may,
in its discretion, declare that the suspension relating to a National Financial
Emergency shall terminate, as the case may be, on the first business day on
which the New York Stock Exchange shall have reopened or the period specified
in Section 22(e) of the 1940 Act shall have expired (as to which, in the
absence of an official ruling by the Commission, the determination of the Board
of Trustees shall be conclusive).
(n) "Person"shall include a natural person, partnership, limited partnership,
trust, estate, association, corporation, custodian, nominee or any other
individual or entity in its own or any representative capacity.
(o) "Principal Underwriter"shall have the meaning given to it in Section
2(a)(29) of the 1940 Act.
(p) "Series"shall refer to each series of Shares established and designated
under or in accordance with the provisions of Article III and shall mean an
entity such as that described in Section 18(f)(2) of the 1940 Act, and subject
to Rule 18f-2 thereunder.
(q) "Shares"shall mean the outstanding shares of beneficial interest into which
the beneficial interest in the Trust shall be divided from time to time, and
shall include fractional and whole shares.
(r) "Shareholder"shall mean a record owner of Shares.
(s) "Trust"shall refer to the Delaware business trust established by this
Declaration of Trust, as amended from time to time.
(t) "Trust Property"shall mean any and all property, real or personal,
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<PAGE> 8
tangible or intangible, which is owned or held by or for the account of the
Trust or one or more of any Series, including, without limitation, the rights
referenced in Article VIII, Section 2 hereof.
(u) "Trustee" or "Trustees"shall refer to each signatory to this Declaration of
Trust as a trustee, so long as such signatory continues in office in accordance
with the terms hereof, and all other Persons who may, from time to time, be
duly elected or appointed, qualified and serving on the Board of Trustees in
accordance with the provisions hereof. Reference herein to a Trustee or the
Trustees shall refer to such Person or Persons in their capacity as trustees
hereunder.
ARTICLE II.
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the business
of a registered management investment company registered under the 1940 Act
through one or more Series investing primarily in securities and, in addition
to any authority given by law, to exercise all of the powers and to do any and
all of the things as fully and to the same extent as any private corporation
organized for profit under the general corporation law of the State of
Delaware, now or hereafter in force, including, without limitation, the
following powers:
(a) To invest and reinvest cash, to hold cash uninvested, and to subscribe
for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge,
sell, assign, mortgage, transfer, exchange, distribute, write options on, lend
or otherwise deal in or dispose of contracts for the future acquisition or
delivery of fixed income or other securities, and securities or property of
every nature and kind, including, without limitation, all types of bonds,
debentures, stocks, preferred stocks, negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or
indebtedness, commercial paper, repurchase agreements, bankers' acceptances,
and other securities of any kind, issued, created, guaranteed, or sponsored by
any and all Persons, including, without limitation, states, territories, and
possessions of the United States and the District of Columbia and any political
subdivision, agency, or instrumentality thereof, any foreign government or any
political subdivision of the U.S. Government or any foreign government, or any
international instrumentality, or by any bank or savings institution, or by any
corporation or organization organized under the laws of the United States or of
any state, territory, or possession thereof, or by any corporation or
organization organized under any foreign law, or "when issued" contracts for
any such securities, or to change the investments of the assets of the Trust;
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<PAGE> 9
(b) To exercise any and all rights, powers and privileges with reference
to or incident to ownership or interest, use and enjoyment of any of such
securities and other instruments or property of every kind and description,
including, but without limitation, the right, power and privilege to own, vote,
hold, purchase, sell, negotiate, assign, exchange, lend, transfer, mortgage,
hypothecate, lease, pledge or write options with respect to or otherwise deal
with, dispose of, use, exercise or enjoy any rights, title, interest, powers or
privileges under or with reference to any of such securities and other
instruments or property, the right to consent and otherwise act with respect
thereto, with power to designate one or more Persons, to exercise any of said
rights, powers, and privileges in respect of any of said instruments, and to do
any and all acts and things for the preservation, protection, improvement and
enhancement in value of any of such securities and other instruments or
property;
(c) To sell, exchange, lend, pledge, mortgage, hypothecate, lease or write
options with respect to or otherwise deal in any property rights relating to
any or all of the assets of the Trust or any Series, subject to any
requirements of the 1940 Act;
(d) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(e) To exercise powers and right of subscription or otherwise which in any
manner arise out of ownership of securities;
(f) To hold any security or property in a form not indicating that it is
trust property, whether in bearer, unregistered or other negotiable form, or in
its own name or in the name of a custodian or subcustodian or a nominee or
nominees or otherwise or to authorize the custodian or a subcustodian or a
nominee or nominees to deposit the same in a securities depository, subject in
each case to proper safeguards according to the usual practice of investment
companies or any rules or regulations applicable thereto;
(g) To consent to, or participate in, any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or
sale of property by such corporation or issuer; and to pay calls or
subscriptions with respect to any security held in the Trust;
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<PAGE> 10
(h) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall
deem proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall
deem proper;
(i) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including but not limited to
claims for taxes;
(j) To enter into joint ventures, general or limited partnerships and any
other combinations or associations;
(k) To endorse or guarantee the payment of any notes or other obligations
of any Person; to make contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property such insurance
as the Trustees may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the assets
of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, Investment Advisers, Principal Underwriters, or
independent contractors of the Trust, individually against all claims and
liabilities of every nature arising by reason of holding Shares, holding, being
or having held any such office or position, or by reason of any action alleged
to have been taken or omitted by any such Person as Trustee, officer, employee,
agent, Investment Adviser, Principal Underwriter, or independent contractor, to
the fullest extent permitted by this Declaration of Trust, the Bylaws and by
applicable law;
(m) To adopt, establish and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life
insurance and annuity contracts as a means of providing such retirement and
other benefits, for any or all of the Trustees, officers, employees and agents
of the Trust;
(n) To purchase or otherwise acquire, own, hold, sell, negotiate,
exchange, assign, transfer, mortgage, pledge or otherwise deal with, dispose
of,
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<PAGE> 11
use, exercise or enjoy, property of all kinds;
(o) To buy, sell, mortgage, encumber, hold, own, exchange, rent or
otherwise acquire and dispose of, and to develop, improve, manage, subdivide,
and generally to deal and trade in real property, improved and unimproved, and
wheresoever situated; and to build, erect, construct, alter and maintain
buildings, structures, and other improvements on real property;
(p) To borrow or raise moneys for any of the purposes of the Trust, and to
mortgage or pledge the whole or any part of the property and franchises of the
Trust, real, personal, and mixed, tangible or intangible, and wheresoever
situated;
(q) To enter into, make and perform contracts and undertakings of every
kind for any lawful purpose, without limit as to amount; and
(r) To issue, purchase, sell and transfer, reacquire, hold, trade and deal
in Shares, bonds, debentures and other securities, instruments or other
property of the Trust, from time to time, to such extent as the Board of
Trustees shall, consistent with the provisions of this Declaration of Trust,
determine; and to repurchase, re-acquire and redeem, from time to time, its
Shares or, if any, its bonds, debentures and other securities.
The Trust shall not be limited to investing in obligations maturing before
the possible dissolution of the Trust or one or more of its Series. The
Trustees shall not in any way be bound or limited by any present or future law
or custom in regard to investment by fiduciaries. Neither the Trust nor the
Trustees shall be required to obtain any court order to deal with any assets of
the Trust or take any other action hereunder.
The foregoing clauses shall each be construed as purposes, objects and
powers, and it is hereby expressly provided that the foregoing enumeration of
specific purposes, objects and powers shall not be held to limit or restrict in
any manner the powers of the Trust, and that they are in furtherance of, and in
addition to, and not in limitation of, the general powers conferred upon the
Trust by the DBTA and the other laws of the State of Delaware or otherwise; nor
shall the enumeration of one thing be deemed to exclude another, although it be
of like nature, not expressed.
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ARTICLE III.
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in the
Trust shall at all times be divided into Shares, all without par value. The
number of Shares authorized hereunder is unlimited. The Board of Trustees may
authorize the division of Shares into separate and distinct Series and the
division of any Series into separate classes of Shares. The different Series
and classes shall be established and designated, and the variations in the
relative rights and preferences as between the different Series and classes
shall be fixed and determined by the Board of Trustees without the requirement
of Shareholder approval. If no separate Series or classes shall be
established, the Shares shall have the rights and preferences provided for
herein and in Article III, Section 6 hereof to the extent relevant and not
otherwise provided for herein, and all references to Series and classes shall
be construed (as the context may require) to refer to the Trust. The fact that
a Series shall have initially been established and designated without any
specific establishment or designation of classes (i.e., that all Shares of such
Series are initially of a single class) shall not limit the authority of the
Board of Trustees to establish and designate separate classes of said Series.
The fact that a Series shall have more than one established and designated
class, shall not limit the authority of the Board of Trustees to establish and
designate additional classes of said Series, or to establish and designate
separate classes of the previously established and designated classes.
The Board of Trustees shall have the power to issue Shares of the Trust,
or any Series or class thereof, from time to time for such consideration (but
not less than the net asset value thereof) and in such form as may be fixed
from time to time pursuant to the direction of the Board of Trustees.
The Board of Trustees may hold as treasury shares, reissue for such
consideration and on such terms as they may determine, or cancel, at their
discretion from time to time, any Shares of any Series reacquired by the Trust.
The Board of Trustees may classify or reclassify any unissued Shares or any
Shares previously issued and reacquired of any Series or class into one or more
Series or classes that may be established and designated from time to time.
Notwithstanding the foregoing, the Trust and any Series thereof may acquire,
hold, sell and otherwise deal in, for purposes of investment or otherwise, the
Shares of any other Series of the Trust or Shares of the Trust, and such Shares
shall not be deemed treasury shares or cancelled.
Subject to the provisions of Section 6 of this Article III, each Share
shall have voting rights as provided in Article V hereof, and the Shareholders
of any
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<PAGE> 13
Series shall be entitled to receive dividends and distributions, when, if and
as declared with respect thereto in the manner provided in Article IV, Section
1 hereof. No Share shall have any priority or preference over any other Share
of the same Series or class with respect to dividends or distributions paid in
the ordinary course of business or distributions upon dissolution of the Trust
or of such Series or class made pursuant to Article VIII, Section 2 hereof.
All dividends and distributions shall be made ratably among all Shareholders of
a particular class of Series from the Trust Property held with respect to such
Series according to the number of Shares of such class of such Series held of
record by such Shareholders on the record date for any dividend or
distribution. Shareholders shall have no preemptive or other right to
subscribe to new or additional Shares or other securities issued by the Trust
or any Series. The Trustees may from time to time divide or combine the Shares
of any particular Series into a greater or lesser number of Shares of that
Series. Such division or combination may not materially change the
proportionate beneficial interests of the Shares of that Series in the Trust
Property held with respect to that Series or materially affect the rights of
Shares of any other Series.
Any Trustee, officer or other agent of the Trust, and any organization in
which any such Person is interested, may acquire, own, hold and dispose of
Shares of the Trust to the same extent as if such Person were not a Trustee,
officer or other agent of the Trust; and the Trust may issue and sell or cause
to be issued and sold and may purchase Shares from any such Person or any such
organization subject only to the general limitations, restrictions or other
provisions applicable to the sale or purchase of such Shares generally.
Section 2. Ownership of Shares. The ownership of Shares shall be recorded on
the books of the Trust kept by the Trust or by a transfer or similar agent for
the Trust, which books shall be maintained separately for the Shares of each
Series and class thereof that has been established and designated. No
certificates certifying the ownership of Shares shall be issued except as the
Board of Trustees may otherwise determine from time to time. The Board of
Trustees may make such rules not inconsistent with the provisions of the 1940
Act as they consider appropriate for the issuance of Share certificates, the
transfer of Shares of each Series or class and similar matters. The record
books of the Trust as kept by the Trust or any transfer or similar agent, as
the case may be, shall be conclusive as to who are the Shareholders of each
Series or class thereof and as to the number of Shares of each Series or class
thereof held from time to time by each such Shareholder.
Section 3. Investments in the Trust. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such
consideration as the Board of Trustees may, from time to time, authorize. Each
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<PAGE> 14
investment shall be credited to the individual Shareholder's account in the
form of full and fractional Shares of the Trust, in such Series or class as the
purchaser may select, at the net asset value per Share next determined for such
Series or class after receipt of the investment; provided, however, that the
Principal Underwriter may, in its sole discretion, impose a sales charge upon
investments in the Trust.
Section 4. Status of Shares and Limitation of Personal Liability. Shares
shall be deemed to be personal property giving to Shareholders only the rights
provided in this Declaration of Trust and under applicable law. Every
Shareholder by virtue of having become a Shareholder shall be held to have
expressly assented and agreed to the terms hereof and to have become a party
hereto. The death of a Shareholder during the existence of the Trust shall not
operate to dissolve the Trust or any Series, nor entitle the representative of
any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees or any Series, but entitles such
representative only to the rights of said deceased Shareholder under this
Declaration of Trust. Ownership of Shares shall not entitle the Shareholder to
any title in or to the whole or any part of the Trust Property or right to call
for a partition or division of the same or for an accounting, nor shall the
ownership of Shares constitute the Shareholders as partners. Neither the Trust
nor the Trustees, nor any officer, employee or agent of the Trust, shall have
any power to bind personally any Shareholder, nor, except as specifically
provided herein, to call upon any Shareholder for the payment of any sum of
money or assessment whatsoever other than such as the Shareholder may at any
time personally agree to pay. All Shares, when issued on the terms determined
by the Board of Trustees, shall be fully paid and nonassessable. As provided
in the DBTA, Shareholders of the Trust shall be entitled to the same limitation
of personal liability extended to stockholders of a private corporation
organized for profit under the general corporation law of the State of
Delaware.
Section 5. Power of Board of Trustees to Change Provisions Relating to Shares.
Notwithstanding any other provision of this Declaration of Trust and without
limiting the power of the Board of Trustees to amend this Declaration of Trust
or the Certificate of Trust as provided elsewhere herein, the Board of Trustees
shall have the power to amend this Declaration of Trust, or the Certificate of
Trust, at any time and from time to time, in such manner as the Board of
Trustees may determine in its sole discretion, without the need for Shareholder
action, so as to add to, delete, replace or otherwise modify any provision
relating to the Shares contained in this Declaration of Trust; provided that
before adopting any such amendment without Shareholder approval, the Board of
Trustees shall determine that it is consistent with the fair and equitable
treatment of all Shareholders and that Shareholder approval is not otherwise
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required by the 1940 Act or other applicable law; provided, however that if
Shares have been issued, Shareholder approval shall be required to adopt any
amendment to this Declaration of Trust which would adversely affect to a
material degree the rights and preferences of the Shares of any Series or class
already issued; provided, however, that in the event that the Board of Trustees
determines that the Trust shall no longer be operated as an investment company
in accordance with the provisions of the 1940 Act, the Board of Trustees may
adopt such amendments to this Declaration of Trust to delete those terms the
Board of Trustees identifies as being required by the 1940 Act.
Subject to the foregoing paragraph, the Board of Trustees may amend any
provision set forth in paragraphs (a) through (i) of Section 6 of this Article
III.
Notwithstanding the foregoing paragraphs, the Board of Trustees shall have
the power, in its discretion, to make such elections as to the tax status of
the Trust as may be permitted or required under the Code as currently in effect
or as amended, without the vote of any Shareholder.
Section 6. Establishment and Designation of Series. The establishment and
designation of any Series or class of Shares shall be effective upon the
resolution by a majority of the then Board of Trustees, adopting a resolution
which sets forth such establishment and designation and the relative rights and
preferences of such Series or class. Each such resolution shall be
incorporated herein by reference upon adoption.
Each Series shall be separate and distinct from any other Series and shall
maintain separate and distinct records on the books of the Trust, and the
assets and liabilities belonging to any such Series shall be held and accounted
for separately from the assets and liabilities of the Trust or any other
Series.
Shares of each Series or class established pursuant to this Section 6,
unless otherwise provided in the resolution establishing such Series, shall
have the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof from whatever source
derived, including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably be held with respect to that Series for all purposes, subject
only to
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the rights of creditors with respect to such Series, and shall be so recorded
upon the books of account of the Trust. Such consideration, assets, income,
earnings, profits and proceeds thereof, from whatever source derived,
including, without limitation, any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds, in whatever form the same may be, are herein
referred to as "assets held with respect to" such Series. In the event that
there are any assets, income, earnings, profits and proceeds thereof, funds or
payments which are not readily identifiable as assets held with respect to any
particular Series (collectively "General Assets"), the Board of Trustees shall
allocate such General Assets to, between or among any one or more of the Series
in such manner and on such basis as the Board of Trustees, in its sole
discretion, deems fair and equitable, and any General Asset so allocated to a
particular Series shall be held with respect to that Series. Each such
allocation by the Board of Trustees shall be conclusive and binding upon the
Shareholders of all Series for all purposes.
(b) Liabilities Held with Respect to a Particular Series. The assets of
the Trust held with respect to each particular Series shall be charged against
the liabilities of the Trust held with respect to that Series and all expenses,
costs, charges and reserves attributable to that Series, and any liabilities,
expenses, costs, charges and reserves of the Trust that are not readily
identifiable as being held with respect to any particular Series (collectively
"General Liabilities") shall be allocated and charged by the Board of Trustees
to and among any one or more of the Series in such manner and on such basis as
the Board of Trustees in its sole discretion deems fair and equitable. The
liabilities, expenses, costs, charges, and reserves so charged to a Series are
herein referred to as "liabilities held with respect to" such Series. Each
allocation of liabilities, expenses, costs, charges and reserves by the Board of
Trustees shall be conclusive and binding upon the Shareholders of all Series for
all purposes. All Persons who have extended credit that has been allocated to a
particular Series, or who have a claim or contract that has been allocated to
any particular Series, shall look, and shall be required by contract to look
exclusively, to the assets of that particular Series for payment of such credit,
claim, or contract. In the absence of an express contractual agreement so
limiting the claims of such creditors, claimants and contract providers, each
creditor, claimant and contract provider will be deemed nevertheless to have
impliedly agreed to such limitation unless an express provision to the contrary
has been incorporated in the written contract or other document establishing the
creditor, claimant or contract provider relationship.
Subject to the right of the Board of Trustees in its discretion to
allocate General Liabilities as provided herein, the debts, liabilities,
obligations and expenses incurred, contracted for or otherwise existing with
respect to a
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particular Series, whether such Series is now authorized and existing pursuant
to this Declaration of Trust or is hereafter authorized and existing pursuant
to this Declaration of Trust, shall be enforceable against the assets held
with respect to such particular Series only, and not against the assets of any
other Series or the General Assets of the Trust and none of the General
Liabilities of the Trust or the debts, liabilities, obligations and expenses
incurred, contracted for or otherwise existing with respect to any other Series
thereof shall be enforceable against the assets held with respect to such
particular Series. Notice of this limitation on liabilities between and among
Series shall be set forth in the Certificate of Trust of the Trust (whether
originally or by amendment) as filed or to be filed in the Office of the
Secretary of State of the State of Delaware pursuant to the DBTA, and upon the
giving of such notice in the Certificate of Trust, the statutory provisions of
Section 3804 of the DBTA relating to limitations on liabilities between and
among Series (and the statutory effect under Section 3804 of setting forth such
notice in the Certificate of Trust) shall become applicable to the Trust and
each Series.
(c) Dividends, Distributions, Redemptions and Repurchases.
Notwithstanding any other provision of this Declaration of Trust, including,
without limitation, Article VI, no dividend or distribution, including without
limitation, any distribution paid upon dissolution of the Trust or of any Series
with respect to, nor any redemption or repurchase of, the Shares of any Series
or class shall be effected by the Trust other than from the assets held with
respect to such Series, nor, except as specifically provided in Section 7 of
this Article III, shall any Shareholder of any particular Series otherwise have
any right or claim against the assets held with respect to any other Series or
the General Assets of the Trust except to the extent that such Shareholder has
such a right or claim hereunder as a Shareholder of such other Series. The
Board of Trustees shall have full discretion, to the extent not inconsistent
with the 1940 Act, to determine which items shall be treated as income and which
items as capital, and each such determination and allocation shall be conclusive
and binding upon the Shareholders.
(d) Voting All Shares of the Trust entitled to vote on a matter shall
vote on the matter, separately by Series and, if applicable, by class; provided,
that (1) where the 1940 Act requires all Shares of the Trust to be voted in the
aggregate, without differentiation between the separate Series or classes, on
any matter, then all of the Trust's Shares shall be entitled to vote in the
aggregate on the matter; and (2) if any matter affects only the interests of
some but not all Series or classes, then only the Shares of such affected Series
or classes shall be entitled to vote on the matter.
(e) Equality All Shares of each particular Series shall represent an
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equal proportionate undivided beneficial interest in the assets held with
respect to each such Series (subject to the liabilities held with respect to
such Series and such rights and preferences as may have been established and
designated with respect to classes of Shares within such Series), and each
Share of any particular Series shall be equal to each other Share of such
Series (subject to the rights and preferences with respect to separate classes
of such Series).
(f) Fractions Any fractional Share of a Series shall carry
proportionately to the fractional amount of such Share all the rights and
obligations of a whole Share of such Series, including rights with respect to
voting, receipt of dividends and distributions, redemption of Shares and
dissolution of the Trust or such Series.
(g) Exchange Privilege The Board of Trustees shall have the authority to
provide that the holders of Shares of any Series shall have the right to
exchange said Shares for Shares of one or more other Series in accordance with
such requirements and procedures as may be established by the Board of Trustees,
and in accordance with the 1940 Act and the rules and regulations thereunder.
(h) Combination of Series The Board of Trustees shall have the authority,
without the approval of the Shareholders of any Series unless otherwise required
by applicable law, to combine the assets and liabilities held with respect to
any two or more Series into assets and liabilities held with respect to a single
Series; provided that upon completion of such combination of Series, the
proportionate interest of each Shareholder of each Series that is combined, in
the assets and liabilities held with respect to the combined Series shall equal
the proportionate interest that each such Shareholder held in the assets and
liabilities held with respect to the particular Series that is combined.
(i) Elimination of Series At any time that there are no Shares
outstanding of any particular Series or class previously established and
designated, the Board of Trustees may by resolution of a majority of the then
Board of Trustees abolish that Series or class and rescind the establishment and
designation thereof. Each such resolution shall be incorporated herein by
reference upon adoption.
Section 7. Indemnification of Shareholders If any Shareholder or former
Shareholder shall be exposed to liability by reason of a claim or demand
relating solely to his or her being or having been a Shareholder of the Trust
(or by having been a Shareholder of a particular Series), and not because of
such Person's acts or omissions, the Shareholder or former Shareholder (or, in
the case of a natural person, his or her heirs, executors, administrators, or
other legal representatives
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or, in the case of a corporation or other entity, its corporate or other
general successor) shall be entitled to be held harmless from, and indemnified
out of the assets of the Trust or out of the assets of the applicable Series
(as the case may be) against, all loss and expense arising from such claim or
demand; provided, however, that there shall be no liability or obligation of
the Trust (or any particular Series) arising hereunder to reimburse any
Shareholder for taxes paid by reason of such Shareholder's ownership of any
Shares.
ARTICLE IV.
The Board of Trustees
Section 1. Powers Subject to the provisions of this Declaration of
Trust, the business of the Trust shall be managed by the Board of Trustees, and
such Board of Trustees shall have all powers necessary or convenient to carry
out that responsibility, including, without limitation, the power to engage in
securities or other transactions of all kinds on behalf of the Trust. The Board
of Trustees shall have full power and authority to do any and all acts and to
make and execute any and all contracts and instruments that it may consider
necessary or appropriate in connection with the administration of the Trust.
The Trustees shall not be bound or limited by present or future laws or customs
with regard to investment by trustees or fiduciaries, but shall have full
authority and absolute power and control over the assets of the Trust and the
business of the Trust to the same extent as if the Trustees were the sole owners
of the assets and business of the Trust in their own right, including such
authority, power and control to do all acts and things as they, in their sole
discretion, shall deem proper to accomplish the purposes of this Trust. Without
limiting the foregoing, the Trustees may (1) adopt, amend and repeal By-Laws,
not inconsistent with this Declaration of Trust, that provide for the regulation
and management of the affairs of the Trust; (2) fill vacancies in or remove from
their number in accordance with this Declaration of Trust or the By-Laws, and
may elect and remove such officers and appoint and terminate such agents as they
consider appropriate; (3) appoint from their own number and establish and
terminate one or more committees consisting of two or more Trustees which may
exercise the powers and authority of the Board of Trustees to the extent that
the Board of Trustees determine; (4) employ one or more custodians of the Trust
Property and may authorize such custodians to employ subcustodians and to
deposit all or any part of such Trust Property in a system or systems for the
central handling of securities or with a Federal Reserve Bank; (5) retain a
transfer agent, dividend disbursing agent, a shareholder servicing agent or
administrative services agent, or all of them; (6) provide for the issuance and
distribution of Shares by the Trust directly or through one or more Principal
Underwriters or otherwise; (7) retain one or more Investment Advisers; (8)
redeem, repurchase or transfer
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Shares pursuant to applicable law; (9) set record dates for the determination
of Shareholders with respect to various matters, in the manner provided in the
By-Laws; (10) declare and pay dividends and distributions to Shareholders from
the Trust Property; (11) establish from time to time, in accordance with the
provisions of Article III, Section 6 hereof, any Series or class of Shares,
each such Series to operate as a separate and distinct investment medium and
with separately defined investment objectives and policies and distinct
investment purposes; and (12) in general, delegate such authority as they
consider desirable to any officer of the Trust, any committee of the Board of
Trustees, any agent or employee of the Trust, or any such custodian, transfer
agent, dividend disbursing agent, shareholder servicing agent, administrative
services agent, Principal Underwriter or Investment Adviser. Any determination
as to what is in the best interests of the Trust made by the Board of Trustees
in good faith shall be conclusive.
In construing the provisions of this Declaration of Trust, the presumption
shall be in favor of a grant of power to the Trustees. Unless otherwise
specified herein or required by law, any action by the Board of Trustees shall
be deemed effective if approved or taken by a majority of the Trustees then in
office.
Any action required or permitted to be taken by the Board of Trustees, or
a committee thereof, may be taken without a meeting if a majority of the
members of the Board of Trustees, or committee thereof, as the case may be,
shall individually or collectively consent in writing to that action. Such
action by written consent shall have the same force and effect as a majority
vote of the Board of Trustees, or committee thereof, as the case may be. Such
written consent or consents shall be filed with the minutes of the proceedings
of the Board of Trustees, or committee thereof, as the case may be.
The Trustees shall devote to the affairs of the Trust such time as may be
necessary for the proper performance of their duties hereunder, but the
Trustees are not expected to devote their full time to the performance of such
duties. The Trustees, or any Affiliate partner or employee thereof, may engage
in, or possess an interest in, any other business or venture of any nature and
description, independently or with or for the account of others.
Section 2. Payment of Expenses by the Trust The Board of Trustees is
authorized to pay or cause to be paid out of the principal or income of the
Trust or any particular Series or class of Shares, or partly out of the
principal and partly out of the income of the Trust or any particular Series or
class of Shares and to charge or allocate the same to, between or among such one
or more of the Series or classes of Shares, as the Board of Trustees deems fair
and in compliance with this Declaration of Trust, including particularly Article
III,
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Section 6 hereof, all expenses, fees, charges, taxes and liabilities incurred
by or arising in connection with the maintenance or operation of the Trust or a
particular Series or class of Shares, or in connection with the management
thereof, including, but not limited to, the Trustees' compensation and such
expenses, fees, charges, taxes and liabilities for the services of the Trust's
officers, employees, Investment Adviser, Principal Underwriter, auditors,
counsel, custodian, sub-custodian (if any), transfer agent, dividend disbursing
agent, shareholder servicing agent, administrative services agent, and such
other agents or independent contractors and such other expenses, fees, charges,
taxes and liabilities as the Board of Trustees may deem necessary or proper to
incur.
Section 3. Payment of Expenses by Shareholders. The Board of Trustees
shall have the power, as frequently as it may determine, to cause each
Shareholder of the Trust, or each Shareholder of any particular Series, to pay
directly, in advance or arrears, for charges of the Trust's custodian or
transfer, dividend disbursing, shareholder servicing, administrative services or
similar agent, an amount fixed from time to time by the Board of Trustees, by
setting off such charges due from such Shareholder from declared but unpaid
dividends or distributions owed such Shareholder and/or by reducing the number
of Shares in the account of such Shareholder by that number of full and/or
fractional Shares which represents the outstanding amount of such charges due
from such Shareholder.
Section 4. Ownership of Trust Property. Legal title to all of the Trust
Property shall at all times be considered to be vested in the Trust, except that
the Board of Trustees shall have the power to cause legal title to any Trust
Property to be held by or in the name of any Person as nominee, on such terms as
the Board of Trustees may determine, in accordance with applicable law.
Section 5. Service Contracts.
(a) Subject to such requirements and restrictions as may be set forth in
the By-Laws and/or the 1940 Act, the Board of Trustees may, at any time and
from time to time, contract for exclusive or nonexclusive advisory, management
and/or administrative services for the Trust or for any Series with any
corporation, trust, association or other organization, including any Affiliate;
and any such contract may contain such other terms as the Board of Trustees may
determine, including without limitation, authority for the Investment Adviser
or administrator to determine from time to time without prior consultation with
the Board of Trustees what securities and other instruments or property shall
be purchased or otherwise acquired, owned, held, invested or reinvested in,
sold, exchanged, transferred, mortgaged, pledged, assigned, negotiated, or
otherwise dealt with or disposed of, and what portion, if any, of the Trust
Property shall be
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held uninvested and to make changes in the Trust's or a particular Series'
investments, or such other activities as may specifically be delegated to such
party.
(b) The Board of Trustees may also, at any time and from time to time,
contract with any corporation, trust, association or other organization,
including any Affiliate, appointing it or them as the exclusive or nonexclusive
distributor or Principal Underwriter for the Shares of the Trust or one or more
of the Series or classes thereof or for other securities to be issued by the
Trust, or appointing it or them to act as the custodian, transfer agent,
dividend disbursing agent and/or shareholder servicing agent for the Trust or
one or more of the Series or classes thereof.
(c) The Board of Trustees is further empowered, at any time and from time
to time, to contract with any Persons to provide such other services to the
Trust or one or more of its Series, as the Board of Trustees determines to be
in the best interests of the Trust or one or more of its Series.
(d) The fact that:
(i) any of the Shareholders, Trustees, employees or officers
of the Trust is a shareholder, director, officer, partner, trustee,
employee, manager, Adviser, Principal Underwriter, distributor, or
Affiliate or agent of or for any corporation, trust, association,
or other organization, or for any parent or Affiliate of any
organization, with which an Adviser's, management or administration
contract, or Principal Underwriter's or distributor's contract, or
custodian, transfer, dividend disbursing, shareholder servicing or
other type of service contract may have been or may hereafter be
made,
(ii) any such organization, or any parent or Affiliate
thereof, is a Shareholder or has an interest in the Trust, or
(iii) any corporation, trust, association or other
organization with which an Adviser's, management or administration
contract or Principal Underwriter's or distributor's contract, or
custodian, transfer, dividend disbursing, shareholder servicing or
other type of service contract may have been or may hereafter be
made also has an Adviser's, management or administration contract,
or Principal Underwriter's or distributor's contract, or custodian,
transfer, dividend disbursing, shareholder servicing or other
service contract with one or more other corporations, trusts,
associations, or other organizations, or has other business or
interests,
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shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee, employee or officer of the Trust from voting upon or
executing the same, or create any liability or accountability to the Trust or
its Shareholders, provided that the establishment of and performance under each
such contract is permissible under the provisions of the 1940 Act.
(e) Every contract referred to in this Section 5 shall comply with such
requirements and restrictions as may be set forth in the By-Laws or the 1940
Act or stipulated by resolution of the Board of Trustees. Any such contract
may contain such other terms as the Board of Trustees may determine.
Section 6. Effect of Death, Resignation, Removal, etc. of a Trustee.
The death, resignation, removal, declaration as bankrupt or incapacity of one or
more Trustees, or of all of them, shall not operate to dissolve the Trust or any
Series or to revoke any existing agency created pursuant to the terms of this
Declaration of Trust. Whenever a vacancy in the Board of Trustees shall occur,
until such vacancy is filled as provided in the By-Laws, the Trustee(s) in
office, regardless of the number, shall have all the powers granted to the Board
of Trustees and shall discharge all the duties imposed upon the Board of
Trustees by this Declaration of Trust.
ARTICLE V.
Shareholders' Voting Powers
Section 1. Voting Powers and Required Vote. Subject to the provisions of
Article III, Section 6(d), the Shareholders shall have power to vote only (i)
for the election of Trustees, including the filling of any vacancies in the
Board of Trustees; (ii) with respect to such additional matters relating to the
Trust as may be required by this Declaration of Trust, the By-Laws, the 1940 Act
or any registration statement of the Trust filed with the Commission; and (iii)
on such other matters as the Board of Trustees may consider necessary or
desirable.
The Shareholder of record (as of the record date established pursuant to
Article II, Section 11 of the By-Laws) of each Share shall be entitled to one
vote for each full Share, and a fractional vote for each fractional Share.
Shareholders shall not be entitled to cumulative voting in the election of
Trustees or on any other matter. Shares may be voted in person or by proxy.
Subject to the provisions of Article III, Section 6(d), Article VIII,
Section 4 and any other provision of this Declaration of Trust, the By-Laws or
applicable
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law which requires a different vote: (1) in all matters other than the election
of Trustees, the affirmative vote of the majority of votes cast at a
Shareholders' meeting at which a quorum is present shall be the act of the
Shareholders; and (2) Trustees shall be elected by a plurality of the votes
cast at a Shareholders' meeting at which a quorum is present.
Section 2. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and related matters.
ARTICLE VI.
Net Asset Value, Distributions and Redemptions
Section 1. Determination of Net Asset Value, Net Income and Distributions
Subject to Article III, Section 6 hereof, the Board of Trustees shall have the
power to fix an initial offering price for the Shares of the Trust, or any
Series or class thereof which shall yield to the Trust, such Series or class not
less than the net asset value thereof, at which price the Shares of the Trust,
such Series or class shall be offered initially for sale, and to determine from
time to time thereafter the offering price which shall yield to the Trust, such
Series or class not less than the net asset value thereof from sales of the
Shares of the Trust, such Series or class; provided, however, that no Shares of
the Trust or Series or class thereof shall be issued or sold for consideration
which shall yield to the Trust, such Series or class less than the net asset
value of the Shares of the Trust, such Series or class next determined after the
receipt of the order (or at such other times set by the Board of Trustees),
except in the case of Shares of the Trust, such Series or class issued in
payment of a dividend properly declared and payable.
Subject to Article III, Section 6 hereof, the Board of Trustees, in their
absolute discretion, may prescribe and shall set forth in the By-laws or in a
duly adopted vote of the Board of Trustees such bases and time for determining
the per Share or net asset value of the Shares of the Trust, any Series or
class of a Series or net income attributable to the Shares of the Trust, any
Series or class of a Series, or the declaration and payment of dividends and
distributions on the Shares of the Trust, any Series or class of a Series, as
they may deem necessary or desirable.
Section 2. Redemptions at the Option of a Shareholder. Unless otherwise
provided in the prospectus of the Trust relating to the Shares of the Trust or
Series thereof, as such prospectus may be amended from time to time
("Prospectus"):
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(a) The Trust shall purchase such Shares as are offered by any Shareholder
for redemption, upon the presentation of a proper instrument of transfer
together with a request directed to the Trust or a Person designated by the
Trust that the Trust purchase such Shares or in accordance with such other
procedures for redemption as the Board of Trustees may from time to time
authorize; and the Trust will pay therefor the net asset value thereof, in
accordance with the By-Laws and applicable law. Payment for said Shares shall
be made by the Trust to the Shareholder within seven days after the date on
which the request is received in proper form. The obligation set forth in this
Section 2 is subject to the provision that (i) in the event that the New York
Stock Exchange (the "Exchange") is closed for other than weekends or holidays,
(ii) if permitted by the Rules of the Commission during periods when trading on
the Exchange is restricted or during any National Financial Emergency which
makes it impracticable for the Trust to dispose of the investments of the Trust
or applicable Series or to determine fairly the value of the net assets of the
Trust or held with respect to such Series, or (iii) during any other period
permitted by order of the Commission for the protection of investors, such
obligations may be suspended or postponed by the Board of Trustees. If
certificates have been issued to a Shareholder, any such request by such
Shareholder must be accompanied by surrender of any outstanding certificate or
certificates for such Shares in form for transfer, together with such proof of
the authenticity of signatures as may reasonably be required on such Shares and
accompanied by proper stock transfer stamps, if applicable.
(b) Payments for Shares so redeemed by the Trust shall be made in cash,
except payment for such Shares may, at the option of the Board of Trustees, or
such officer or officers as the Board of Trustees may duly authorize in its
complete discretion, be made in kind, or partially in cash and partially in
kind. In case of any payment in kind, the Board of Trustees, or its delegate,
shall have absolute discretion as to what security or securities of the Trust
shall be distributed in kind and the amount of the same; and the securities
distributed shall be valued for purposes of distribution at the value at which
they were appraised in computing the then current net asset value of the
Shares, provided that any Shareholder who cannot legally acquire securities so
distributed in kind by reason of the prohibitions of the 1940 Act or the
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), shall receive cash. Shareholders shall bear the expenses of in-kind
transactions, including, but not limited to, transfer agency fees, custodian
fees and costs of disposition of such securities.
(c) Payment for Shares so redeemed by the Trust shall be made by the Trust
as provided above within seven days after the date on which the redemption
request is received in good order; provided, however, that if payment
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shall be made other than exclusively in cash, any securities to be delivered as
part of such payment shall be delivered as promptly as any necessary transfers
of such securities on the books of the several corporations whose securities
are to be delivered practicably can be made, which may not necessarily occur
within such seven-day period. Moreover, redemptions may be suspended in the
event of a National Financial Emergency. In no case shall the Trust be liable
for any delay of any corporation or other Person in transferring securities
selected for delivery as all or part of any payment in kind.
(d) The right of Shareholders to receive dividends or other distributions
on Shares may be set forth in a Plan adopted by the Board of Trustees and
amended from time to time pursuant to Rule 18f-3 under the 1940 Act. The right
of any Shareholder of the Trust to receive dividends or other distributions on
Shares redeemed and all other rights of such Shareholder with respect to the
Shares so redeemed by the Trust, except the right of such Shareholder to
receive payment for such Shares, shall cease at the time as of which the
purchase price of such Shares shall have been fixed, as provided above.
Section 3. Redemptions at the Option of the Trust. The Board of
Trustees may, from time to time, without the vote or consent of the
Shareholders, and subject to the 1940 Act, redeem Shares or authorize the
closing of any Shareholder account, subject to such conditions as may be
established by the Board of Trustees.
ARTICLE VII.
Compensation and Limitation of Liability of
Officers and Trustees
Section 1. Compensation. Except as set forth in the last sentence of
this Section 1, the Board of Trustees may, from time to time, fix a reasonable
amount of compensation to be paid by the Trust to the Trustees and officers of
the Trust. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or
other services and payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability.
(a) To the fullest extent that limitations on the liability of Trustees
and officers are permitted by the DBTA, the officers and Trustees shall not be
responsible or liable in any event for any act or omission of any agent,
employee, Investment Adviser or Principal Underwriter of the Trust; or with
respect to each Trustee and officer, the act or omission of any other Trustee
or officer,
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respectively. The Trust, out of the Trust Property, shall indemnify and hold
harmless each and every officer and Trustee from and against any and all claims
and demands whatsoever arising out of or related to such officer's or Trustee's
performance of his or her duties as an officer or Trustee of the Trust. This
limitation on liability applies to events occurring at the time a Person serves
as a Trustee or officer of the Trust whether or not such Person is a Trustee or
officer at the time of any proceeding in which liability is asserted. Nothing
herein contained shall indemnify, hold harmless or protect any officer or
Trustee from or against any liability to the Trust or any Shareholder to which
such Person would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Person's office.
(b) Every note, bond, contract, instrument, certificate or undertaking and
every other act or document whatsoever issued, executed or done by or on behalf
of the Trust, the officers or the Trustees or any of them in connection with
the Trust shall be conclusively deemed to have been issued, executed or done
only in such Person's capacity as Trustee and/or as officer, and such Trustee
or officer, as applicable, shall not be personally liable therefore, except as
described in the last sentence of the first paragraph of this Section 2 of this
Article VII.
Section 3. Officers and Trustees' Good Faith Action, Expert Advice, No
Bond or Surety. The exercise by the Trustees of their powers and discretions
hereunder shall be binding upon everyone interested. An officer or Trustee
shall be liable to the Trust and to any Shareholder solely for such officer's
or Trustee's own willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of such officer
or Trustee, and for nothing else, and shall not be liable for errors of
judgment or mistakes of fact or law. The officers and Trustees may obtain the
advice of counsel or other experts with respect to the meaning and operation of
this Declaration of Trust and their duties as officers or Trustees. No such
officer or Trustee shall be liable for any act or omission in accordance with
such advice and no inference concerning liability shall arise from a failure to
follow such advice. The officers and Trustees shall not be required to give
any bond as such, nor any surety if a bond is required.
Section 4. Insurance. To the fullest extent permitted by applicable
law, the officers and Trustees shall be entitled and have the authority to
purchase with Trust Property, insurance for liability and for all expenses
reasonably incurred, paid or expected to be paid by a Trustee or officer in
connection with any claim, action, suit or proceeding in which such Person
becomes involved by virtue of such Person's capacity or former capacity with
the Trust, whether or not the Trust would have the power to indemnify such
Person against such liability
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under the provisions of this Article.
ARTICLE VIII.
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any actions made or to be made by the Trustees.
Section 2. Dissolution of Trust or Series. Unless dissolved as provided
herein, the Trust shall have perpetual existence. The Trust may be dissolved
at any time by vote of a majority of the Shares of the Trust entitled to vote
or by the Board of Trustees by written notice to the Shareholders. Any Series
may be dissolved at any time by vote of a majority of the Shares of that Series
or by the Board of Trustees by written notice to the Shareholders of that
Series.
Upon dissolution of the Trust, the Trustees shall (in accordance with
Section 3808 of the DBTA) pay or make reasonable provision to pay all claims
and obligations of the Trust and/or each Series, including all contingent,
conditional or unmatured claims and obligations known to the Trust, and all
claims and obligations which are known to the Trust but for which the identity
of the claimant is unknown. If there are sufficient assets held with respect
to the Trust and/or each Series of the Trust, such claims and obligations shall
be paid in full and any such provisions for payment shall be made in full. If
there are insufficient assets held with respect to the Trust and/or each Series
of the Trust, such claims and obligations shall be paid or provided for in
accordance with Article III, Section 6, according to their priority and, among
claims and obligations of equal priority, ratably to the extent of assets
available therefor. Any remaining assets (including without limitation, cash,
securities or any combination thereof) held with respect to the Trust and/or
each Series of the Trust shall be distributed to the Shareholders of the Trust
and/or such Series in accordance with Article III, Section 6, and ratably
according to the number of Shares of the Trust and/or such Series held by the
several Shareholders on the record date for such dissolution distribution.
Upon dissolution of a particular Series, the Trustees shall (in accordance
with Section 3808 of the DBTA) pay or make reasonable provision to pay all
claims and obligations of the particular Series, including all contingent,
conditional or unmatured claims and obligations known to the Trust, and all
claims and obligations which are known to the Trust but for which the identity
of the claimant is unknown. If there are sufficient assets held with respect
to the particular Series, such claims and obligations shall be paid in full and
any such
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provisions for payment shall be made in full. If there are insufficient assets
held with respect to the particular Series, such claims and obligations shall
be paid or provided for in accordance with Article III, Section 6, according to
their priority and, among claims and obligations of equal priority, ratably to
the extent of assets available therefor. Any remaining assets (including
without limitation, cash, securities or any combination thereof) held with
respect to the particular Series shall be distributed to the Shareholders of
the particular Series in accordance with Article III, Section 6, and ratably
according to the number of Shares of the particular Series held by the several
Shareholders on the record date for such dissolution distribution.
Section 3. Merger and Consolidation; Conversion
(a) Merger and Consolidation. Pursuant to an agreement of merger or
consolidation, the Trust, or any one or more Series, may, by act of a majority
of the Board of Trustees, merge or consolidate with or into one or more
business trusts or other business entities formed or organized or existing
under the laws of the State of Delaware or any other state or the United States
or any foreign country or other foreign jurisdiction. Any such merger or
consolidation shall not require the vote of the Shareholders affected thereby,
unless such vote is required by the 1940 Act, or unless such merger or
consolidation would result in an amendment of this Declaration of Trust which
would otherwise require the approval of such Shareholders. In accordance with
Section 3815(f) of the DBTA, an agreement of merger or consolidation may effect
any amendment to this Declaration of Trust or the By-Laws or effect the
adoption of a new declaration of trust or by-laws of the Trust if the Trust is
the surviving or resulting business trust. Upon completion of the merger or
consolidation, the Trustees shall file a certificate of merger or consolidation
in accordance with Section 3815 of the DBTA.
(b) Conversion. A majority of the Board of Trustees may, without the
vote or consent of the Shareholders, cause (i) the Trust to convert to a
common-law trust, a general partnership, limited partnership or a limited
liability company organized, formed or created under the laws of the State of
Delaware as permitted pursuant to Section 3821 of the DBTA; (ii) the Shares of
the Trust or any Series to be converted into beneficial interests in another
business trust (or series thereof) created pursuant to this Section 3 of this
Article VIII, or (iii) the Shares to be exchanged under or pursuant to any
state or federal statute to the extent permitted by law; provided, however,
that if required by the 1940 Act, no such statutory conversion, Share
conversion or Share exchange shall be effective unless the terms of such
transaction shall first have been approved at a meeting called for that purpose
by the "vote of a majority of the outstanding voting
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securities," as such phrase is defined in the 1940 Act, of the Trust or Series,
as applicable; provided, further, that in all respects not governed by statute
or applicable law, the Board of Trustees shall have the power to prescribe the
procedure necessary or appropriate to accomplish a sale of assets, merger or
consolidation including the power to create one or more separate business
trusts to which all or any part of the assets, liabilities, profits or losses
of the Trust may be transferred and to provide for the conversion of Shares of
the Trust or any Series into beneficial interests in such separate business
trust or trusts (or series thereof).
Section 4. Reorganization. A majority of the Board of Trustees may cause
the Trust to sell, convey and transfer all or substantially all of the assets
of the Trust, or all or substantially all of the assets held with respect to
any one or more Series (the "Acquired Series"), to another trust, business
trust, partnership, limited partnership, limited liability company, association
or corporation organized under the laws of any state, or to one or more
separate series thereof, or to the Trust to be held as assets held with respect
to one or more other Series of the Trust, in exchange for cash, shares or other
securities (including, without limitation, in the case of a transfer to another
Series of the Trust, Shares of such other Series) with such transfer either (a)
being made subject to, or with the assumption by the transferee of, the
liabilities of the Trust or the liabilities held with respect to each Acquired
Series, or (b) not being made subject to, or not with the assumption of, such
liabilities; provided, however, that, if required by the 1940 Act, no assets
held with respect to any particular Series shall be so sold, conveyed or
transferred unless the terms of such transaction shall first have been approved
at a meeting called for that purpose by the "vote of a majority of the
outstanding voting securities," as such phrase is defined in the 1940 Act, of
that Series. Following such sale, conveyance and transfer, the Board of
Trustees shall distribute such cash, shares or other securities (giving due
effect to the assets and liabilities held with respect to the Acquired Series,
and any other differences between or among the Acquired Series), ratably among
the Shareholders of the Trust or the Acquired Series, (giving due effect to the
differences among the various classes within the Trust or each such Acquired
Series); and if all of the assets of the Trust have been so sold, conveyed and
transferred, the Trust shall be dissolved.
Section 5. Amendments Subject to the provisions of the second paragraph
of this Section 5 of this Article VIII, this Declaration of Trust may be
restated and/or amended at any time by an instrument in writing signed by a
majority of the then Board of Trustees and, if required, by approval of such
amendment by Shareholders in accordance with Article V hereof. Any such
restatement and/or amendment hereto shall be effective immediately upon
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execution and approval or upon such future date and time as may be stated
therein. The Certificate of Trust of the Trust may be restated and/or amended
by a similar procedure, and any such restatement and/or amendment shall be
effective immediately upon filing with the Office of the Secretary of State of
the State of Delaware or upon such future date as may be stated therein.
Notwithstanding the above, the Board of Trustees expressly reserves the
right to amend or repeal any provisions contained in this Declaration of Trust
or the Certificate of Trust, in accordance with the provisions of Section 5 of
Article III hereof, and all rights, contractual and otherwise, conferred upon
Shareholders are granted subject to such reservation. The Board of Trustees
further expressly reserves the right to amend or repeal any provision of the
By-Laws pursuant to Article X of the By-Laws.
Section 6. Filing of Copies, References, Headings. The original or a
copy of this Declaration of Trust and of each restatement and/or amendment
hereto shall be kept at the principal executive office of the Trust where it
may be inspected by any Shareholder. Anyone dealing with the Trust may rely on
a certificate by an officer of the Trust as to whether or not any such
restatements and/or amendments have been made and as to any matters in
connection with the Trust hereunder; and, with the same effect as if it were
the original, may rely on a copy certified by an officer of the Trust to be a
copy of this instrument or of any such restatements and/or amendments. In this
Declaration of Trust and in any such restatements and/or amendments, references
to this instrument, and all expressions of similar effect to "herein," "hereof"
and "hereunder," shall be deemed to refer to this instrument as amended or
affected by any such restatements and/or amendments. Headings are placed
herein for convenience of reference only and shall not be taken as a part
hereof or control or affect the meaning, construction or effect of this
instrument. Whenever the singular number is used herein, the same shall
include the plural; and the neuter, masculine and feminine genders shall
include each other, as applicable. This instrument may be executed in any
number of counterparts, each of which shall be deemed an original.
Section 7. Applicable Law. This Declaration of Trust is created under
and is to be governed by and construed and administered according to the laws
of the State of Delaware and the applicable provisions of the 1940 Act and the
Code. The Trust shall be a Delaware business trust pursuant to the DBTA, and
without limiting the provisions hereof, the Trust may exercise all powers that
are ordinarily exercised by such a business trust.
Section 8. Provisions in Conflict with Law or Regulations.
(a) The provisions of this Declaration of Trust are severable, and if the
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Board of Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the Code, the DBTA, or with other
applicable laws and regulations, the conflicting provision shall be deemed not
to have constituted a part of this Declaration of Trust from the time when such
provisions became inconsistent with such laws or regulations; provided,
however, that such determination shall not affect any of the remaining
provisions of this Declaration of Trust or render invalid or improper any
action taken or omitted prior to such determination.
(b) If any provision of this Declaration of Trust shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration of Trust in any jurisdiction.
Section 9. Business Trust Only. It is the intention of the Trustees to
create a business trust pursuant to the DBTA, and thereby to create the
relationship of trustee and beneficial owners within the meaning of the DBTA
between the Trustees and each Shareholder. It is not the intention of the
Trustees to create a general or limited partnership, limited liability company,
joint stock association, corporation, bailment, or any form of legal
relationship other than a business trust pursuant to the DBTA. Nothing in this
Declaration of Trust shall be construed to make the Shareholders, either by
themselves or with the Trustees, partners or members of a joint stock
association.
Section 10. Counterparts. This Declaration of Trust may be executed in
one or more separate counterparts, each when taken together, constitute the
whole.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Trustees named below do hereby make and enter into
this Declaration of Trust as of the date first written above.
/s/ Thomas J. Blackburn
-----------------------------
Thomas J. Blackburn
Trustee
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<PAGE> 1
EX-99.b
By laws
BY-LAWS
of
AB FUNDS TRUST
A Delaware Business Trust
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal executive office of AB Funds
Trust (the "Trust") shall be Denver, Colorado. The board of trustees (the
"Board") may, from time to time, change the location of the principal executive
office of the Trust to any place within or outside the State of Delaware.
Section 2. OTHER OFFICES. The Board may at any time establish branch or
subordinate offices at any place or places where the Trust intends to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place within or outside the State of Delaware designated by the Board. In
the absence of any such designation by the Board, shareholders' meetings shall
be held at the principal executive office of the Trust. For purposes of these
By-Laws, the term "shareholder" shall mean a record owner of shares of the
Trust.
Section 2. CALL OF MEETING. A meeting of the shareholders may be called at
any time by the Board, by the chairperson of the Board or by the president for
the purpose of electing trustees as provided in these Bylaws or for the purpose
of taking action upon any other matter deemed by the Board to be necessary or
desirable. If the Trust is required under the Investment Company Act of 1940,
as amended (the "1940 Act"), to hold a shareholders' meeting to elect trustees,
the meeting shall be deemed an "annual meeting" for that year for purposes of
the 1940 Act.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 4 of
this Article II not less than seven (7) nor more than ninety-three (93) days
before the date of the meeting. The notice shall specify (i) the place, date
and hour of the meeting, and (ii) the general nature of the business to be
<PAGE> 2
transacted. The notice of any meeting at which trustees are to be elected also
shall include the name of any nominee or nominees who at the time of the notice
are intended to be presented for election. Except with respect to adjournments
as provided herein, no business shall be transacted at such meeting other than
that specified in the notice.
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class
mail, courier, telegraphic, facsimile or electronic mail, or other written
communication, charges prepaid, addressed to the shareholder at the address of
that shareholder appearing on the books of the Trust or its transfer agent or
given by the shareholder to the Trust for the purpose of notice. If no such
address appears on the Trust's books or is given, notice shall be deemed to
have been given if sent to that shareholder by first-class mail, courier,
telegraphic, facsimile or electronic mail, or other written communication to
the Trust's principal executive office. Notice shall be deemed to have been
given at the time when delivered personally, deposited in the mail or with a
courier, or sent by telegram, facsimile, electronic mail or other means of
written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the Trust is returned to the Trust marked
to indicate that the notice to the shareholder cannot be delivered at that
address, all future notices or reports shall be deemed to have been duly given
without further mailing, or substantial equivalent thereof, if such notices
shall be available to the shareholder on written demand of the shareholder at
the principal executive office of the Trust for a period of one year from the
date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary
or any transfer agent of the Trust giving the notice and shall be filed and
maintained in the records of the Trust. Such affidavit shall, in the absence
of fraud, be prima facie evidence of the facts stated therein.
Section 5. ADJOURNED MEETING; NOTICE. Any shareholders' meeting, whether
or not a quorum is present, may be adjourned from time to time (and at any time
during the course of the meeting) by a majority of the votes cast by those
shareholders present in person or by proxy, or by the chairperson of the
meeting. Any adjournment may be with respect to one or more proposals, but not
necessarily all proposals, to be voted or acted upon at such meeting and any
adjournment will not delay or otherwise affect the effectiveness and validity
of a vote or other action taken at a shareholders' meeting prior to
adjournment.
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When any shareholders' meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting at which the adjournment is
taken, unless a new record date of the adjourned meeting is fixed or unless the
adjournment is for more than one hundred eighty (180) days from the record date
set for the original meeting, in which case the Board shall set a new record
date. If notice of any such adjourned meeting is required pursuant to the
preceding sentence, it shall be given to each shareholder of record entitled to
vote at the adjourned meeting in accordance with the provisions of Sections 3
and 4 of this Article II. At any adjourned meeting, the Trust may transact any
business that might have been transacted at the original meeting.
Section 6. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of these
Bylaws, as in effect at such time. The shareholders' vote may be by voice vote
or by ballot; provided, however, that any election of trustees must be by
ballot if demanded by any shareholder before the voting has begun. On any
matter other than elections of trustees, any shareholder may vote part of the
shares in favor of the proposal and refrain from voting the remaining shares or
vote them against the proposal, but if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
the total shares that the shareholder is entitled to vote on such proposal.
Abstentions and broker non-votes will be included for purposes of
determining whether a quorum is present at a shareholders' meeting.
Abstentions and broker non-votes will be treated as votes present at a
shareholders' meeting, but will not be treated as votes cast. Abstentions and
broker non-votes, therefore, will have no effect on proposals which require a
plurality or majority of votes cast for approval, but will have the same effect
as a vote "against" on proposals requiring a majority of outstanding voting
securities for approval.
Section 7. QUORUOM. Except when a larger quorum is required by
applicable law, the Declaration of Trust or these By-Laws, thirty-three and
one-third percent (33-1/3%) of the shares present in person or represented by
proxy and entitled to vote at a shareholders' meeting shall constitute a quorum
at such meeting. When a separate vote by one or more series or classes is
required, thirty-three and one-third percent (33-1/3%) of the shares of each
such series or class present in person or represented by proxy and entitled to
vote shall constitute a quorum at a shareholders' meeting of such series or
class.
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Section 8. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. The
transactions of a meeting of shareholders, however called and noticed and
wherever held, shall be valid as though transacted at a meeting duly held after
regular call and notice if a quorum is present either in person or by proxy.
Attendance by a person at a meeting shall also constitute a waiver of notice of
that meeting with respect to that person, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened and except that such attendance is not a
waiver of any right to object to the consideration of matters not included in
the notice of the meeting if that objection is expressly made at the beginning
of the meeting. Whenever notice of a meeting is required to be given to a
shareholder under the Declaration of Trust or these By-Laws, a written waiver
thereof, executed before or after the meeting by such shareholder or his or her
attorney thereunto authorized and filed with the records of the meeting, shall
be deemed equivalent to such notice.
Section 9. PROXIES. Every shareholder entitled to vote for trustees or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the shareholder and filed
with the secretary of the Trust; provided, that an alternative to the execution
of a written proxy may be permitted as provided in the second paragraph of this
Section 9. A proxy shall be deemed signed if the shareholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) revoked by the
shareholder executing it by a written notice delivered to the Trust prior to
the exercise of the proxy or by the shareholder's execution of a subsequent
proxy or attendance and vote in person at the meeting; or (ii) written notice
of the death or incapacity of the shareholder is received by the Trust before
the proxy's vote is counted; provided, however, that no proxy shall be valid
after the expiration of eleven (11) months from the date of the proxy unless
otherwise provided in the proxy. The revocability of a proxy that states on
its face that it is irrevocable shall be governed by the provisions of the
General Corporation Law of the State of Delaware.
With respect to any shareholders' meeting, the Board may act to permit the
Trust to accept proxies by any electronic, telephonic, computerized,
telecommunications or other reasonable alternative to the execution of a
written instrument authorizing the proxy to act, provided the shareholder's
authorization is received within eleven (11) months before the meeting. A
proxy with respect to shares held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the
proxy the Trust receives a specific written notice to the contrary from any one
of them. A proxy
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purporting to be executed by or on behalf of a shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest with the challenger.
Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT. Any action which may
be taken at any meeting of shareholders may be taken without a meeting and
without prior notice if a consent in writing setting forth the action so taken
is signed by the holders of shares having not less than the minimum number of
votes that would be necessary to authorize or take that action at a meeting at
which all shares entitled to vote on that action were present and voted. All
such consents shall be filed with the secretary of the Trust and shall be
maintained in the Trust's records. Any shareholder giving a written consent,
the shareholder's proxy holders, a transferee of the shares (prior to the
record date), a personal representative of the shareholder or its respective
proxy holder may revoke the consent by a writing received by the secretary of
the Trust before written consents of the number of shares required to authorize
the proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the action taken without a meeting to such shareholders. This notice
shall be given in the manner specified in these By-Laws.
Section 11. RECORD DATES. For purposes of determining the shareholders
entitled to notice of any meeting, to vote at any meeting, or to give consent
to action without a meeting, the Board may fix in advance a record date which
shall not be more than one hundred eighty (180) days nor less than seven (7)
days before the date of any such meeting.
If the Board does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day which is five (5) business
days next preceding to the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give consent
to action in writing without a meeting, (i) when no prior action by the Board
has been taken, shall be the day on which the first written consent is given,
or (ii) when prior action of the Board has been taken, shall be at the close of
business on the day on which the Board adopts the resolution taking such
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prior action or the seventy-fifth (75th) day before the date of such other
action, whichever is later.
For the purpose of determining the shareholders of any series or class who
are entitled to receive payment of any dividend or of any other distribution,
the Board may from time to time fix a date, which shall be before the date for
the payment of such dividend or such other distribution, as the record date for
determining the shareholders of such series or class having the right to
receive such dividend or distribution. Nothing in this Section shall be
construed as precluding the Board from setting different record dates for
different series or classes.
Section 12. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the Board may appoint any person other than nominees for office to act as
inspector of election at the meeting or its adjournment. If no inspector of
election is so appointed, the chairperson of the meeting may, and on the
request of any shareholder or a shareholder's proxy shall, appoint an inspector
of election at the meeting. If any person appointed as inspector fails to
appear or fails or refuses to act, the chairperson of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint a person
to fill the vacancy.
The inspector shall:
(a) determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum and the
authenticity, validity and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result of voting or consents; and
(g) do any other acts that may be proper to conduct the election or vote
with fairness to all shareholders.
ARTICLE III
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TRUSTEES
Section 1. NUMBER, ELECTION AND TENURE. The number of trustees
constituting the Board may be fixed from time to time by a written instrument
signed, or by resolution approved at a duly constituted meeting, by a majority
of the Board, provided, however, that the number of trustees shall in no event
be less than one (1) nor more than sixteen (16). The Board, by action of a
majority of the then trustees at a duly constituted meeting, may remove any
trustee with or without cause. The shareholders may elect trustees at any
meeting of shareholders called by the Board for that purpose. A meeting of
shareholders for the purpose of electing one or more trustees may be called by
the Board or, to the extent provided by the 1940 Act and the rules and
regulations thereunder, by the shareholders. Shareholders shall have the power
to remove a trustee only to the extent provided by the 1940 Act and the rules
and regulations thereunder.
Each trustee shall serve during the continued lifetime of the Trust until
he or she dies, resigns, is declared bankrupt or incompetent by a court of
appropriate jurisdiction, or is removed, or, if sooner than any of such events,
until the next meeting of shareholders called for the purpose of electing
trustees and until the election and qualification of his or her successor. Any
trustee may resign at any time by written instrument signed by him or her and
delivered to any officer of the Trust or to a meeting of the Board. Such
resignation shall be effective upon receipt unless specified to be effective at
some later time. Except to the extent expressly provided in a written
agreement with the Trust, no trustee that resigns or is removed shall have any
right to any compensation for any period following any such event or any right
to damages on account of such events or any actions taken in connection
therewith following his or her resignation or removal.
Section 2. POWERS. Subject to the applicable provisions of the Declaration
of Trust and these By-Laws relating to action required to be approved by the
shareholders, the business and affairs of the Trust shall be managed and all
powers shall be exercised by or under the direction of the Board.
Section 3. VACANCIES. Vacancies in the Board may be filled by a majority
of the remaining trustees, though less than a quorum, or by a sole remaining
trustee, unless the Board calls a meeting of shareholders for the purpose of
filling such vacancies. Notwithstanding the above, whenever and for so long as
the Trust is a participant in or otherwise has in effect a plan under which the
Trust may be deemed to bear expenses of distributing its shares as that
practice
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is described in Rule 12b-1 under the 1940 Act, then the selection and
nomination of the trustees who are not "interested persons" of the Trust, as
that term is defined in the 1940 Act (such trustees are referred to herein as
"disinterested trustees"), shall be, and is, committed to the discretion of the
disinterested trustees remaining in office. In the event of the death,
resignation, removal, declaration as bankrupt or incapacity of all of the then
trustees, the Trust's investment adviser or advisers is or are, as the case may
be, empowered to appoint new trustees subject to the provisions of Section
16(a) of the 1940 Act.
Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings of
the Board may be held at any place within or outside the State of Delaware that
has been designated from time to time by the Board. In the absence of such a
designation, regular meetings shall be held at the principal executive office
of the Trust. Any meeting, regular or special, may be held by conference
telephone or similar communication equipment, so long as all trustees
participating in the meeting can hear one another, and all such trustees shall
be deemed to be present in person at such meeting.
Section 5. REGULAR MEETINGS. Regular meetings of the Board shall be held
without call at such time as shall from time to time be fixed by the Board.
Such regular meetings may be held without notice.
Section 6. SPECIAL MEETINGS. Special meetings of the Board for any purpose
or purposes may be called at any time by the chairperson of the Board, the
president, any vice president, the secretary or any trustee.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each trustee or sent by first-class mail, courier
or telegram, charges prepaid, or by facsimile or electronic mail, addressed to
each trustee at that trustee's address as it is shown on the records of the
Trust. In case the notice is mailed, it shall be deposited in the United States
mail at least seven (7) days before the time of the holding of the meeting. In
case the notice is delivered personally, by telephone, by courier, to the
telegraph company, or by express mail, facsimile, electronic mail or similar
service, it shall be delivered at least forty-eight (48) hours before the time
of the holding of the meeting. Any oral notice given personally or by telephone
may be communicated either to the trustee or to a person at the office of the
trustee who the person giving the notice has reason to believe will promptly
communicate it to the trustee. The notice need not specify the purpose of the
meeting or the place if the meeting is to be held at the principal executive
office of the Trust.
Section 7. QUORUM. A majority of the authorized number of trustees shall
constitute a quorum for the transaction of business, except to adjourn as
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provided in Sections 9 and 10 of this Article III. Every act or decision done
or made by a majority of the trustees present at a meeting duly held at which a
quorum is present shall be regarded as the act of the Board, subject to the
provisions of the Declaration of Trust. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of trustees if any action taken is approved by at least a majority
of the required quorum for that meeting.
Section 8. WAIVER OF NOTICE. Notice of any meeting need not be given to
any trustee who either before or after the meeting signs a written waiver of
notice, a consent to holding the meeting, or an approval of the minutes. The
waiver of notice or consent need not specify the purpose of the meeting. All
such waivers, consents, and approvals shall be filed with the records of the
Trust or made a part of the minutes of the meeting. Notice of a meeting shall
also be deemed given to any trustee who attends the meeting without protesting
before or at its commencement about the lack of notice to that trustee.
Section 9. ADJOURNMENT. A majority of the trustees present, whether or not
constituting a quorum, may adjourn any matter at any meeting to another time
and place.
Section 10. NOTICE OF ADJOURNMENT. Notice of the time and place of holding
an adjourned meeting need not be given unless the meeting is adjourned for more
than seven (7) days, in which case notice of the time and place shall be given
before the time of the recommencement of an adjourned meeting to the trustees
who were present at the time of the adjournment.
Section 11. FEES AND COMPENSATION OF TRUSTEES. Trustees and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board. This Section 11 shall not be construed to preclude any trustee from
serving the Trust in any other capacity as an officer, agent, employee, or
otherwise and receiving compensation for those services.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board may, by resolution adopted by
a majority of the authorized number of trustees, designate one or more
committees, each consisting of two (2) or more trustees, to serve at the
pleasure of the Board. The Board may designate one or more trustees as
alternate members of any committee who may replace any absent member at any
meeting of the committee. Any committee to the extent provided in the
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resolution of the Board, shall have the authority of the Board, except with
respect to:
(a) the approval of any action which under the Declaration of Trust or
applicable law also requires shareholders' approval or requires approval by a
majority of the entire Board or certain members of the Board;
(b) the filling of vacancies on the Board or in any committee;
(c) the fixing of compensation of the trustees for serving on the Board or
on any committee;
(d) the amendment or repeal of the Declaration of Trust or of these
By-Laws or the adoption of a new Declaration of Trust or new By-Laws;
(e) the amendment or repeal of any resolution of the Board which by its
express terms is not so amendable or repealable; or
(f) the appointment of any other committees of the Board or the members of
these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of any
committee shall be governed by and held and taken in accordance with the
provisions of Article III of these By-Laws, with such changes in the context
thereof as are necessary to substitute the committee and its members for the
Board and its members, except that the time of regular meetings of any
committee may be determined either by the Board or by the committee. Special
meetings of any committee may also be called by resolution of the Board, and
notice of special meetings of any committee shall also be given to all
alternate members who shall have the right to attend all meetings of the
committee. The Board may adopt rules for the government of any committee not
inconsistent with the provisions of these By-Laws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a chairperson of
the Board, a president and chief executive officer, a secretary, and a
treasurer. The Trust may also have, at the discretion of the Board, one or
more vice presidents, one or more assistant vice presidents, one or more
assistant secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article V. Any
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number of offices may be held by the same person, except the offices of
president and vice president.
Section 2. ELECTION OF OFFICERS. The officers of the Trust shall be
chosen by the Board, and each shall serve at the pleasure of the Board, subject
to the rights, if any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board may appoint and may empower
the president to appoint such other officers as the business of the Trust may
require, each of whom shall hold office for such period, have such authority
and perform such duties as are provided in these By-Laws or as the Board may
from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by the Board at any regular or special
meeting of the Board, or by an officer upon whom such power of removal may be
conferred by the Board.
Any officer may resign at any time by giving written notice to the Trust.
Any resignation shall take effect at the date of the receipt of that notice or
at any later time specified in such notice. Unless otherwise specified in such
notice, the acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights, if any, of the
Trust under any contract to which the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or other cause shall be filled in
the manner prescribed in these By-Laws for regular appointment to that office.
Section 6. CHAIRPERSON OF THE BOARD. The chairperson of the Board shall,
if present, preside at meetings of the Board and exercise and perform such
other powers and duties as may be from time to time assigned to the chairperson
by the Board or prescribed by these By-Laws. The chairperson of the Board
shall be a member ex officio of all standing committees. In the absence,
resignation, disability or death of the president, the chairperson shall
exercise all the powers and perform all the duties of the president until his
or her return, such disability shall be removed or a new president shall have
been elected.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may
be given by the Board to the chairperson of the Board, the president shall be
the chief executive officer of the Trust and shall, subject to the control of
the Board, have general supervision, direction and control of the business and
the officers of
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the Trust. In the absence of the chairperson of the Board, he shall preside at
all meetings of the shareholders and at all meetings of the Board. He shall
have the general powers and duties of management usually vested in the office
of president of a corporation and shall have such other powers and duties as
may be prescribed by the Board or these By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of the president,
the vice presidents, if any, in order of their rank as fixed by the Board or if
not ranked, a vice president designated by the Board, shall perform all the
duties of the president and when so acting shall have all powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may
be prescribed for them respectively by the Board, these By-Laws, the president
or the chairperson of the Board.
Section 9. SECRETARY. The secretary shall keep or cause to be kept at the
principal executive office of the Trust or such other place as the Board may
direct a book of minutes of all meetings and actions of trustees, committees of
trustees and shareholders with the time and place of holding, whether regular
or special, and if special, how authorized, the notice given, the names of
those present at trustees' meetings or committee meetings, the number of shares
present or represented at shareholders' meetings, and the proceedings.
The secretary shall cause to be kept at the principal executive office of
the Trust or at the office of the Trust's transfer agent or registrar, as
determined by resolution of the Board, a share register or a duplicate share
register showing the names of all shareholders and their addresses, the number,
series and classes of shares held by each, the number and date of certificates
issued for the same and the number and date of cancellation of every
certificate surrendered for cancellation.
The secretary shall give or cause to be given notice of all meetings of
the shareholders and of the Board required by these By-Laws or by applicable
law to be given and shall have such other powers and perform such other duties
as may be prescribed by the Board or by these By-Laws.
Section 10. TREASURER. The treasurer shall be the chief financial officer
of the Trust and shall keep and maintain or cause to be kept and maintained
adequate and correct books and records of accounts of the properties and
business transactions of the Trust, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings
and shares. The books of account shall at all reasonable times be open to
inspection by any trustee.
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The treasurer shall deposit all monies and other valuables in the name and
to the credit of the Trust with such depositories as may be designated by the
Board. He shall disburse the funds of the Trust as may be ordered by the Board,
shall render to the president and trustees, whenever they request it, an
account of all of his transactions as chief financial officer and of the
financial condition of the Trust and shall have other powers and perform such
other duties as may be prescribed by the Board or these By-Laws.
ARTICLE VI
INDEMNIFICATION OF TRUSTEES, OFFICERS,
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a trustee, officer, employee or
other agent of this Trust or is or was serving at the request of the Trust as a
trustee, director, officer, employee or other agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise;
"proceeding" means any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative; and "expenses"
include without limitation attorneys' fees and any expenses of establishing a
right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. The Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the Trust) by reason of
the fact that such person is or was an agent of the Trust, against expenses,
judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with such proceeding if such person acted in good faith
and in a manner that such person reasonably believed to be in the best
interests of the Trust and in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of such person was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or
plea of nolo contendere or its equivalent shall not of itself create a
presumption that the person did not act in good faith or in a manner which the
person reasonably believed to be in the best interests of the Trust or that the
person had reasonable cause to believe that the person's conduct was unlawful.
Section 3. ACTIONS BY TRUST. The Trust shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action by or in the right of the Trust to procure a judgment in its
favor by reason of the fact that the person is or was an agent of the Trust,
against expenses actually and reasonably incurred by that person in connection
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with the defense or settlement of that action if that person acted in good
faith, in a manner that person believed to be in the best interests of the
Trust and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to
the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless disregard of the duties involved in the conduct of
the agent's office with the Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
(a) In respect of any claim, issue or matter as to which that person shall
have been adjudged to be liable in the performance of that person's duty to the
Trust, unless and only to the extent that the court in which that action was
brought shall determine upon application that in view of all the circumstances
of the case, that person was not liable by reason of the disabling conduct set
forth in the preceding paragraph and is fairly and reasonably entitled to
indemnity for the expenses which the court shall determine; or
(b) In respect of any claim, issue, or matter as to which that person
shall have been adjudged to be liable on the basis that personal benefit was
improperly received by him, whether or not the benefit resulted from an action
taken in the person's official capacity; or
(c) Of amounts paid in settling or otherwise disposing of a threatened or
pending action, with or without court approval, or of expenses incurred in
defending a threatened or pending action which is settled or otherwise disposed
of without court approval, unless the required approval set forth in Section 6
of this Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of the
Trust has been successful on the merits in defense of any proceeding referred
to in Sections 2 or 3 of this Article or in defense of any claim, issue or
matter therein, before the court or other body before whom the proceeding was
brought, the agent shall be indemnified against expenses actually and
reasonably incurred by the agent in connection therewith, provided that the
Board, including a majority who are disinterested trustees and not parties to
such proceeding, also determines that based upon a review of the facts, the
agent was not liable by reason of the disabling conduct referred to in Section
4 of this Article.
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Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by the Trust only
if authorized in the specific case on a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article and
is not prohibited from indemnification because of the disabling conduct set
forth in Section 4 of this Article, by:
(a) A majority vote of a quorum consisting of trustees who are not parties
to the proceeding and are disinterested trustees; or
(b) A written opinion by an independent legal counsel.
Section 7. ADVANCEMENT OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by the Trust before the final disposition of the
proceeding on receipt of an undertaking by or on behalf of the agent to repay
the amount of the advance unless it shall be determined ultimately that the
agent is entitled to be indemnified as authorized in this Article, provided the
agent provides a security for his undertaking, or a majority of a quorum of the
disinterested trustees who are not parties to such proceeding, or an
independent legal counsel in a written opinion, determine that based on a
review of readily available facts, there is reason to believe that said agent
ultimately will be found entitled to indemnification.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than trustees
and officers of the Trust or any subsidiary thereof may be entitled by contract
or otherwise.
Section 9. LIMITATIONS. No indemnification or advance shall be made under
this Article, except as provided in Sections 5 or 6, in any circumstances where
it appears:
(a) That it would be inconsistent with a provision of the Declaration of
Trust, a resolution of the shareholders, or an agreement which prohibits or
otherwise limits indemnification that was in effect at the time of accrual of
the alleged cause of action asserted in the proceeding in which the expenses
were incurred or other amounts were paid; or
(b) That it would be inconsistent with any condition expressly imposed by
a court in approving a settlement.
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Section 10. INSURANCE. Upon and in the event of a determination by the
Board to purchase such insurance, the Trust shall purchase and maintain
insurance on behalf of any agent of the Trust against any liability asserted
against or incurred by the agent in such capacity or arising out of the agent's
status as such, but only to the extent that the Trust would have the power to
indemnify the agent against that liability under the provisions of this
Article.
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not
apply to any proceeding against any trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of the Trust as defined in Section 1 of
this Article. Nothing contained in this Article shall limit any right to
indemnification to which such a trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The Trust shall
keep at its principal executive office or at the office of its transfer agent
or registrar a record of its shareholders, providing the names and addresses of
all shareholders and the number, series and classes of shares held by each
shareholder.
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS. The Trust shall keep at
its principal executive office the original or a copy of these By-Laws as
amended from time to time, which shall be open to inspection by the
shareholders at all reasonable times during office hours.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The accounting
books and records and minutes of proceedings of the shareholders and the Board
and any committee or committees of the Board shall be kept at such place or
places designated by the Board or in the absence of such designation, at the
principal executive office of the Trust. The minutes shall be kept in written
form and the accounting books and records shall be kept either in written form
or in any other form capable of being converted into written form. The minutes,
accounting books and records shall be open to inspection upon the written
demand of any shareholder or holder of a voting trust certificate at any
reasonable time during usual business hours for a purpose reasonably related to
the holder's interests as a shareholder or as the holder of a voting trust
certificate. The inspection may be made in person or by an agent or attorney
and shall include the right to copy and make extracts.
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Section 4. INSPECTION BY TRUSTEES. Every trustee shall have the absolute
right at any reasonable time to inspect all books, records, and documents of
every kind and the physical properties of the Trust. This inspection by a
trustee may be made in person or by an agent or attorney and the right of
inspection includes the right to copy and make extracts of documents.
ARTICLE VIII
DIVIDENDS
Section 1. DECLARATION OF DIVIDENDS. Dividends upon the shares of
beneficial interest of the Trust may, subject to the provisions of the
Declaration of Trust, if any, be declared by the Board at any regular or
special meeting, pursuant to applicable law. Dividends may be paid in cash, in
property, or in shares of the Trust.
Section 2. RESERVES. Before payment of any dividend there may be set aside
out of any funds of the Trust available for dividends such sum or sums as the
Board may, from time to time, in its absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Trust, or for such other purpose
as the Board shall deem to be in the best interests of the Trust, and the Board
may abolish any such reserve in the manner in which it was created.
ARTICLE IX
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts,
or other orders for payment of money, notes or other evidences of indebtedness
issued in the name of or payable to the Trust shall be signed or endorsed by
such person or persons and in such manner as from time to time shall be
determined by resolution of the Board.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board, except as
otherwise provided in these By-Laws, may authorize any officer or officers or
agent or agents, to enter into any contract or execute any instrument in the
name of and on behalf of the Trust and this authority may be general or
confined to specific instances; and unless so authorized or ratified by the
Board or within the agency power of an officer, no officer, agent, or employee
shall have any power or authority to bind the Trust by any contract or
engagement or to pledge its credit or to render it liable for any purpose or
for any amount.
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Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of beneficial interest in any series of the Trust may be issued to a
shareholder upon his request when such shares are fully paid. All certificates
shall be signed in the name of the Trust by the chairperson of the Board or the
president or vice president and by the treasurer or an assistant treasurer or
the secretary or any assistant secretary, certifying the number of shares and
the series and class of shares owned by the shareholders. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
on a certificate shall have ceased to be such officer, transfer agent, or
registrar before such certificate is issued, it may be issued by the Trust with
the same effect as if such person were an officer, transfer agent or registrar
at the date of issue. Notwithstanding the foregoing, the Trust may adopt and
use a system of issuance, recordation and transfer of its shares by electronic
or other means.
Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no new
certificates for shares shall be issued to replace an old certificate unless
the latter is surrendered to the Trust and cancelled at the same time. The
Board may, in case any share certificate or certificate for any other security
is lost, stolen, or destroyed, authorize the issuance of a replacement
certificate on such terms and conditions as the Board may require, including a
provision for indemnification of the Trust secured by a bond or other adequate
security sufficient to protect the Trust against any claim that may be made
against it, including any expense or liability on account of the alleged loss,
theft, or destruction of the certificate or the issuance of the replacement
certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST. The
chairperson of the Board, the president or any vice president or any other
person authorized by resolution of the Board or by any of the foregoing
designated officers, is authorized to vote or represent on behalf of the Trust
any and all shares of any corporation, partnership, trust, or other entity,
foreign or domestic, standing in the name of the Trust. The authority granted
may be exercised in person or by a proxy duly executed by such designated
person.
Section 6. TRANSFER OF SHARES. Shares of the Trust shall be transferable
only on the record books of the Trust by the Person in whose name such shares
are registered, or by his or her duly authorized attorney or representative. In
all cases of transfer by an attorney-in-fact, the original power of attorney,
or an official copy thereof duly certified, shall be deposited and remain with
the Trust, its transfer agent or other duly authorized agent. In case of
transfers by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
presented to the Trust, transfer agent or other duly authorized agent, and may
be required
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to be deposited and remain with the Trust, its transfer agent or other duly
authorized agent. No transfer shall be made unless and until the certificate
issued to the transferor, if any, shall be delivered to the Trust, its transfer
agent or other duly authorized agent, properly endorsed.
Section 7. HOLDERS OF RECORD. The Trust shall be entitled to treat the
holder of record of any share or shares of the Trust as the owner thereof and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not the Trust shall have express or other notice thereof.
Section 8. FISCAL YEAR. The fiscal year of the Trust and each series
thereof shall end on the last day of December each year. The fiscal year of the
Trust or any series thereof may be refixed or changed from time to time by
resolution of the Board. The fiscal year of the Trust shall be the taxable
year of each series of the Trust.
ARTICLE X
AMENDMENTS
Section 1. AMENDMENT. These By-laws may be restated and/or amended at any
time, without the approval of the shareholders, by an instrument in writing
signed by, or a resolution of, a majority of the then Board.
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