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As filed with the Securities and Exchange Commission on October 8, 1999
Securities Act Registration No. 333-83419
Investment Company Act Registration No. 811-09485
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. 1 [x]
Post-Effective Amendment No. [ ]
--------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 1
CHOICE FUNDS
(Exact Name of Registrant as Specified in Charter)
5299 DTC BOULEVARD
ENGLEWOOD, COLORADO 80111
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (303) 488-2200
PATRICK S. ADAMS, PRESIDENT
CHOICE FUNDS
5299 DTC BOULEVARD
ENGLEWOOD, COLORADO 80111
(Name and Address of Agent for Service)
Copy to:
BARBARA A. NUGENT, ESQ.
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 ONE COMMERCE SQUARE
PHILADELPHIA, PENNSYLVANIA 19103-7098
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
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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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CHOICE FUNDS
FOCUS FUND
PROSPECTUS
October 31, 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.
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE> 3
TABLE OF CONTENTS
FUND OVERVIEW...............................................................
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
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.
Because the Fund is non-diversified, its 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, initial public offerings and securities of smaller issuers, including
issuers with limited operating histories. For temporary defensive purposes, the
Fund may invest in 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. In addition, the stocks of small or
unseasoned companies in which the Fund invests may be more volatile and less
liquid than the stocks of larger and well-established companies.
The 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.
An investment in the Fund is not a deposit of the bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any governmental
entity.
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 Fund had not commenced operations as of the date of this prospectus and,
therefore, has no performance information to report. Information on the Fund's
performance will be included in future amendments to this prospectus and in
periodic reports to shareholders.
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 Fund.
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. The
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 Fund.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (a)
(expenses deducted directly from fund assets)
<S> <C>
Management fee 1.0%
Distribution (12b-1) fee (b) 0.25%
Other expenses 0.79%
Total Annual Fund Operating Expenses (c) 2.04%
</TABLE>
(a) Because the Fund was established on July 16, 1999 and has no operating
history, the management fee is the fee to which the adviser is entitled under
its contract with the Fund, and the Distribution fee is the maximum rate that
can be charged under the Distribution Plan. "Other expenses" are estimates of
the other operating expenses (without taking into account any expense limitation
arrangement between the adviser and the Fund) based on the adviser's projections
of what those expenses will be in the Fund's first fiscal year ended October 31,
2000.
(b) The Fund has adopted a Distribution Plan under Rule 12b-1 that permits
the Fund to pay distribution fees for the sale and distribution of its shares.
Because these fees are paid out of the Fund's assets on an ongoing basis, over
(c) Pursuant to an expense limitation agreement between the adviser and the
Fund, the adviser has agreed to limit the total operating expenses of the Fund
to an annual rate of 2.25% of the Fund's average net assets until October 31,
2000. After such date, the expense limitation may be terminated at any time.
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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
Fund 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
- - The 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:
1 YEAR 3 YEARS
$207 $640
OTHER INVESTMENT PRACTICES AND RISKS
The principal risks of investing in the Fund are summarized above. The following
discussion provides more detail about some of those risks. This section also
describes additional investment practices that, while not principal, the Fund
may follow in seeking to achieve its objective, and the risks associated with
those particular practices.
COMMON STOCKS. Because the Fund invests in common stocks, it is subject to the
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 Fund invests 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, the 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 the Fund's
portfolio.
The Fund may invest without limit in stocks of small or unseasoned companies. To
the extent the Fund does so, your investment is subject to the following
additional risks:
- - Unseasoned companies. These are companies that have been in operation
for less than three years. The securities of these companies may have
limited liquidity and the prices of such securities may be volatile.
- - Small capitalization. An investment in companies with smaller
capitalizations involves greater risks than investing in larger, more
established companies. Small company stocks
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may be subject to more abrupt or erratic price movements, because the
stocks are traded in lower volume and their issuers are more sensitive to
changing conditions and have less certain growth prospects. Also, there are
fewer markets for these stocks and wider spreads between quoted bid and
asked prices in the over-the-counter market for these stocks. Small cap
stocks tend to be less liquid, particularly during periods of market
disruption. There is normally less publicly available information
concerning the issuers of these securities. Small companies in which the
Fund invests may have limited product lines, markets or financial
resources, or may be dependent on a small management group.
FIXED-INCOME SECURITIES. To the extent that the portfolio manager invests assets
of the Fund in fixed-income securities, which will only be done as a temporary
defensive measure, 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. "Duration" measures how a change in interest rates could affect
a bond's price by considering its yield, scheduled interest payments and
years to maturity. Generally, the longer a bond's duration, the greater the
exposure to interest rate risk.
- - 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." Although the Fund
will not invest in defaulted securities, it may invest in convertible
securities of all other grades, including securities rated as low as C. To
the extent the Fund purchases or holds convertible or other securities that
are below investment grade (securities rated BB/Ba or lower), 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. The Fund may, for temporary defensive purposes,
invest without limitation in cash or various short-term instruments, including
those of the U.S.
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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. The 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 Fund. To the extent the 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 the 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 the Fund's portfolio in pursuing the Fund's
investment strategy.
NON-DIVERSIFICATION. The 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 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 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 other mutual funds that invest in a
greater number of companies.
SECTOR RISK. 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.
FOREIGN SECURITIES. The Fund may invest without limit in foreign securities in
an effort to achieve its investment objective; however, it does not intend to
allocate a significant portion of its assets to this strategy. To the extent the
Fund invests in foreign securities, your investment 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 Fund is capital
appreciation. The Fund's objective may be changed by the Fund's board of
trustees without shareholder approval.
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You will receive advance written notice of any material changes to the Fund's
investment objective.
MANAGEMENT
INVESTMENT ADVISER
The Fund has entered into an investment advisory agreement with Choice
Investment Management, LLC. The adviser was organized on August 27, 1999 as a
Colorado limited liability company to become the Fund's investment adviser.
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 trustee of the adviser, has had 14 years of experience
as a portfolio manager. In addition to the Fund, 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 Fund's
investments and business affairs, subject to the supervision of the Fund's board
of trustees. The Fund has agreed to pay the adviser an annual management fee of
1.0% of the Fund's average daily net assets. The advisory fee accrues daily and
is paid monthly.
PORTFOLIO MANAGER
Patrick S. Adams is the portfolio manager for the Fund. As portfolio manager, he
is responsible for the day to day management of the Fund and the selection of
the Fund's investments. Prior to organizing the adviser and managing the Fund,
Mr. Adams served as Senior Vice President to Berger Associates, Executive Vice
President and portfolio manager of the Berger 100 Fund, President and portfolio
manager of the Berger IPT-100 Fund, President and co-portfolio manager of the
Berger IPT-Growth and Income Fund and Executive Vice President and co-portfolio
manager of the Berger Growth and Income Fund since February 1997. Mr. Berger
also served as the President and co-portfolio manager of the Berger Balanced
Fund since its inception in August 1997, and as President and portfolio manager
of the Berger Select Fund from its inception on December 31, 1997 until April
1999.
Prior to his affiliation with the Berger Funds, Mr. Adams acted as Senior Vice
President from June 1996 to January 1997 with Zurich Kemper Investments;
portfolio manager from March 1993 to May 1996 with Founders Asset Management,
Inc.; research analyst and portfolio manager from January 1990 to January 1992
and senior portfolio manager/senior analyst from January 1992 to February 1993
with First of America Investment Corp.; and portfolio manager from August 1985
to December 1989 with Capital Management Group - Star Bank.
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BUYING, SELLING AND EXCHANGING SHARES
BEFORE YOU INVEST
PROSPECTUS. This prospectus contains important information about the Fund.
Please read it carefully before you decide to invest.
ACCOUNT REGISTRATION. Once you have decided to invest in the Fund, 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 Fund 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 Fund offers a variety of retirement
accounts 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 Fund may waive the minimum investment amounts
at any time.
<TABLE>
<CAPTION>
TYPE OF ACCOUNT INITIAL MINIMUM PURCHASE ADDITIONAL MINIMUM PURCHASE
- ------------------------------------- --------------------------------- -------------------------------------
<S> <C> <C>
Regular (Individual, joint,
business or trust) $2,500 $100
IRA (including spousal, Roth and
SEP) $2,500 $100
Gifts to Minors (UTMA/UGMA)
$1,000 $100
Automatic Investment Plan $2,500 $100
</TABLE>
DETERMINING YOUR SHARE PRICE. The price at which you purchase and sell the
Fund's shares is called the Fund's net asset value (NAV) per share. The 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. The 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.
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The Fund does not calculate NAV on days the Exchange is closed (including
national holidays and Good Friday). The price of the shares you purchase or
redeem will be the next NAV calculated after your order is received and accepted
by the Fund's transfer agent, or other financial intermediary with the authority
to accept orders on the Fund's behalf.
The value of the Fund's assets is based on the current market value of its
investments. For securities with readily available market quotations, the Fund
uses those quotations to price a security. If a security does not have a readily
available market quotation, the Fund values the security based on fair value, as
determined in good faith in accordance with the guidelines established by the
Fund's board of trustees. The Fund may use pricing services to assist in the
determination of market value.
Foreign securities may trade during hours and on days that the Exchange is
closed and the Fund's NAV is not calculated. Although the Fund's NAV may be
affected, you will not be able to purchase or redeem shares on these days.
PURCHASING SHARES
You can buy shares directly from the Fund or through a broker-dealer or other
institution that the Fund has authorized to sell shares. To open an account or
buy additional shares from the Fund, just follow these steps:
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO ADD TO AN EXISTING ACCOUNT
- ------------------------------------------------------ -----------------------------------------------------
<S> <C>
BY MAIL: BY MAIL:
- - Complete and sign the account application or - Complete the investment slip that is
an IRA application. If you don't complete the included in your account statement, and write
application properly, your purchase may be your account number on your check.
delayed or rejected. - If you no longer have your investment
- - Make your check payable to "The Choice Funds." please reference your name, account
The Fund does not accept cash, third party number and address on your check.
checks, travelers checks or checks drawn - Make your check payable to "The Choice
on banks outside the U.S. Funds."
- - For IRA accounts, please specify the year for
which the contributions is made.
MAIL YOUR APPLICATION AND CHECK TO: MAIL THE SLIP AND THE CHECK TO:
Choice Funds Choice Funds
P.O. Box 759 P.O. Box 759
Milwaukee, WI 53201-0759 Milwaukee, WI 53201-0759
BY OVERNIGHT COURIER, SEND TO:
Choice Funds
207 E. Buffalo Street
Suite 315
Milwaukee, WI 53202
</TABLE>
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<TABLE>
<CAPTION>
BY TELEPHONE: BY TELEPHONE:
<S> <C>
- You automatically have the privilege to
You may not make your initial purchase by telephone. purchase additional shares by telephone unless
you have declined this service on your account
application. You may call 1-800-392-7107 to
purchase shares for an existing account.
- Investments made by electronic funds transfer
must be in amounts of at least $100 and not
greater than $50,000.
BY WIRE: BY WIRE:
- - To purchase shares by wire, the transfer - Send your investment to UMB Bank, n.a. by following
agent must have received a completed application the instructions listed in the column to the left.
and issued an account number to you. Call
1-800-392-7107 for instructions prior to wiring
the funds.
- - Send your investment to UMB Bank, n.a. with these
instructions:
UMB Bank, n.a.
ABA #101000695
For Credit to the Choice Funds
A/C #9870983788
For further credit to: investor account number;
name(s) of investor(s); SSN or TIN; name of Fund.
</TABLE>
If your purchase request is received by the Fund's transfer agent, broker-dealer
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.
"Good order" means that we have received your completed, signed application,
your payment, and any supporting legal documentation that may be required. 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 completed application, the
wired funds and all required information is provided in the wire instructions.
ADDITIONAL PURCHASE INFORMATION.
- - The Fund does 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 the Fund or the transfer agent. The Fund may redeem shares you
own in this or another identically registered Choice Funds account as
reimbursement for any such losses.
- - You must provide the Fund 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.
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<PAGE> 13
- - The Fund is 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 solicitation to buy or an offer to
sell shares of the Fund in any jurisdiction where it would be unlawful to
do so under the securities laws of that jurisdiction.
- - The Fund will not accept your application if you are investing for
another person as attorney-in-fact. The Fund 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 Fund
may reject a purchase order for any reason.
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS. In addition to purchasing shares
from the Fund, 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 Fund offers.
SELLING SHARES
You may sell your shares on any day the Fund is 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 Fund normally pays redemption
proceeds within two business days, but may take up to seven days. You can redeem
shares purchased by check at any time. However, while the Fund will process your
redemption on the day it receives your request, it will not pay your redemption
proceeds until your check has cleared, which may take up to 15 days from the
date of purchase. You can avoid this delay by purchasing shares by a federal
funds wire. Please note that this provision is intended to protect the Fund and
its shareholders from loss.
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 registered
owners must sign.
- - Include a signature guarantee, if necessary (see "Signature Guarantees",
below).
- - Mail your request to:
REGULAR MAIL OVERNIGHT COURIER
Choice Funds Choice Funds
P.O. Box 759 207 East Buffalo Street, Suite 315
Milwaukee, WI 53201-0759 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 1-800-392-7107, 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.
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<PAGE> 14
Redemption requests received in good order 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. "Good order" means that you have included all required
information and documentation along with any required signature guarantees.
Redemption requests sent by facsimile will not be honored.
Please note that the Fund 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 1-800-392-7107.
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.
- - The Fund reserves 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 the Fund is not
reasonably practicable, the 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 the 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 Fund 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 Fund reserves the right to temporarily
discontinue or limit the telephone purchase, redemption or exchange
privileges at any time during such periods. If you are unable to reach the
Fund by telephone, please send your redemption request via overnight courier.
- - The Fund reserves the right to refuse a telephone redemption request if it
believes it is advisable to do so. The Fund uses 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 Fund may implement other procedures from time to time. If
12
<PAGE> 15
these procedures are followed, the Fund and its 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 30 days; or
- - if your redemption is for $50,000 or more.
The Fund requires signature guarantees to protect both you and the Fund 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 Choice Fund account owners share the high cost of
maintaining accounts with low balances. To reduce this cost, the Fund reserves
the right to close an account when a redemption or exchange leaves your account
balance below $1,000, 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 60 days to add additional money to bring the balance
up to $1,000 or to renew your automatic investment plan. This provision does not
apply to retirement plan accounts, automatic investment plans or UGMA/UTMA
accounts.
EXCHANGING SHARES
You may exchange all or a portion of your shares in the Fund for shares of the
Northern Money Market Fund (the "Money Market Fund") at their relative net asset
values and may also exchange back into the 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 1-800-392-7107. The Money
Market Fund is not affiliated with the adviser or the Fund.
When you exchange from the 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.
13
<PAGE> 16
LIMITATIONS ON EXCHANGES. The Fund believes that use of the exchange privilege
by investors utilizing market-timing strategies adversely affects the Fund and
its shareholders. Therefore, the Fund 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 Fund reserves the right to suspend, limit or terminate
the exchange privilege of any investor who uses the exchange privilege more than
six times during any twelve month period, or, in the Fund's opinion, engages in
excessive trading that would be disadvantageous to the Fund or its shareholders.
The Fund 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 1-800-392-7107.
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
1-800-392-7107 to determine what additional documents are required.
SPECIAL FEATURES AND SERVICES
RETIREMENT ACCOUNT OPTIONS
The Fund offers a variety of retirement accounts for individuals and
organizations. These accounts may offer you tax advantages. For information on
establishing retirement accounts, please call 1-800-392-7107. You should consult
with your legal and/or tax adviser before you establish a retirement account.
The Fund currently accepts investments into the following kinds of retirement
accounts:
- - Traditional IRA (including spousal IRA)
- - "Rollover" IRA
- - Roth IRA
- - SEP-IRA
14
<PAGE> 17
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
1-800-392-7107.
AUTOMATED TELEPHONE SERVICE
The Fund offers 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 Fund and gives you account balances and history (e.g., last
transaction, latest dividend distribution). To access the automated system,
please call 1-800-392-7107.
AUTOMATIC INVESTMENT PLAN
To make regular investing more convenient, you can open an automatic investment
plan with an initial investment of $2,500 and a minimum investment of $100 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 Fund. You can terminate your
automatic investment plan at any time by calling the Fund 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 1-800-392-7107 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 $500 or more on a monthly or
quarterly basis. The proceeds of a withdrawal can be sent to your address of
record or sent by electronic transfer to your bank. This plan may be a useful
way to deal with mandatory withdrawals from an IRA. If you want to implement
this plan, please fill out the appropriate section of the purchase application
or call 1-800-392-7107 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.
15
<PAGE> 18
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 Fund sends semi-annual and annual reports to
its shareholders. These reports provide financial information on your
investments and give you a "snapshot" of the Fund's portfolio holdings at the
end of its semi-annual and fiscal year periods. Additionally, the annual report
discusses the factors that materially affected the Fund's performance for its
most recently completed year, including relevant market conditions and the
investment strategies and techniques that were used.
Prospectus. Each year, the Fund sends 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 PLAN
The Fund has adopted a plan under Rule 12b-1 that allows the 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, the Fund may pay a fee of up to 0.25% of its
average daily net assets (computed on an annual basis). To the extent these fees
are paid by the Fund, its expenses will increase. Because 12b-1 fees are paid
out of the 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.
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS AND SUB-AGENTS
The Fund may authorize one or more broker-dealers or other financial services
agents or sub-agents to accept purchase, redemption and exchange orders on the
Fund's behalf. In these cases, the 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, the Fund could
be adversely affected if the computer systems used by its investment adviser and
the Fund's 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
16
<PAGE> 19
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 Fund's 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 Fund. Also, companies in which the Fund invests could be adversely
affected by the Year 2000 Problem. It is also possible that the normal operation
of the Fund and its 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
The Fund intends to distribute virtually all of its net investment income and
net realized capital gains at least once a year. The Fund 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 Fund will send a check to your address of
record.
A dividend from net investment income represents the income the 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 the
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.
The Fund will distribute any net realized capital gains and dividends annually,
normally in December. If the 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.
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 the 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 the Fund's distribution schedule before you invest by calling
1-800-392-7107.
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 the Fund's net short-term
capital gains are taxable to you as ordinary income. Distributions of the 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.
17
<PAGE> 20
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 Fund.
18
<PAGE> 21
FOR MORE INFORMATION
For more information about the Choice Funds, ask for a free copy of the
following:
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information (SAI) contains more detailed information
about the 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 Fund's holdings. The annual
report describes the market conditions, economic trends and investment
strategies that significantly affected the Fund's performance during its last
fiscal year.
To obtain copies of the SAI, annual or semi-annual reports, or to get other
information about the Fund, please write or call us at:
Choice Funds
P.O. Box 759
207 E. Buffalo Street, Suite 315 (for overnight deliveries)
Milwaukee, WI 53202
1-800-392-7107
You can also review and copy the SAI and other information about the Fund 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.
<PAGE> 22
CHOICE FUNDS
BALANCED FUND
PROSPECTUS
October 31, 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.
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE> 23
TABLE OF CONTENTS
FUND OVERVIEW..................................................................
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> 24
FUND OVERVIEW
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. From time to time, the Fund may take
substantial positions in initial public offerings and securities of smaller
issuers, including issuers with limited operating histories.
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.
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
2
<PAGE> 25
risk. Credit risk means that the issuer of a security may default or be unable
to pay its obligations when due. Interest rate risk is the risk that changes in
interest rates will adversely affect the value of the portfolio's securities. As
a result of these risks, the price of the Fund's investments may go down and you
could lose money on your investment. In addition, the stocks of small or
unseasoned companies in which the Fund invests may be more volatile and less
liquid than the stocks of larger and well-established companies. 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. These types of securities are subject
to the additional risk that the underlying assets (loans) may be prepaid at any
time. 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.
An investment in the Fund is not a deposit of the bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any governmental
entity.
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 Fund had not commenced operations as of the date of this prospectus and,
therefore, has no performance information to report. Information on the Fund's
performance will be included in future amendments to this prospectus and in
periodic reports to shareholders.
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 Fund.
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. The
Fund's operating expenses will vary from year to year.
3
<PAGE> 26
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
<TABLE>
<CAPTION>
<S> <C>
------------------------------------------------------------- ----------------------
ANNUAL FUND OPERATING EXPENSES (a)
(expenses deducted directly from fund assets)
------------------------------------------------------------- ----------------------
Management fee 0.75%
------------------------------------------------------------- ----------------------
Distribution (12b-1) fee (b) 0.25%
------------------------------------------------------------- ----------------------
Other expenses 1.05%
------------------------------------------------------------- ----------------------
Total Annual Fund Operating Expenses 2.05%
------------------------------------------------------------- ----------------------
Expense Reimbursement (c) (0.05%)
------------------------------------------------------------- ----------------------
Net Expenses 2.00%
------------------------------------------------------------- ----------------------
</TABLE>
(a) Because the Fund was established on July 16, 1999 and has no operating
history, the management fee is the fee to which the adviser is entitled under
its contract with the Fund, and the Distribution fee is the maximum rate that
can be charged under the Distribution Plan. "Other expenses" are estimates of
the other operating expenses (without taking into account any expense limitation
arrangement between the adviser and the Fund) based on the adviser's projections
of what those expenses will be in the Fund's first fiscal year ended October 31,
2000.
(b) The Fund has adopted a Distribution Plan under Rule 12b-1 that permits
the Fund to pay distribution fees for the sale and distribution of its shares.
Because these fees are paid out of the 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 charge.
(c) Pursuant to an expense limitation agreement between the adviser and the
Fund, the adviser has agreed to limit the total operating expenses of the Fund
to an annual rate of 2.00% of the Fund's average net assets until October 31,
2000. After such date, the expense limitation may be terminated at any time.
Example: The following example helps you compare the cost of investing
in the Fund 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
- - The 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>
<CAPTION>
<S> <C>
-------------------------------- -----------------------------------
1 YEAR 3 YEARS
-------------------------------- -----------------------------------
$208 $643
-------------------------------- -----------------------------------
</TABLE>
OTHER INVESTMENT PRACTICES AND RISKS
The principal risks of investing in the Fund are summarized above. The following
discussion provides more detail about some of those risks. This section also
describes additional investment practices that, while not principal, the Fund
may follow in seeking to achieve its objective, and the risks associated with
those particular practices.
4
<PAGE> 27
COMMON STOCKS. To the extent the Fund invests in common stocks, it is 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 Fund
invests 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, the 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 the Fund's
portfolio.
The Fund may invest in stocks of small or unseasoned companies. To the extent
the Fund does so, your investment is subject to the following additional risks:
- - Unseasoned companies. These are companies that have been in operation
for less than three years. The securities of these companies may have
limited liquidity and the prices of such securities may be volatile.
- - Small capitalization. An investment in companies with smaller
capitalizations involves greater risks than investing in larger, more
established companies. Small company stocks may be subject to more abrupt or
erratic price movements, because the stocks are traded in lower volume and
their issuers are more sensitive to changing conditions and have less
certain growth prospects. Also, there are fewer markets for these stocks and
wider spreads between quoted bid and asked prices in the over-the-counter
market for these stocks. Small cap stocks tend to be less liquid,
particularly during periods of market disruption. There is normally less
publicly available information concerning the issuers of these securities.
Small companies in which the Fund invests may have limited product lines,
markets or financial resources, or may be dependent on a small management
group.
FIXED-INCOME SECURITIES. To the extent that the portfolio manager invests
assets of the Fund 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. "Duration" measures how a change in interest
rates could affect a bond's price by considering its yield, scheduled
interest payments and years to maturity. Generally, the longer a bond's
duration, the greater the exposure to interest rate risk.
5
<PAGE> 28
- - 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."
Although the Fund will not invest in defaulted securities, it may invest in
convertible securities of all other grades, including securities rated as
low as C. To the extent the Fund purchases or holds convertible or other
securities that are below investment grade (securities rated BB/Ba or
lower), 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. The Fund 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. The 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 Fund. To the extent the 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 the 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 the Fund's portfolio in pursuing the Fund's
investment strategy.
MORTGAGE- AND ASSET-BACKED SECURITIES. The 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
6
<PAGE> 29
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. The Fund may invest without limit in foreign securities in
an effort to achieve its investment objective; however, it does not intend to
allocate a significant portion of its assets to this strategy. To the extent the
Fund invests in foreign securities, your investment 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 objectives of the Fund are capital
appreciation and current income. The Fund's objectives may be changed by the
Fund's board of trustees without shareholder approval. You will receive advance
written notice of any material changes to the Fund's investment objectives.
MANAGEMENT
INVESTMENT ADVISER
The Fund has entered into an investment advisory agreement with Choice
Investment Management, LLC. The adviser was organized on August 27, 1999 as a
Colorado limited liability company to become the Fund's investment adviser.
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 trustee of the adviser, has had 14 years of experience
as a portfolio manager. In addition to the Fund, 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 Fund's
investments and business affairs, subject to the supervision of the Fund's board
of trustees. The Fund has agreed to pay the adviser an annual management fee of
0.75% of the Fund's average daily net assets. The advisory fee accrues daily and
is paid monthly.
7
<PAGE> 30
PORTFOLIO MANAGER
Patrick S. Adams is the portfolio manager for the Fund. As portfolio manager, he
is responsible for the day to day management of the Fund and the selection of
the Fund's investments. Prior to organizing the adviser and managing the Fund,
Mr. Adams served as Senior Vice President to Berger Associates, Executive Vice
President and portfolio manager of the Berger 100 Fund, President and portfolio
manager of the Berger IPT-100 Fund, President and co-portfolio manager of the
Berger IPT-Growth and Income Fund and Executive Vice President and co-portfolio
manager of the Berger Growth and Income Fund since February 1997. Mr. Berger
also served as the President and co-portfolio manager of the Berger Balanced
Fund since its inception in August 1997, and as President and portfolio manager
of the Berger Select Fund from its inception on December 31, 1997 until April
1999.
Prior to his affiliation with the Berger Funds, Mr. Adams acted as Senior Vice
President from June 1996 to January 1997 with Zurich Kemper Investments;
portfolio manager from March 1993 to May 1996 with Founders Asset Management,
Inc.; research analyst and portfolio manager from January 1990 to January 1992
and senior portfolio manager/senior analyst from January 1992 to February 1993
with First of America Investment Corp.; and portfolio manager from August 1985
to December 1989 with Capital Management Group - Star Bank.
BUYING, SELLING AND EXCHANGING SHARES
BEFORE YOU INVEST
PROSPECTUS. This prospectus contains important information about the
Fund. Please read it carefully before you
decide to invest.
ACCOUNT REGISTRATION. Once you have decided to invest in the Fund, 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 Fund 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 Fund offers a variety of
retirement accounts for individuals and institutions. Please refer to
"Retirement Account Options," below, for more information about these types
of accounts.
8
<PAGE> 31
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 Fund may waive the minimum investment amounts
at any time.
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------- --------------------------------- -------------------------------------
TYPE OF ACCOUNT INITIAL MINIMUM PURCHASE ADDITIONAL MINIMUM PURCHASE
- ------------------------------------- --------------------------------- -------------------------------------
Regular (Individual, joint,
business or trust) $2,500 $100
- ------------------------------------- --------------------------------- -------------------------------------
IRA (including spousal,
Roth and SEP) $2,500 $100
- ------------------------------------- --------------------------------- -------------------------------------
Gifts to Minors
(UTMA/UGMA) $1000 $100
- ------------------------------------- --------------------------------- -------------------------------------
Automatic Investment Plan $2,500 $100
- ------------------------------------- --------------------------------- -------------------------------------
</TABLE>
DETERMINING YOUR SHARE PRICE. The price at which you purchase and sell the
Fund's shares is called the Fund's net asset value (NAV) per share. The 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. The 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 Fund does not calculate NAV on days the Exchange is closed
(including national holidays and Good Friday). The price of the shares you
purchase or redeem will be the next NAV calculated after your order is received
and accepted by the Fund's transfer agent, or other financial intermediary with
the authority to accept orders on the Fund's behalf.
The value of the Fund's assets is based on the current market value of its
investments. For securities with readily available market quotations, the Fund
uses those quotations to price a security. If a security does not have a readily
available market quotation, the Fund values the security based on fair value, as
determined in good faith in accordance with the guidelines established by the
Fund's board of trustees. The Fund may use pricing services to assist in the
determination of market value.
Foreign securities may trade during hours and on days that the Exchange is
closed and the Fund's NAV is not calculated. Although the Fund's NAV may be
affected, you will not be able to purchase or redeem shares on these days.
PURCHASING SHARES
You can buy shares directly from the Fund or through a broker-dealer or other
institution that the Fund has authorized to sell shares. To open an account or
buy additional shares from the Fund, just follow these steps:
9
<PAGE> 32
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------- -----------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN EXISTING ACCOUNT
- ------------------------------------------------------- -----------------------------------------------------
BY MAIL: BY MAIL:
- - Complete and sign the account application or - Complete the investment slip that is
an IRA application. If you don't complete the included in your account statement, and write
application properly, your purchase may be your account number on your check.
delayed or rejected. - If you no longer have your investment
- - Make your check payable to "The Choice Funds." slip, please reference your name, account
The Fund does not accept cash, third number and address on your check.
party checks, travelers checks or checks drawn - Make your check payable to "The Choice Funds."
on banks outside the U.S.
- - For IRA accounts, please specify the year for
which the contribution is made
- ------------------------------------------------------- -----------------------------------------------------
MAIL YOUR APPLICATION AND CHECK TO: MAIL THE SLIP AND THE CHECK TO:
Choice Funds Choice Funds
P.O. Box 759 P.O. Box 759
Milwaukee, WI 53201-0759 Milwaukee, WI 53201-0759
- ------------------------------------------------------- -----------------------------------------------------
BY OVERNIGHT COURIER, SEND TO:
Choice Funds
207 E. Buffalo Street
Suite 315
Milwaukee, WI 53202
- ------------------------------------------------------- -----------------------------------------------------
BY TELEPHONE: BY TELEPHONE:
- You automatically have the privilege to
You may not make your initial purchase by purchase additional shares by telephone
telephone. unless you have declined this service on
your account application. You may call 1-
800-392-7107 to purchase shares for an
existing account.
- Investments made by electronic funds
transfer must be in amounts of at least $100
and not greater than $50,000.
- ------------------------------------------------------- -----------------------------------------------------
BY WIRE: BY WIRE:
- - To purchase shares by wire, the transfer Send you investment to UMB Bank, n.a. by
agent must have received a completed following the instructions listed in the column
application and issued an account number to the left.
to you. Call 1-800-392-7107 for
instructions prior to wiring the funds.
- - Send your investment to UMB Bank, n.a.
with these instructions:
UMB Bank, n.a.
ABA #101000695
For Credit to the Choice Funds
A/C #9870983788
For further credit to: investor account
number; name(s) of investor(s); SSN or
TIN; name of Fund.
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
10
<PAGE> 33
If your purchase request is received by the Fund's transfer agent, broker-dealer
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.
"Good order" means that we have received your completed, signed application,
your payment, and any supporting legal documentation that may be required. 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 completed application, the
wired funds and all required information is provided in the wire instructions.
ADDITIONAL PURCHASE INFORMATION.
- - The Fund does 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 the Fund or the transfer agent. The Fund may redeem shares you
own in this or another identically registered Choice Funds account as
reimbursement for any such losses.
- - You must provide the Fund 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 Fund is 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 solicitation to buy or an offer to
sell shares of the Fund in any jurisdiction where it would be unlawful to
do so under the securities laws of that jurisdiction.
- - The Fund will not accept your application if you are investing for
another person as attorney-in-fact. The Fund 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 Fund
may reject a purchase order for any reason.
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS. In addition to purchasing shares
from the Fund, 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 Fund offers.
SELLING SHARES
You may sell your shares on any day the Fund is 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 Fund normally pays redemption
proceeds within two business days, but may take up to seven days. You can redeem
shares purchased by check at any time. However, while the Fund will process your
redemption on the day it receives your request, it will not pay your
11
<PAGE> 34
redemption proceeds until your check has cleared, which may take up to 15 days
from the date of purchase. You can avoid this delay by purchasing shares by a
federal funds wire. Please note that this provision is intended to protect the
Fund and its shareholders from loss.
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 registered
owners must sign.
- - Include a signature guarantee, if necessary (see "Signature Guarantees",
below).
- - Mail your request to:
<TABLE>
<S> <C> <C>
REGULAR MAIL OVERNIGHT COURIER
------------ -----------------
Choice Funds Choice Funds
P.O. Box 759 207 East Buffalo Street, Suite 315
Milwaukee, WI 53201-0759 Milwaukee, WI 53202
</TABLE>
BY TELEPHONE
- - You automatically have the privilege to redeem shares by telephone
unless you have declined this option on your account application.
- - Call 1-800-392-7107, 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 good order 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. "Good order" means that you have included all required
information and documentation along with any required signature guarantees.
Redemption requests sent by facsimile will not be honored.
Please note that the fund 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 1-800-392-7107.
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.
- - The Fund reserves 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 the Fund is
not reasonably practicable, the Fund cannot fairly determine
12
<PAGE> 35
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 the 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 Fund 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 Fund reserves the right to
temporarily discontinue or limit the telephone purchase, redemption or
exchange privileges at any time during such periods. If you are unable to
reach the Fund by telephone, please send your redemption request via
overnight courier.
- - The Fund reserves the right to refuse a telephone redemption request if
it believes it is advisable to do so. The Fund uses 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 Fund may implement other procedures from time to time.
If these procedures are followed, the Fund and its 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 30 days;
or
- - if your redemption is for $50,000 or more.
The Fund requires signature guarantees to protect both you and the Fund 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 Choice Fund account owners share the high cost of
maintaining accounts with low balances. To reduce this cost, the Fund reserves
the right to close an account when a redemption or exchange leaves your account
balance below $1,000, 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 60 days to add additional money to bring the balance
13
<PAGE> 36
up to $1,000 or to renew your automatic investment plan. This provision does not
apply to retirement plan accounts, automatic investment plans or UGMA/UTMA
accounts.
EXCHANGING SHARES
You may exchange all or a portion of your shares in the Fund for shares of the
Northern Money Market Fund (the "Money Market Fund") at their relative net asset
values and may also exchange back into the 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 1-800-392-7107. The Money
Market Fund is not affiliated with the adviser or the Fund.
When you exchange from the 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 Fund believes that use of the exchange privilege
by investors utilizing market-timing strategies adversely affects the Fund and
its shareholders. Therefore, the Fund 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 Fund reserves the right to suspend, limit or terminate
the exchange privilege of any investor who uses the exchange privilege more than
six times during any twelve month period, or, in the Fund's opinion, engages in
excessive trading that would be disadvantageous to the Fund or its shareholders.
The Fund 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 1-800-392-7107.
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
14
<PAGE> 37
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 1-800-392-7107 to determine what additional documents are
required.
SPECIAL FEATURES AND SERVICES
RETIREMENT ACCOUNT OPTIONS
The Fund offers a variety of retirement accounts for individuals and
organizations. These accounts may offer you tax advantages. For information on
establishing retirement accounts, please call 1-800-392-7107. You should consult
with your legal and/or tax adviser before you establish a retirement account.
The Fund currently accepts investments into the following kinds of retirement
accounts:
- - 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
1-800-392-7107.
AUTOMATED TELEPHONE SERVICE
The Fund offers 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 Fund and gives you account balances and history (e.g., last
transaction, latest dividend distribution). To access the automated system,
please call 1-800-392-7107.
AUTOMATIC INVESTMENT PLAN
To make regular investing more convenient, you can open an automatic investment
plan with an initial investment of $2,500 and a minimum investment of $100 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 Fund. You can terminate your
automatic investment plan at any time by calling the Fund 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 1-800-392-7107 for
assistance.
15
<PAGE> 38
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 $500 or more on a monthly or
quarterly basis. The proceeds of a withdrawal can be sent to your address of
record or sent by electronic transfer to your bank. This plan may be a useful
way to deal with mandatory withdrawals from an IRA. If you want to implement
this plan, please fill out the appropriate section of the purchase application
or call 1-800-392-7107 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 Fund sends semi-annual and annual reports to
its shareholders. These reports provide financial information on your
investments and give you a "snapshot" of the Fund's portfolio holdings at the
end of its semi-annual and fiscal year periods. Additionally, the annual report
discusses the factors that materially affected the Fund's performance for its
most recently completed year, including relevant market conditions and the
investment strategies and techniques that were used.
PROSPECTUS. Each year, the Fund sends 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 PLAN
The Fund has adopted a plan under Rule 12b-1 that allows the 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, the Fund may pay a fee of up to 0.25% of its
average daily net assets (computed on an annual basis). To the extent these fees
are paid by the Fund, its expenses will increase. Because 12b-1 fees are paid
out of the Fund's net
16
<PAGE> 39
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.
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS AND SUB-AGENTS
The Fund may authorize one or more broker-dealers or other financial services
agents or sub-agents to accept purchase, redemption and exchange orders on the
Fund's behalf. In these cases, the 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, the Fund could
be adversely affected if the computer systems used by its investment adviser and
the Fund's 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 Fund's 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 Fund. Also,
companies in which the Fund invests could be adversely affected by the Year 2000
Problem. It is also possible that the normal operation of the Fund and its
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
The Fund intends to distribute virtually all of its net investment income and
net realized capital gains at least once a year. The Fund 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 Fund will send a check to your address of
record.
A DIVIDEND from net investment income represents the income the 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 the
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.
17
<PAGE> 40
The Fund will distribute any net realized capital gains annually, normally in
December. If the 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 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 the 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 the Fund's distribution schedule before you invest by calling
1-800-392-7107.
- --------------------------------------------------------------------------------
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 the Fund's net short-term
capital gains are taxable to you as ordinary income. Distributions of the 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 Fund.
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<PAGE> 41
FOR MORE INFORMATION
For more information about the Choice Funds, ask for a free copy of the
following:
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information (SAI) contains more detailed information
about the 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 Fund's holdings. The annual
report describes the market conditions, economic trends and investment
strategies that significantly affected the Fund's performance during its last
fiscal year.
- --------------------------------------------------------------------------------
To obtain copies of the SAI, annual or semi-annual reports, or to get other
information about the Fund, please write or call us at:
Choice Funds
P.O. Box 759
207 E. Buffalo Street, Suite 315 (for overnight deliveries)
Milwaukee, WI 53202
1-800-392-7107
- --------------------------------------------------------------------------------
You can also review and copy the SAI and other information about the Fund 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. 811-09485
<PAGE> 42
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
CHOICE FUNDS
FOCUS FUND
This Statement of Additional Information should be read in conjunction
with the Prospectus for the Choice Focus Fund dated October 31, 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 Choice Focus Fund based solely on the
information contained herein. You may obtain copies of the Prospectus for the
Choice Focus Fund without charge by calling 1-800-392-7107 or by writing to
Choice Funds, P.O. Box 759, Milwaukee, Wisconsin 53201-0759.
The information in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
This Statement of Additional Information is dated October 31, 1999.
<PAGE> 43
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FUND ORGANIZATION................................................................................
INVESTMENT POLICIES AND PRACTICES................................................................
Investment Restrictions.................................................................
Investment Strategies and Risks.........................................................
MANAGEMENT OF THE FUND...........................................................................
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 Fund. The Prospectus does not constitute an
offering by the Fund in any jurisdiction in which such offering may not lawfully
be made.
2
<PAGE> 44
FUND ORGANIZATION
Choice Funds is an open-end management investment company
organized as a Delaware business trust on July 16, 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 one
series of shares, the Focus Fund (the "Fund").
INVESTMENT POLICIES AND PRACTICES
INVESTMENT RESTRICTIONS
Consistent with the Fund's investment objective, the Fund has adopted
certain investment restrictions. Unless otherwise noted, whenever an investment
restriction states a maximum percentage of the 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 the 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 the Fund's investment limitations except with
respect to the Fund's restrictions on borrowings as set forth in restriction 6
below.
The 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 Fund's fundamental investment restrictions.
Except as otherwise noted, the Fund may not:
1. Issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended (the "Investment Company Act"); provided,
however, the 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); provided,
however, that the Fund may make loans to affiliated investment companies to the
extent permitted by the Investment Company Act or any exemptions there from that
may be granted by the SEC.
3. 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.
4. Act as an underwriter or distributor of securities other than
shares of the Fund except to the extent that the 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 the
Fund may be deemed an underwriter under the Securities Act, by virtue of
disposing of portfolio securities.
3
<PAGE> 45
5. 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).
6. Borrow money, except that the Fund may borrow money from a bank or
affiliated investment companies to the extent permitted by the Investment
Company Act or any exemption there from that may be granted by the SEC or 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. The Fund will not purchase securities while its borrowings exceed
5% of its total assets.
7. 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
Fund. These restrictions are operating policies of the Fund and may be changed
by the Trustees without shareholder approval.
The 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 the 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.
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
4
<PAGE> 46
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.
7. With respect to fifty percent (50%) 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 10% of the outstanding voting
securities of any one issuer.
In determining industry classifications with respect to the Fund, 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 the Fund, does not exceed 10% of
the value of the Fund's assets.
INVESTMENT STRATEGIES AND RISKS
The Fund is a non-diversified fund that seeks capital appreciation. The
Prospectus describes the Fund's investment objective, as well as the principal
investment strategies used to achieve that objective and the principal risks
associated with such strategy. The following information supplements the
discussion about the Fund set forth in the Prospectus under the headings "Fund
Overview" and "Other Investment Practices and Risks."
TEMPORARY DEFENSIVE MEASURES. The Fund may increase its 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, the Fund could miss the opportunity 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 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
5
<PAGE> 47
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 Fund may engage in a high level of trading
in seeking to achieve its investment objective. The portfolio turnover rate for
the Fund 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
the 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 Fund is not restricted by policy
with regard to portfolio turnover and will make changes in its investment
portfolio 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 Fund. Although the existence of a
higher portfolio turnover rate has no direct correlation to the tax liability of
the Fund, sales of certain stocks will result in realized gains, and, possibly,
in increased taxable distributions to shareholders.
INITIAL PUBLIC OFFERINGS. The Fund 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, the 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. As a temporary defensive measure, the 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. 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.
6
<PAGE> 48
FOREIGN SECURITIES. The 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 the 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 Fund
may be subject to greater fluctuation than securities of domestic companies.
Changes in foreign currency exchange rates will affect the value of the
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. The Fund may
invest in securities of companies with limited operating histories. The Fund
considers 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 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.
7
<PAGE> 49
SECURITIES OF SMALLER COMPANIES. The Fund 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 Fund invests 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. The 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. The Fund 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 the 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, the Fund might have to incur the potentially substantial
expense and delay associated with effecting registration. The 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 the Fund.
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
8
<PAGE> 50
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
Fund's limitation on illiquid securities. Because an active market may not exist
for illiquid securities, the Fund 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, the 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, the 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, the 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. The 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, the 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 Fund, 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
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 the Fund's portfolio as to issuers; and
whether the securities are rated by a rating agency and, if so, the ratings
assigned.
9
<PAGE> 51
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.
The 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 the
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
NON-INVESTMENT GRADE SECURITIES. The Fund has the authority to invest
in convertible debt securities that are of a quality less than investment grade
(so-called "junk bonds"). The Fund has 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 Fund will
not invest in any securities in default at the time of purchase, and will limit
its investment in non-investment grade convertible debt securities to less than
20% of its net assets at the time of purchase. In addition, investment grade
bonds in which the Fund invests may be downgraded. If convertible securities
purchased by the Fund are downgraded following purchase, or if other
circumstances cause 20% or more of the 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.
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.
10
<PAGE> 52
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 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, the 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 the 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 the 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, the Fund may be forced to liquidate
these securities at a substantial discount. Any such liquidation would reduce
the 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, the 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 monitors the 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. The 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
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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 the 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. The 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 the Fund of any single investment, it does
not reduce the overall risk of investing in lower-rated securities.
ZEROS/STRIPS. The Fund 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. The 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 the Fund's acquisition of the securities and
normally will be within a shorter period of time. The Fund will not enter into a
repurchase agreement maturing in 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
Fund's custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a
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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 the 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
the 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, the 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 the
Fund. If the seller were to be subject to a federal bankruptcy proceeding, the
ability of the 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. The Fund may purchase and
sell securities on a when-issued or delayed delivery basis. However, the Fund
does not currently intend 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 the 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 the 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 the Fund until it receives delivery or payment
from the other party to the transaction.
When the 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 Fund may lend its 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 failures to deliver
securities or completing arbitrage operations. By lending its securities, the
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.
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The 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, 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 Fund bears 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. The Fund will not
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 the 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. The 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 the Fund's securities or the price of
securities that the 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, the Fund is not
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 Fund on a cost-effective basis, that they
will be used or, if used, will achieve the intended result.
A hedging transaction may partially protect the Fund from a decline in
the value of a particular security or its portfolio generally, although hedging
may also limit the Fund's 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 the 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, the
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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 the 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 the 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 Fund 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 Fund may only write call options that are
covered and only up to 25% of the Fund's total assets.
Options. The 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 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.
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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.
The 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 the Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If the 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 the Fund expires on the stipulated expiration date or if the 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 the Fund is exercised, the proceeds
of the sale will be increased by the net premium originally received and the
Fund will realize a gain or loss.
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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 Fund 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, the
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 the Fund. Inasmuch as the Fund's securities will not duplicate the
components of an index, the correlation will not be perfect. Consequently, the
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 the 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 the 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
the Fund is unable to close out a call option on securities 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 the Fund is unable to effect a closing sale
transaction with respect to options on securities that it
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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 the Fund has purchased) expose the Fund to an obligation to another
party. The 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. The 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 Fund will
segregate assets to cover transactions in which the Fund writes or sells
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 the
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 Fund 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 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
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credited to the Fund 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 the Fund's investment
limitations. The 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 the 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. The 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, the 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, the 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 the 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 the 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. The 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
the 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, the 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.
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
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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 the Fund still may not result in a successful use of futures.
Futures contracts entail additional risks. Although the 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, the 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
the Fund will not match exactly the Fund's current or potential investments. The
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 the
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 the Fund's investments and its futures positions may also
result from differing levels of 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. The
Fund may buy or sell futures contracts with a value less than or equal to the
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securities it wishes to hedge or is considering purchasing. If price changes in
the 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 the 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, the 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, the Fund's access to other assets held to cover its futures positions
also could be impaired.
Options On Futures Contracts. The Fund may buy and write options on
futures contracts for hedging purposes. An option on a futures contract gives
the 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, the Fund may buy a call
option on a futures contract to hedge against a market advance, and the 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,
the 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 the 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, the
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, the 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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<PAGE> 63
The amount of risk the 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 Fund currently intends that it will
only use forward contracts or commitments for hedging purposes and will only use
forward foreign currency exchange contracts, although the 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 Fund's possible principal uses
of forward foreign currency exchange contracts ("forward currency contracts").
The 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. The
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"). The 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. The 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 the 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 the Fund's currency exposure from one
foreign currency to another limits the Fund's opportunity to profit from
increases in the value of the original currency and involves a risk of increased
losses to the Fund if its investment manager's
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<PAGE> 64
projection of future exchange rates is inaccurate. Unforeseen changes in
currency prices may result in poorer overall performance for the Fund than if it
had not entered into such contracts.
The 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 the Fund
is not able to cover its forward currency positions with underlying portfolio
securities, the Fund's Custodian will segregate cash or liquid assets having a
value equal to the aggregate amount of the 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 the 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 Fund's ability to utilize forward contracts may be restricted. The
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 the 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, the 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. The Fund may seek to realize additional gains through
short sales. Short sales are transactions in which the 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.
The 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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<PAGE> 65
The Fund may 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 the 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.
MANAGEMENT OF THE FUND
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 September 30, 1999.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS AND AGE POSITIONS HELD WITH TRUST PRINCIPAL OCCUPATION
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Patrick S. Adams* President, CEO, Trustee, President and Director, Choice Investment
DOB: 1960 Chairman of the Board Management, LLC, since August, 1999. Senior Vice
5299 DTC Boulevard President to Berger Associates, Executive Vice
Englewood, Colorado 80111 President and portfolio manager of the Berger
100 Fund, President and portfolio manager of
the Berger IPT-100 Fund, President and co-portfolio
manager of the Berger IPT-Growth and Income Fund and
Executive Vice President and co-portfolio manager of
the Berger Growth and Income Fund since February
1997. President and co-portfolio manager of the Berger
Balanced Fund from August 1997, and President and
portfolio manager of the Berger Select Fund from
December 31, 1997 until April 1999. Senior Vice
President from June 1996 to January 1997 with
Zurich Kemper Investments. Portfolio manager
from March 1993 to May 1996 with Founders
Asset Management, Inc.
- -------------------------------------------------------------------------------------------------------------------------------
Gerard M. Lavin Trustee President and a director of Berger 100
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 66
<TABLE>
<S> <C> <C>
DOB: 1942 Fund and Berger Growth and Income Fund, and President
52999 DTC Boulevard and a trustee of Berger Investment Portfolio Trust
Englewood, Colorado 80111 and Berger Omni Investment Trust from February 1997
through May 1999. President and a trustee of Berger/BIAM
Worldwide Portfolios Trust and Berger/BIAM Worldwide
Funds Trust from May 1996 through May 1999. President
and a trustee of Berger Institutional Products Trust from
October 1995 through May 1999. President and a director of
Berger Associates, Inc. from April 1995 to May 1999. Member
and Chairman of the Board of Managers and Chief Executive
Officer on the Management Committee of BBOI Worldwide
LLC from November 1996 to May 1999. A Vice President
of DST Systems, Inc. (data processing) from July
1995 to May 1999 President and Chief Executive
Officer of Investors Fiduciary Trust Company
(banking) from February 1992 to March 1995.
- -------------------------------------------------------------------------------------------------------------------------------
Dr. Richard A. Hathaway Trustee Physician with Colorado Permanente since 1992.
DOB: 1961 Dr. Hathaway is a board certified orthopedic surgeon.
2045 Franklin Street
Denver, Colorado 80205
- -------------------------------------------------------------------------------------------------------------------------------
Christelle C. Beck Treasurer Director of Choice Investment Management, LLC
DOB: 1948 since August 1999. Has maintained private law
250 Arapahoe Ave., Ste. 301 practice since March 1993.
Boulder, Colorado 80302
- -------------------------------------------------------------------------------------------------------------------------------
Sharon E. Adams Secretary Employee of Choice Investment Management, LLC
DOB: 1963 since August 1999. Full-time homemaker from
5299 DTC Boulevard 1993 until August 1999. Account executive -
Englewood, Colorado 80111 outside sales for Sprint from 1990 to 1993.
Sales manager for Allnet Communications
from 1989 to 1990.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Trustees of the Trust who are officers of the Adviser receive no
remuneration from the Fund. Each of the other Trustees will be paid an annual
retainer fee of $2,500, will be paid the sum of $1000 per meeting attended, and
will be reimbursed for the expenses of attending meetings.
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<PAGE> 67
<TABLE>
<CAPTION>
COMPENSATION TABLE (a)
- -------------------------------------------------------------------------------------------------------------------------------
AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM TRUST PAID
NAME OF PERSON TRUST TO TRUSTEES
-------------- ----- -----------
<S> <C> <C>
Patrick S. Adams $ 0 $ 0
Gerard M. Lavin $6,500 $6,500
Dr. Richard A. Hathaway $6,500 $6,500
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The information provided in the above table is based on an estimate of
payments to be made for the Fund's first fiscal year ended October 31, 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 October 1, 1999, Patrick Adams and Sharon E. Adams jointly owned
all of the outstanding shares of the Fund. It is contemplated that soon after
the initial public offering of shares of the Fund, the Adams' ownership of the
shares of the Fund will represent less than 25% of the Fund's outstanding
shares.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. The investment adviser to the Fund is Choice
Investment Management, LLC (the "Adviser"). The Adviser was organized as a
Colorado limited liability company on August 27, 1999. Patrick S. Adams is the
founder and President of the Adviser and owns 50.25% of the outstanding
membership interests of the Adviser. As such, he controls the Adviser. Pursuant
to an Investment Advisory Agreement entered into between the Trust on behalf of
the Fund and the Adviser (the "Investment Advisory Agreement"), the Adviser
provides continuous investment advisory services to the Fund. The Adviser also
provides the Fund with office space, equipment and personnel necessary to
operate and administer the Fund's business and to supervise the provision of
services by third parties.
The Advisory Agreement is dated October 31, 1999. The Investment
Advisory Agreement has an initial term of two years and thereafter is required
to be approved annually by the Board of Trustees of the Trust or by vote of a
majority of the 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 Fund's Trustees who are not parties to the Investment
Advisory Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The Investment
Advisory Agreement was approved by the vote of a majority of the Trustees who
are not parties to the Investment Advisory Agreement or interested persons of
any such party on September 30, 1999 and by the initial shareholder of the Fund
on September 30, 1999. The Investment Advisory Agreement is terminable without
penalty on 60 days' written notice by the Trustees, by vote of a majority of a
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<PAGE> 68
Fund's outstanding voting securities, or by the Adviser, and will terminate
automatically in the event of its assignment.
As compensation for its services, the Fund pays to the Adviser an
advisory fee at the annual rate of 1.0% of its average daily net assets. The
advisory fee is accrued daily and paid monthly.
For the fiscal year ending October 31, 2000, the Adviser has agreed to
waive its management fees and/or reimburse the Fund's operating expenses to the
extent necessary to ensure that the total annual operating expenses for the Fund
will not exceed 2.25% 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 October 31, 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 the Fund by reducing the Adviser's fee, subject to
later adjustment, month by month, for the remainder of the Fund's fiscal year.
The Adviser may from time to time voluntarily absorb expenses for the Fund in
addition to the reimbursement of expenses in excess of the foregoing.
The Investment Advisory Agreement provides that the Adviser shall not
be liable to the 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 Agreement also provides 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.
The 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 the 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. Any
such management fee or expense reimbursement will be accounted for on the
financial statement of the 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 the 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.
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
Fund under an Administration and Fund Accounting Agreement dated October 31,
1999 (the "Administration Agreement"). Sunstone's services include, but are not
limited to, the following: calculating daily net asset values for the Fund;
overseeing the Fund's Custodian; assist in preparing and filing all federal
income and excise tax filings (other than those to be made by the Fund's
Custodian); overseeing
27
<PAGE> 69
the Fund's fidelity insurance relationships; participating in the preparation of
the Fund's 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 Fund's
expenses; monitoring the Fund's status as a regulated investment company under
Subchapter M of the Code; monitoring compliance with the Fund's investment
policies and restrictions and generally assisting the Fund's administrative
operations.
Sunstone, at its own expense, and without reimbursement from the Fund,
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
Fund or its 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 the Fund
computed daily and payable monthly, at the annual rate of 0.15 percent of the
first $50 million of its average daily net assets, and decreasing as assets
reach certain levels, subject to an annual minimum fee of $70,000.00, plus
out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND-PAYING AGENT. Sunstone also acts as the
Fund's transfer agent and dividend-paying agent. As such, Sunstone processes
purchase and redemption requests for the securities of the 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, the Fund pays Sunstone a fee based on the number of shareholder
accounts, transactions and other activities, subject to a minimum annual fee.
Sunstone does not exercise any supervisory functions over the management of the
Fund or the purchase and sale of Fund securities.
From time to time, the Trust, on behalf of the Fund, 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 Fund to persons who have a beneficial
interest in the Fund, 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 Fund
and other related services as the Fund may request.
CUSTODIAN. UMB Bank, n.a. (the "Custodian") serves as the custodian for
the Fund. Under the terms of the Custody Agreement, the Custodian is responsible
for the receipt and
28
<PAGE> 70
delivery of the Fund's securities and cash. The Custodian does not exercise any
supervisory functions over the management of the Fund or the purchase and sale
of securities.
DISTRIBUTOR. Under a distribution agreement dated October 31, 1999,
Sunstone Distribution Services, LLC, 207 East Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202 (the "Distributor") acts as principal underwriter for
the Fund and acts as exclusive agent for the Fund in selling its shares to the
public. The Distributor shall offer shares of the Fund 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
Fund. For marketing and distribution services provided, the Fund pay the
Distributor compensation at the annual rate of 0.02% of the first $250 million
of its average daily net assets and decreasing as assets reach certain levels,
subject to an annual minimum fee of $25,000.00, plus out-of-pocket expenses.
LEGAL COUNSEL. Stradley, Ronon, Stevens & Young, LLP, with offices at
2600 One Commerce Square, Philadelphia, Pennsylvania 19103, serves as counsel to
the Fund.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP are the independent
accountants for the Fund. They are responsible for performing an audit of the
Fund's year-end financial statements as well as providing accounting and tax
advice to the management of the Fund.
DISTRIBUTION OF SHARES
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act. The Plan authorizes payments by the Fund
in connection with the distribution of its shares at an annual rate, as
determined from time to time by the Board of Trustees, of up to 0.25% of the
Fund's average daily net assets. Payments may be made by the 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 the Fund may finance without the 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.
The Plan was adopted in anticipation that the Fund will benefit from
the Plan through increased sales of shares of the Fund, thereby reducing the
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 Fund who are not interested persons of the Fund 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 Fund provided for in the Plan requires approval of
the shareholders and the Board of Trustees, including the Rule 12b-1 Trustees.
29
<PAGE> 71
While the Plan is in effect, the selection and nomination of Trustees
who are not interested persons of the Fund will be committed to the discretion
of the Trustees of the Fund who are not interested persons of the Fund. 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 October 31, 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
the 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 Fund 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 the 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 the 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. Subject to obtaining the best price and execution, the Adviser may
consider the sales of shares of the Fund when allocating Fund portfolio
transactions to brokers.
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 services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) provided to the Fund and/or other
accounts over which the 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 Fund 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
30
<PAGE> 72
for the 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 Fund. 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 Fund and
place portfolio transactions for these accounts. Research services furnished by
firms through which the Fund effects its 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 Fund. 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 Fund) 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 Fund will not, in the opinion of the Adviser,
be disproportionate to the benefits to be received by the Fund 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 the 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 the Fund. In making such allocations between the 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 the 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 the 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 most
equitable and consistent with its fiduciary obligations to the Fund and other
accounts involved. In some instances, this procedure may adversely affect the
size of the position obtainable for the Fund or the amount of the securities
that are able to be sold for the Fund.
CAPITAL STRUCTURE
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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.
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 the 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 the Fund affected by the matter. The Fund is affected by a matter unless it
is clear that the interests of the Fund in the matter are substantially
identical or that the matter does not affect any interest of the Fund. 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 the Fund only if approved by a majority
of the outstanding shares of the 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 Fund outstanding (or
of a class or series of the Fund, 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.
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.
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TAXES
GENERAL. The Fund intends to qualify for treatment as a regulated
investment company ("RIC") under Subchapter M of the Code. To so qualify, the
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, the 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
the 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. The Fund intends
to distribute substantially all of such income.
If the 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 the 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 Fund
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 the Fund, 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 Fund 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 the
Fund at a constant rate over
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the time remaining to the debt security's maturity or, at the election
of the 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. The
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.
The 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 Fund's status as a
regulated investment company may limit its transactions involving foreign
currency, futures, options, and forward contracts.
Certain option transactions have special tax results for the Fund.
Expiration of a call option written by the 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 the 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 Fund 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 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 the Fund may result in "straddles"
for federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the 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 the Fund may make with
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<PAGE> 76
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. The Fund will
maintain accounts and calculate income by reference to the U.S. dollar for U.S.
federal income tax purposes. Some of the 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 the Fund to repatriate investment income
or the proceeds of sales of securities. These restrictions and limitations may
limit the Fund's ability to make sufficient distributions to satisfy the 90%
distribution requirement for qualification as a regulated investment company.
Even if the 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 the Fund accrues income or other receivables (including
dividends) or accrues expenses or other liabilities denominated in a foreign
currency and the time the 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 amount of the Fund's 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, the 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. The 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
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of 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 the Fund to a corporate shareholder, to the extent such
dividends are attributable to dividends received from U.S. corporations by the
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 the Fund as capital gain 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 the 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 the 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
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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 the 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.
The 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. The 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
the 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 the 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 Fund will be required to report to the Internal
Revenue Service (the "IRS") all distributions and gross proceeds from the
redemption of the Fund's shares, except in the case of certain exempt
shareholders. All distributions and proceeds from the redemption of the 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 Fund 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 Fund 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 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 Fund or shareholders,
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and shareholders are advised to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE. As set forth in the Prospectus, the
net asset value of the Fund 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 Fund's net asset value,
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 Fund 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 Fund's 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 Fund 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 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 the Fund,
all assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the mean
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between the bid and offer prices of such currencies against U.S. dollars
furnished by a pricing service approved by the Trustees.
The Fund's net asset value per share will be calculated separately from
the per share net asset value of the other funds of the Trust. "Assets belonging
to" the Fund consist of the consideration received upon the issuance of shares
of the 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. The 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 Fund may be exchanged for shares of
the Northern Money Market Fund as provided in the Prospectus. Sunstone, the
Fund's 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 Fund offers 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
1-800-392-7107. 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 Fund 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.
SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended, or
the date of payment postponed beyond the normal seven-day period by the Fund,
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 the Fund of securities owned by it is not reasonably
practical, or it is not reasonably practical for the 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 Fund's
shareholders.
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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 the Fund to pay for redemptions in cash. In such cases the Board may
authorize payment to be made in portfolio securities of the Fund. 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 Fund may advertise its "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 the 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 the 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. The Fund also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in the
Fund for a specific period (again reflecting changes in the 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 the 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:
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.
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Total return performance for a specific period is calculated by first
taking an investment ("initial investment") in the 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 Fund's performance figures will be based upon historical results
and will not necessarily be indicative of future performance. The Fund's 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 the Fund's returns.
From time to time, in marketing and other literature, the Fund's
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 Fund will be compared to Lipper's appropriate fund
category, that is, by fund objective and portfolio holdings.
The Fund's 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. 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 Fund, including reprints of or selections
from, editorials or articles about the Fund. Sources for Fund performance and
articles about the Fund 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.
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The Fund may compare its 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 Fund may purchase for its
portfolio and the investments measured by these indices.
Occasionally statistics may be used to specify the Fund's volatility or
risk. Measures of volatility or risk are generally used to compare the 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 Fund. The
description may include a "risk/return spectrum" which compares the Fund to
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 the 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 Fund's Prospectus. Certain portions of the Registration Statement have
been omitted from the Prospectus and this Statement of 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
42
<PAGE> 84
The following financial statements have been audited and are attached
hereto:
1. Report of Independent Public Accountants
2. Statement of Assets and Liabilities
3. Statement of Operations
4. Notes to the Financial Statements
<PAGE> 85
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> 86
"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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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
AA is modest, but may vary slightly from time to time because
AA- of economic conditions.
- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk
A factors are more variable and greater in periods of
A- economic uncertainty.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective financial
BB- protection factors 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
B obligations will not be met when due. Financial protection
B- factors will fluctuate 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> 94
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DD Default debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
- --------------------------------------------------------------------------------
A-10
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder and Board of Trustees
of Choice Funds Focus Fund
In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of the Choice Funds Balanced Fund (one of the portfolios of
Choice Funds (the "Fund")) at October 1, 1999 and the results of it operations
for the period indicated, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Fund's
management, our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
October 5, 1999
<PAGE> 96
CHOICE FUNDS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 1, 1999
ASSETS
<TABLE>
<CAPTION>
<S> <C>
FOCUS FUND
Cash............................................................................$100,000
Receivable from Sponsor.........................................................$ 43,475
Prepaid initial registration expenses...........................................$ 20,740
TOTAL ASSETS....................................................................$164,215
LIABILITIES AND NET ASSETS
Payable to Sponsor..............................................................$ 64,215
TOTAL LIABILITIES...............................................................$ 64,215
NET ASSETS......................................................................$100,000
NET ASSETS CONSIST OF:
Capital shares outstanding, no par value, indefinite shares authorized..........$ 10,000
Net asset value, redemption price and offering price per share..................$ 10.00
(net assets/shares outstanding) ========
</TABLE>
STATEMENT OF OPERATIONS
For the Period From July 16, 1999 (inception) to October 1, 1999
<TABLE>
<CAPTION>
Focus Fund
----------
<S> <C>
Organization expenses $ 43,475
Less: Expenses paid by Sponsor (43,475)
Net Investment Income $ --
</TABLE> ----------
The accompanying notes to the Financial Statements are an
integral part of this statement.
<PAGE> 97
NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM
JULY 16, 1999 (INCEPTION) TO OCTOBER 1, 1999
Note 1-Organization and Registration
Choice Funds (the "Company") was established on July 16, 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
Focus Fund (the "Fund" is a separate, non-diversified investment portfolio of
the company). The Fund has had no operations other than those relating to
organizational matters, including the sale of 10,000 shares of beneficial
interest of the Fund to capitalize the Fund ("Original Shares"), which were sold
to Patrick and Sharon Adams on October 1, 1999 for cash in the amount of
$100,000.
Note 2-Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its 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. Organization and Prepaid Initial Registration Expenses
Expenses incurred by the Company in connection with the organization
and the initial public offering of shares are expenses as incurred. These
expenses were advanced by the Advisor, and the Advisor has agreed to voluntarily
reimburse the Fund for their expenses, subject to potential recovery (see Note
3). Prepaid initial registration expenses are deferred and amortized over the
period of benefit (not to exceed 12 months).
c. 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
Choice Investment Management, LLC serves as the Fund's investment adviser. As
compensation for its services to the Fund, the Adviser receives an investment
advisory fee at an annual rate of 1.0% of the average daily net assets of the
Fund which is accrued daily and paid monthly. The Adviser has also agreed to
voluntarily reduce fees for expenses (exclusive of brokerage, interest, taxes
and extraordinary expenses) that exceed 2.25% of average daily net assets of the
Fund until October 31, 2000. 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, to the extent actual fees and expenses for a period are
less than the expense limitation.
The Company has 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 0.15% which decreases as the
assets of the Fund reach certain levels, subject to a minimum annual fee of
$70,000, plus out-of-pocket expenses. The transfer agent agreement provides for
an annual base fee per shareholder account, with a minimum annual fee of
$18,000. The transfer agent is also paid certain fees related to set-up costs,
processing and out-of-pocket expenses.
The Company has entered into a distribution agreement with Sunstone Distribution
Services, LLC (the "Distributor"). Under the Distribution Agreement, the
Distributor shall offer shares of the Fund on a continuous basis and may engage
in advertising and solicitation activities in connection therewith.
Note 4-Capital Stock
The Company is authorized to issue an unlimited number of shares with no par
value. A total of 10,000 shares were initially sold to Patrick and Sharon Adams
to capitalize the Company.
<PAGE> 98
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
CHOICE FUNDS
BALANCED FUND
This Statement of Additional Information should be read in conjunction
with the Prospectus for the Choice Balanced Fund dated October 31, 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 Choice Balanced Fund based solely on the
information contained herein. You may obtain copies of the Prospectus for the
Choice Balanced Fund without charge by calling 1-800-392-7107 or by writing to
Choice Funds, P.O. Box 759, Milwaukee, Wisconsin 53201-0759.
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
This Statement of Additional Information is dated October 31, 1999.
<PAGE> 99
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
FUND ORGANIZATION................................................................................
INVESTMENT POLICIES AND PRACTICES................................................................
Investment Restrictions.................................................................
Investment Strategies and Risks.........................................................
MANAGEMENT OF THE FUND...........................................................................
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 Fund. The Prospectus does not constitute an
offering by the Fund in any jurisdiction in which such offering may not lawfully
be made.
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FUND ORGANIZATION
Choice Funds is an open-end management investment company
organized as a Delaware business trust on July 16, 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 Focus Fund, which is offered through a separate
prospectus, and the Balanced Fund (the "Fund").
INVESTMENT POLICIES AND PRACTICES
INVESTMENT RESTRICTIONS
Consistent with the Fund's investment objective, the Fund has adopted
certain investment restrictions. Unless otherwise noted, whenever an investment
restriction states a maximum percentage of the 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 the 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 the Fund's investment limitations except with
respect to the Fund's restrictions on borrowings as set forth in restriction 7
below.
The 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 Fund's fundamental investment restrictions.
Except as otherwise noted, the Fund may not:
1. Issue senior securities, except as permitted under the Investment
Company Act of 1940, as amended (the "Investment Company Act"); provided,
however, the 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); provided,
however, that the Fund may make loans to affiliated investment companies to
the extent permitted by the Investment Company Act or any exemptions therefrom
that may be granted by the SEC.
3. 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 Fund except to the extent that the 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 the
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 the Fund may borrow money from a bank or
affiliated investment companies to the extent permitted by the Investment
Company Act or any exemption therefrom that may be granted by the SEC 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. The 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
Fund. These restrictions are operating policies of the Fund and may be changed
by the Trustees without shareholder approval.
The 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 the 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 Fund, 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 the Fund, does not exceed 10% of
the value of the Fund's assets.
INVESTMENT STRATEGIES AND RISKS
The Fund is a diversified fund that seeks both capital appreciation and
current income. The Fund emphasized capital appreciation, but invests at least
25% of its total assets in fixed income securities. The Fund invests at least
25% of its total assets in equity securities.
The Prospectus describes the Fund's investment objective, as well as
the principal investment strategies used to achieve that objective and the
principal risks associated with such strategy. The following information
supplements the discussion about the Fund set forth in the Prospectus under the
headings "Fund Overview" and "Other Investment Practices and Risks."
TEMPORARY DEFENSIVE MEASURES. The Fund may increase its 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, the Fund could miss the opportunity to
participate in
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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.
PORTFOLIO TURNOVER RATE. The Fund may engage in a high level of trading
in seeking to achieve its investment objective. The portfolio turnover rate for
the Fund 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
the 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 Fund is not restricted by policy
with regard to portfolio turnover and will make changes in its investment
portfolio 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 Fund. Although the existence of a
higher portfolio turnover rate has no direct correlation to the tax liability of
the Fund, sales of certain stocks will result in realized gains, and, possibly,
in increased taxable distributions to shareholders.
INITIAL PUBLIC OFFERINGS. The Fund 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, the 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 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.
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. The 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.
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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 the 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 Fund
may be subject to greater fluctuation than securities of domestic companies.
Changes in foreign currency exchange rates will affect the value of the
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. The Fund may
invest in securities of companies with limited operating histories. The Fund
considers 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 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. The Fund 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.
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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 Fund invests 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. The 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. The Fund 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 the 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, the Fund might have to incur the potentially substantial
expense and delay associated with effecting registration. The 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 the Fund.
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
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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 Fund's limitation on illiquid securities. Because an active
market may not exist for illiquid securities, the Fund 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, the 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, the 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, the 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. The 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, the 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 Fund, 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
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 the 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
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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.
The 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 the
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
NON-INVESTMENT GRADE SECURITIES. The Fund has the authority to invest
in convertible debt securities that are of a quality less than investment grade
(so-called "junk bonds"). The Fund has 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 Fund will
not invest in any securities in default at the time of purchase, and will limit
its investment in non-investment grade convertible debt securities to less than
20% of its net assets at the time of purchase. In addition, investment grade
bonds in which the Fund invests may be downgraded. If convertible securities
purchased by the Fund are downgraded following purchase, or if other
circumstances cause 20% or more of the 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.
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
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also tend to be more sensitive to economic conditions than 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, the 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 the 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 the 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, the Fund may be forced to liquidate
these securities at a substantial discount. Any such liquidation would reduce
the 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, the 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 monitors the 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. The 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 the Fund to obtain accurate
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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. The 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 the Fund of any single investment, it does
not reduce the overall risk of investing in lower-rated securities.
ZEROS/STRIPS. The Fund 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. The 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 the Fund's acquisition of the securities and
normally will be within a shorter period of time. The Fund will not enter into a
repurchase agreement maturing in 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
Fund's 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 the Fund is limited to the ability of the
seller to pay the agreed upon sum
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on the repurchase date; in the event of default, the repurchase agreement
provides that the 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, the 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 the Fund. If the seller were to be subject to a federal bankruptcy
proceeding, the ability of the 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. The Fund may purchase and
sell securities on a when-issued or delayed delivery basis. However, the Fund
does not currently intend 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 the 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 the 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 the Fund until it receives delivery or payment
from the other party to the transaction.
When the 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 Fund may lend its 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 failures to deliver
securities or completing arbitrage operations. By lending its securities, the
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.
The 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,
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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 Fund bears 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. The Fund will not
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 the 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. The 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 the Fund's securities or the price of
securities that the 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, the Fund is not
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 Fund on a cost-effective basis, that they
will be used or, if used, will achieve the intended result.
A hedging transaction may partially protect the Fund from a decline in
the value of a particular security or its portfolio generally, although hedging
may also limit the Fund's 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 the 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, the 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
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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 the 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 the 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 Fund 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 Fund may only write call options that are
covered and only up to 25% of the Fund's total assets.
Options. The 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 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
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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.
The 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 the Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If the 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 the Fund expires on the stipulated expiration date or if the 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 the Fund is exercised, the 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
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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 Fund 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, the
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 the Fund. Inasmuch as the Fund's securities will not duplicate the
components of an index, the correlation will not be perfect. Consequently, the
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 the 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 the 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
the Fund is unable to close out a call option on securities 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 the 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 the Fund has purchased) expose the Fund to an obligation to another
party. The Fund will not enter into
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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. The 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 Fund will segregate assets to cover
transactions in which the Fund writes or sells 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 the
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 Fund 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 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 Fund 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 the Fund's investment
limitations. The Fund will incur brokerage fees when it buys or sells futures
contracts.
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In the event of the bankruptcy of the FCM that holds margin on behalf
of the 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. The 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, the 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, the 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 the 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 the 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. The 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
the 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, the 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.
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
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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 the
Fund still may not result in a successful use of futures.
Futures contracts entail additional risks. Although the 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, the 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
the Fund will not match exactly the Fund's current or potential investments. The
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 the
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 the Fund's investments and its futures positions may also
result from differing levels of 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. The
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
the 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.
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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 the 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, the 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, the Fund's access to other assets held to cover its futures positions
also could be impaired.
Options On Futures Contracts. The Fund may buy and write options on
futures contracts for hedging purposes. An option on a futures contract gives
the 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, the Fund may buy a call
option on a futures contract to hedge against a market advance, and the 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,
the 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 the 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, the
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, the Fund may buy a put option on a futures contract to hedge the Fund's
portfolio against the risk of falling prices.
The amount of risk the 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.
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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 Fund currently intends that it will
only use forward contracts or commitments for hedging purposes and will only use
forward foreign currency exchange contracts, although the 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 Fund's possible principal uses
of forward foreign currency exchange contracts ("forward currency contracts").
The 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. The
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"). The 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. The 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 the 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 the Fund's currency exposure from one
foreign currency to another limits the Fund's opportunity to profit from
increases in the value of the original currency and involves a risk of increased
losses to the 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 the Fund than if it had not entered into such contracts.
The Fund will cover outstanding forward currency contracts by
maintaining liquid portfolio securities denominated in the currency underlying
the forward contract or the currency
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being hedged. To the extent that the Fund is not able to cover its forward
currency positions with underlying portfolio securities, the Fund's Custodian
will segregate cash or liquid assets having a value equal to the aggregate
amount of the 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 the 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 Fund's ability to utilize forward contracts may be restricted. The
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 the 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, the 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. The Fund may seek to realize additional gains through
short sales. Short sales are transactions in which the 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.
The 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.
The Fund may 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 the 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
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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 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.
Collateralized Mortgage Obligations And Multiclass Pass-Through
Securities. The 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
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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.
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 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
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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 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
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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.
Asset-Backed Securities. The 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
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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 FUND
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 September 30, 1999.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITIONS HELD WITH TRUST PRINCIPAL OCCUPATION
<S> <C> <C>
Patrick S. Adams* President, CEO, Trustee, President and Director, Choice Investment
DOB: 1960 Chairman of the Board Management, LLC, since August, 1999. Senior Vice
5299 DTC Boulevard President to Berger Associates, Executive Vice
Englewood, Colorado 80111 President and portfolio manager of the Berger
100 Fund, President and portfolio manager of the Berger
IPT-100 Fund, President and co-portfolio manager of the Berger
IPT-Growth and Income Fund and Executive Vice President and
co-portfolio manager of the Berger Growth and Income Fund
since February 1997. President and co-portfolio manager of the
Berger Balanced Fund from August 1997, and President and
portfolio manager of the Berger Select Fund from December 31,
1997 until April 1999. Senior Vice President from June 1996 to
January 1997 with Zurich Kemper Investments. Portfolio manager
from
</TABLE>
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<TABLE>
<S> <C> <C>
March 1993 to May 1996 with Founders Asset Management, Inc.
Gerard M. Lavin Trustee President and a director of Berger 100 Fund and
DOB: 1942 Berger Growth and Income Fund, and President and
5299 DTC Boulevard a trustee of Berger Investment Portfolio Trust
Englewood, Colorado 80111 and Berger Omni Investment Trust from February
1997 through May 1999. President and a trustee of Berger/BIAM
Worldwide Portfolios Trust and Berger/BIAM Worldwide Funds
Trust from May 1996 through May 1999. President and a trustee
of Berger Institutional Products Trust from October 1995
through May 1999. President and a director of Berger
Associates, Inc. from April 1995 to May 1999. Member and
Chairman of the Board of Managers and Chief Executive Officer
on the Management Committee of BBOI Worldwide LLC from November
1996 to _______. A Vice President of DST Systems, Inc.
(data processing) from July 1995 to _______ President and Chief
Executive Officer of Investors Fiduciary Trust Company
(banking) from February 1992 to March 1995.
Dr. Richard A. Hathaway Trustee Physician with Colorado Permanente since 1992.
DOB: 1961 Dr. Hathaway is a board certified orthopedic
2045 Franklin Street surgeon.
Denver, Colorado 80205
Christelle C. Beck Treasurer Director of Choice Investment Management, LLC
DOB: 1948 since August 1999. Has maintained private law
250 Arapahoe Ave., Ste. 301 practice since March 1993.
Boulder, Colorado 80302
Sharon E. Adams Secretary Employee of Choice Investment Management, LLC
DOB: 1963 since August 1999. Full-time homemaker from
5299 DTC Boulevard 1993 until August 1999. Account executive -
Englewood, Colorado 80111 outside sales for Sprint from 1990 to 1993.
Sales manager for Allnet Communications from 1989
to 1990.
</TABLE>
The Trustees of the Trust who are officers of the Adviser receive no
remuneration from the Fund. Each of the other Trustees will be paid an annual
retainer fee of $2,500, will be paid
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the sum of $1000 per meeting attended, and will be reimbursed for the expenses
of attending meetings.
COMPENSATION TABLE (a)
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM
NAME OF PERSON TRUST TRUST PAID TO TRUSTEES
-------------- ----- ----------------------
--------------
<S> <C> <C>
Patrick S. Adams $0 $0
Gerard M. Lavin $6,500 $6,500
Dr. Richard A. Hathaway $6,500 $6,500
</TABLE>
(a) The information provided in the above table is based on an estimate of
payments to be made for the Fund's first fiscal year ended October 31, 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 October 1, 1999, Patrick S. Adams and Sharon E. Adams jointly
owned all of the outstanding shares of the Fund. It is contemplated that soon
after the initial public offering of shares of the Fund, the Adams' ownership of
the shares of the Fund will represent less than 25% of the Fund's outstanding
shares.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. The investment adviser to the Fund is Choice
Investment Management, LLC (the "Adviser"). The Adviser was organized as a
Colorado limited liability company on August 27, 1999. Patrick S. Adams is the
founder and President of the Adviser and owns 50.25% of the outstanding
membership interests of the Adviser. As such, he controls the Adviser. Pursuant
to an Investment Advisory Agreement entered into between the Trust on behalf of
the Fund and the Adviser (the "Investment Advisory Agreement"), the Adviser
provides continuous investment advisory services to the Fund. The Adviser also
provides the Fund with office space, equipment and personnel necessary to
operate and administer the Fund's business and to supervise the provision of
services by third parties.
The Advisory Agreement is dated October 31, 1999. The Investment
Advisory Agreement has an initial term of two years and thereafter is required
to be approved annually by the Board of Trustees of the Trust or by vote of a
majority of the 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 Fund's Trustees who are not parties to the Investment
Advisory Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The Investment
Advisory Agreement was approved
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<PAGE> 128
by the vote of a majority of the Trustees who are not parties to the Investment
Advisory Agreement or interested persons of any such party on September 30, 1999
and by the initial shareholder of the Fund on September 30, 1999. The Investment
Advisory Agreement is terminable without penalty 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 its
assignment.
As compensation for its services, the Fund pays to the Adviser an
advisory fee at the annual rate of 0.75% of its average daily net assets. The
advisory fee is accrued daily and paid monthly.
For the fiscal year ending October 31, 2000, the Adviser has agreed to
waive its management fees and/or reimburse the Fund's operating expenses to the
extent necessary to ensure that the total annual operating expenses for the Fund
will not exceed 2.0% 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 October 31, 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 the Fund by reducing the Adviser's fee, subject to
later adjustment, month by month, for the remainder of the Fund's fiscal year.
The Adviser may from time to time voluntarily absorb expenses for the Fund in
addition to the reimbursement of expenses in excess of the foregoing.
The Investment Advisory Agreement provides that the Adviser shall not
be liable to the 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 Agreement also provides 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.
The 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 the 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. Any
such management fee or expense reimbursement will be accounted for on the
financial statement of the 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 the 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.
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
Fund under an Administration
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<PAGE> 129
and Fund Accounting Agreement dated October 31, 1999 (the "Administration
Agreement"). Sunstone's services include, but are not limited to, the following:
calculating daily net asset values for the Fund; overseeing the Fund's
Custodian; assist in preparing and filing all federal income and excise tax
filings (other than those to be made by the Fund's Custodian); overseeing the
Fund's fidelity insurance relationships; participating in the preparation of the
Fund's 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 Fund's expenses; monitoring the
Fund's status as a regulated investment company under Subchapter M of the Code;
monitoring compliance with the Fund's investment policies and restrictions and
generally assisting the Fund's administrative operations.
Sunstone, at its own expense, and without reimbursement from the Fund,
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
Fund or its 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 the Fund
computed daily and payable monthly, at the annual rate of 0.15 percent of the
first $50 million of its average daily net assets, and decreasing as assets
reach certain levels, subject to an annual minimum fee of $70,000.00, plus
out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND-PAYING AGENT. Sunstone also acts as the
Fund's transfer agent and dividend-paying agent. As such, Sunstone processes
purchase and redemption requests for the securities of the 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, the Fund pays Sunstone a fee based on the number of shareholder
accounts, transactions and other activities, subject to a minimum annual fee.
Sunstone does not exercise any supervisory functions over the management of the
Fund or the purchase and sale of Fund securities.
From time to time, the Trust, on behalf of the Fund, 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 Fund to persons who have a beneficial
interest in the Fund, such as 401(k) plan participants. These services may
include, among other things, sub-accounting services, transfer agent type
activities, answering Fund-related inquiries,
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<PAGE> 130
transmitting proxy statements, annual reports, updated prospectuses and other
communications regarding the Fund and other related services as the Fund may
request.
CUSTODIAN. UMB Bank, n.a. (the "Custodian") serves as the custodian for
the Fund. Under the terms of the Custody Agreement, the Custodian is responsible
for the receipt and delivery of the Fund's securities and cash. The Custodian
does not exercise any supervisory functions over the management of the Fund or
the purchase and sale of securities.
DISTRIBUTOR. Under a distribution agreement dated October 31, 1999,
Sunstone Distribution Services, LLC, 207 East Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202 (the "Distributor") acts as principal underwriter for
the Fund and acts as exclusive agent for the Fund in selling its shares to the
public. The Distributor shall offer shares of the Fund 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
Fund. For marketing and distribution services provided, the Fund pay the
Distributor compensation at the annual rate of 0.02% of the first $250 million
of its average daily net assets and decreasing as assets reach certain levels,
subject to an annual minimum fee of $25,000.00, plus out-of-pocket expenses.
LEGAL COUNSEL. Stradley, Ronon, Stevens & Young, LLP, with offices at
2600 One Commerce Square, Philadelphia, Pennsylvania 19103, serves as counsel to
the Fund.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP are the independent
accountants for the Fund. They are responsible for performing an audit of the
Fund's year-end financial statements as well as providing accounting and tax
advice to the management of the Fund.
DISTRIBUTION OF SHARES
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act. The Plan authorizes payments by the Fund
in connection with the distribution of its shares at an annual rate, as
determined from time to time by the Board of Trustees, of up to 0.25% of the
Fund's average daily net assets. Payments may be made by the 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 the Fund may finance without the 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.
The Plan was adopted in anticipation that the Fund will benefit from
the Plan through increased sales of shares of the Fund, thereby reducing the
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 Fund who are not interested persons of the Fund and
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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 Fund 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 Fund will be committed to the discretion
of the Trustees of the Fund who are not interested persons of the Fund. 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 October 31, 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
the 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 Fund 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 the 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 the 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. Subject to obtaining the best price and execution, the Adviser may
consider the sales of shares of the Fund when allocating Fund portfolio
transactions to brokers.
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 services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) provided to the Fund and/or other
accounts over which the Adviser or an affiliate of the Adviser exercises
investment discretion. While the Adviser believes these services have
substantial
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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 Fund 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 the 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
Fund. 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 Fund and
place portfolio transactions for these accounts. Research services furnished by
firms through which the Fund effects its 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 Fund. 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 Fund) 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 Fund will not, in the opinion of the Adviser,
be disproportionate to the benefits to be received by the Fund 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 the 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 the Fund. In making such allocations between the 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 the 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 the 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 most
equitable and consistent with its fiduciary obligations to the Fund and other
accounts
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involved. In some instances, this procedure may adversely affect the size of the
position obtainable for the Fund or the amount of the securities that are able
to be sold for the Fund.
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.
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 the 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 the Fund affected by the matter. The Fund is affected by a matter unless it
is clear that the interests of the Fund in the matter are substantially
identical or that the matter does not affect any interest of the Fund. 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 the Fund only if approved by a majority
of the outstanding shares of the 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 Fund outstanding (or
of a class or series of the Fund, 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.
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
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Trustee, and to assist in communications with other shareholders as required by
Section 16(c) of the Investment Company Act.
TAXES
GENERAL. The Fund intends to qualify for treatment as a regulated
investment company ("RIC") under Subchapter M of the Code. To so qualify, the
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, the 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
the 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. The Fund intends
to distribute substantially all of such income.
If the 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 the 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 Fund
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 the Fund, 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 Fund at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market
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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 the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the 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. The
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.
The 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 Fund's status as a
regulated investment company may limit its transactions involving foreign
currency, futures, options, and forward contracts.
Certain option transactions have special tax results for the Fund.
Expiration of a call option written by the 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 the 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 Fund 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 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 the Fund may result in "straddles"
for federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the 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
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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 the 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. The Fund will
maintain accounts and calculate income by reference to the U.S. dollar for U.S.
federal income tax purposes. Some of the 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 the Fund to repatriate investment income
or the proceeds of sales of securities. These restrictions and limitations may
limit the Fund's ability to make sufficient distributions to satisfy the 90%
distribution requirement for qualification as a regulated investment company.
Even if the 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 the Fund accrues income or other receivables (including
dividends) or accrues expenses or other liabilities denominated in a foreign
currency and the time the 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 amount of the Fund's 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, the 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.
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PASSIVE FOREIGN INVESTMENT COMPANIES. The 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 of 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 the Fund to a corporate shareholder, to the extent such
dividends are attributable to dividends received from U.S. corporations by the
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 the Fund as capital gain 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 the 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.
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Dividends and other distributions declared by the 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 the 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.
The 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. The 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
the 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 the 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 Fund will be required to report to the Internal
Revenue Service (the "IRS") all distributions and gross proceeds from the
redemption of the Fund's shares, except in the case of certain exempt
shareholders. All distributions and proceeds from the redemption of the 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 Fund 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 Fund 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 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
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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 Fund 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 the Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE. As set forth in the Prospectus, the
net asset value of the Fund 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 Fund's net asset value,
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 Fund 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 Fund's 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 Fund 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 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.
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For purposes of determining the net asset value per share of the 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.
The Fund's net asset value per share will be calculated separately from
the per share net asset value of the other funds of the Trust. "Assets belonging
to" the Fund consist of the consideration received upon the issuance of shares
of the 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. The 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 Fund may be exchanged for shares of
the Northern Money Market Fund as provided in the Prospectus. Sunstone, the
Fund's 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 Fund offers 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
1-800-392-7107. 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 Fund 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.
SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended, or
the date of payment postponed beyond the normal seven-day period by the Fund,
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 the Fund of securities owned by it is not reasonably
practical, or it is not reasonably practical for the Fund to determine the fair
value
43
<PAGE> 141
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 Fund's 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 the Fund to pay for redemptions in cash. In such cases the Board may
authorize payment to be made in portfolio securities of the Fund. 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 Fund may advertise its "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 the 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 the 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. The Fund also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in the
Fund for a specific period (again reflecting changes in the 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 the 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:
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.
44
<PAGE> 142
Total return performance for a specific period is calculated by first
taking an investment ("initial investment") in the 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 Fund's performance figures will be based upon historical results
and will not necessarily be indicative of future performance. The Fund's 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 the Fund's returns.
From time to time, in marketing and other literature, the Fund's
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 Fund will be compared to Lipper's appropriate fund
category, that is, by fund objective and portfolio holdings.
The Fund's 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. 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 Fund, including reprints of or selections
from, editorials or articles about the Fund. Sources for Fund performance and
articles about the Fund 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.
45
<PAGE> 143
The Fund may compare its 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 Fund may purchase for its
portfolio and the investments measured by these indices.
Occasionally statistics may be used to specify the Fund's volatility or
risk. Measures of volatility or risk are generally used to compare the 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 Fund. The
description may include a "risk/return spectrum" which compares the Fund to
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 the 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 Fund's Prospectus. Certain portions of the Registration Statement have
been omitted from the Prospectus and this Statement of 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.
46
<PAGE> 144
FINANCIAL STATEMENTS
The following financial statements have been audited and are attached
hereto:
1. Report of Independent Public Accountants
2. Statement of Assets and Liabilities
3. Statement of Operations
4. Notes to the Financial Statements
47
<PAGE> 145
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> 146
"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> 147
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> 148
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> 149
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> 150
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> 151
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> 152
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> 153
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
AA is modest, but may vary slightly from time to time because
AA- of economic conditions.
- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate. However, risk
A factors are more variable and greater in periods of
A- economic uncertainty.
- --------------------------------------------------------------------------------
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective financial
BB- protection factors 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
B obligations will not be met when due. Financial protection
B- factors will fluctuate 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> 154
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DD Default debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
- --------------------------------------------------------------------------------
A-10
<PAGE> 155
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees
of Choice Funds Balanced Fund
In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of the Choice Funds Focus Fund (one of the portfolios of
Choice Funds (the "Fund")) at October 1, 1999 and the results of its operations
for the period indicated, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
October 5, 1999
<PAGE> 156
g
CHOICE FUNDS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 1, 1999
ASSETS
<TABLE>
<CAPTION>
BALANCED FUND
-------------
<S> <C>
- -
Receivables from sponsor........................................................$ 43,475
TOTAL ASSETS....................................................................$ 43,475
LIABILITIES AND NET ASSETS
Payable to Sponsor..............................................................$ 43,475
TOTAL LIABILITIES...............................................................$ 43,475
NET ASSETS......................................................................$ ---
------
NET ASSETS CONSIST OF:
Capital shares, no par value, indefinite shares authorized......................
------
Net asset value (net assets/shares outstanding).................................$
</TABLE>
STATEMENT OF OPERATIONS
For the period from July 16, 1999 (inception) to October 1, 1999
<TABLE>
<CAPTION>
Balanced Fund
-------------
<S> <C>
Organization Expenses $ 43,475
Less: Expenses paid by sponsor (43,475)
Net Investment Income $ ---
</TABLE>
- ---------------------------------------
The accompanying notes to the Financial Statements are an
integral part of this statement.
<PAGE> 157
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM JULY 16, 1999 (INCEPTION) TO OCTOBER 1, 1999
Note 1-Organization and Registration
Choice Funds (the "Company") was established on July 16, 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
Balanced Fund (the "Fund") is a separate, diversified investment portfolio of
the Company. The Fund has had no operations other than those relating to
organizational matters. The Company was capitalized by the sale of 10,000 shares
of beneficial interest of the Focus Fund (another portfolio of the Company) for
cash in the amount of $100,000.
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. Organization and Prepaid Initial Registration Expense
Expenses incurred by the Company in connection with the organization
and initial public offering of shares are expensed as incurred. These expenses
were advanced by the Adviser, and the Adviser has agreed to voluntarily
reimburse the Fund for these expenses, subject to potential recovery (see Note
3). Prepaid initial registration expenses are deferred and amortized over the
period of benefit (not to exceed 12 months.)
c. 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
Choice Investment Management, LLC serves as the Fund's investment adviser. As
compensation for its services to the Fund, the Adviser receives an investment
advisory fee at an annual rate of 0.75% of the average daily net assets of the
Fund which is accrued daily and paid monthly. The Adviser has also agreed to
voluntarily reduce fees for expenses (exclusive of brokerage, interest, taxes
and extraordinary expenses) that exceed 2.00% of average daily net assets of the
Fund until October 31, 2000. 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, to the extent actual fees and expenses for a period are
less than the expense limitation.
The Company has 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 0.15% which decreases as the
assets of the Fund reach certain levels, subject to a minimum annual fee of
$70,000, plus out-of-pocket expenses. The transfer agent agreement provides for
an annual base fee per shareholder account with a minimum annual fee of $18,000.
The transfer agent is also paid certain fees related to set-up costs, processing
and out-of-pocket expenses.
The Company has entered into a distribution agreement with Sunstone Distribution
Services, LLC (the "Distributor"). Under the Distribution Agreement, the
Distributor shall offer shares of the Fund on a continuous basis and may engage
in advertising and solicitation activities in connection therewith.
Note 4-Capital Stock
The Company is authorized to issue an unlimited number of shares with no par
value.
<PAGE> 158
PART C
OTHER INFORMATION
Item 23. Exhibits
Exhibit No. Exhibit
---------- -------
(a) Declaration of Trust of AB Funds Trust dated July
16, 1999*
(a.1) Amendment to Declaration of Trust dated August 30,
1999
(b) Registrant's By-Laws*
(c) None
(d) Investment Advisory Agreement between Choice Funds on
behalf of the Focus Fund and the Balanced Fund and
Choice Investment Management, LLC, dated October 31,
1999.
(e) Distribution Agreement between Choice Funds and
Sunstone Distribution Services, LLC dated October 31,
1999.
(f) None
(g) Custodian Agreement between Choice Funds and
UMB Bank, n.a. dated , 1999
(h) (1) Administration and Fund Accounting Agreement
between Choice Funds and Sunstone Financial
Group, Inc. dated October 31, 1999
(2) Transfer Agency Agreement between Choice Funds
and Sunstone Financial Group, Inc. dated October 31,
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) None
*Incorporated by reference to Registrant's initial Registration Statement on
Form N-1A, as filed with the Commission on July 21, 1999
<PAGE> 159
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 4 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.
<PAGE> 160
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 First Omaha Funds, Inc., The Marsico Investment Fund,
Green Century Funds, The Haven Funds, JohnsonFamily Funds, and La Crosse
Funds.
(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>
--------------------------------------------------------------------------------------------------------------------
NAME POSITIONS AND OFFICES WITH POSITIONS AND OFFICES WITH
UNDERWRITER 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 5299 DTC Boulevard, Englewood,
Colorado 80111, other than records held and maintained by (i) UMB Bank, n.a.,
the Registrant's custodian, located at 928 Grand Boulevard, 10TH Floor, Kansas
City, Missouri 64106; (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.
<PAGE> 161
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> 162
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 Englewood, and the State of Colorado on
the 30th day of September, 1999.
CHOICE FUNDS,
a Delaware business
By: /s/
------------------------------
Patrick S. Adams, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/
- --------------------------- Trustee; President; Principal September 30, 1999
Patrick S. Adams Executive Officer; Chairman of the
Board
/s/
- --------------------------- Trustee September 30, 1999
Gerard M. Lavin
/s/
- --------------------------- Trustee September 30, 1999
Richard A. Hathaway
/s/
- --------------------------- Treasurer; Principal September 30, 1999
Christelle C. Beck Accounting Officer
</TABLE>
<PAGE> 163
NOTICE OF RESIGNATION
Pursuant to Section 11(b)(1)
of the
Securities Act of 1933
September 30, 1999
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Choice Funds
5299 DTC Boulevard
Englewood, Colorado 80111
Re: Choice Funds (f/k/a AB Funds Trust) Registration Statement on Form N-1A
("Registration Statement")
File No. 333-83419; 811-09485
In accordance with Section 11(b)(1) of the Securities Act of 1933, as amended
(the "Act"), the undersigned hereby informs the Securities and Exchange
Commission that the undersigned has resigned as president, principal executive
officer and a trustee of Choice Funds, a registered investment company,
effective September 30, 1999. Accordingly, the undersigned will not be
responsible for any part of the Registration Statement which, as of the date
such part becomes effective, contains an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading. In connection with the foregoing,
the undersigned notes that no part of the Registration Statement has become
effective as of the date of this letter.
This letter constitutes notice to both the Securities and Exchange Commission
and Choice Funds as contemplated by Section 11(b)(1) of the Act.
Very truly yours,
/s/ Randy M. Pavlick
<PAGE> 164
NOTICE OF RESIGNATION
Pursuant to Section 11(b)(1)
of the
Securities Act of 1933
September 30, 1999
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Choice Funds
5299 DTC Boulevard
Englewood, Colorado 80111
Re: Choice Funds (f/k/a AB Funds Trust) Registration Statement on Form N-1A
("Registration Statement")
File No. 333-83419; 811-09485
In accordance with Section 11(b)(1) of the Securities Act of 1933, as amended
(the "Act"), the undersigned hereby informs the Securities and Exchange
Commission that the undersigned has resigned as secretary, treasurer, principal
financial and accounting officer and a trustee of Choice Funds, a registered
investment company, effective September 30, 1999. Accordingly, the undersigned
will not be responsible for any part of the Registration Statement which, as of
the date such part becomes effective, contains an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. In connection with the
foregoing, the undersigned notes that no part of the Registration Statement has
become effective as of the date of this letter.
This letter constitutes notice to both the Securities and Exchange Commission
and Choice Funds as contemplated by Section 11(b)(1) of the Act.
Very truly yours,
/s/ Lesli Hosford McLinden
<PAGE> 1
EXHIBIT 99.a-1
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF TRUST
OF
AB FUNDS TRUST
The undersigned certifies that:
1. The name of the business trust is AB Funds Trust (the "Business Trust").
2. The amendment to the Certificate of Trust of the Business Trust set forth
below (the "Amendment") has been duly authorized by the Board of Trustees of the
Business Trust.
The first Article of the Certificate of Trust is hereby amended
to read as follows:
"FIRST: The name of the business trust is Choice Funds."
3. Pursuant to section 3810(b) of the Delaware Business Trust Act, Del. Code
Ann. Title 12, Sec. 3801-3819 (the "Act"), this Certificate of Amendment to the
Certificate of Trust of the Business Trust shall become effective immediately
upon filing with the Office of the Secretary of State of the State of Delaware.
4. The Amendment is made pursuant to the authority granted to the Trustees
of the Business Trust under Section 3810(b) of the Act and pursuant to the
authority set forth in the governing instrument of the Business Trust.
IN WITNESS WHEREOF, the undersigned, being a Trustee of the Business
Trust, has duly executed this Certificate of Amendment this 30th day of August,
1999.
s/ Lesli Hosford McLinden
-------------------------
Name: Lesli Hosford McLinden, Trustee
<PAGE> 1
EXHIBIT 99.d
CHOICE FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT, made effective as of October 31, 1999, by and between Choice
Funds, a Delaware business trust (the "Trust"), on behalf of trust's mutual fund
portfolios (each portfolio, a "Fund" and collectively, the "Funds"), as set
forth on attached Schedule A which may be amended from time to time to add new
Funds and Choice Investment Management, LLC, a Colorado Limited Liability
Company (the "Investment Adviser").
W I T N E S S E T H:
WHEREAS, the Trust has been organized and operates as an investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act") and engages in the business of investing and reinvesting its assets
in securities; and
WHEREAS, the Investment Adviser is a registered investment adviser
under the Investment Advisers Act of 1940, as amended (the "Advisers Act") and
engages in the business of providing investment management services; and
WHEREAS, the Trust has selected the Investment Adviser to serve as the
Investment Adviser for the Trust effective as to any Funds when listed on
attached Schedule A as of the date of this Agreement as may be amended from time
to time.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and each of the parties hereto intending to be legally bound, it is
agreed as follows:
<PAGE> 2
1. Appointment:
1.1 The Trust on behalf of each Fund hereby appoints the
Investment Adviser to provide either directly or through sub-advisers approved
by the Board of the Trust, a continuous investment management program for the
Trust's assets and to provide administration of the Trust not otherwise provided
by third party service providers, subject to the direction and supervision of
the trustees and officers of the Trust and in accordance with the Trust's
prospectus and Statement of Additional Information as may be amended or
supplemented from time to time and in accordance with all applicable rules and
regulations of the Securities Exchange Commission ("SEC") and with all other
applicable law, for the period and on the terms hereinafter set forth.
1.2. The Investment Adviser hereby accepts such appointment
and agrees during such period to render the services and assume the obligations
herein set forth for the compensation herein provided. The Investment Adviser
shall for all purposes herein, be deemed to be an independent contractor, and
shall, unless otherwise expressly provided and authorized, have no authority to
act for or to represent the Trust or any Fund in any way, or in any way be
deemed an agent of the Trust or a Fund.
2. Representations of the Investment Adviser:
The Investment Adviser represents and warrants that it:
2.1. upon the commencement of its provision of investment
advisory services to the Trust and its Funds, and continuing throughout the term
of this Agreement and any successive renewals thereof, is a registered
investment adviser under the
<PAGE> 3
Advisors Act; and that it meets all federal, state and other regulatory
requirements and will promptly notify the Trust in the event, it ceases to do
so;
2.2. has in place compliance procedures including a Code of
Ethics and agrees to provide to the Trust, periodic reports required thereunder;
2.3. certifies that it has obtained and will continue to
maintain the appropriate insurances, including Fidelity Bond and D&O/E&O, and
agrees to provide copies of such to the Trust;
2.4. agrees to give prompt notification to the Trust of
any material changes in its organizational structure or key personnel;
2.5. agrees to permit the Trust upon reasonable notice, to
conduct periodic onsite visits and formal reviews of the Adviser's operations
and procedures; and
2.6. will treat confidentially and as proprietary information
of the Trust all records and information relative to the Trust or/and Funds of
the Trust and the Trust's past, current or potential shareholders and will not
use such information for any purpose other than performance of its
responsibilities under this Agreement, except upon prior notification to and
written approval of the Trust, which approval shall not be unreasonably
withheld.
3. Services to be provided by Investment Adviser.
3.1. The Investment Adviser shall regularly make and implement
such decisions with respect to each Fund as to what securities and other
investments to
<PAGE> 4
purchase and sell on behalf of each Fund and shall effect the purchase and sale
of such investments in furtherance of each Fund's objectives and policies.
3.2. The Investment Adviser shall keep books and records with
respect to each Fund's securities transactions and shall furnish the Board of
Trustees of the Trust with such information and reports regarding the Funds'
investments as the Investment Adviser deems appropriate or as the Trustees of
the Trust may reasonably request.
3.3. The Investment Adviser hereby agrees that all records it
maintains for each Fund are the property of the Trust and further agrees to
surrender such records promptly to the Trust upon request. The Investment
Adviser further agrees to preserve such records for the periods proscribed under
the 1940 Act rules and regulations as may be amended from time to time.
3.4. The Investment Adviser shall place and execute Fund
orders for the purchase and sale of portfolio securities directly with
broker-dealers. Subject to obtaining the best price and execution, the
Investment Adviser is authorized to place orders for the purchase and sale of
portfolio securities for the Fund with such broker-dealers as it may select from
time to time. Subject to subparagraph 3.5 below, the Investment Adviser is also
authorized to place transactions with broker-dealers who provide research or
statistical information or analyses to a Fund, to the Investment Adviser, or to
any other client for which the Investment Adviser provides investment management
services. Subject to obtaining the best price and execution, the Investment
Adviser may also place brokerage transactions with broker-dealers who sell
shares of the Fund. Broker-dealers who sell shares of the Funds shall only
receive orders for the
<PAGE> 5
purchase or sale of portfolio securities to the extent that the placing of such
orders is in compliance with the rules of the U.S. Securities and Exchange
Commission ("SEC") and the National Association of Securities Dealers, Inc.
("NASD"). The Investment Adviser also agrees that it will cooperate with the
Trust to execute instructions that brokerage transactions be allocated to
broker-dealers who provide benefits directly to the Funds.
3.5. Notwithstanding the provisions of subparagraph 3.4 above
and subject to such policies and procedures as may be adopted by the Board of
Trustees and officers of the Trust, the Investment Adviser is authorized to pay
a member of an exchange, broker or dealer an amount of commission for effecting
a securities transaction in excess of the amount of commission another member of
an exchange, broker or dealer would have charged for effecting that transaction,
in such instances where the Investment Adviser has determined in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such member, broker or dealer,
viewed in terms of either that particular transaction or the Investment
Adviser's overall responsibilities with respect to the Fund and to other funds
for which the Investment Adviser exercises investment discretion.
3.6. The Investment Adviser is authorized to direct portfolio
transactions to a broker-dealer which is an affiliated person of the Investment
Adviser or the Trust in accordance with such standards and procedures as may be
approved by the Board in accordance with 1940 Act Rule 17e-1, or other rules
promulgated by the Securities and Exchange Commission. Any transaction placed
with an affiliated broker-dealer must (i) be placed at the best available and
execution, and (ii) may not be a principal transaction.
<PAGE> 6
3.7. Subject to compliance with the requirements of the 1940
Act, the Investment Adviser may retain as a sub-adviser to a Fund, at the
Investment Adviser's own expense, any investment adviser registered under the
Advisers Act subject to the approval of the Trustees of the Trust.
4. Responsibilities of the Trust.
4.1. The Trust shall conduct its own business and affairs and
shall bear the expenses and salaries necessary and incidental thereto including,
but not in limitation of the foregoing, the costs incurred in: (a) the
maintenance of its corporate existence; (b) the maintenance of its own books,
records and procedures; (c) dealing with its own shareholders; (d) the payment
of dividends; (e) transfer of stock, including issuance, redemption and
repurchase of shares; (f) preparation of share certificates; (g) reports and
notices to shareholders; (h) calling and holding of shareholders' meetings; (i)
miscellaneous office expenses; (j) brokerage commissions; (k) custodian fees;
(l) legal and accounting fees; (m) taxes, and state and federal registration
fees.
4.2. Directors, officers, and employees of the Investment
Adviser may be trustees/directors, officers and employees of the Funds for which
the Investment Adviser serves as Investment Adviser. Directors, officers and
employees of the Investment Adviser who are trustees, officers and/or employees
of the Trust shall not receive any compensation from the Trust for acting in
such dual capacity.
4.3. In the conduct of the respective businesses of the
parties hereto and in the performance of this Agreement, the Trust and the
Investment Adviser may share facilities common to each, with appropriate
proration of expenses between them.
<PAGE> 7
4.4. To the extent the Investment Adviser incurs any costs by
assuming expenses which are an obligation of Trust and/or any Fund as set forth
herein, the respective Fund shall promptly reimburse the Investment Adviser for
such costs and expenses, except to the extent the Investment Adviser has
otherwise agreed to bear such expenses. To the extent the services for which a
Fund is obligated to pay are performed by the Investment Adviser, the Investment
Adviser shall be entitled to recover from that Fund to the extent of the
Investment Adviser's actual costs for providing such services.
5. Compensation.
5.1. As compensation for the services to be rendered to the
Funds by the Investment Adviser under the provisions of this Agreement, the
Trust on behalf of each of the respective Funds shall pay to the Investment
Adviser from each Fund's respective net assets an annual fee payable on a
monthly basis as set forth on attached Schedule A which may be amended from time
to time and which is incorporated herein by reference.
5.2. If this Agreement is terminated prior to the end of any
calendar month, the management fee shall be prorated for the portion of any
month in which this Agreement is in effect according to the proportion which the
number of calendar days, during which the Agreement is in effect, bears to the
number of calendar days in the month, and shall be payable within 10 days after
the date of termination.
5.3. The Investment Adviser may voluntarily reduce any portion
of the compensation or reimbursement of expenses due to it pursuant to this
Agreement and may agree to make payments to limit expenses which are the
responsibility of the Fund
<PAGE> 8
under this Agreement. Any such reduction or payment shall be applicable only to
such specific reduction or payment and shall not constitute an agreement to
reduce any future compensation or reimbursement due to the Investment Adviser
hereunder or to continue future payments. Any such reduction will be agreed upon
prior to accrual of the related expense or fee and will be estimated daily. Any
fee withheld shall be voluntarily reduced and any Fund expense paid by the
Investment Adviser voluntarily or pursuant to an agreed expense limitation shall
be reimbursed by the appropriate Fund to the Investment Adviser in the first,
second, or third (or any combination thereof) fiscal year next succeeding the
fiscal year of the withholding, reduction, or payment to the extent permitted by
applicable law if the aggregate expenses for the next succeeding fiscal year,
second fiscal year or third succeeding fiscal year do not exceed any limitation
to which the Investment Adviser has agreed.
6. Services Not Exclusive.
6.1. The services to be rendered by the Investment Adviser to
the Trust on behalf of the Funds under the provisions of this Agreement are not
to be deemed to be exclusive, and the Investment Adviser shall be free to render
similar or different services to others so long as its ability to render the
services provided for in this Agreement shall not be impaired thereby.
<PAGE> 9
6.2. The Investment Adviser, its directors, officers,
employees, and agents may engage in other businesses, may render investment
management services to other investment companies, or to any other corporation,
association, firm or individual, and may render underwriting services to the
Trust on behalf of the Funds or to any other investment company, corporation,
association, firm or individual.
7. Limitation on Liability.
In the absence of willful misfeasance, bad faith, negligence,
or a reckless disregard of the performance of duties of the Investment Adviser
to the Trust or any Fund, the Investment Adviser shall not be subject to
liabilities to the Trust, a Fund or to any shareholder of a Fund for any action
or omission in the course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security, or otherwise.
8. Term and Termination.
8.1. This Agreement shall be executed and become effective as
to each Fund, listed on attached Schedule A (as may be amended from time to
time) as of the date specified adjacent to each Fund's name on Schedule A if
approved by the vote of a majority of the disinterested Trustees of each Fund
meeting in person at a meeting specifically called for the purpose of voting on
such approval and a vote of the majority of the outstanding voting securities of
each Fund. It shall continue in effect for a period of two years and may be
renewed thereafter only so long as such renewal and continuance is specifically
approved at least annually by the Board of Trustees for each Fund or by vote of
a majority of the outstanding voting securities of a Fund and only if
<PAGE> 10
the terms and the renewal hereof have been approved by the vote of a majority of
the Trustees of the Trust who are not parties hereto or interested persons of
any such party, cast in person at a meeting called for the purpose of voting on
such approval.
8.2. Notwithstanding the foregoing, this Agreement may be
terminated by the Trust at any time, without the payment of a penalty, on sixty
(60) days written notice to the Investment Adviser of the Trust's intention to
do so, pursuant to action by the Board of Trustees of the Trust or pursuant to a
vote of a majority of the outstanding voting securities of a Fund or the Trust.
The Investment Adviser may terminate this Agreement at any time, with respect to
any Fund without the payment of any penalty or sixty (60) days written notice to
the Trust of its intention to do so.
8.3. Upon termination of this Agreement, the obligations of
all the parties hereunder shall cease and terminate as of the date of such
termination, except for any obligation to respond to a breach of this Agreement
committed prior to such termination, and except for the obligation of the Trust
to pay to the Investment Adviser the fee provided for in Section 5 hereof and as
set forth in Schedule A, prorated to the date of termination. Termination of the
Agreement with respect to one Fund will not, itself, cause termination with
respect to any other Fund.
8.4. This Agreement shall automatically terminate in the event
of its assignment.
8.5. This Agreement shall extend to and bind the heirs,
executors, administrators and successors of the parties hereto and cannot be
amended without shareholder approval unless permitted by the SEC.
<PAGE> 11
9. Miscellaneous.
9.1. This Agreement may be executed in counterparts, each of
which shall constitute an original counterpart, and all of which, when taken
together, shall constitute one Agreement.
9.2. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware. To the extent that the
applicable laws of the State of Delaware or any provisions therein conflict with
the applicable provisions of the 1940 Act, the 1940 Act shall control. Nothing
herein shall be construed in a manner inconsistent with the 1940 Act, or any
rule or order of the SEC thereunder.
9.3. If any provision of this Agreement is determined by
competent authority to be prohibited or unenforceable in any jurisdiction, it
shall, as to such jurisdiction, be ineffective to the extent of such prohibition
or unenforceability and shall not invalidate or render unenforceable such person
in any other jurisdiction nor any other person of this Agreement.
9.4. For the purposes of this Agreement, the terms "vote of a
majority of the outstanding voting securities"; "interested persons"; and
"assignment" shall have the meaning defined in the 1940 Act.
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below and have caused their corporate
seals to be affixed and duly attested as of the 31st day of October, 1999.
Attest: CHOICE FUNDS
By:
----------------------------------
Title:
-------------------------------
Attest: CHOICE INVESTMENT MANAGEMENT, LLC
By:
----------------------------------
Patrick S. Adams
Title:
-------------------------------
<PAGE> 13
SCHEDULE A
<TABLE>
<CAPTION>
FUND NAME ANNUAL INVESTMENT EFFECTIVE DATE
ADVISORY FEE*
<S> <C> <C>
Choice Balanced Fund 0.75% 10/31/99
Choice Focus Fund 1.00% 10/31/99
</TABLE>
*As a % of the average daily net assets of each respective Fund.
<PAGE> 1
EXHIBIT 99.e
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of this 31st day of October, 1999, by and
between Choice Funds, a Delaware business trust (the "Trust"), and Sunstone
Distribution Services, LLC, a Wisconsin limited liability company (the
"Distributor").
WHEREAS, the Trust is an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and is authorized to
issue shares of beneficial interest (the "Shares") in separate series with each
such series representing interests in a separate portfolio of securities and
other assets;
WHEREAS, the Distributor is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a member of
the National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, the Trust and Distributor desire to enter into an agreement
pursuant to which Distributor shall be the distributor of the Shares of the
Trust representing the investment portfolios listed on Schedule A hereto and any
additional investment portfolios the Trust and Distributor may agree upon and
include on Schedule A as such Schedule may be amended from time to time (such
investment portfolios and any additional investment portfolios are individually
referred to as a "Fund" and collectively the "Funds").
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. APPOINTMENT OF THE DISTRIBUTOR.
The Trust hereby appoints the Distributor as agent for the
distribution of the Shares, on the terms and for the period set forth in this
Agreement. Distributor hereby accepts such appointment as agent for the
distribution of the Shares on the terms and for the period set forth in this
Agreement.
2. SERVICES AND DUTIES OF THE DISTRIBUTOR.
2.1 Distributor will act as agent for the distribution of Shares in
accordance with the instructions of the Trust's Board of Trustees and the
registration statement and prospectuses then in effect with respect to the Funds
under the Securities Act of 1933, as amended (the "1933 Act").
2.2 Distributor may incur expenses for appropriate distribution
activities which it deems reasonable which are primarily intended to result in
the sale of Shares, including, but not limited to,
<PAGE> 2
advertising, the printing and mailing of prospectuses to other than current
shareholders, and the printing and mailing of sales literature, provided that
the Fund approves any such activity. With the Fund's approval, Distributor may
enter into servicing and/or selling agreements with qualified broker/dealers and
other persons with respect to the offering of Shares to the public, and if it so
chooses Distributor will act only on its own behalf as principal. The
Distributor shall not be obligated to incur any specific expenses or sell any
certain number of Shares of any Fund.
2.3 All Shares of the Funds offered for sale by Distributor shall be
offered for sale to the public at a price per unit (the "offering price")
provided in the Funds' then current prospectus. The Distributor shall have no
liability for payment of the purchase price of the Shares sold pursuant to the
Agreement or with respect to redemptions or repurchases of Shares.
2.4 Distributor shall act as distributor of the Shares in compliance in
all material respects with all applicable laws, rules and regulations,
including, without limitation, all rules and regulations made or adopted
pursuant to the 1940 Act, by the Securities and Exchange Commission (the
"Commission") and the NASD.
2.5 Distributor shall not utilize any materials in connection with the
sales or offering of Shares except the Trust's prospectus and statement of
additional information and such other materials as the Trust shall provide or
approve. The Distributor agrees to provide compliance review of all sales
literature and marketing materials prepared for use by or on behalf of the Funds
in advance of the use of such materials. The Distributor will file the materials
as may be required with the NASD, SEC or state securities commissioners. Each
party agrees and represents that it will not use or authorize the use of any
advertising or sales materials unless and until such materials have been
approved and authorized for use by the other party hereto.
2.6 For its services hereunder, the Distributor shall receive the fees
and be reimbursed the expenses provided in Schedule B hereto.
3. DUTIES AND REPRESENTATIONS OF THE TRUST.
3.1 The Trust represents that it is registered as an open-end
management investment company under the 1940 Act and that it has and will
continue to act in conformity with its Declaration of Trust, By-Laws, its
registration statement as may be amended from time to time and resolutions and
other instructions of its Board of Trustees and has and will continue to comply
with all applicable laws, rules and regulations including without limitation the
1933 Act, the 1934 Act, the 1940 Act, the laws of the states in which shares of
the Funds are offered and sold, and the rules and regulations thereunder.
3.2 The Trust shall take or cause to be taken all necessary action to
register and maintain the registration of the Shares under the 1933 Act for sale
as herein contemplated and shall pay all costs and expenses in connection with
the registration of Shares under the 1933 Act, and be responsible for all
expenses in connection with maintaining facilities for the issue and transfer of
Shares and for supplying information, prices and other data to be furnished by
the Trust hereunder.
2
<PAGE> 3
3.3 The Trust shall execute any and all documents and furnish any and
all information and otherwise take all actions which may be reasonably necessary
in the discretion of the Trust's officers in connection with the qualification
of the Shares for sale in such states as Distributor and the Trust may approve,
shall maintain the registration of a sufficient number or amount of Shares
thereunder, and shall pay all expenses which may be incurred in connection with
such qualification.
3.4 The Trust shall, at its expense, keep the Distributor fully
informed with regard to its affairs. In addition, the Trust shall furnish
Distributor from time to time such information, documents and reports with
respect to the Trust and the Shares as Distributor may reasonably request, and
the Trust warrants that the statements contained in any such information shall
be true and correct and fairly represent what they purport to represent.
3.5 The Trust represents to Distributor that all registration
statements and prospectuses of the Trust filed or to be filed with the
Commission under the 1933 Act with respect to the Shares have been and will be
prepared in conformity with the requirements of the 1933 Act, the 1940 Act, and
the rules and regulations of the Commission thereunder. As used in this
Agreement the terms "registration statement" and "prospectus" shall mean any
registration statement and prospectus (together with the related statement of
additional information) at any time now or hereafter filed with the Commission
with respect to any of the Shares and any amendments and supplements thereto
which at any time shall have been or will be filed with said Commission. The
Trust represents and warrants to Distributor that any registration statement and
prospectus, when such registration statement becomes effective, will contain all
statements required to be stated therein in conformity with the 1933 Act, the
1940 Act and the rules and regulations of the Commission; that all information
contained in the registration statement and prospectus will be true and correct
in all material respects when such registration statement becomes effective; and
that neither the registration statement nor any prospectus when such
registration statement becomes effective will include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Trust agrees to
file from time to time such amendments, supplements, reports and other documents
as may be necessary or required in order to comply with the 1933 Act and the
1940 Act and in order that there may be no untrue statement of a material fact
in a registration statement or prospectus, or necessary or required in order
that there may be no omission to state a material fact in the registration
statement or prospectus which omission would make the statements therein
misleading. The Trust shall promptly notify the Distributor of any advice given
to it by counsel to the Trust regarding the necessity or advisability of
amending or supplementing the registration statement.
3.6 The Trust shall not file any amendment to the registration
statement or supplement to any prospectus without giving Distributor reasonable
notice thereof in advance and if the Distributor declines to assent to such
amendment (after a reasonable time), the Trust may terminate this Agreement
forthwith by written notice to the Distributor without payment of any penalty.
If the Trust shall not propose an amendment or amendments and/or supplement or
supplements promptly after receipt by the Trust of a written request in good
faith from Distributor to do so, Distributor may, at its option, immediately
terminate this Agreement. In addition, if, at any time during the term of this
Agreement, the Distributor requests the Trust to make any change in its
governing instruments or in
3
<PAGE> 4
its methods of doing business which are necessary in order to comply with any
requirement of applicable law or regulation, and the Trust fails (after a
reasonable time) to make any such change as requested, the Distributor may
terminate this Agreement forthwith by written notice to the Trust without
payment of any penalty. Nothing contained in this Agreement shall in any way
limit the Trust's right to file at any time any amendments to any registration
statement and/or supplements to any prospectus, of whatever character, as the
Trust may deem advisable, such right being in all respects absolute and
unconditional.
3.7 Whenever in their judgment such action is warranted by market,
economic or political conditions, or by circumstances of any kind, the Trust's
officers may decline to accept any orders for, or make any sales of, any Shares
until such time as they deem it advisable to accept such orders and to make such
sales and the Trust shall advise Distributor promptly of such determination.
3.8 The Trust agrees to advise the Distributor promptly in writing:
(i) of any correspondence or other communication by the Commission
or its staff relating to the Funds including requests by the Commission for
amendments to the registration statement or prospectuses;
(ii) in the event of the issuance by the Commission of any stop
order suspending the effectiveness of the registration statement or prospectuses
then in effect or the initiation of any proceeding for that purpose;
(iii) of the happening of any event which makes untrue any
statement of a material fact made in the registration statement or prospectuses
or which requires the making of a change in such registration statement or
prospectuses in order to make the statements therein not misleading; and
(iv) of all actions taken by the Commission with respect to any
amendments to any registration statement or prospectus which may from time to
time be filed with the Commission.
4. INDEMNIFICATION.
4.1(a) The Trust authorizes Distributor to use any prospectus or
statement of additional information, in the form furnished to Distributor from
time to time, in connection with the sale of Shares. The Trust shall indemnify,
defend and hold the Distributor, and each of its present or former directors,
members, officers, employees, representatives and any person who controls or
previously controlled the Distributor within the meaning of Section 15 of the
1933 Act, free and harmless from and against any and all losses, claims,
demands, liabilities, damages and expenses (including the costs of investigating
or defending any alleged losses, claims, demands, liabilities, damages or
expenses and any counsel fees incurred in connection therewith) which
Distributor, each of its present and former directors, officers, employees or
representatives or any such controlling person, may incur under the 1933 Act,
the 1934 Act, any other statute (including Blue Sky laws) or any rule or
regulation thereunder, or under common law or otherwise, (a) arising out of or
based upon any untrue
4
<PAGE> 5
statement, or alleged untrue statement, of a material fact contained in the
registration statement or any prospectus, as from time to time amended or
supplemented, or an annual or interim report to shareholders, or arising out of
or based upon any omission, or alleged omission, to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading; provided, however, that the Trust's obligation to indemnify
Distributor and any of the foregoing indemnitees shall not be deemed to cover
any losses, claims, demands, liabilities, damages or expenses arising out of any
untrue statement or alleged untrue statement or omission or alleged omission
made in the registration statement, prospectus, or annual or interim report in
reliance upon and in conformity with information relating to the Distributor and
furnished to the Trust or its counsel by Distributor for the purpose of, and
used in, the preparation thereof; or (b) in connection with this Agreement or
arising out of or based on the Distributor's or any of the foregoing
indemnitee's performance hereunder, except to the extent any such losses result
from the Distributor's willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement. The Trust's agreement to indemnify
the Distributor, and any of the foregoing indemnitees, as the case may be, with
respect to any action, is expressly conditioned upon the Trust being notified of
such action brought against Distributor, or any of the foregoing indemnitees,
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the
Distributor, or such person, such notification to be given by letter or by
telegram addressed to the Trust's President, but the failure so to notify the
Trust of any such action shall not relieve the Trust from any liability which
the Trust may have to the person against whom such action is brought by reason
of any such untrue, or alleged untrue, statement or omission, or alleged
omission, otherwise than on account of the Trust's indemnity agreement contained
in this Section 4.1.
4.1(b) The Trust shall be entitled to participate at its own expense in
the defense or, if it so elects, to assume the defense of any suit brought to
enforce any such loss, claim, demand, liability, damage or expense, but if the
Trust elects to assume the defense, such defense shall be conducted by counsel
chosen by the Trust and approved by the Distributor, which approval shall not be
unreasonably withheld. In the event the Trust elects to assume the defense of
any such suit and retain such counsel, the indemnified defendant or defendants
in such suit shall bear the fees and expenses of any additional counsel retained
by them. If the Trust does not elect to assume the defense of any such suit, or
in case the Distributor does not, in the exercise of reasonable judgment,
approve of counsel chosen by the Trust, the Trust will reimburse the indemnified
person or persons named as defendant or defendants in such suit, for the fees
and expenses of any counsel retained by Distributor and them. The Trust's
indemnification agreement contained in this Section 4.1 and the Trust's
representations and warranties in this Agreement shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
the Distributor, and each of its present or former directors, officers,
employees, representatives or any controlling person, and shall survive the
delivery of any Shares and the termination of this Agreement. This agreement of
indemnity will inure exclusively to the Distributor's benefit, to the benefit of
each of its present or former directors, members, officers, employees or
representatives or to the benefit of any controlling persons and their
successors and estates. The Trust agrees promptly to notify Distributor of the
commencement of any litigation or proceedings against the Trust or any of its
officers or trustees in connection with the issue and sale of any of the Shares.
5
<PAGE> 6
4.1(c) The Trust acknowledges and agrees that in the event the
Distributor, at the request of the Trust, is required to give indemnification
comparable to that set forth in clause (a) of this Section to any entity selling
Shares or providing shareholder services to shareholders or others and such
entity shall make a claim for indemnification against the Distributor, the
Distributor shall make a similar claim for indemnification against the Trust and
shall be entitled to such indemnification.
4.2(a) Distributor shall indemnify, defend and hold the Trust, and each
of its present or former trustees, officers, employees, representatives, and any
person who controls or previously controlled the Trust within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
losses, claims, demands, liabilities, damages and expenses (including the costs
of investigating or defending any alleged losses, claims, demands, liabilities,
damages or expenses, and any counsel fees incurred in connection therewith)
which the Trust, and each of its present or former trustees, officers,
employees, representatives, or any such controlling person, may incur under the
1933 Act, the 1934 Act, any other statute (including Blue Sky laws) or any rule
or regulation thereunder, or under common law or otherwise, (a) arising out of
or based upon any untrue, or alleged untrue, statement of a material fact
contained in the Trust's registration statement or any prospectus, as from time
to time amended or supplemented, or annual or interim report to shareholders or
the omission, or alleged omission, to state therein a material fact required to
be stated therein or necessary to make the statement not misleading, but only if
such statement or omission was made in reliance upon, and in conformity with,
information relating to the Distributor and furnished to the Trust or its
counsel by the Distributor for the purpose of, and used in, the preparation
thereof; or (b) as a result of Distributor's failure to comply with the Terms of
this Agreement, except to the extent and such losses result from the Trust's
willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties,
under this Agreement. The Distributor's Agreement to indemnify the Trust, and
any of the foregoing indemnitees, is expressly conditioned upon the
Distributor's being notified of any action brought against the Trust, and any of
the foregoing indemnitees, such notification to be given by letter or telegram
addressed to Distributor's President, within a reasonable time after the summons
or other first legal process giving information of the nature of the claim shall
have been served upon the Trust or such person, but the failure so to notify
Distributor of any such action shall not relieve Distributor from any liability
which Distributor may have to the person against whom such action is brought by
reason of any such untrue, or alleged untrue, statement or omission, otherwise
than on account of Distributor's indemnity agreement contained in this Section
4.2(a).
4.2(b) The Distributor shall be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any such loss, claim, demand, liability, damage or expense,
but if the Distributor elects to assume the defense, such defense shall be
conducted by counsel chosen by the Distributor and approved by the Trust, which
approval shall not be unreasonably withheld. In the event the Distributor elects
to assume the defense of any such suit and retain such counsel, the indemnified
defendant or defendants in such suit shall bear the fees and expenses of any
additional counsel retained by them. If the Distributor does not elect to assume
the defense of any such suit, or in case the Trust does not, in the exercise of
reasonable judgment, approve of counsel chosen by the Distributor, the
Distributor will reimburse the indemnified person or persons named as defendant
or defendants in such suit, for the fees and expenses of any counsel retained by
the Trust and them. The Distributor's indemnification agreement contained in
this
6
<PAGE> 7
Section 4.2 and the Distributor's representations and warranties in this
Agreement shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Trust, and each of its present or
former trustees, officers, employees, representatives or any controlling person,
and shall survive the delivery of any Shares and the termination of this
Agreement. This Agreement of indemnity will inure exclusively to the Trust's
benefit, to the benefit of each of its present or former trustees, officers,
employees or representatives or to the benefit of any controlling persons and
their successors. The Distributor agrees promptly to notify the Trust of the
commencement of any litigation or proceedings against the Distributor or any of
its officers or directors in connection with the issue and sale of any of the
Shares.
5. OFFERING OF SHARES.
No Shares shall be offered by either the Distributor or the Trust under
any of the provisions of this Agreement and no orders for the purchase or sale
of such Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the 1933
Act, or if and so long as the current prospectus as required by Section 10 of
the 1933 Act, as amended, is not on file with the Commission; provided, however,
that nothing contained in this paragraph 5 shall in any way restrict or have an
application to or bearing upon the Trust's obligation to repurchase Shares from
any shareholder in accordance with the provisions of the prospectus or
Declaration of Trust.
6. LIMITATION OF LIABILITY.
6.1 The Distributor shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust in connection with the
performance of its obligations and duties under this Agreement, except a loss
resulting from the Distributor's willful misfeasance, bad faith or gross
negligence in the performance of such duties and obligations, or by reason of
its reckless disregard thereof. Furthermore, the Distributor shall not be liable
for any action taken or omitted to be taken in good faith in accordance with
instructions received by the Distributor from an officer or representative of
the Trust.
6.2 The Distributor assumes no responsibility hereunder, and shall
not be liable, for any damage, loss of data, errors, delay or any other loss
whatsoever caused by events beyond its reasonable control. The Distributor will,
however, take all reasonable steps to minimize service interruptions for any
period that such interruption continues beyond its control. At the request of
the Trust, the Distributor will provide to the Trust a copy of the Distributor's
current disaster recovery plan, or, at the discretion of the Distributor, a
summary thereof.
7. TERM.
7.1 This Agreement shall become effective with respect to each Fund
listed on Schedule A hereof as of the date hereof and, with respect to each Fund
not in existence on that date, on the date an amendment to Schedule A to this
Agreement relating to that Fund is executed. Unless sooner terminated as
provided herein, this Agreement shall continue in effect with respect to each
Fund until
7
<PAGE> 8
__________, 199_. Thereafter, if not terminated, this Agreement shall
continue automatically in effect as to each Fund for successive annual periods,
provided such continuance is specifically approved at least annually by (i) the
Trust's Board of Trustees or (ii) the vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of a Fund, and provided that in either
event the continuance is also approved by the Distributor and by a majority of
the Trust's Board of Trustees who are not "interested persons" (as defined in
the 1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval.
7.2 This Agreement may be terminated without penalty with respect to a
particular Fund (1) through a failure to renew this Agreement at the end of a
term, (2) upon mutual consent of the parties, or (3) on no less than thirty (30)
days' written notice, by the Trust's Board of Trustees, by vote of a majority
(as defined with respect to voting securities in the 1940 Act) of the
outstanding voting securities of a Fund, or by the Distributor (which notice may
be waived by the party entitled to such notice). In addition, this Agreement may
be terminated at any time, without penalty, with respect to a particular Fund by
vote of a majority of the members of the Board of Trustees who are not
interested persons of the Trust (as defined in the 1940 Act) and have no direct
or indirect financial interest in this Agreement. The terms of this Agreement
shall not be waived, altered, modified, amended or supplemented in any manner
whatsoever except by a written instrument signed by the Distributor and the
Trust. This Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act).
8. MISCELLANEOUS.
8.1 The services of the Distributor rendered to the Funds are not
deemed to be exclusive. The Distributor may render such services and any other
services to others, including other investment companies. The Trust recognizes
that from time to time directors, officers, and employees of the Distributor may
serve as directors, trustees, officers and employees of other entities
(including other investment companies), that such other entities may include the
name of the Distributor as part of their name and that the Distributor or its
affiliates may enter into distribution, administration, fund accounting,
transfer agent or other agreements with such other entities.
8.2 Distributor agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Trust all records relative
to the Funds and prior, present or potential shareholders of the Trust (and
clients of said shareholders), and not to use such records and information for
any purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Trust, which
approval may not be withheld where the Distributor may be exposed to civil or
criminal proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, when subject to governmental or
regulatory audit or investigation, or when so requested by the Trust. Records
and information which have become known to the public through no wrongful act of
the Distributor or any of its employees, agents or representatives shall not be
subject to this paragraph.
8.3 This Agreement shall be governed by Wisconsin law. To the extent
that the applicable laws of the State of Wisconsin, or any of the provisions
herein, conflict with the applicable provisions of the 1940 Act, the latter
shall control, and nothing herein shall be construed in a manner
8
<PAGE> 9
inconsistent with the 1940 Act or any rule or order of the Commission
thereunder. Any provision of this Agreement which may be determined by competent
authority to be prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
8.4 Any notice required or to be permitted to be given by either party
to the other shall be in writing and shall be deemed to have been given when
sent by registered or certified mail, postage prepaid, return receipt requested,
as follows: Notice to the Distributor shall be sent to Sunstone Distribution
Services, LLC, 207 East Buffalo Street, Suite 400, Milwaukee, WI, 53202,
Attention: Miriam M. Allison, and notice to the Trust shall be sent to Choice
Funds, c/o Stradley Ronon Stevens & Young, LLP, Attention: Barbara A. Nugent,
Esquire.
8.5 This Agreement is executed by the Trust with respect to each of the
Funds and the obligations hereunder are not binding upon any of the trustees,
officers or shareholders of the Trust individually but are binding only upon the
Fund to which such obligations pertain and the assets and property of such Fund.
All obligations of the Trust under this Agreement shall apply only on a
Fund-by-Fund basis, and the assets of one Fund shall not be liable for the
obligations of another Fund. The Fund's Declaration of Trust is on file with the
Secretary of State of Delaware.
8.6 This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original agreement but such counterparts shall
together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer as of the day and year first above
written.
CHOICE FUNDS
(the "Trust")
By:
-----------------------------------------
Patrick S. Adams
President
SUNSTONE DISTRIBUTION SERVICES, LLC
(the "Distributor")
By:
-----------------------------------------
Miriam M. Allison
President
9
<PAGE> 10
SCHEDULE A
TO
DISTRIBUTION AGREEMENT
NAME OF FUNDS
<TABLE>
<CAPTION>
FUND EFFECTIVE DATE
<S> <C>
Choice Focus Fund
Choice Balanced Fund
</TABLE>
10
<PAGE> 11
SCHEDULE B
TO
DISTRIBUTION AGREEMENT
FEE SCHEDULE
ASSET BASED FEES
<TABLE>
<CAPTION>
NAME OF FUND AVERAGE NET ASSETS BASIS POINTS MINIMUM
ANNUAL FEE
<S> <C> <C> <C>
Focus Fund Up to $250 Million 2.0 basis points $25,000*
Over $250 Million 1.0 basis points
Balanced Fund Up to $250 Million 2.0 basis points $25,000*
Over $250 Million 1.0 basis points
</TABLE>
*The minimum annual fee shall not exceed $100,000 per fund family.
DISTRIBUTION EXPENSES
Expenses of marketing, promoting and distributing the Funds are in addition to
the fees set forth above, including, but not limited to, prospectus development
and printing; advertising; direct mail; public relations activities; trade show
attendance; call management and fulfillment and fees paid to broker/dealers.
ADVERTISING COMPLIANCE
In addition to the above fees, the Trust shall pay to the Distributor a fee
based on the actual time spent by representatives of the Distributor providing
compliance review of sales literature and marketing materials at the rate of
$150 per hour, plus filing fees. The hourly rate shall not apply for any sales
or marketing pieces prepared by the Distributor's affiliate, 2XL.
OUT-OF-POCKET EXPENSES
In addition to the compensation payable to the Distributor, the Funds agree to
reimburse, upon request (or pay directly at the Distributor's discretion), the
Distributor's out-of-pocket expenses in providing services hereunder including,
without limitation, amounts paid or to be paid by Distributor to dealers or
others entering into selling, servicing or related agreements with the
Distributor or the Trust. The Distributor is not required to
1
<PAGE> 12
finance any activities and as such may, in its discretion, require prepayment of
expenses and in such event will not be required to incur any expense until
payment is received.
PAYMENT OF FEES
The fees and expenses set forth on this Schedule B shall be paid to the
Distributor by the respective Funds pursuant to the Trust's Rule 12b-1 Plan or,
if the Rule 12b-1 Plan payments are not sufficient to pay such fees and expenses
over an annual period, or if the Rule 12b-1 Plan is discontinued, or if the
Funds otherwise determine that Rule 12b-1 Plan fees may not be paid, in whole or
in part, to the Distributor, the Funds' adviser(s) shall be responsible for the
payment of the amount of such fees not covered by Rule 12b-1 payments and shall
reimburse Distributor or pay directly at the Distributor's discretion such
amounts. Fees and expenses shall be payable monthly, promptly after the receipt
by the Trust of an invoice for such fees and/or expenses.
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<PAGE> 1
EXHIBIT 99.g
CUSTODY AGREEMENT
DATED , 1999
BETWEEN
UMB BANK, N.A.
AND
[FAMILY OF MUTUAL FUNDS]
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C>
1. Appointment of Custodian 1
2. Definitions 1
(a) Securities 1
(b) Assets 1
(c) Instructions and Special Instructions 1
3. Delivery of Corporate Documents 2
4. Powers and Duties of Custodian and Domestic Subcustodian 2
(a) Safekeeping 3
(b) Manner of Holding Securities 3
(c) Free Delivery of Assets 4
(d) Exchange of Securities 4
(e) Purchases of Assets 4
(f) Sales of Assets 5
(g) Options 5
(h) Futures Contracts 6
(i) Segregated Accounts 6
(j) Depositary Receipts 6
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 6
(l) Interest Bearing Deposits 7
(m) Foreign Exchange Transactions 7
(n) Pledges or Loans of Securities 8
(o) Stock Dividends, Rights, Etc. 8
(p) Routine Dealings 8
(q) Collections 8
(r) Bank Accounts 9
(s) Dividends, Distributions and Redemptions 9
(t) Proceeds from Shares Sold 9
(u) Proxies and Notices; Compliance with the Shareholders
Communication Act of 1985 9
(v) Books and Records 9
(w) Opinion of Fund's Independent Certified Public Accountants 10
(x) Reports by Independent Certified Public Accountants 10
(y) Bills and Others Disbursements 10
5. Subcustodians 10
(a) Domestic Subcustodians 10
(b) Foreign Subcustodians 10
(c) Interim Subcustodians 11
(d) Special Subcustodians 11
(e) Termination of a Subcustodian 11
(f) Certification Regarding Foreign Subcustodians 11
6. Standard of Care 12
(a) General Standard of Care 12
(b) Actions Prohibited by Applicable Law, Events Beyond 12
Custodian's Control, Armed Conflict, Sovereign Risk, etc.
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
(c) Liability for Past Records 12
(d) Advice of Counsel 12
(e) Advice of the Fund and Others 12
(f) Instructions Appearing to be Genuine 13
(g) Exceptions from Liability 13
7. Liability of the Custodian for Actions of Others 13
(a) Domestic Subcustodians 13
(b) Liability for Acts and Omissions of Foreign Subcustodians 13
(c) Securities Systems, Interim Subcustodians, Special Subcustodians, Securities 13
Depositories and Clearing Agencies
(d) Defaults or Insolvency's of Brokers, Banks, Etc. 14
(e) Reimbursement of Expenses 14
8. Indemnification 14
(a) Indemnification by Fund 14
(b) Indemnification by Custodian 14
9. Advances 14
10. Liens 15
11. Compensation 15
12. Powers of Attorney 15
13. Termination and Assignment 15
14. Additional Funds 15
15. Notices 16
16. Miscellaneous 16
</TABLE>
<PAGE> 4
CUSTODY AGREEMENT
This agreement made as of this day of , 1999, between UMB
Bank, n.a., a national banking association with its principal place of business
located at Kansas City, Missouri (hereinafter "Custodian"), and each of the
Funds listed on Appendix B hereof, together with such additional Funds which
shall be made parties to this Agreement by the execution of Appendix B hereto
(individually, a "Fund" and collectively, the "Funds").
WITNESSETH:
WHEREAS, each Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended; and
WHEREAS, each Fund desires to appoint Custodian as its custodian for
the custody of Assets (as hereinafter defined) owned by such Fund which Assets
are to be held in such accounts as such Fund may establish from time to time;
and
WHEREAS, Custodian is willing to accept such appointment on the terms
and conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutually covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN.
Each Fund hereby constitutes and appoints the Custodian as custodian of
Assets belonging to each such Fund which have been or may be from time to time
deposited with the Custodian. Custodian accepts such appointment as a custodian
and agrees to perform the duties and responsibilities of Custodian as set forth
herein on the conditions set forth herein.
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the
meanings so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills, rights,
script, warrants, interim certificates and all negotiable or nonnegotiable paper
commonly known as Securities and other instruments or obligations.
(b) "Assets" shall mean Securities, monies and other property held by
the Custodian for the benefit of a Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested telex,
a written (including, without limitation, facsimile transmission) request,
direction, instruction or certification signed or initialed by or on behalf of a
Fund by an Authorized Person; (ii) a telephonic or other oral communication from
a person the Custodian reasonably believes to be an Authorized Person; or (iii)
a communication effected directly between an electro-mechanical or electronic
device or system (including, without limitation, computers) on behalf of a Fund.
Instructions in the form of oral communications shall be confirmed by the
appropriate Fund by tested telex or in writing in the manner set forth in clause
(i) above, but the lack of such confirmation shall in no way affect any action
taken by the Custodian in reliance upon such oral Instructions prior to the
Custodian's receipt of such confirmation. Each Fund authorizes the Custodian to
record any and all telephonic or other oral Instructions communicated to the
Custodian.
(c)(2) "Special Instructions", as used herein, shall mean Instructions
countersigned or confirmed in writing by the Treasurer or any Assistant
Treasurer of a Fund or any other person designated by the Treasurer of such Fund
in writing, which countersignature or confirmation shall be included on the same
instrument containing the Instructions or on a separate instrument relating
thereto.
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<PAGE> 5
(c)(3) Instructions and Special Instructions shall be delivered to the
Custodian at the address and/or telephone, facsimile transmission or telex
number agreed upon from time to time by the Custodian and each Fund.
(c)(4) Where appropriate, Instructions and Special Instructions shall
be continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution
does not violate any of the provisions of its respective charter, articles of
incorporation, articles of association or bylaws and all required corporate
action to authorize the execution and delivery of this Agreement has been taken.
Each Fund has furnished the Custodian with copies, properly certified
or authenticated, with all amendments or supplements thereto, of the following
documents:
(a) Certificate of Incorporation (or equivalent document) of the Fund
as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing the
Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statements of additional
information.
Each Fund shall promptly furnish the Custodian with copies of any
updates, amendments or supplements to the foregoing documents.
In addition, each Fund has delivered or will promptly deliver to the
Custodian, copies of the Resolution(s) of its Board of Directors or Trustees and
all amendments or supplements thereto, properly certified or authenticated,
designating certain officers or employees of each such Fund who will have
continuing authority to certify to the Custodian: (a) the names, titles,
signatures and scope of authority of all persons authorized to give Instructions
or any other notice, request, direction, instruction, certificate or instrument
on behalf of each Fund, and (b) the names, titles and signatures of those
persons authorized to countersign or confirm Special Instructions on behalf of
each Fund (in both cases collectively, the "Authorized Persons" and
individually, an "Authorized Person"). Such Resolutions and certificates may be
accepted and relied upon by the Custodian as conclusive evidence of the facts
set forth therein and shall be considered to be in full force and effect until
delivery to the Custodian of a similar Resolution or certificate to the
contrary. Upon delivery of a certificate which deletes or does not include the
name(s) of a person previously authorized to give Instructions or to countersign
or confirm Special Instructions, such persons shall no longer be considered an
Authorized Person authorized to give Instructions or to countersign or confirm
Special Instructions. Unless the certificate specifically requires that the
approval of anyone else will first have been obtained, the Custodian will be
under no obligation to inquire into the right of the person giving such
Instructions or Special Instructions to do so. Notwithstanding any of the
foregoing, no Instructions or Special Instructions received by the Custodian
from a Fund will be deemed to authorize or permit any director, trustee,
officer, employee, or agent of such Fund to withdraw any of the Assets of such
Fund upon the mere receipt of such authorization, Special Instructions or
Instructions from such director, trustee, officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to
Sections 5(b), (c), or (d) of this Agreement, the Custodian shall have and
perform the powers and duties hereinafter set forth in this Section 4. For
purposes of this Section 4 all references to powers and duties of the
"Custodian" shall also refer to any Domestic Subcustodian appointed pursuant to
Section 5(a).
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<PAGE> 6
(a) Safekeeping.
The Custodian will keep safely the Assets of each Fund which are
delivered to it from time to time. The Custodian shall not be responsible for
any property of a Fund held or received by such Fund and not delivered to the
Custodian.
(b) Manner of Holding Securities.
(1) The Custodian shall at all times hold Securities of each Fund
either: (i) by physical possession of the share certificates or other
instruments representing such Securities in registered or bearer form; or (ii)
in book-entry form by a Securities System (as hereinafter defined) in accordance
with the provisions of sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio Securities which
have been delivered to it in physical form, by registering the same in the name
of the appropriate Fund or its nominee, or in the name of the Custodian or its
nominee, for whose actions such Fund and Custodian, respectively, shall be fully
responsible. Upon the receipt of Instructions, the Custodian shall hold such
Securities in street certificate form, so called, with or without any indication
of fiduciary capacity. However, unless it receives Instructions to the contrary,
the Custodian will register all such portfolio Securities in the name of the
Custodian's authorized nominee. All such Securities shall be held in an account
of the Custodian containing only assets of the appropriate Fund or only assets
held by the Custodian as a fiduciary, provided that the records of the Custodian
shall indicate at all times the Fund or other customer for which such Securities
are held in such accounts and the respective interests therein.
(3) The Custodian may deposit and/or maintain domestic Securities
owned by a Fund in, and each Fund hereby approves use of: (a) The Depository
Trust Company; (b) The Participants Trust Company; and (c) any book-entry system
as provided in (i) Subpart O of Treasury Circular No. 300, 31 CFR 306.115, (ii)
Subpart B of Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2, or
(iii) the book-entry regulations of federal agencies substantially in the form
of 31 CFR 306.115. Upon the receipt of Special Instructions, the Custodian may
deposit and/or maintain domestic Securities owned by a Fund in any other
domestic clearing agency registered with the Securities and Exchange Commission
("SEC") under Section 17A of the Securities Exchange Act of 1934 (or as may
otherwise be authorized by the SEC to serve in the capacity of depository or
clearing agent for the Securities or other assets of investment companies) which
acts as a Securities depository. Each of the foregoing shall be referred to in
this Agreement as a "Securities System", and all such Securities Systems shall
be listed on the attached Appendix A. Use of a Securities System shall be in
accordance with applicable Federal Reserve Board and SEC rules and regulations,
if any, and subject to the following provisions:
(i) The Custodian may deposit the Securities directly or
through one or more agents or Subcustodians which are also qualified to act as
custodians for investment companies.
(ii) The Custodian shall deposit and/or maintain the
Securities in a Securities System, provided that such Securities are represented
in an account ("Account") of the Custodian in the Securities System that
includes only assets held by the Custodian as a fiduciary, custodian or
otherwise for customers.
(iii) The books and records of the Custodian shall at all
times identify those Securities belonging to any one or more Funds which are
maintained in a Securities System.
(iv) The Custodian shall pay for Securities purchased for the
account of a Fund only upon (a) receipt of advice from the Securities System
that such Securities have been transferred to the Account of the Custodian in
accordance with the rules of the Securities System, and (b) the making of an
entry on the records of the Custodian to reflect such payment and transfer for
the account of such Fund. The Custodian shall transfer Securities sold for the
account of a Fund only upon (a) receipt of advice from the Securities System
that payment for such Securities has been transferred to the Account of the
Custodian in accordance with the rules of the Securities System, and (b) the
making of an entry on the records of the Custodian to reflect such transfer and
payment for the account of such Fund. Copies of all advices from the Securities
System relating to transfers of Securities for the
3
<PAGE> 7
account of a Fund shall be maintained for such Fund by the Custodian. The
Custodian shall deliver to a Fund on the next succeeding business day daily
transaction reports that shall include each day's transactions in the Securities
System for the account of such Fund. Such transaction reports shall be delivered
to such Fund or any agent designated by such Fund pursuant to Instructions, by
computer or in such other manner as such Fund and Custodian may agree.
(v) The Custodian shall, if requested by a Fund pursuant to
Instructions, provide such Fund with reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding Securities deposited in the
Securities System.
(vi) Upon receipt of Special Instructions, the Custodian shall
terminate the use of any Securities System on behalf of a Fund as promptly as
practicable and shall take all actions reasonably practicable to safeguard the
Securities of such Fund maintained with such Securities System.
(c) Free Delivery of Assets.
Notwithstanding any other provision of this Agreement and except as
provided in Section 3 hereof, the Custodian, upon receipt of Special
Instructions, will undertake to make free delivery of Assets, provided such
Assets are on hand and available, in connection with a Fund's transactions and
to transfer such Assets to such broker, dealer, Subcustodian, bank, agent,
Securities System or otherwise as specified in such Special Instructions.
(d) Exchange of Securities.
Upon receipt of Instructions, the Custodian will exchange portfolio
Securities held by it for a Fund for other Securities or cash paid in connection
with any reorganization, recapitalization, merger, consolidation, or conversion
of convertible Securities, and will deposit any such Securities in accordance
with the terms of any reorganization or protective plan.
Without Instructions, the Custodian is authorized to exchange Securities
held by it in temporary form for Securities in definitive form, to surrender
Securities for transfer into a name or nominee name as permitted in Section
4(b)(2), to effect an exchange of shares in a stock split or when the par value
of the stock is changed, to sell any fractional shares, and, upon receiving
payment therefor, to surrender bonds or other Securities held by it at maturity
or call.
(e) Purchases of Assets.
(1) Securities Purchases. In accordance with Instructions, the
Custodian shall, with respect to a purchase of Securities, pay for such
Securities out of monies held for a Fund's account for which the purchase was
made, but only insofar as monies are available therein for such purpose, and
receive the portfolio Securities so purchased. Unless the Custodian has received
Special Instructions to the contrary, such payment will be made only upon
receipt of Securities by the Custodian, a clearing corporation of a national
Securities exchange of which the Custodian is a member, or a Securities System
in accordance with the provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, upon receipt of Instructions: (i) in connection with a repurchase
agreement, the Custodian may release funds to a Securities System prior to the
receipt of advice from the Securities System that the Securities underlying such
repurchase agreement have been transferred by book-entry into the Account
maintained with such Securities System by the Custodian, provided that the
Custodian's instructions to the Securities System require that the Securities
System may make payment of such funds to the other party to the repurchase
agreement only upon transfer by book-entry of the Securities underlying the
repurchase agreement into such Account; (ii) in the case of Interest Bearing
Deposits, currency deposits, and other deposits, foreign exchange transactions,
futures contracts or options, pursuant to Sections 4(g), 4(h), 4(l), and 4(m)
hereof, the Custodian may make payment therefor before receipt of an advice of
transaction; and (iii) in the case of Securities as to which payment for the
Security and receipt of the instrument evidencing the Security are under
generally accepted trade practice or the terms of the instrument representing
the Security expected to take place in different locations or through separate
parties, such as commercial paper which is indexed to foreign currency exchange
rates, derivatives and similar Securities, the
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<PAGE> 8
Custodian may make payment for such Securities prior to delivery thereof in
accordance with such generally accepted trade practice or the terms of the
instrument representing such Security.
(2) Other Assets Purchased. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall pay for and receive other Assets
for the account of a Fund as provided in Instructions.
(f) Sales of Assets.
(1) Securities Sold. In accordance with Instructions, the Custodian
will, with respect to a sale, deliver or cause to be delivered the Securities
thus designated as sold to the broker or other person specified in the
Instructions relating to such sale. Unless the Custodian has received Special
Instructions to the contrary, such delivery shall be made only upon receipt of
payment therefor in the form of: (a) cash, certified check, bank cashier's
check, bank credit, or bank wire transfer; (b) credit to the account of the
Custodian with a clearing corporation of a national Securities exchange of which
the Custodian is a member; or (c) credit to the Account of the Custodian with a
Securities System, in accordance with the provisions of Section 4(b)(3) hereof.
Notwithstanding the foregoing, Securities held in physical form may be delivered
and paid for in accordance with "street delivery custom" to a broker or its
clearing agent, against delivery to the Custodian of a receipt for such
Securities, provided that the Custodian shall have taken reasonable steps to
ensure prompt collection of the payment for, or return of, such Securities by
the broker or its clearing agent, and provided further that the Custodian shall
not be responsible for the selection of or the failure or inability to perform
of such broker or its clearing agent or for any related loss arising from
delivery or custody of such Securities prior to receiving payment therefor.
(2) Other Assets Sold. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall receive payment for and deliver
other Assets for the account of a Fund as provided in Instructions.
(g) Options.
(1) Upon receipt of Instructions relating to the purchase of an option
or sale of a covered call option, the Custodian shall: (a) receive and retain
confirmations or other documents, if any, evidencing the purchase or writing of
the option by a Fund; (b) if the transaction involves the sale of a covered call
option, deposit and maintain in a segregated account the Securities (either
physically or by book-entry in a Securities System) subject to the covered call
option written on behalf of such Fund; and (c) pay, release and/or transfer such
Securities, cash or other Assets in accordance with any notices or other
communications evidencing the expiration, termination or exercise of such
options which are furnished to the Custodian by the Options Clearing Corporation
(the "OCC"), the securities or options exchanges on which such options were
traded, or such other organization as may be responsible for handling such
option transactions.
(2) Upon receipt of Instructions relating to the sale of a naked
option (including stock index and commodity options), the Custodian, the
appropriate Fund and the broker-dealer shall enter into an agreement to comply
with the rules of the OCC or of any registered national securities exchange or
similar organizations(s). Pursuant to that agreement and such Fund's
Instructions, the Custodian shall: (a) receive and retain confirmations or other
documents, if any, evidencing the writing of the option; (b) deposit and
maintain in a segregated account, Securities (either physically or by book-entry
in a Securities System), cash and/or other Assets; and (c) pay, release and/or
transfer such Securities, cash or other Assets in accordance with any such
agreement and with any notices or other communications evidencing the
expiration, termination or exercise of such option which are furnished to the
Custodian by the OCC, the securities or options exchanges on which such options
were traded, or such other organization as may be responsible for handling such
option transactions. The appropriate Fund and the broker-dealer shall be
responsible for determining the quality and quantity of assets held in any
segregated account established in compliance with applicable margin maintenance
requirements and the performance of other terms of any option contract.
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<PAGE> 9
(h) Futures Contracts.
Upon receipt of Instructions, the Custodian shall enter into a futures
margin procedural agreement among the appropriate Fund, the Custodian and the
designated futures commission merchant (a "Procedural Agreement"). Under the
Procedural Agreement the Custodian shall: (a) receive and retain confirmations,
if any, evidencing the purchase or sale of a futures contract or an option on a
futures contract by such Fund; (b) deposit and maintain in a segregated account
cash, Securities and/or other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure such Fund's performance of its
obligations under any futures contracts purchased or sold, or any options on
futures contracts written by such Fund, in accordance with the provisions of any
Procedural Agreement designed to comply with the provisions of the Commodity
Futures Trading Commission and/or any commodity exchange or contract market
(such as the Chicago Board of Trade), or any similar organization(s), regarding
such margin deposits; and (c) release Assets from and/or transfer Assets into
such margin accounts only in accordance with any such Procedural Agreements. The
appropriate Fund and such futures commission merchant shall be responsible for
determining the type and amount of Assets held in the segregated account or paid
to the broker-dealer in compliance with applicable margin maintenance
requirements and the performance of any futures contract or option on a futures
contract in accordance with its terms.
(i) Segregated Accounts.
Upon receipt of Instructions, the Custodian shall establish and maintain
on its books a segregated account or accounts for and on behalf of a Fund, into
which account or accounts may be transferred Assets of such Fund, including
Securities maintained by the Custodian in a Securities System pursuant to
Paragraph (b)(3) of this Section 4, said account or accounts to be maintained
(i) for the purposes set forth in Sections 4(g), 4(h) and 4(n) and (ii) for the
purpose of compliance by such Fund with the procedures required by the SEC
Investment Company Act Release Number 10666 or any subsequent release or
releases relating to the maintenance of segregated accounts by registered
investment companies, or (iii) for such other purposes as may be set forth, from
time to time, in Special Instructions. The Custodian shall not be responsible
for the determination of the type or amount of Assets to be held in any
segregated account referred to in this paragraph, or for compliance by the Fund
with required procedures noted in (ii) above.
(j) Depositary Receipts.
Upon receipt of Instructions, the Custodian shall surrender or cause to be
surrendered Securities to the depositary used for such Securities by an issuer
of American Depositary Receipts or International Depositary Receipts
(hereinafter referred to, collectively, as "ADRs"), against a written receipt
therefor adequately describing such Securities and written evidence satisfactory
to the organization surrendering the same that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such Securities in the
name of the Custodian or a nominee of the Custodian, for delivery in accordance
with such instructions.
Upon receipt of Instructions, the Custodian shall surrender or cause to be
surrendered ADRs to the issuer thereof, against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the organization surrendering the same that the issuer of the ADRs has
acknowledged receipt of instructions to cause its depository to deliver the
Securities underlying such ADRs in accordance with such instructions.
(k) Corporate Actions, Put Bonds, Called Bonds, Etc.
Upon receipt of Instructions, the Custodian shall: (a) deliver warrants,
puts, calls, rights or similar Securities to the issuer or trustee thereof (or
to the agent of such issuer or trustee) for the purpose of exercise or sale,
provided that the new Securities, cash or other Assets, if any, acquired as a
result of such actions are to be delivered to the Custodian; and (b) deposit
Securities upon invitations for tenders thereof, provided that the consideration
for such Securities is to be paid or delivered to the Custodian, or the tendered
Securities are to be returned to the Custodian.
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<PAGE> 10
Notwithstanding any provision of this Agreement to the contrary, the
Custodian shall take all necessary action, unless otherwise directed to the
contrary in Instructions, to comply with the terms of all mandatory or
compulsory exchanges, calls, tenders, redemptions, or similar rights of security
ownership, and shall notify the appropriate Fund of such action in writing by
facsimile transmission or in such other manner as such Fund and Custodian may
agree in writing.
The Fund agrees that if it gives an Instruction for the performance of an
act on the last permissible date of a period established by any optional offer
or on the last permissible date for the performance of such act, the Fund shall
hold the Bank harmless from any adverse consequences in connection with acting
upon or failing to act upon such Instructions.
(l) Interest Bearing Deposits.
Upon receipt of Instructions directing the Custodian to purchase interest
bearing fixed term and call deposits (hereinafter referred to, collectively, as
"Interest Bearing Deposits") for the account of a Fund, the Custodian shall
purchase such Interest Bearing Deposits in the name of such Fund with such banks
or trust companies, including the Custodian, any Subcustodian or any subsidiary
or affiliate of the Custodian (hereinafter referred to as "Banking
Institutions"), and in such amounts as such Fund may direct pursuant to
Instructions. Such Interest Bearing Deposits may be denominated in U.S. dollars
or other currencies, as such Fund may determine and direct pursuant to
Instructions. The responsibilities of the Custodian to a Fund for Interest
Bearing Deposits issued by the Custodian shall be that of a U.S. bank for a
similar deposit. With respect to Interest Bearing Deposits other than those
issued by the Custodian, (a) the Custodian shall be responsible for the
collection of income and the transmission of cash to and from such accounts; and
(b) the Custodian shall have no duty with respect to the selection of the
Banking Institution or for the failure of such Banking Institution to pay upon
demand.
(m) Foreign Exchange Transactions.
(l) Each Fund hereby appoints the Custodian as its agent in the
execution of all currency exchange transactions. The Custodian agrees to provide
exchange rate and U.S. Dollar information, in writing, to the Funds. Such
information shall be supplied by the Custodian at least by the business day
prior to the value date of the foreign exchange transaction, provided that the
Custodian receives the request for such information at least two business days
prior to the value date of the transaction.
(2) Upon receipt of Instructions, the Custodian shall settle foreign
exchange contracts or options to purchase and sell foreign currencies for spot
and future delivery on behalf of and for the account of a Fund with such
currency brokers or Banking Institutions as such Fund may determine and direct
pursuant to Instructions. If, in its Instructions, a Fund does not direct the
Custodian to utilize a particular currency broker or Banking Institution, the
Custodian is authorized to select such currency broker or Banking Institution as
it deems appropriate to execute the Fund's foreign currency transaction.
(3) Each Fund accepts full responsibility for its use of third party
foreign exchange brokers and for execution of said foreign exchange contracts
and understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange. The Custodian shall have no
responsibility or liability with respect to the selection of the currency
brokers or Banking Institutions with which a Fund deals or the performance of
such brokers or Banking Institutions.
(4) Notwithstanding anything to the contrary contained herein, upon
receipt of Instructions the Custodian may, in connection with a foreign exchange
contract, make free outgoing payments of cash in the form of U.S. Dollars or
foreign currency prior to receipt of confirmation of such foreign exchange
contract or confirmation that the countervalue currency completing such contract
has been delivered or received.
(5) The Custodian shall not be obligated to enter into foreign
exchange transactions as principal. However, if the Custodian has made available
to a Fund its services as a principal in foreign exchange transactions
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<PAGE> 11
and subject to any separate agreement between the parties relating to such
transactions, the Custodian shall enter into foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund, with the Custodian as principal.
(n) Pledges or Loans of Securities.
(1) Upon receipt of Instructions from a Fund, the Custodian will
release or cause to be released Securities held in custody to the pledgees
designated in such Instructions by way of pledge or hypothecation to secure
loans incurred by such Fund with various lenders including but not limited to
UMB Bank, n.a.; provided, however, that the Securities shall be released only
upon payment to the Custodian of the monies borrowed, except that in cases where
additional collateral is required to secure existing borrowings, further
Securities may be released or delivered, or caused to be released or delivered
for that purpose upon receipt of Instructions. Upon receipt of Instructions, the
Custodian will pay, but only from funds available for such purpose, any such
loan upon re-delivery to it of the Securities pledged or hypothecated therefor
and upon surrender of the note or notes evidencing such loan. In lieu of
delivering collateral to a pledgee, the Custodian, on the receipt of
Instructions, shall transfer the pledged Securities to a segregated account for
the benefit of the pledgee.
(2) Upon receipt of Special Instructions, and execution of a separate
Securities Lending Agreement, the Custodian will release Securities held in
custody to the borrower designated in such Instructions and may, except as
otherwise provided below, deliver such Securities prior to the receipt of
collateral, if any, for such borrowing, provided that, in case of loans of
Securities held by a Securities System that are secured by cash collateral, the
Custodian's instructions to the Securities System shall require that the
Securities System deliver the Securities of the appropriate Fund to the borrower
thereof only upon receipt of the collateral for such borrowing. The Custodian
shall have no responsibility or liability for any loss arising from the delivery
of Securities prior to the receipt of collateral. Upon receipt of Instructions
and the loaned Securities, the Custodian will release the collateral to the
borrower.
(o) Stock Dividends, Rights, Etc.
The Custodian shall receive and collect all stock dividends, rights, and
other items of like nature and, upon receipt of Instructions, take action with
respect to the same as directed in such Instructions.
(p) Routine Dealings.
The Custodian will, in general, attend to all routine and mechanical
matters in accordance with industry standards in connection with the sale,
exchange, substitution, purchase, transfer, or other dealings with Securities or
other property of each Fund except as may be otherwise provided in this
Agreement or directed from time to time by Instructions from any particular
Fund. The Custodian may also make payments to itself or others from the Assets
for disbursements and out-of-pocket expenses incidental to handling Securities
or other similar items relating to its duties under this Agreement, provided
that all such payments shall be accounted for to the appropriate Fund.
(q) Collections.
The Custodian shall (a) collect amounts due and payable to each Fund with
respect to portfolio Securities and other Assets; (b) promptly credit to the
account of each Fund all income and other payments relating to portfolio
Securities and other Assets held by the Custodian hereunder upon Custodian's
receipt of such income or payments or as otherwise agreed in writing by the
Custodian and any particular Fund; (c) promptly endorse and deliver any
instruments required to effect such collection; and (d) promptly execute
ownership and other certificates and affidavits for all federal, state, local
and foreign tax purposes in connection with receipt of income or other payments
with respect to portfolio Securities and other Assets, or in connection with the
transfer of such Securities or other Assets; provided, however, that with
respect to portfolio Securities registered in so-called street name, or physical
Securities with variable interest rates, the Custodian shall use its best
efforts to collect amounts due and payable to any such Fund. The Custodian shall
notify a Fund in writing by facsimile transmission or in such other manner as
such Fund and Custodian may agree in writing if any amount payable with respect
to portfolio Securities
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or other Assets is not received by the Custodian when due. The Custodian shall
not be responsible for the collection of amounts due and payable with respect to
portfolio Securities or other Assets that are in default.
(r) Bank Accounts.
Upon Instructions, the Custodian shall open and operate a bank account or
accounts on the books of the Custodian; provided that such bank account(s) shall
be in the name of the Custodian or a nominee thereof, for the account of one or
more Funds, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to any one or more such Funds for deposits
accepted on the Custodian's books shall be that of a U.S. bank for a similar
deposit.
(s) Dividends, Distributions and Redemptions.
To enable each Fund to pay dividends or other distributions to
shareholders of each such Fund and to make payment to shareholders who have
requested repurchase or redemption of their shares of each such Fund
(collectively, the "Shares"), the Custodian shall release cash or Securities
insofar as available. In the case of cash, the Custodian shall, upon the receipt
of Instructions, transfer such funds by check or wire transfer to any account at
any bank or trust company designated by each such Fund in such Instructions. In
the case of Securities, the Custodian shall, upon the receipt of Special
Instructions, make such transfer to any entity or account designated by each
such Fund in such Special Instructions.
(t) Proceeds from Shares Sold.
The Custodian shall receive funds representing cash payments received for
shares issued or sold from time to time by each Fund, and shall credit such
funds to the account of the appropriate Fund. The Custodian shall notify the
appropriate Fund of Custodian's receipt of cash in payment for shares issued by
such Fund by facsimile transmission or in such other manner as such Fund and the
Custodian shall agree. Upon receipt of Instructions, the Custodian shall: (a)
deliver all federal funds received by the Custodian in payment for shares as may
be set forth in such Instructions and at a time agreed upon between the
Custodian and such Fund; and (b) make federal funds available to a Fund as of
specified times agreed upon from time to time by such Fund and the Custodian, in
the amount of checks received in payment for shares which are deposited to the
accounts of such Fund.
(u) Proxies and Notices; Compliance with the Shareholders Communication
Act of 1985.
The Custodian shall deliver or cause to be delivered to the appropriate
Fund all forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to Securities owned by such Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Instructions, the Custodian shall execute and deliver, or
cause such Subcustodian or nominee to execute and deliver, such proxies or other
authorizations as may be required. Except as directed pursuant to Instructions,
neither the Custodian nor any Subcustodian or nominee shall vote upon any such
Securities, or execute any proxy to vote thereon, or give any consent or take
any other action with respect thereto.
The Custodian will not release the identity of any Fund to an issuer which
requests such information pursuant to the Shareholder Communications Act of 1985
for the specific purpose of direct communications between such issuer and any
such Fund unless a particular Fund directs the Custodian otherwise in writing.
(v) Books and Records.
The Custodian shall maintain such records relating to its activities under
this Agreement as are required to be maintained by Rule 31a-1 under the
Investment Company Act of 1940 ("the 1940 Act") and to preserve them for the
periods prescribed in Rule 31a-2 under the 1940 Act. These records shall be open
for inspection by duly authorized officers, employees or agents (including
independent public accountants) of the appropriate Fund during normal business
hours of the Custodian.
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The Custodian shall provide accountings relating to its activities under
this Agreement as shall be agreed upon by each Fund and the Custodian.
(w) Opinion of Fund's Independent Certified Public Accountants.
The Custodian shall take all reasonable action as each Fund may request to
obtain from year to year favorable opinions from each such Fund's independent
certified public accountants with respect to the Custodian's activities
hereunder and in connection with the preparation of each such Fund's periodic
reports to the SEC and with respect to any other requirements of the SEC.
(x) Reports by Independent Certified Public Accountants.
At the request of a Fund, the Custodian shall deliver to such Fund a
written report prepared by the Custodian's independent certified public
accountants with respect to the services provided by the Custodian under this
Agreement, including, without limitation, the Custodian's accounting system,
internal accounting control and procedures for safeguarding cash, Securities and
other Assets, including cash, Securities and other Assets deposited and/or
maintained in a Securities System or with a Subcustodian. Such report shall be
of sufficient scope and in sufficient detail as may reasonably be required by
such Fund and as may reasonably be obtained by the Custodian.
(y) Bills and Other Disbursements.
Upon receipt of Instructions, the Custodian shall pay, or cause to be
paid, all bills, statements, or other obligations of a Fund.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic Subcustodians, Foreign
Subcustodians, Special Subcustodians, or Interim Subcustodians (as each are
hereinafter defined) to act on behalf of any one or more Funds. A Domestic
Subcustodian, in accordance with the provisions of this Agreement, may also
appoint a Foreign Subcustodian, Special Subcustodian, or Interim Subcustodian to
act on behalf of any one or more Funds. For purposes of this Agreement, all
Domestic Subcustodians, Foreign Subcustodians, Special Subcustodians and Interim
Subcustodians shall be referred to collectively as "Subcustodians".
(a) Domestic Subcustodians.
The Custodian may, at any time and from time to time, appoint any bank as
defined in Section 2(a)(5) of the 1940 Act or any trust company or other entity,
any of which meet the requirements of a custodian under Section 17(f) of the
1940 Act and the rules and regulations thereunder, to act for the Custodian on
behalf of any one or more Funds as a subcustodian for purposes of holding Assets
of such Fund(s) and performing other functions of the Custodian within the
United States (a "Domestic Subcustodian"). Each Fund shall approve in writing
the appointment of the proposed Domestic Subcustodian; and the Custodian's
appointment of any such Domestic Subcustodian shall not be effective without
such prior written approval of the Fund(s). Each such duly approved Domestic
Subcustodian shall be listed on Appendix A attached hereto, as it may be
amended, from time to time.
(b) Foreign Subcustodians.
The Custodian may at any time appoint, or cause a Domestic Subcustodian to
appoint, any bank, trust company or other entity meeting the requirements of an
"eligible foreign custodian" under Section 17(f) of the 1940 Act and the rules
and regulations thereunder to act for the Custodian on behalf of any one or more
Funds as a subcustodian or sub-subcustodian (if appointed by a Domestic
Subcustodian) for purposes of holding Assets of the Fund(s) and performing other
functions of the Custodian in countries other than the United States of America
(hereinafter referred to as a "Foreign Subcustodian" in the context of either a
subcustodian or a sub-subcustodian); provided that the Custodian shall have
obtained written confirmation from each Fund of the approval of the Board
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<PAGE> 14
of Directors or other governing body of each such Fund (which approval may be
withheld in the sole discretion of such Board of Directors or other governing
body or entity) with respect to (i) the identity of any proposed Foreign
Subcustodian (including branch designation), (ii) the country or countries in
which, and the securities depositories or clearing agencies (hereinafter
"Securities Depositories and Clearing Agencies"), if any, through which, the
Custodian or any proposed Foreign Subcustodian is authorized to hold Securities
and other Assets of each such Fund, and (iii) the form and terms of the
subcustodian agreement to be entered into with such proposed Foreign
Subcustodian. Each such duly approved Foreign Subcustodian and the countries
where and the Securities Depositories and Clearing Agencies through which they
may hold Securities and other Assets of the Fund(s) shall be listed on Appendix
A attached hereto, as it may be amended, from time to time. Each Fund shall be
responsible for informing the Custodian sufficiently in advance of a proposed
investment which is to be held in a country in which no Foreign Subcustodian is
authorized to act, in order that there shall be sufficient time for the
Custodian, or any Domestic Subcustodian, to effect the appropriate arrangements
with a proposed Foreign Subcustodian, including obtaining approval as provided
in this Section 5(b). In connection with the appointment of any Foreign
Subcustodian, the Custodian shall, or shall cause the Domestic Subcustodian to,
enter into a subcustodian agreement with the Foreign Subcustodian in form and
substance approved by each such Fund. The Custodian shall not consent to the
amendment of, and shall cause any Domestic Subcustodian not to consent to the
amendment of, any agreement entered into with a Foreign Subcustodian, which
materially affects any Fund's rights under such agreement, except upon prior
written approval of such Fund pursuant to Special Instructions.
(c) Interim Subcustodians.
Notwithstanding the foregoing, in the event that a Fund shall invest in an
Asset to be held in a country in which no Foreign Subcustodian is authorized to
act, the Custodian shall notify such Fund in writing by facsimile transmission
or in such other manner as such Fund and the Custodian shall agree in writing of
the unavailability of an approved Foreign Subcustodian in such country; and upon
the receipt of Special Instructions from such Fund, the Custodian shall, or
shall cause its Domestic Subcustodian to, appoint or approve an entity (referred
to herein as an "Interim Subcustodian") designated in such Special Instructions
to hold such Security or other Asset.
(d) Special Subcustodians.
Upon receipt of Special Instructions, the Custodian shall, on behalf of a
Fund, appoint one or more banks, trust companies or other entities designated in
such Special Instructions to act for the Custodian on behalf of such Fund as a
subcustodian for purposes of: (i) effecting third-party repurchase transactions
with banks, brokers, dealers or other entities through the use of a common
custodian or subcustodian; (ii) providing depository and clearing agency
services with respect to certain variable rate demand note Securities, (iii)
providing depository and clearing agency services with respect to dollar
denominated Securities, and (iv) effecting any other transactions designated by
such Fund in such Special Instructions. Each such designated subcustodian
(hereinafter referred to as a "Special Subcustodian") shall be listed on
Appendix A attached hereto, as it may be amended from time to time. In
connection with the appointment of any Special Subcustodian, the Custodian shall
enter into a subcustodian agreement with the Special Subcustodian in form and
substance approved by the appropriate Fund in Special Instructions. The
Custodian shall not amend any subcustodian agreement entered into with a Special
Subcustodian, or waive any rights under such agreement, except upon prior
approval pursuant to Special Instructions.
(e) Termination of a Subcustodian.
The Custodian may, at any time in its discretion upon notification to the
appropriate Fund(s), terminate any Subcustodian of such Fund(s) in accordance
with the termination provisions under the applicable subcustodian agreement, and
upon the receipt of Special Instructions, the Custodian will terminate any
Subcustodian in accordance with the termination provisions under the applicable
subcustodian agreement.
(f) Certification Regarding Foreign Subcustodians.
Upon request of a Fund, the Custodian shall deliver to such Fund a
certificate stating: (i) the identity of each Foreign Subcustodian then acting
on behalf of the Custodian; (ii) the countries in which and the Securities
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<PAGE> 15
Depositories and Clearing Agencies through which each such Foreign Subcustodian
is then holding cash, Securities and other Assets of such Fund; and (iii) such
other information as may be requested by such Fund, and as the Custodian shall
be reasonably able to obtain, to evidence compliance with rules and regulations
under the 1940 Act.
6. STANDARD OF CARE.
(a) General Standard of Care.
The Custodian shall be liable to a Fund for all losses, damages and
reasonable costs and expenses suffered or incurred by such Fund resulting from
the negligence or willful misfeasance of the Custodian; provided, however, in no
event shall the Custodian be liable for special, indirect or consequential
damages arising under or in connection with this Agreement.
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's
Control, Sovereign Risk, Etc.
In no event shall the Custodian or any Domestic Subcustodian incur
liability hereunder (i) if the Custodian or any Subcustodian or Securities
System, or any subcustodian, Securities System, Securities Depository or
Clearing Agency utilized by the Custodian or any such Subcustodian, or any
nominee of the Custodian or any Subcustodian (individually, a "Person") is
prevented, forbidden or delayed from performing, or omits to perform, any act or
thing which this Agreement provides shall be performed or omitted to be
performed, by reason of: (a) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or of
any foreign country, or political subdivision thereof or of any court of
competent jurisdiction (and neither the Custodian nor any other Person shall be
obligated to take any action contrary thereto); or (b) any event beyond the
control of the Custodian or other Person such as armed conflict, riots, strikes,
lockouts, labor disputes, equipment or transmission failures, natural disasters,
or failure of the mails, transportation, communications or power supply; or (ii)
for any loss, damage, cost or expense resulting from "Sovereign Risk." A
"Sovereign Risk" shall mean nationalization, expropriation, currency
devaluation, revaluation or fluctuation, confiscation, seizure, cancellation,
destruction or similar action by any governmental authority, de facto or de
jure; or enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting a Fund's Assets; or acts of armed conflict,
terrorism, insurrection or revolution; or any other act or event beyond the
Custodian's or such other Person's control.
(c) Liability for Past Records.
Neither the Custodian nor any Domestic Subcustodian shall have any
liability in respect of any loss, damage or expense suffered by a Fund, insofar
as such loss, damage or expense arises from the performance of the Custodian or
any Domestic Subcustodian in reliance upon records that were maintained for such
Fund by entities other than the Custodian or any Domestic Subcustodian prior to
the Custodian's employment hereunder.
(d) Advice of Counsel.
The Custodian and all Domestic Subcustodians shall be entitled to receive
and act upon advice of counsel of its own choosing on all matters. The Custodian
and all Domestic Subcustodians shall be without liability for any actions taken
or omitted in good faith pursuant to the advice of counsel.
(e) Advice of the Fund and Others.
The Custodian and any Domestic Subcustodian may rely upon the advice of
any Fund and upon statements of such Fund's accountants and other persons
believed by it in good faith to be expert in matters upon which they are
consulted, and neither the Custodian nor any Domestic Subcustodian shall be
liable for any actions taken or omitted, in good faith, pursuant to such advice
or statements.
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(f) Instructions Appearing to be Genuine.
The Custodian and all Domestic Subcustodians shall be fully protected and
indemnified in acting as a custodian hereunder upon any Resolutions of the Board
of Directors or Trustees, Instructions, Special Instructions, advice, notice,
request, consent, certificate, instrument or paper appearing to it to be genuine
and to have been properly executed and shall, unless otherwise specifically
provided herein, be entitled to receive as conclusive proof of any fact or
matter required to be ascertained from any Fund hereunder a certificate signed
by any officer of such Fund authorized to countersign or confirm Special
Instructions.
(g) Exceptions from Liability.
Without limiting the generality of any other provisions hereof, neither
the Custodian nor any Domestic Subcustodian shall be under any duty or
obligation to inquire into, nor be liable for:
(i) the validity of the issue of any Securities purchased by or for
any Fund, the legality of the purchase thereof or evidence of ownership required
to be received by any such Fund, or the propriety of the decision to purchase or
amount paid therefor;
(ii) the legality of the sale of any Securities by or for any Fund,
or the propriety of the amount for which the same were sold; or
(iii) any other expenditures, encumbrances of Securities, borrowings
or similar actions with respect to any Fund's Assets;
and may, until notified to the contrary, presume that all Instructions or
Special Instructions received by it are not in conflict with or in any way
contrary to any provisions of any such Fund's Declaration of Trust, Partnership
Agreement, Articles of Incorporation or By-Laws or votes or proceedings of the
shareholders, trustees, partners or directors of any such Fund, or any such
Fund's currently effective Registration Statement on file with the SEC.
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) Domestic Subcustodians
The Custodian shall be liable for the acts or omissions of any Domestic
Subcustodian to the same extent as if such actions or omissions were performed
by the Custodian itself.
(b) Liability for Acts and Omissions of Foreign Subcustodians.
The Custodian shall be liable to a Fund for any loss or damage to such
Fund caused by or resulting from the acts or omissions of any Foreign
Subcustodian to the extent that, under the terms set forth in the subcustodian
agreement between the Custodian or a Domestic Subcustodian and such Foreign
Subcustodian, the Foreign Subcustodian has failed to perform in accordance with
the standard of conduct imposed under such subcustodian agreement and the
Custodian or Domestic Subcustodian recovers from the Foreign Subcustodian under
the applicable subcustodian agreement.
(c) Securities Systems, Interim Subcustodians, Special Subcustodians,
Securities Depositories and Clearing Agencies.
The Custodian shall not be liable to any Fund for any loss, damage or
expense suffered or incurred by such Fund resulting from or occasioned by the
actions or omissions of a Securities System, Interim Subcustodian, Special
Subcustodian, or Securities Depository and Clearing Agency unless such loss,
damage or expense is caused by, or results from, the negligence or willful
misfeasance of the Custodian.
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(d) Defaults or Insolvency's of Brokers, Banks, Etc.
The Custodian shall not be liable for any loss, damage or expense suffered
or incurred by any Fund resulting from or occasioned by the actions, omissions,
neglects, defaults or insolvency of any broker, bank, trust company or any other
person with whom the Custodian may deal (other than any of such entities acting
as a Subcustodian, Securities System or Securities Depository and Clearing
Agency, for whose actions the liability of the Custodian is set out elsewhere in
this Agreement) unless such loss, damage or expense is caused by, or results
from, the negligence or willful misfeasance of the Custodian.
(e) Reimbursement of Expenses.
Each Fund agrees to reimburse the Custodian for all out-of-pocket expenses
incurred by the Custodian in connection with this Agreement, but excluding
salaries and usual overhead expenses.
8. INDEMNIFICATION.
(a) Indemnification by Fund.
Subject to the limitations set forth in this Agreement, each Fund agrees
to indemnify and hold harmless the Custodian and its nominees from all losses,
damages and expenses (including attorneys' fees) suffered or incurred by the
Custodian or its nominee caused by or arising from actions taken by the
Custodian, its employees or agents in the performance of its duties and
obligations under this Agreement, including, but not limited to, any
indemnification obligations undertaken by the Custodian under any relevant
subcustodian agreement; provided, however, that such indemnity shall not apply
to the extent the Custodian is liable under Sections 6 or 7 hereof.
If any Fund requires the Custodian to take any action with respect to
Securities, which action involves the payment of money or which may, in the
opinion of the Custodian, result in the Custodian or its nominee assigned to
such Fund being liable for the payment of money or incurring liability of some
other form, such Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
(b) Indemnification by Custodian.
Subject to the limitations set forth in this Agreement and in addition to
the obligations provided in Sections 6 and 7, the Custodian agrees to indemnify
and hold harmless each Fund from all losses, damages and expenses suffered or
incurred by each such Fund caused by the negligence or willful misfeasance of
the Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing Agency
acting either directly or indirectly under agreement with the Custodian (each of
which for purposes of this Section 9 shall be referred to as "Custodian"), makes
any payment or transfer of funds on behalf of any Fund as to which there would
be, at the close of business on the date of such payment or transfer,
insufficient funds held by the Custodian on behalf of any such Fund, the
Custodian may, in its discretion without further Instructions, provide an
advance ("Advance") to any such Fund in an amount sufficient to allow the
completion of the transaction by reason of which such payment or transfer of
funds is to be made. In addition, in the event the Custodian is directed by
Instructions to make any payment or transfer of funds on behalf of any Fund as
to which it is subsequently determined that such Fund has overdrawn its cash
account with the Custodian as of the close of business on the date of such
payment or transfer, said overdraft shall constitute an Advance. Any Advance
shall be payable by the Fund on behalf of which the Advance was made on demand
by Custodian, unless otherwise agreed by such Fund and the Custodian, and shall
accrue interest from the date of the Advance to the date of payment by such Fund
to the Custodian at a rate agreed upon in writing from time to time by the
Custodian and such Fund. It is understood that any transaction in respect of
which the Custodian shall have made an Advance, including but not limited to a
foreign exchange contract or transaction in respect of which the Custodian is
not
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acting as a principal, is for the account of and at the risk of the Fund on
behalf of which the Advance was made, and not, by reason of such Advance, deemed
to be a transaction undertaken by the Custodian for its own account and risk.
The Custodian and each of the Funds which are parties to this Agreement
acknowledge that the purpose of Advances is to finance temporarily the purchase
or sale of Securities for prompt delivery in accordance with the settlement
terms of such transactions or to meet emergency expenses not reasonably
foreseeable by a Fund. The Custodian shall promptly notify the appropriate Fund
of any Advance. Such notification shall be sent by facsimile transmission or in
such other manner as such Fund and the Custodian may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to
secure payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any purpose
or in the event that the Bank or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of its duties hereunder, except such as may arise from its or
its nominee's negligent action, negligent failure to act or willful misconduct,
any Property at any time held for the Custody Account shall be security therefor
and the Fund hereby grants a security interest therein to the Bank. The Fund
shall promptly reimburse the Bank for any such advance of cash or securities or
any such taxes, charges, expenses, assessments, claims or liabilities upon
request for payment, but should the Fund fail to so reimburse the Bank, the Bank
shall be entitled to dispose of such Property to the extent necessary to obtain
reimbursement. The Bank shall be entitled to debit any account of the Fund with
the Bank including, without limitation, the Custody Account, in connection with
any such advance and any interest on such advance as the Bank deems reasonable.
11. COMPENSATION.
Each Fund will pay to the Custodian such compensation as is agreed to in
writing by the Custodian and each such Fund from time to time. Such
compensation, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 7(e), shall be billed to each such Fund
and paid in cash to the Custodian.
12. POWERS OF ATTORNEY.
Upon request, each Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
Any Fund or the Custodian may terminate this Agreement by notice in
writing, delivered or mailed, postage prepaid (certified mail, return receipt
requested) to the other not less than 90 days prior to the date upon which such
termination shall take effect. Upon termination of this Agreement, the
appropriate Fund shall pay to the Custodian such fees as may be due the
Custodian hereunder as well as its reimbursable disbursements, costs and
expenses paid or incurred. Upon termination of this Agreement, the Custodian
shall deliver, at the terminating party's expense, all Assets held by it
hereunder to the appropriate Fund or as otherwise designated by such Fund by
Special Instructions. Upon such delivery, the Custodian shall have no further
obligations or liabilities under this Agreement except as to the final
resolution of matters relating to activity occurring prior to the effective date
of termination.
This Agreement may not be assigned by the Custodian or any Fund without
the respective consent of the other, duly authorized by a resolution by its
Board of Directors or Trustees.
14. ADDITIONAL FUNDS.
An additional Fund or Funds may become a party to this Agreement after the
date hereof by an instrument in writing to such effect signed by such Fund or
Funds and the Custodian. If this Agreement is terminated as to one or more of
the Funds (but less than all of the Funds) or if an additional Fund or Funds
shall become a party to this Agreement, there shall be delivered to each party
an Appendix B or an amended Appendix B, signed by each of the
15
<PAGE> 19
additional Funds (if any) and each of the remaining Funds as well as the
Custodian, deleting or adding such Fund or Funds, as the case may be. The
termination of this Agreement as to less than all of the Funds shall not affect
the obligations of the Custodian and the remaining Funds hereunder as set forth
on the signature page hereto and in Appendix B as revised from time to time.
15. NOTICES.
As to each Fund, notices, requests, instructions and other writings
delivered to [INSERT FUND COMPLEX ADDRESS], postage prepaid, or to such other
address as any particular Fund may have designated to the Custodian in writing,
shall be deemed to have been properly delivered or given to a Fund.
Notices, requests, instructions and other writings delivered to the
Securities Administration department of the Custodian at its office at 928 Grand
Blvd., 10th Floor, Attn: Ralph Santoro, Kansas City, Missouri 64106, or mailed
postage prepaid, to the Custodian's Securities Administration department, Post
Office Box 226, Attn: Ralph Santoro, Kansas City, Missouri 64141, or to such
other addresses as the Custodian may have designated to each Fund in writing,
shall be deemed to have been properly delivered or given to the Custodian
hereunder; provided, however, that procedures for the delivery of Instructions
and Special Instructions shall be governed by Section 2(c) hereof.
16. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the State of Missouri and
shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement shall be binding
upon, and inure to the benefit of, and be enforceable by the respective
successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended, modified or waived, in
any manner except in writing, properly executed by both parties hereto;
provided, however, Appendix A may be amended from time to time as Domestic
Subcustodians, Foreign Subcustodians, Special Subcustodians, and Securities
Depositories and Clearing Agencies are approved or terminated according to the
terms of this Agreement.
(d) The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of execution hereof.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(g) The following terms are defined terms within the meaning of this
Agreement, and the definitions thereof are found in the following sections of
the Agreement:
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2(b)
Authorized Person 3
Banking Institution 4(1)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2(c)(1)
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(1)
</TABLE>
16
<PAGE> 20
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Liens 10
OCC 4(g)(1)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2(a)
Securities Depositories and Clearing Agencies 5(b)
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2(c)(2)
Special Subcustodian 5(d)
Subcustodian 5
1940 Act 4(v)
</TABLE>
(h) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid by any court of competent
jurisdiction, the remaining portion or portions shall be considered severable
and shall not be affected, and the rights and obligations of the parties shall
be construed and enforced as if this Agreement did not contain the particular
part, term or provision held to be illegal or invalid.
(i) This Agreement constitutes the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof, and accordingly
supersedes, as of the effective date of this Agreement, any custodian agreement
heretofore in effect between the Fund and the Custodian.
IN WITNESS WHEREOF, the parties hereto have caused this Custody
Agreement to be executed by their respective duly authorized officers.
[INSERT MUTUAL FUND COMPLEX]
Attest: By:
- ------------------------------------ ---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
Date:
---------------------------------------
UMB BANK, N.A.
Attest: By:
- ------------------------------------ ---------------------------------------
Name: Ralph R. Santoro
---------------------------------------
Title: Senior Vice President
---------------------------------------
Date:
---------------------------------------
17
<PAGE> 21
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
United Missouri Trust Company of New York
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant Trust Company
SPECIAL SUBCUSTODIANS:
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
- --------- --------------------- -----------------
Euroclear
[INSERT MUTUAL FUND COMPLEX] UMB BANK, N.A.
By: By:
- ------------------------------------- ----------------------------------------
Name: Name: Ralph R. Santoro
- ------------------------------------- ----------------------------------------
Title: Title: Senior Vice President
- ------------------------------------- ----------------------------------------
Date: Date:
- ------------------------------------- ----------------------------------------
18
<PAGE> 22
APPENDIX B
CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are
hereby made parties to the Custody Agreement dated , 199 , with UMB
Bank, n.a. ("Custodian") and , and agree to be bound by all the
terms and conditions contained in said Agreement:
[LIST THE FUNDS]
[INSERT MUTUAL FUND COMPLEX]
Attest: By:
- --------------------------------- ----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
Date:
----------------------------------------
UMB BANK, N.A.
Attest: By:
- --------------------------------- ----------------------------------------
Name: Ralph R. Santoro
----------------------------------------
Title: Senior Vice President
----------------------------------------
Date:
----------------------------------------
<PAGE> 1
EXHIBIT 99.h-1
ADMINISTRATION AND FUND ACCOUNTING AGREEMENT
THIS AGREEMENT is made as of this 31st day of October, 1999, by and
between Choice Funds, a Delaware business trust (the "Trust"), and
Sunstone Financial Group, Inc., a Wisconsin corporation (the "Administrator").
WHEREAS, the Trust is an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and is authorized to
issue shares of beneficial interest (the "Shares") in separate series with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Trust and the Administrator desire to enter into an
agreement pursuant to which the Administrator shall provide administration and
fund accounting services to such investment portfolios of the Trust as are
listed on Schedule A hereto and any additional investment portfolios the Trust
and Administrator may agree upon and include on Schedule A as such Schedule may
be amended from time to time (such investment portfolios and any additional
investment portfolios are individually referred to as a "Fund" and collectively,
the "Funds").
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. Appointment
The Trust hereby appoints the Administrator as administrator and fund
accountant of the Funds for the period and on the terms set forth in this
Agreement. The Administrator accepts such appointment and agrees to render the
services herein set forth, for the compensation herein provided.
2. Services as Administrator
(a) In performing its duties, the Administrator will act under the
direction and control of the Trust's Board of Trustees and in accordance with
the Trust's Agreement and Declaration of Trust, By-Laws, Registration Statement
and in compliance with the requirements of the 1940 Act and all other applicable
federal or state laws and will consult with legal counsel to the Trust as
necessary and appropriate. The expense of legal counsel will be the
responsibility of the Trust. The duties of the Administrator shall be confined
to those expressly set forth herein, and no implied duties are assumed by or may
be asserted against the Administrator hereunder In conformance with the
foregoing and utilizing information provided by the Trust and its agents, the
Administrator will:
(1) provide office space, facilities, equipment and personnel to
carry out its services hereunder;
1
<PAGE> 2
(2) compile data for and prepare with respect to the Funds timely
Notices to the Securities and Exchange Commission (the "Commission") required
pursuant to Rule 24f-2 under the 1940 Act and Semi-Annual Reports on Form N-SAR;
(3) assist in the preparation for execution by the Trust and file
for all Funds and the Trust all federal income and excise tax returns and state
income tax returns (and such other required tax filings as may be agreed to by
the parties) other than those required to be made by the Trust's custodian or
transfer agent, subject to review and approval of the Trust and the Trust's
independent accountants;
(4) prepare the financial statements (including footnotes to
financial statements) for the Annual and Semi-Annual Reports required pursuant
to Section 30(d) under the 1940 Act;
(5) assist the Trust's legal counsel in the preparation of the
Registration Statement for the Trust (on Form N-1A or any replacement therefor)
and any pre- or post-effective amendments thereto, and file the same;
(6) determine and periodically monitor each Fund's income and
expense accruals and cause all appropriate expenses to be paid from Trust assets
on proper authorization from the Trust;
(7) calculate daily net asset values and income factors of each
Fund;
(8) maintain all general ledger accounts and related subledgers;
(9) perform security valuations;
(10) assist in the acquisition of the Trust's fidelity bond
required by the Act, monitor the amount of the bond and make the necessary
Commission filings related thereto;
(11) from time to time as the Administrator deems appropriate,
check each Fund's compliance with the policies and limitations of each Fund
relating to the portfolio investments as set forth in the Prospectus and
Statement of Additional Information and monitor each Fund's status as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (but these functions shall not relieve the Trust's investment
adviser and sub-advisers, if any, of their primary day-to-day responsibility for
assuring such compliance);
(12) maintain, and/or coordinate with the other service providers
the maintenance of, the accounts, books and other documents required pursuant to
Rule 31a-1(a) and (b) under the 1940 Act for periods proscribed by Rule 31a-2
under the 1940 Act during the term of this Agreement;
(13) prepare and/or file securities registration compliance
filings with appropriate state authorities so as to enable each Fund to make a
continuous offering of its shares in the states identified by the Trust in a
written instruction to the Administrator, with the advice of the Trust's legal
counsel;
2
<PAGE> 3
(14) develop with legal counsel and secretary of the Trust an
agenda for each board meeting and, if requested by the Trustees, attend all
regular and special board meetings and prepare and distribute minutes of such
meetings;
(15) prepare Form 1099s for Trustees and other Trust vendors;
(16) calculate dividend and capital gains distributions subject to
review and approval by the Trust and its independent accountants; and
(17) generally assist in the Trust's administrative operations as
mutually agreed to by the parties.
(b) The Trustees of the Trust shall cause the officers, investment
adviser, legal counsel, independent accountants, transfer agent and custodian
for the Funds to cooperate with the Administrator and to provide the
Administrator, upon request, with such information, documents and advice
relating to the Funds and the Trust as is within the possession or knowledge of
such persons, in order to enable the Administrator to perform its duties
hereunder. In connection with its duties hereunder, the Administrator shall be
entitled to rely, and shall be held harmless by the Trust when acting in
reliance, upon the instruction, advice, information or any documents relating to
the Funds provided to the Administrator by an officer or representative of the
Funds or by any of the aforementioned persons. The Administrator shall be
entitled to rely on any document which it reasonably believes to be genuine and
to have been signed or presented by the proper party. Fees charged by such
persons shall be an expense of the Trust. The Administrator shall not be held to
have notice of any change of authority of any officer, agent, representative or
employee of the Trust until receipt of written notice thereof from the Trust.
(c) In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Administrator hereby agrees that all records which it maintains for the
Trust are the property of the Trust and further agrees to surrender promptly to
the Trust any of such records upon the Trust's request. Subject to the terms of
Section 6, the Administrator further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act the records described in (a) above
which are maintained by the Administrator for the Trust.
(d) It is understood that in determining security valuations, the
Administrator employs one or more pricing services to determine valuations of
portfolio securities for purposes of calculating net asset values of the Funds.
The Administrator shall identify to the Trust and the Board of Trustees any such
pricing service utilized on behalf of the Trust. The Administrator is authorized
to rely on the prices provided by such service(s) or by the Funds' investment
adviser or other authorized representative of the Funds, and shall not be liable
for losses to the Trust or its securityholders as a result of its reliance on
the valuations provided by the approved pricing service(s) or the
representative.
(e) The Trust's Board of Trustees and the Funds' investment adviser have
and retain primary responsibility for all compliance matters relating to the
Funds, including, but not limited to, compliance with the Investment Company Act
of 1940, as amended, the Internal Revenue Code of 1986, as amended, and the
policies and limitations of each Fund relating to the portfolio investments as
set forth
3
<PAGE> 4
in the Prospectus and Statement of Additional Information. Sunstone's
monitoring and other functions hereunder shall not relieve the Board and the
investment adviser of their primary day-to-day responsibility for assuring such
compliance.
3. Fees; Delegation; Expenses
(a) In consideration of the services rendered pursuant to this Agreement,
the Trust will pay the Administrator a fee, computed daily and payable monthly,
plus out-of-pocket expenses, each as provided in Schedule B hereto. The Trust
shall also pay the Administrator for organizational start-up services provided
on behalf of the Funds as specified in Schedule B.
(b) For the purpose of determining fees payable to the Administrator, net
asset value shall be computed in accordance with the Trust's Prospectuses and
resolutions of the Trust's Board of Trustees. The fee for the period from the
day of the month this Agreement is entered into until the end of that month
shall be pro-rated according to the proportion which such period bears to the
full monthly period. Upon any termination of this Agreement before the end of
any month, the fee for such part of a month shall be pro-rated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. Should the Trust be
liquidated, merged with or acquired by another fund or investment company, any
accrued fees shall be immediately payable. Such fee as is attributable to each
Fund shall be a separate charge to each Fund and shall be the several (and not
joint or joint and several) obligation of each such Fund.
(c) The Administrator will bear all expenses in connection with the
performance of its services under this Agreement except as otherwise provided
herein. Other costs and expenses to be incurred in the operation of the Funds,
including, but not limited to: taxes; interest; brokerage fees and commissions,
if any; salaries, fees and expenses of officers and Trustees; Commission fees
and state Blue Sky fees; advisory fees; charges of custodians, transfer agents,
dividend disbursing and accounting services agents; security pricing services;
insurance premiums; outside auditing and legal expenses; costs of organization
and maintenance of corporate existence; typesetting, printing, proofing and
mailing of prospectuses, statements of additional information, supplements,
notices and proxy materials for regulatory purposes and for distribution to
current shareholders; typesetting, printing, proofing and mailing and other
costs of shareholder reports; expenses in connection with the electronic
transmission of documents and information including electronic filings with the
Commission and the states: expenses incidental to holding meetings of the Fund's
shareholders and Trustees; and any extraordinary expenses; will be borne by the
Funds or their investment adviser, as appropriate. Expenses incurred for
distribution of shares, including the typesetting, printing, proofing and
mailing of prospectuses for persons who are not shareholders of the Trust, will
be borne by the investment adviser, except for such expenses permitted to be
paid by the Trust under a distribution agreement and/or plan adopted in
accordance with applicable laws. The Administrator shall not be required to pay
any Blue Sky registration or filing fees unless and until it has received the
amount of such fees from the Trust
4. PROPRIETARY AND CONFIDENTIAL INFORMATION
4
<PAGE> 5
The Administrator agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Trust all records relative
to the Trust and/or Funds and prior, present or future shareholders of the
Trust, and not to use such records and information for any purpose other than
performance of its responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Trust, which approval shall not
be unreasonably withheld and may not be withheld where the Administrator may be
exposed to civil or criminal proceedings for failure to comply, when requested
to divulge such information by duly constituted authorities, when subject to
governmental or regulatory audit or investigation, or when so requested by the
Trust. Records and information which have become known to the public through no
wrongful act of the Administrator or any of its employees, agents or
representatives shall not be subject to this paragraph.
5. LIMITATION OF LIABILITY
(a) The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Funds in connection with the
matters to which this Agreement relates, except for a loss resulting from the
Administrator's willful misfeasance, bad faith or gross negligence in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement. Furthermore, the Administrator shall not be
liable for any action taken or omitted to be taken in good faith in accordance
with written or oral instructions received by the Administrator from an officer
or representative of the Trust.
(b) The Administrator shall indemnify and hold the Trust, its Trustees or
its duly authorized officers harmless from and against any and all claims,
demands, losses, expenses and liability (whether with or without basis in fact
or law) of any nature (including reasonable attorney's fees which may be
asserted against any or all of them by any person arising out of any action
taken or omitted to be taken by the Administrator as a result of the
Administrator's refusal or failure to comply with the terms of this Agreement,
its willful misfeasance, bad faith, negligence or willful misconduct, and will
cooperate in the transfer of the Administrators duties and responsibilities. The
Trust on behalf of the Funds agrees to indemnify and hold harmless the
Administrator, its officers, directors, employees, agents and nominees from and
against any and all claims, demands, losses, expenses and liability (whether
with or without basis in fact or law) of any nature (including reasonable
attorney's fees which may be asserted against any or all of them by any person
arising out of the Administrator's actions taken or nonactions with respect to
the performance of services under this Agreement or based, if applicable, upon
good faith reliance on information, records, instructions (oral or written) or
requests given or made to the Administrator by the Trust, its officers,
directors, agents or representatives; provided that this indemnification shall
not apply to actions or omissions of the Administrator in cases of its own
willful misfeasance, bad faith, negligence or willful misconduct. The indemnity
and defense provisions provided hereunder shall indefinitely survive the
termination of this Agreement
(c) The Administrator assumes no responsibility hereunder, and shall not
be liable, for any damage, loss of data, errors, delay or any other loss
whatsoever caused by events beyond its reasonable control. The Administrator
will, however, take all reasonable steps to minimize service interruptions for
any period that such interruption continues beyond its control. At the request
of the Trust, the
5
<PAGE> 6
Administrator will provide to the Trust a copy of the Administrator's current
disaster recovery plan, or, at the discretion of the Administrator, a summary
thereof.
6. TERM
(a) This Agreement shall become effective with respect to each Fund
listed on Schedule A hereof as of the date hereof and, with respect to each Fund
not in existence on that date, on the date an amendment to Schedule A to this
Agreement relating to that Fund is executed. This Agreement shall continue in
effect with respect to each Fund until _______ __, 199_ (the "Initial Term").
Thereafter, if not terminated as provided herein, this Agreement shall continue
automatically in effect as to each Fund for successive annual periods provided
that the continuance of the Agreement is approved by the Trustees of the Trust.
(b) This Agreement may be terminated with respect to any one or more
particular Funds without penalty after the Initial Term (i) upon mutual consent
of the parties, or (ii) by either party upon not less than sixty (60) days'
written notice to the other party (which notice may be waived by the party
entitled to the notice). The terms of this Agreement shall not be waived,
altered, modified, amended or supplemented in any manner whatsoever except by a
written instrument signed by the Administrator and the Trust.
(c) Notwithstanding anything herein to the contrary, upon the termination
of this Agreement or the liquidation of a Fund or the Trust, the Administrator
shall deliver all data and the records and any other records or data established
or maintained by the Administrator under this Agreement and will cooperate in
the transfer of the Administrator's duties and responsibilities of the Fund(s)
and/or Trust as the case may be to the Trust or person(s) designated by the
Trust as successor to the Administrator and thereafter the Trust or its designee
shall be solely responsible for preserving the records for the periods required
by all applicable laws, rules and regulations. In the absence of such
designation by the Trust, upon the date specified in the notice of termination
of this Agreement and delivery of the records maintained hereunder, the
Administrator shall be relieved of all duties and responsibilities pursuant to
this Agreement. In addition, in the event of termination of this Agreement, or
the proposed liquidation or merger of the Trust or a Fund(s), and the Trust
requests the Administrator to provide services in connection therewith, the
Administrator shall provide such services and be entitled to such compensation
as the parties may mutually agree.
7. NON-EXCLUSIVITY
The services of the Administrator rendered to the Trust are not deemed to
be exclusive. The Administrator may render such services and any other services
to others, including other investment companies. The Trust recognizes that from
time to time directors, officers and employees of the Administrator may serve as
trustees, directors, officers and employees of other entities (including other
investment companies), that such other entities may include the name of the
Administrator as part of their name and that the Administrator or its affiliates
may enter into investment advisory or other agreements with such other entities.
6
<PAGE> 7
8. GOVERNING LAW; INVALIDITY
This Agreement shall be governed by and construed in accordance with the
laws of the State of Wisconsin. To the extent that the applicable laws of the
State of Wisconsin, or any of the provisions herein, conflict with the
applicable provisions of the 1940 Act, the latter shall control, and nothing
herein shall be construed in a manner inconsistent with the 1940 Act or any rule
or order of the Commission thereunder. Any provision of this Agreement which may
be determined by competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability and shall not invalidate or render
unenforceable such provision in any other jurisdiction.
9. NOTICES
Any notice required or permitted to be given by either party to the other
shall be in writing and shall be deemed to have been given when sent by
registered or certified mail, postage prepaid, return receipt requested, as
follows: Notice to the Administrator shall be sent to Sunstone Financial Group,
Inc., 207 East Buffalo Street, Suite 400, Milwaukee, WI, 53202, Attention:
Miriam M. Allison, and notice to the Trust shall be sent to Choice Funds, c/o
Stradley Ronon Stevens & Young, LLP, Attention: Barbara Nugent, Esquire.
10. TRUST LIMITATIONS
This Agreement is executed by the Trust with respect to each of the Funds
and the obligations hereunder are not binding upon any of the trustees, officers
or shareholders of the Trust individually but are binding only upon the Fund to
which such obligations pertain and the assets and property of such Fund. All
obligations of the Trust under this Agreement shall apply only on a Fund-by-Fund
basis, and the assets of one Fund shall not be liable for the obligations of
another Fund. The Fund's Declaration of Trust is on file with the Secretary of
State of Delaware.
11. ENTIRE AGREEMENT
This Agreement constitutes the entire Agreement of the parties hereto.
12. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original agreement but such counterparts shall
together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer as of the day and year first above
written.
CHOICE FUNDS
(the "Trust")
7
<PAGE> 8
By:____________________________________________
President
SUNSTONE FINANCIAL GROUP, INC.
("Administrator")
By:____________________________________________
President
8
<PAGE> 9
SCHEDULE A
TO
ADMINISTRATION AND FUND ACCOUNTING AGREEMENT
TRUST PORTFOLIOS
Choice Focus Fund
Choice Balanced Fund
1
<PAGE> 10
SCHEDULE B
TO
ADMINISTRATION AND FUND ACCOUNTING AGREEMENT
FEE SCHEDULE
ASSET BASED FEES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------- -------------------------------------- ----------------------------- ----------------------
NAME OF FUND AVERAGE NET ASSETS BASIS POINTS* MINIMUM
- ------------ ------------------ ------------- ANNUAL FEE*
-----------
- ------------------------- -------------------------------------- ----------------------------- ----------------------
Focus Fund Up to $50 Million 15.0 basis points $70,000
- ------------------------- -------------------------------------- ----------------------------- ----------------------
$50 Million to $100 Million 7.5 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
$100 Million to $250 Million 5.0 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
$250 Million to $500 Million 3.0 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
Over $500 Million 2.0 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------- -------------------------------------- ----------------------------- ----------------------
Balanced Fund Up to $50 Million 15.0 basis points $70,000
- ------------------------- -------------------------------------- ----------------------------- ----------------------
$50 Million to $100 Million 7.5 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
$100 Million to $250 Million 5.0 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
$250 Million to $500 Million 3.0 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
Over $500 Million 2.0 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
</TABLE>
*The parties agree that in the event that the Balanced Fund has not commenced
operations by June 30, 2000, then beginning on July 1, 2000, the following
revised fee schedule shall apply to the Focus Fund:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------- -------------------------------------- ----------------------------- ----------------------
NAME OF FUND AVERAGE NET ASSETS BASIS POINTS MINIMUM
- ------------ ------------------ ------------ ANNUAL FEE
----------
- ------------------------- -------------------------------------- ----------------------------- ----------------------
Focus Fund Up to $50 Million 18.0 basis points $75,000
- ------------------------- -------------------------------------- ----------------------------- ----------------------
$50 Million to $100 Million 10.0 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
$100 Million to $250 Million 7.0 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
$250 Million to $500 Million 5.0 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
Over $500 Million 3.0 basis points
- ------------------------- -------------------------------------- ----------------------------- ----------------------
</TABLE>
The minimum annual fee is subject to an annual escalation of five percent (5%),
which escalation shall be effective commencing one year from the effective date
of each Fund and the corresponding date each year thereafter. No amendment of
this Schedule B shall be required with each escalation. The foregoing fee
schedules assume a single class of shares for each Fund.
1
<PAGE> 11
Additional fees shall apply when adding any additional Fund(s) and/or classes
including compensation for the Administrator's services in connection with the
organization of the new Fund(s) or classes. The Administrator shall provide such
services and be entitled to such compensation as the parties may mutually agree
in writing.
OUT-OF-POCKET AND OTHER RELATED EXPENSES
The Trust shall also pay/reimburse the Administrator's out-of-pocket and other
related expenses. Out-of-pocket expenses include, but are not limited to,
travel, lodging and meals in connection with travel in connection with Board
meetings and otherwise on behalf of the Trust, programming and related expenses
(previously incurred or to be incurred by Administrator) in connection with
providing electronic transmission of data between the Administrator and the
Funds' other service providers, brokers, dealers and depositories, fees and
expenses of pricing services, fees of research services including Lexis/Nexis,
Morningstar and Lipper, NASDAQ and other service interface fees, EDGAR related
fees, long distance telephone charges, and photocopying, faxes, postage and
overnight delivery expenses.
ORGANIZATIONAL AND START-UP EXPENSES
The Trust agrees to reimburse the Administrator the sum of $20,000 for providing
organizational and start-up expenses.
2
<PAGE> 1
EXHIBIT 99.h-2
TRANSFER AGENCY AGREEMENT
THIS AGREEMENT made as of the 31st day of October, 1999 by and between
Choice Funds, a Delaware business trust (the "Trust"), and Sunstone Financial
Group, Inc., a Wisconsin corporation ("Sunstone"):
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end management investment company
and is authorized to issue shares of beneficial interest ("Shares") in separate
series with each such series representing the interests in a separate portfolio
of securities and other assets;
WHEREAS, the Trust desires to retain Sunstone to render the transfer
agency and other services contemplated hereby with respect to each of the
investment portfolios of the Trust as are listed on Schedule A hereto and any
additional investment portfolios the Trust and Sunstone may agree upon and
include on Schedule A as such Schedule may be amended from time to time (such
investment portfolios and any additional investment portfolios are individually
referred to as a "Fund" and collectively the "Funds"), and Sunstone is willing
to render such services.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
ARTICLE I
APPOINTMENT OF TRANSFER AGENT
A. APPOINTMENT.
1. The Trust hereby appoints Sunstone as transfer agent and
dividend disbursing agent of all the Shares of the Funds during the period of
this Agreement, and Sunstone hereby accepts such appointment as transfer agent
and dividend disbursing agent and agrees to perform the duties thereof as
hereinafter set forth.
2. Sunstone shall perform the transfer agent and dividend
disbursing agent services described on Schedule B hereto. To the extent that the
Trust requests Sunstone to perform any additional services, Sunstone and the
Trust shall mutually agree as to the services to be accomplished, the manner of
accomplishment and the compensation to which Sunstone shall be entitled with
respect thereto.
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3. Sunstone may, in its discretion, appoint in writing other
parties qualified to perform transfer agency services (each, individually, a
"Sub-transfer Agent"), provided such appointment is approved by a majority of
the Trustees of the Trust, to carry out some or all of its responsibilities
under this Agreement with respect to a Fund; provided, however, that unless the
Trust shall enter into a written agreement with such Sub-transfer Agent, the
Sub-transfer Agent shall be the agent of Sunstone and not the agent of the Trust
and, in such event Sunstone shall be fully responsible for the acts or omissions
of such Sub-transfer Agent and shall not be relieved of any of its
responsibilities hereunder by the appointment of such Sub-transfer Agent.
4. Sunstone shall have no duties or responsibilities whatsoever
hereunder except such duties and responsibilities as are specifically set forth
in this Agreement, and no covenant or obligation shall be implied in this
Agreement against Sunstone.
B. DOCUMENTS/RECORDS.
1. In connection with such appointment, the Trust shall deliver or
cause to be delivered the following documents to Sunstone:
a) A copy of the Declaration of Trust and By-laws of the Trust
and all amendments thereto, and a copy of the resolutions of the Board of
Trustees of the Trust appointing Sunstone and authorizing the execution of this
Transfer Agency Agreement on behalf of the Funds, each certified by the
Secretary of the Trust;
b) A certificate signed by the President and Secretary of the
Trust specifying: the number of authorized Shares and the number of such
authorized Shares issued and currently outstanding, if any; and the individuals
authorized to provide oral instructions and to sign written instructions and
requests on behalf of the Trust (hereinafter referred to as "Authorized
Persons") and to change the persons authorized to provide such instructions from
time to time, it being understood Sunstone shall not be held to have notice of
any change in the authority of any Authorized Person until receipt of written
notice thereof from the Trust;
d) Copies of the Trust's Registration Statement, as amended to
date, and the most recently filed Pre- or Post-Effective Amendment thereto,
filed by the Trust with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "1933 Act"), and under the 1940 Act, as
amended, together with any applications filed in connection therewith; and
e) Opinion of counsel for the Trust with respect to the Trust's
organization and existence under the laws of its state of organization, the
validity of the authorized and outstanding Shares, whether such Shares are fully
paid and non-assessable and the status of such Shares under the Securities Act
of 1933, as amended, and any other applicable federal law or regulation (i.e.,
if subject to registration, that they have been registered and that the
Registration Statement has become effective or, if exempt, the specific grounds
therefor.)
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2. The Trust agrees to deliver or to cause to be delivered to
Sunstone in Milwaukee, Wisconsin, at the Trust's expense, all of its shareholder
account records relating to the Funds in a format acceptable to Sunstone and all
such other documents, records and information as Sunstone may reasonably request
in order for Sunstone to perform its services hereunder.
ARTICLE II
COMPENSATION & EXPENSES
A. COMPENSATION. In consideration for its services hereunder as
transfer agent and dividend disbursing agent, each Fund will pay to Sunstone
such compensation as set forth in Schedule C attached hereto.
B. EXPENSES. The Trust on behalf of each Fund also agrees to promptly
reimburse Sunstone for all out-of-pocket expenses or disbursements incurred by
Sunstone in connection with the performance of services under this Agreement
including, but not limited to, expenses for postage, express delivery services,
freight charges, envelopes, checks, drafts, forms (continuous or otherwise),
specially requested reports and statements, bank account service fees and
charges, telephone calls, telegraphs, stationery supplies, outside printing and
mailing firms, magnetic tapes, reels or cartridges (if sent to a Fund or to a
third party at a Fund's request) and magnetic tape handling charges, on-site and
off-site record storage, media for storage of records (e.g., microfilm,
microfiche, optical platters, computer tapes and disks), computer equipment
installed at a Fund's request at a Fund's or a third party's premises,
telecommunications equipment, telephone/telecommunication lines between the
Trust and its agents, on one hand, and Sunstone on the other, proxy soliciting,
processing and/or tabulating costs, second site back-up computer facility,
transmission of statement data for remote printing or processing, and
transaction fees to the extent any of the foregoing are paid by Sunstone. If
requested by Sunstone, postage and other out-of-pocket expenses are payable in
advance, and in the event requested, postage is due at least seven days prior to
the anticipated mail date. In the event Sunstone requests advance payment,
Sunstone shall not be obligated to incur such expenses or perform the related
service(s) until payment is received.
C. PAYMENT PROCEDURES.
1. Amounts due hereunder shall be due and paid by the respective
Fund on or before the 15th day after the date of the statement therefor (the
"Due Date"). Service fees are billed monthly, and out-of-pocket expenses are
billed as incurred (unless prepayment is requested by Sunstone). Sunstone may,
at its option, arrange to have various service providers submit invoices
directly to the Funds for payment of out-of-pocket expenses reimbursable
hereunder. The Trust is aware that its failure to pay all amounts in a timely
fashion so that they will be received by Sunstone on or before the Due Date will
give rise to costs to Sunstone not contemplated by this Agreement, including but
not limited to carrying, processing and accounting charges. Accordingly, in the
event that any amounts due hereunder are not received
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<PAGE> 4
by Sunstone by the Due Date, the Trust shall pay a late charge equal to one and
one-half percent (1.5%) per month or the maximum amount permitted by law,
whichever is less. In addition, the Trust shall pay reasonable attorney's fees
and court costs of Sunstone if any amounts due Sunstone are collected by or
through an attorney. The parties hereby agree that such late charge represents a
fair and reasonable computation of the costs incurred by reason of late payment
or payment of amounts not properly due. Acceptance of such late charge shall in
no event constitute a waiver of a Fund's default or prevent Sunstone from
exercising any other rights and remedies available to it.
ARTICLE III
PROCESSING AND PROCEDURES
A. ISSUANCE, REDEMPTION AND TRANSFER OF SHARES
1. Sunstone acknowledges that it has received a copy of each
Fund's Prospectus (as hereinafter defined), which Prospectus describes how sales
and redemptions of shares of each Fund shall be made and Sunstone agrees to
accept purchase orders and redemption requests with respect to Fund shares on
each Fund Business Day in accordance with such Prospectus. "Fund Business Day"
shall be deemed to be each day on which the New York Stock Exchange is open for
trading, and "Prospectus" shall mean the last Fund prospectus actually received
by Sunstone from the Fund with respect to which the Fund has indicated a
registration statement under the 1933 Act has become effective, including the
Statement of Additional Information, incorporated by reference therein.
2. On each Fund Business Day Sunstone shall, as of the time at
which the net asset value of each Fund is computed, issue to and redeem from the
accounts specified in a purchase order or redemption request in proper form and
accepted by the Trust, which in accordance with the Prospectus is effective on
such Fund Business Day, the appropriate number of full and fractional Shares
based on the net asset value per Share of the respective Fund specified in an
advice received on such Fund Business Day from or on behalf of the Fund.
3. Upon the issuance of any Shares in accordance with this
Agreement, Sunstone shall not be responsible for the payment of any original
issue or other taxes required to be paid by the Fund in connection with such
issuance of any Shares.
4. Sunstone shall not be required to issue any Shares after it has
received from an Authorized Person or from an appropriate federal or state
authority written notification that the sale of Shares has been suspended or
discontinued, and Sunstone shall be entitled to rely upon such written
notification.
5. Upon receipt of a redemption request and monies paid to it by
the Fund's custodian bank ("Custodian") in connection with a redemption of
Shares, Sunstone shall cancel
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<PAGE> 5
the redeemed Shares and after making appropriate deduction for any withholding
of taxes required of it by applicable law, make payment in accordance with the
Fund's redemption and payment procedures described in the Prospectus.
6. (a) Except as otherwise provided in sub-paragraph (b) of this
paragraph, Shares will be transferred or redeemed upon presentation to Sunstone
of instructions in good order endorsed for exchange, transfer or redemption,
accompanied by such documents as Sunstone deems necessary to evidence the
authority of the person making such transfer or redemption, and bearing
satisfactory evidence of the payment of stock transfer taxes. Sunstone reserves
the right to refuse to transfer or redeem Shares until it is satisfied that the
endorsement on the stock certificate, if any, or instructions is valid and
genuine, and for that purpose it will require, unless otherwise instructed by an
Authorized Person or except as provided in sub-paragraph (b) of this paragraph,
a guarantee of signature by an "Eligible Guarantor Institution" as that term is
defined by SEC Rule 17Ad-15(a)(2) of the Securities Exchange Act of 1934, as
amended. Sunstone also reserves the right to refuse to transfer or redeem Shares
until it is satisfied that the requested transfer or redemption is legally
authorized, and it shall incur no liability for the refusal, in good faith, to
make transfers or redemptions which Sunstone, in its judgment, deems improper or
unauthorized, or until it is satisfied that there is no reasonable basis to any
claims adverse to such transfer or redemption. Sunstone may, in effecting
transfers and redemptions of Shares, rely upon those provisions of the Uniform
Act for the Simplification of Fiduciary Security Transfers or the Uniform
Commercial Code, as the same may be amended from time to time, applicable to the
transfer of securities, and shall not be responsible for any act done or omitted
by it in good faith in reliance upon such laws.
(b) Notwithstanding the foregoing or any other provision
contained in this Agreement to the contrary, Sunstone shall be fully protected
by each Fund in not requiring any instruments, documents, assurances,
endorsements or guarantees, including, without limitation, any signature
guarantees, in connection with a redemption, exchange or transfer, of Shares
whenever Sunstone reasonably believes that requiring the same would be
inconsistent with the transfer and redemption procedures as described in the
Fund's Registration Statement and/or in certified resolutions of the Board of
Trustees of the Trust provided to Sunstone.
7. Notwithstanding any provision contained in this Agreement to
the contrary, Sunstone shall not be required or expected to require, as a
condition to any transfer or redemption of any Shares pursuant to a computer
tape or electronic data transmission, any documents to evidence the authority of
the person requesting the transfer or redemption and/or the payment of any stock
transfer taxes, and shall be fully protected in acting in accordance with the
applicable provisions of this Article.
8. In connection with each purchase and each redemption of Shares,
Sunstone shall send such statements as are prescribed by the Federal securities
laws applicable to transfer agents or as described in the Prospectus. It is
understood that certificates for Shares will not be offered by the Trust or
available to investors.
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<PAGE> 6
9. Procedures for effecting purchase, redemption or transfer
transactions accepted from investors by telephone or other related methods shall
be established by mutual agreement between the Trust and Sunstone consistent
with the terms of the Prospectus and such rules and regulations generally
adopted by mutual fund transfer agents. At any time, Sunstone may request
instructions from the Trust with respect to any matter arising in connection
with the foregoing procedures. If such instructions are not received within a
reasonable time, then Sunstone may seek advice from legal counsel for the Trust,
or its own legal counsel at the expense of the Trust. Sunstone shall not be
liable, and shall be held harmless by the Trust, for any action taken or
omissions which are consistent with the foregoing procedures, or for any action
taken or omitted by it in good faith in reliance upon such instructions or in
accordance with advice of counsel.
10. Prior to the effective date of any increase or decrease in the
total number of Shares authorized to be issued, or the issuance of any
additional Shares of a Fund pursuant to stock dividends, stock splits,
recapitalizations, capital adjustments or similar transactions, the Trust agrees
to deliver to Sunstone such documents, certificates, reports and legal opinions
as Sunstone may reasonably request.
B. DIVIDENDS AND DISTRIBUTIONS.
1. The Trust shall furnish to Sunstone a copy of a resolution of
its Board of Trustees, certified by an Authorized Person, either (i) setting
forth the date of the declaration of a dividend or distribution, the date of
accrual or payment, as the case may be, thereof, the record date as of which
shareholders entitled to payment, or accrual, as the case may be, shall be
determined, the amount per Share of such dividend or distribution, the payment
date on which all previously accrued and unpaid dividends are to be paid, and
the total amount, if any, payable to Sunstone on such payment date, or (ii)
authorizing the declaration of dividends and distributions on a daily or other
periodic basis and authorizing Sunstone to rely on a certificate of an
Authorized Person setting forth the information described in subsection (i) of
this paragraph.
2. In connection with a reinvestment of a dividend or distribution
of Shares of a Fund, Sunstone shall as of each Fund Business Day, as specified
in a certificate or resolution described in paragraph 1, issue Shares of the
Fund based on the net asset value per Share of such Fund specified in an advice
received from or on behalf of the Fund on such Fund Business Day.
3. Upon the mail date specified in such certificate or resolution,
as the case may be, the Trust shall, in the case of a cash dividend or
distribution, cause the Custodian to deposit in an account in the name of
Sunstone on behalf of a Fund, an amount of cash, if any, sufficient for Sunstone
to make the payment, as of the mail date, specified in such Certificate or
resolution, as the case may be, to the Shareholders who were of record on the
record date. Sunstone will, upon receipt of any such cash, make payment of such
cash dividends or distributions to the shareholders of record as of the record
date. Sunstone shall not be liable for any improper payments made in accordance
with a certificate or resolution described in the preceding paragraph. If
Sunstone shall not receive from the Custodian sufficient cash to make payments
of any cash dividend or distribution to all shareholders of the Fund as of the
record date, Sunstone
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shall, upon notifying the Fund, withhold payment to all shareholders of record
as of the record date until sufficient cash is provided to Sunstone.
4. It is understood that Sunstone in its capacity as transfer
agent and dividend disbursing agent shall in no way be responsible for the
determination of the rate or form of dividends or capital gain distributions due
to the shareholders pursuant to the terms of this Agreement. It is further
understood that Sunstone shall file with the Internal Revenue Service and
shareholders such appropriate federal tax forms concerning the payment of
dividend and capital gain distributions but shall in no way be responsible for
the collection or withholding of taxes due on such dividends or distributions
due to shareholders, except and only to the extent, required by applicable
federal law.
C. RECORDS.
1. Sunstone shall keep such records as are specified in Schedule D
hereto in the form and manner, and for such period, as it may deem advisable but
not inconsistent with the rules and regulations of appropriate government
authorities, in particular Rules 31a-2 and 31a-3 under the 1940 Act. Sunstone
may deliver to the Trust from time to time at Sunstone's discretion, for
safekeeping or disposition by the Trust in accordance with law, such records,
papers and documents accumulated in the execution of its duties as such transfer
agent, as Sunstone may deem expedient, other than those which Sunstone is itself
required to maintain pursuant to applicable laws and regulations. The Trust
shall assume all responsibility for any failure thereafter to produce any such
record, paper, canceled Share certificate, or other document so returned, if and
when required. To the extent required by Section 31 of the 1940 Act and the
rules and regulations thereunder, the records specified in Schedule D hereto
maintained by Sunstone, which have not been previously delivered to the Trust
pursuant to the foregoing provisions of this paragraph, shall be considered to
be the property of the Trust, shall be made available upon request for
inspection by the officers, employees, and auditors of the Trust, and shall be
delivered to the Trust promptly upon request and in any event upon the date of
termination of this Agreement, in the form and manner kept by Sunstone on such
date of termination or such earlier date as may be requested by the Trust.
2. Sunstone agrees to keep all records and other information
relative to the Trust, the Funds and their shareholders confidential. In case of
any requests or demands for the inspection of the shareholder records of a Fund,
Sunstone will use its best efforts to notify the Fund promptly and to secure
instructions from an Authorized Person as to such inspection. Sunstone reserves
the right, however, to exhibit the shareholder records to any person whenever it
believes there is a reasonable likelihood that Sunstone will be held liable for
the failure to exhibit the shareholder records to such person; provided,
however, that in connection with any such disclosure Sunstone shall promptly
notify the Trust, where reasonably possible, that such disclosure has been made
or is about to be made in order to give the Trust an opportunity to take
remedial steps to block such disclosure. Notwithstanding the foregoing, Sunstone
may disclose information when requested by a shareholder concerning an account
as to which such shareholder claims a legal or beneficial interest or when
requested by the Trust, the shareholder or the dealer of record as to such
account.
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ARTICLE IV
CONCERNING THE TRUST
A. REPRESENTATIONS. The Trust represents and warrants to Sunstone
that:
(a) It is a business trust duly organized and existing under the
laws of the State of Delaware, it is empowered under applicable laws and by its
Declaration of Trust and By-Laws to enter into and perform this Agreement, and
all requisite corporate proceedings have been taken to authorize it to enter
into and perform this Agreement.
(b) It is an investment company registered under the 1940 Act.
(c) A registration statement under the 1933 Act with respect to
the Shares is effective. The Trust shall notify Sunstone if such registration
statement or any state securities registrations have been terminated, lapse or a
stop order has been entered with respect to the Shares.
B. COVENANTS.
1. The Trust will provide to Sunstone copies of all amendments to
its Declaration of Trust and By-laws made after the date of this Agreement. If
requested by Sunstone, each copy of the Declaration of Trust and By-laws of the
Trust and copies of all amendments thereto shall be certified by the Secretary
of the Trust.
2. The Trust shall deliver to Sunstone the Fund's currently
effective Prospectus and, for purposes of this Agreement, Sunstone shall not be
deemed to have notice of any information contained in such Prospectus until a
reasonable time (not to exceed three business days) after it is actually
received by Sunstone.
3. All requisite steps will be taken by the Trust from time to
time when and as necessary to register the Trust's shares for sale in all states
in which Trust shares shall at the time be offered for sale and require
registration. If at any time the Trust receives notice of any stop order or
other proceeding in any such state affecting such registration or the sale of
Trust shares, or of any stop order or other proceeding under the federal
securities laws affecting the sale of Trust shares, the Trust will give prompt
notice thereof to Sunstone.
4. The Trust will comply with all applicable requirements of the
1933 Act, the Securities Exchange Act of 1934, as amended, the 1940 Act, blue
sky laws, and any other applicable laws, rules and regulations.
5. The Trust agrees that prior to effecting any change in the
Prospectus which would increase or alter the duties and obligations of Sunstone
hereunder, it shall advise Sunstone of such proposed change at least 30 days
prior to the intended date of the same, and shall proceed
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with such change only if it shall have received the written consent of Sunstone
thereto, which shall not be unreasonably withheld.
ARTICLE V
CONCERNING THE TRANSFER AGENT
A. REPRESENTATIONS. Sunstone represents and warrants to the Fund
that:
(a) It is a corporation duly organized and existing under the laws
of the State of Wisconsin, is empowered under applicable law and by its Articles
of Incorporation and By-laws to enter into and perform this Agreement, and all
requisite proceedings have been taken to authorize it to enter into and perform
this Agreement.
(b) It is duly registered as a transfer agent under Section 17A of
the Securities Exchange Act of 1934, as amended, to the extent required.
(c) To the extent it deems necessary, it (a) has reviewed its
business and operations as they relate to the services provided hereunder, (b)
has developed or is developing a program to remediate or replace computer
applications and systems, and (c) has developed a testing plan to test where
reasonably feasible the remediation or replacement of computer
applications/systems, in each case, to address on a timely basis the risk that
certain computer applications/systems used by Sunstone may be unable to
recognize and properly perform date sensitive functions involving dates prior
to, including and after December 31, 1999, including dates such as February 29,
2000. To Sunstone's knowledge and belief, its proprietary systems are Year 2000
compliant in all material respects with regard to the services to be provided
under this Agreement.
B. LIMITATION OF LIABILITY; INDEMNIFICATION.
1. Sunstone shall not be liable for any loss or damage, including
counsel fees, resulting from its actions or omissions to act or otherwise, in
the absence of its bad faith, willful misfeasance, gross negligence or reckless
disregard of its duties under this Agreement. Sunstone shall not be liable in
acting upon any writing, document or instructions believed by it to be genuine
and to have been signed or made by an Authorized Person or verbal instructions
which the individual receiving the instructions on behalf of Sunstone believes
to have been given by an Authorized Person, and Sunstone shall not be held to
have any notice of any change of authority of any person until receipt of
written notice thereof from a Fund or such person.
2. The Trust on behalf of the Funds agrees to indemnify and hold
harmless Sunstone, its employees, agents, members, officers and nominees from
and against any and all claims, demands, actions and suits, whether groundless
or otherwise, and from and against any and all judgments, liabilities, losses,
damages, costs, charges, counsel fees and other expenses of every nature and
character arising out of or in any way relating to Sunstone's actions taken or
nonactions with respect to the performance of services under this Agreement or
based, if applicable, upon reliance on information, records, instructions (oral
or written) or requests given
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or made to Sunstone by the Funds, its officers, directors, agents or
representatives; provided that this indemnification shall not apply to actions
or omissions of Sunstone in cases of its own willful misfeasance or gross
negligence, and further provided that prior to confessing any claim against it
which may be the subject of this indemnification, Sunstone shall give the Funds
written notice of and reasonable opportunity to defend against said claim in its
own name or in the name of Sunstone. The indemnity and defense provisions
provided hereunder shall indefinitely survive the termination of this Agreement.
3. Sunstone assumes no responsibility hereunder, and shall not be
liable, for any damage, loss of data, errors, delay or any other loss whatsoever
caused by events beyond its reasonable control. Sunstone will, however, take all
reasonable steps to minimize service interruptions for any period that such
interruption continues beyond Sunstone's control.
4. In no event and under no circumstances shall either party to
this Agreement be liable to anyone, including, without limitation to the other
party, for consequential or punitive damages for any act or failure to act under
any provision of this Agreement even if advised of the possibility thereof.
5. Notwithstanding any of the provisions of this Agreement,
Sunstone shall be under no duty or obligation under this Agreement to inquire
into, and shall not be liable for:
(a) The legality of the issue or sale of any Shares, the
sufficiency of the amount to be received therefor, or the authority of a Fund,
as the case may be, to request such sale or issuance;
(b) The legality of a transfer of Shares, or of a redemption of
any Shares, the propriety of the amount to be paid therefor, or the authority of
a Fund, as the case may be, to request such transfer or redemption;
(c) The legality of the declaration of any dividend by a Fund,
or the legality of the issue of any Shares in payment of any stock dividend, or
the legality of any recapitalization or readjustment of Shares.
ARTICLE VI
TERM
1. This Agreement shall remain in full force and effect until
____________, 199_, (the "Initial Term") and thereafter shall automatically
extend for additional, successive twelve (12) month terms unless earlier
terminated as provided below.
2. Either of the parties hereto may terminate this Agreement at
any time after the Initial Term by giving to the other party a notice in writing
specifying the date of such termination, which shall be not less than ninety
(90) days after the date of receipt of such notice.
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In the event such notice is given by a Fund, it shall be accompanied by a copy
of a resolution of the Board of Trustees of the Trust, certified by the
Secretary or any Assistant Secretary, electing to terminate this Agreement and
designating the successor transfer agent or transfer agents. In the event such
notice is given by Sunstone, the Fund shall on or before the termination date,
deliver to Sunstone a copy of a resolution of its Board of Trustees certified by
the Secretary or any Assistant Secretary designating a successor transfer agent
or transfer agents. In the absence of such designation by the Fund, the Fund
shall upon the date specified in the notice of termination of this Agreement and
delivery of the records maintained hereunder, be deemed to be its own transfer
agent and Sunstone shall thereby be relieved of all duties and responsibilities
pursuant to this Agreement. Fees and out-of-pocket expenses incurred by
Sunstone, but unpaid by a Fund upon such termination, shall be immediately due
and payable upon and notwithstanding such termination.
3. In the event this Agreement is terminated as provided herein,
Sunstone, upon the written request of the Trust, shall deliver the records of
the Trust to the Trust or its successor transfer agent in the form maintained by
Sunstone at the expense of the Trust. The Trust shall be responsible to Sunstone
for all out-of-pocket expenses and for the costs and expenses associated with
the preparation and delivery of such media, including: (a) any custom
programming requested by Trust in connection with the preparation of such media;
(b) transportation of forms and other materials used in connection with the
processing of Fund transactions by Sunstone; and (c) transportation of records
and files in the possession of Sunstone. Sunstone shall not reduce the level of
service provided to the Trust following notice of termination by the Trust.
ARTICLE VII
MISCELLANEOUS
A. NOTICES. Any notice required or permitted by Article VI to be given by
either party to the other shall be in writing and shall be deemed to have been
given when sent by registered or certified mail, postage prepaid, return receipt
requested, as follows: Notice to Sunstone shall be sent to Sunstone Financial
Group, Inc., at 207 East Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202,
Attention President, or at such other place as Sunstone may from time to time
designate in writing, and notice to the Trust shall be sent to
- --------------------------------.
B. AMENDMENTS/ASSIGNMENTS.
1. This Agreement may not be amended or modified in any manner
except by a written agreement executed by both parties with the formality of
this Agreement.
2. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns. This Agreement
shall not be assignable by either party without the written consent of the other
party except that Sunstone may assign this Agreement to an affiliate with
advance written notice to the Trust.
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C. WISCONSIN LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin. If any part, term or
provision of this Agreement is determined by the courts or any regulatory
authority having jurisdiction over the issue to be illegal, in conflict with any
law or otherwise invalid, the remaining portion or portions shall be considered
severable and not be affected, and the rights and obligations of the parties
shall be construed and enforced as if the Agreement did not contain the
particular part, term or provision held to be illegal or invalid.
D. COUNTERPARTS. This Agreement may be executed in any number of
counterparts each of which shall be deemed to be an original; but such
counterparts shall, together, constitute only one instrument.
E. NON-EXCLUSIVE; OTHER AGREEMENTS. The services of Sunstone hereunder
are not deemed exclusive and Sunstone shall be free to render similar services
to others. Except as specifically provided herein, this Agreement does not in
any way affect any other agreements entered into among the parties hereto and
any actions taken or omitted by any party hereunder shall not affect any rights
or obligations of any other party hereunder.
F. CAPTIONS. The captions in the Agreement are included for convenience
of reference only, and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate officer, thereunto duly authorized and
their respective corporate seals to be hereunto affixed, as the day and year
first above written.
SUNSTONE FINANCIAL GROUP, INC. CHOICE FUNDS
By: By:
------------------------------ --------------------------------
(Signature) (Signature)
------------------------------ --------------------------------
(Name) (Name)
------------------------------ --------------------------------
(Title) (Title)
------------------------------ --------------------------------
(Date Signed) (Date Signed)
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SCHEDULE A
TO
TRANSFER AGENCY AGREEMENT
NAMES OF FUNDS
Choice Balanced Fund
Choice Focus Fund
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SCHEDULE B
TO
TRANSFER AGENCY AGREEMENT
SERVICE SCHEDULE
SERVICES
- - Set up and maintain shareholder accounts and records, including IRAs and
other retirement accounts
- - Store account documents electronically
- - Receive and respond to investor account inquiries by telephone, mail, or
e-mail, if desired
- - Process purchase and redemption orders, transfers, and exchanges, including
automatic purchases and redemptions
- - Process dividend payments by check, wire or ACH, or reinvest dividends
- - Issue daily transaction confirmations and monthly or quarterly statements
- - Mail prospectus, annual and semiannual reports, and other shareholder
communications to existing shareholders
- - File IRS Forms 1099, 5498, 1042, 1042-S and 945 with shareholders and/or the
IRS
- - Handle load and multi-class processing, including rights of accumulation and
purchases by letters of intent
- - Calculate 12b-1 plan fees
- - Give dealers access through NSCC's Fund/SERV and Networking
- - Provide standards to structure forms and applications for efficient
processing
OPTIONAL SERVICES
The Funds may contract with Sunstone to provide one or more of the following
optional services. Additional fees apply.
- - Personal follow-up calls to prospects who return incomplete applications
- - Comprehensive clerical confirmation statements for maintenance transactions
- - 4.NET SERVICES, Sunstone's array of Internet services, including Adviser
Services, RIA/Broker Services, Shareholder Services, NAV Services and email
services.
- - Average cost calculations and cost basis statements
- - Shareholder "welcome" packages with initial confirmation
1
<PAGE> 15
- - Access to Sunstone's Tax and Retirement Group to answer questions and
coordinate retirement plan options
- - Follow up on IRAs, soliciting beneficiary and other information and sending
required minimum distribution reminder letters
- - Money market funds for short-term investment or exchanges
- - Dedicated service representatives
- - Weekend shareholder services
- - Customized reorder form tracking
2
<PAGE> 16
SCHEDULE C
TO
TRANSFER AGENCY AGREEMENT
FEE SCHEDULE
SERVICES
The following fees are charged for standard shareholder services:
BASE FEES
<TABLE>
<S> <C>
- - Open account fee (per year)
- No load equity and non-daily accrual fixed income funds $8.50
- Additional for 12b-1 fee $0.75
- Additional for front-end load $1.50
- Additional for CDSC or back-end load $2.00
- Money market and daily accrual fixed income funds $11.00
- Additional for 12b-1 fee $0.75
- Additional for front-end load $1.50
- Additional for CDSC or back-end load $2.00
- - Closed account fee (per year) $3.00
- - Monthly base (per fund)
- One to three funds in fund family $1,500
- 4 or more funds in fund family $1,000
- Add for multiclass (per class) 25%
ACCOUNT MAINTENANCE FEES (PER OCCURRENCE)
- - New account set up $3.00
- - Financial transactions $1.50
- - Maintenance transactions $1.00
- - Research/correspondence $2.50
- - Transfer on death (TOD) set-up $7.50
- - Fund/SERV
- Initial set-up per fund family $3,500
- Set-up fee per subsequent CUSIP $1,000
- New account set-up $1.00
- Per transaction - no load fund $0.25
- Per transaction - load fund $0.35
- Adjustments and rebills $2.50
- Fund/SERV direct charges at cost
- - Commission/SERV (per check) $0.25
- - ACH/AIP/SWP/automatic exchanges
- Set-up $1.00
- Per transaction $0.25
- - Withholding per eligible account per year $0.25
- - Account transcripts older than 2 years
(may be charged to shareholders) $5.00
- - Locating lost shareholders $8.00
</TABLE>
1
<PAGE> 17
<TABLE>
<S> <C>
- - Postal clean up per account $3.00
- - Tax ID number solicitation $2.50
SHAREHOLDER SERVICING FEES
- - Telephone calls (per call) $2.50
- - Annual maintenance per omnibus account $150
TAX AND RETIREMENT FEES
- - Retirement accounts (IRA/Roth/others)
- Annual maintenance per account (may be
charged to shareholders) $12.50
- Account distribution (may be charged to shareholders) $12.50
- - IRA transfer/rollover $7.50
DOCUMENT SERVICES
- - Per statement, confirmation and check processing $0.25
- - Per tax form processing $0.25
- - Per label printing for proxy or marketing purposes $0.10
- - Bulk mailings/insert handling charge
- 1 insert $0.06
- 2 - 3 inserts $0.08
- 4 or more inserts as quoted
- - Production of ad hoc reports starting at $100
SUNSTONE OFFERED MONEY MARKET EXCHANGE VEHICLES
- - One-time set up per money market fund used $2,000
- - Monthly base fee per money market fund used $650
- - Money market checkbooks at cost
- - Signature verification of check writing $2.00
FORMS AND APPLICATIONS
- - Standard applications and forms with custom logo $1,500 plus printing
- - Customized forms as quoted
SUNSTONE 4.PROMPTSM SERVICES (MONTHLY FEES)
- - Automated Account Information and Prospectus Service
- Monthly maintenance fee $350
- One time set up fee $3,750
</TABLE>
REPROCESSINGS DUE TO NAV ERRORS
This charge applies when shareholder transactions are required to be reprocessed
as a result of NAV errors caused by the adviser or fund accountant unaffiliated
with Sunstone. This charge is not a fund expense and is billed to the adviser.
<TABLE>
<S> <C>
- - Base fee (per occurrence, per day, per fund) $750
- - Transaction fee $1.00
</TABLE>
2
<PAGE> 18
FUND/SERV ACCESS
<TABLE>
<S> <C>
- - Use of Sunstone Fund/SERV membership (per fund/per year)
- First three funds in fund family $2,000
- 4 or more funds $1,000
</TABLE>
CUSTOM PROGRAMMING
Additional fees at $150 per hour or quoted by project may apply for special
programming to meet your servicing requirements or to create custom reports.
PREMIUM SERVICES
Certain premium services described on Exhibit B may be purchased on an as-needed
basis. Fees for premium services will be based on Sunstone's current rate at the
time services are purchased.
OUT-OF-POCKET EXPENSES
<TABLE>
<S> <C>
DOCUMENT CHARGES
- - Copying charges (per page) $0.15
- - Facsimile charges (per fax) $1.25
- - Inventory and records storage $20.00/pallet
SUPPLIES AND SERVICES
- - Statement paper, check stock, envelopes, tax forms at cost
- - Postage and express delivery charges at cost
- - Tape/disk storage at cost
- - Telephone and long distance at cost
- - P.O. box rental at cost
- - Toll-free number at cost
BANK CHARGES
- - Bank account service fees and any other bank charges at cost
- - Outgoing wire fee varies by bank
- - Non-sufficient funds varies by bank
- - Stopped check on money market funds $25.00
</TABLE>
3
<PAGE> 19
SCHEDULE D
RECORDS MAINTAINED BY SUNSTONE
Account applications
Canceled certificates plus stock powers and supporting documents
Checks including check registers, reconciliation records, any adjustment records
and tax withholding documentation
Indemnity bonds for replacement of lost or missing stock certificates and checks
Liquidation, redemption, withdrawal and transfer requests including stock
powers, signature guarantees and any supporting documentation
Shareholder correspondence
Shareholder transaction records
Share transaction history of the Funds
14
<PAGE> 1
EXHIBIT 99.i
Law Office
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8042
September 30, 1999
The Choice Funds
207 E. Buffalo Street
Suite 400
Milwaukee, Wisconsin 53202
RE: CHOICE FUNDS - FORM N-1A
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION
STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
LEGAL OPINION-SECURITIES ACT OF 1933
Ladies and Gentlemen:
We have examined the Agreement and Declaration of Trust (the
"Declaration"), of The Choice Funds (the "Fund"), a series business trust
organized under the Delaware Business Trust Act and the By-Laws of the Fund, as
amended to date, and the various pertinent corporate proceedings we deem
material. We have also examined the Notification of Registration and the
Registration Statements filed under the Investment Company Act of 1940, as
amended (the "Investment Company Act") and the Securities Act of 1933, as
amended (the "Securities Act"), all as amended to date, as well as other items
we deem material to this opinion. As to various questions of fact material to
our opinion, we have relied upon statements of officers and representatives of
the Fund.
The Fund is authorized by the Declaration to issue an
unlimited number of shares of beneficial interest, all without par value, and
has designated, and proposes to issue, two series of shares as the Choice Focus
Fund series and Choice Balanced Fund series. The Declaration also empowers the
Board to designate any additional series or classes and allocate shares to such
series or classes.
The Fund has filed with the U.S. Securities and Exchange
Commission, a registration statement under the Securities Act, which
registration statement is deemed to register an indefinite number of shares of
the Fund pursuant to the provisions of Section 24(f) of the Investment Company
Act. You have further advised us that the Fund will file a Notice pursuant to
Rule 24f-2 under the Investment Company Act each year in order to perfect the
registration of
<PAGE> 2
The Choice Funds
September 29, 1999
Page 2
the shares sold by the Fund during each fiscal year during which such
registration of an indefinite number of shares remains in effect.
You have also informed us that the shares of the Fund will be
sold in accordance with the Fund's usual method of distributing its registered
shares, under which prospectuses are made available for delivery to offerees and
purchasers of such shares in accordance with Section 5(b) of the Securities Act.
Based upon the foregoing information and examination, so long
as the Fund remains a valid and subsisting entity under the laws of its state of
organization, and the registration of an indefinite number of shares of the Fund
remains effective, the authorized shares of the Fund when issued for the
consideration set by the Board of Trustees pursuant to the Declaration, and
subject to compliance with Rule 24f-2, will be legally outstanding, fully-paid,
and non-assessable shares, and the holders of such shares will have all the
rights provided for with respect to such holding by the Declaration and the laws
of the State of Delaware.
We hereby consent to the use of this opinion, in lieu of any
other, as an exhibit to the Registration Statement of the Fund, covering the
registration of the shares of the Fund under the Securities Act and the
applications, registration statements or notice filings, and amendments thereto,
filed in accordance with the securities laws of the several states in which
shares of the Fund are offered, and we further consent to reference in the
registration statement of the Fund to the fact that this opinion concerning the
legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY:
-----------------------------------------
Robert K. Fulton
<PAGE> 1
EXHIBIT 99.j
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (the "Registration Statement") of our reports dated
October 5, 1999, relating to the financial statements of the Choice Funds, Focus
Fund and Balanced Fund, which appear in such Statements of Additional
Information, and to the incorporation by reference of our reports into the
Prospectuses which constitute part of this Registration Statement. We also
consent to the reference to us under the heading "Independent Accountants" in
such Statements of Additional Information.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
October 6, 1999
<PAGE> 1
EXHIBIT 99.l
September 30, 1999
Choice Funds
5299 DTC Boulevard
Englewood, Colorado 80111
Re: Subscription for the Purchase of Shares of Beneficial Interest
Of the Choice Focus Fund
Dear Sirs:
The undersigned hereby subscribes to purchase 10,000 shares of
beneficial interest of the Choice Focus Fund, at a price of $10.00 per share,
and agrees to pay therefor upon demand in cash the amount of $100,000.00.
Very truly yours,
- ----------------------------
By:
------------------------
<PAGE> 1
EXHIBIT 99.m
DISTRIBUTION PLAN OF CHOICE FUNDS
The following Distribution Plan (the "Plan") has been adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act") by Choice Funds (the "Trust") for the use of the Choice Balanced Fund and
Choice Focus Fund series of the Trust (each a "Fund" and, collectively, the
"Funds"). The Plan has been approved by a majority of the Board of Trustees of
the Trust, including a majority of the Trustees who are not interested persons
of the Trust and who have no direct or indirect financial interest in the
operation of the Plan (the "non-interested trustees"), cast in person at a
meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board of Trustees concluded that adoption of
the Plan would be prudent and in the best interests of the Fund and its
shareholders. Such approval included a determination that in the exercise of
their reasonable business judgment and in light of their fiduciary duties, there
is a reasonable likelihood that the Plan will benefit each Fund and its
shareholders.
The provisions of the Plan are:
1. (a) The Trust shall pay fees and expenses for the distribution and
promotion of the shares of each Fund at the annual rate of up to .25% of each
respective Funds' average daily net assets. Such fees shall be paid on a monthly
or quarterly basis as determined by the Board. In no event, shall the payments
made under this Plan, plus any other payments deemed to be made pursuant to the
Plan, exceed the amount permitted to be paid pursuant to the Conduct Rules of
the National Association of Securities Dealers, Inc.
(b) The amount set forth in paragraph 1(a) of this Plan shall be
paid in connection with any activities or expenses primarily intended to result
in the sale of the shares of the Funds, including but not limited to, the
printing of prospectuses and reports used for sales purposes; expenses of
preparation, printing and distribution of sales literature and advertisements
and related expenses; compensation to broker-dealers that have entered into
dealer agreements with the Trust or its distributor, which form of agreement has
been approved from time to time by the Board, including the non-interested
trustees, and to financial institutions and other entities that make shares of
the Funds available to their customers; compensation to and expenses of the
Trust's distributor; and the cost of implementing and operating the Plan.
Payments under this plan are not tied exclusively to actual distribution
expenses and the payments may exceed distribution expenses actually incurred.
2. The Investment Manager and Distributor shall collect and monitor the
documentation of payments made under Paragraph 1, and shall furnish to the Board
of Trustees of the Trust, for their review, on a quarterly basis, a written
report of the monies reimbursed to them and others, and the purpose of any such
payment made, under the Plan as to each Fund, and shall furnish the Board of
Trustees of the Trust with such other information as the Board may reasonably
request in connection with the payments made
<PAGE> 2
under the Plan as to each Fund in order to enable the Board of Trustees to make
an informed determination of whether the Plan should be continued.
3. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Trust's Board of Trustees, including the non-interested trustees, cast in
person at a meeting called for the purpose of voting on the Plan.
4. The Plan, or any agreements entered into related to this Plan, may
be terminated at any time, without penalty, on not more than sixty (60) days'
written notice by (a) the vote of a majority of the outstanding voting
securities of a Fund, (b) the vote of a majority of the non-interested trustees,
on not more than sixty (60) days' written notice, or (c) the Distributor, and
shall terminate automatically in the event of any act that constitutes an
assignment of the investment management agreement between the Trust on behalf of
a Fund and the Investment Manager.
5. The Plan and any agreements entered into pursuant to this Plan may
not be amended to increase materially the amount to be spent by the Trust for
distribution pursuant to Paragraph 1 above without approval by a majority of the
Trust's outstanding voting securities.
6. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested trustees cast in
person at a meeting called for the purpose of voting on any such amendment.
7. So long as the Plan is in effect, the selection and nomination of
the non-interested trustees of the Trust shall be committed to the discretion of
such non-interested trustees.
8. This Plan shall take effect on the 31st day of October, 1999.
Choice Funds
By:
----------------------------------------
Sunstone Distribution Services, LLC
By:
----------------------------------------
<PAGE> 3
SUNSTONE DISTRIBUTION SERVICES, LLC
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
DEALER ASSISTANCE AGREEMENT FOR THE SALE OF SHARES
OF THE CHOICE FUNDS
Gentlemen:
We have entered into a Distribution Agreement with the Choice Funds (the
"Trust"), a business trust registered as a management investment company under
the Investment Company Act of 1940 (the "1940 Act"), in connection with its two
separate series, and such other series as may be added to the Trust in the
future (collectively the "Funds"), pursuant to which we have been appointed
distributor of shares of the Funds.
This Dealer Agreement (the "Agreement") has been adopted pursuant to Rule 12b-1
under the 1940 Act by the Trust on behalf of the Funds under a Distribution Plan
(the "Plan") adopted pursuant to said Rule. This Agreement, being made between
Sunstone Distribution Services, LLC (the "Distributor") and the undersigned
authorized dealer, relates to the services to be provided by the authorized
dealer and for which it is entitled to receive payments pursuant to the Plan.
1. To the extent that you provide distribution assistance [and/or account
maintenance and personal services] in accordance with the Plan and applicable
rules of the National Association of Securities Dealers, Inc. (the "NASD") to
those of your customers who may from time to time directly or beneficially own
shares of the Funds, you shall be entitled to a fee periodically pursuant to the
Plan.
2. The fee paid with respect to each applicable Fund will be computed daily and
paid quarterly at an annual rate of up to ___% of the average net asset value of
the shares of such Fund purchased or acquired by your firm as nominee for your
customers, or are owned by those customers of your firm whose records, as
maintained by the Fund or its transfer agent, designate your firm as the
customers' dealer of record or holder of record (the "Subject Shares"). For
purposes of determining the fees payable under this Agreement, the average daily
net asset value of the Subject Shares will be computed in the manner specified
in the Funds' Registration Statement ("Registration Statement") (as the same is
in effect from time to time) in connection with the computation of the net asset
value of shares for purposes of purchases and redemptions.
3. The total of the fees calculated for each respective Fund for any period with
respect to which such calculations are made will be paid within 45 days after
the close of such period. We reserve the right at any time to impose minimum fee
payment requirements before any periodic payments will be made to you hereunder.
In the event payment due for a period is less than $___, such payment will not
be made but will be included with the next scheduled payment when the aggregate
due exceeds $____.
<PAGE> 4
4. In our discretion payment may be withheld with respect to the Subject Shares
purchased by you and redeemed or repurchased by a Fund within seven (7) business
days after the date of the confirmation of such purchase.
5. You shall furnish us and the Funds with such information as shall reasonably
be requested either by the Trustees of the Funds or by us with respect to the
services provided and the fees paid to you pursuant to this Agreement, including
but not limited to blue sky sales reports. We shall furnish the Trustees of the
Funds, for their review on a quarterly basis, a written report of the amounts
expended under the Plan by us and the purposes for which such expenditures were
made.
6. All orders shall be placed either directly with the Funds' Transfer Agent in
accordance with such procedures as may be established by us or the Transfer
Agent, or with the Transfer Agent through the facilities of the National
Securities Clearing Corporation ("NSCC"), if available, in accordance with the
rules of the NSCC. In addition, all orders are subject to acceptance or
rejection by the Distributor or the relevant Fund in the sole discretion of
either. Purchase orders shall be subject to receipt by the Trust's Transfer
Agent of all required documents in proper form and to the minimum initial and
subsequent purchase requirements set forth in the Registration Statement.
7. For all purposes of this Agreement you will be deemed to be an independent
contractor and neither you nor any of your employees or agents shall have any
authority to act in any matter or in any respect as agent for the Funds or for
the Distributor. Neither you nor any of your employees or agents are authorized
to make any representation concerning shares of the Funds except those contained
in the then current Prospectus for the Funds. By your written acceptance of this
Agreement, you agree to and do release, indemnify and hold us harmless from and
against any and all liabilities, losses, claims, demands, charges, costs and
expenses (including reasonable attorneys fees) resulting from requests,
directions, actions or inactions of or by you or your officers, employees or
agents or the purchase, redemption, transfer or registration of shares of the
Funds (or orders relating to the same) by you or your clients, or from your
breach of any of the terms of this Agreement. Notwithstanding anything herein to
the contrary, the foregoing indemnity and hold harmless agreement shall
indefinitely survive the termination of this Agreement.
8. We may enter into other similar agreements with any other person without your
consent.
9. You represent that you are a member of the NASD and agree to maintain
membership in the NASD. You agree to abide by all the rules and regulations of
the Securities and Exchange Commission and the NASD which are binding upon
underwriters and dealers in the distribution of the securities of open-end
investment companies, including without limitation, Section 2830 of the NASD
Conduct Rules, all of which are incorporated herein as if set forth in full. You
shall comply with all applicable laws including state and Federal laws and the
rules and regulations of authorized regulatory agencies. You will not sell or
offer for sale shares of any Fund in any state or jurisdiction where (i) you are
not qualified to act as a dealer or (ii) the shares are not qualified for sale,
including under the Blue Sky laws and regulations, except for jurisdictions in
which they are exempt from qualification. You agree to notify us immediately if
your license or registration to act as a broker-dealer is revoked or suspended
by any Federal, self-
<PAGE> 5
regulatory or state agency. If you are not a member of the NASD but are a dealer
subject to the laws of a foreign country, you agree to conform to the rules of
fair practice of such association. Notwithstanding the foregoing, we do not
assume any responsibility in connection with your registration under the laws of
the various states or jurisdictions or under federal law or your qualification
under any applicable law or regulation to offer or sell shares. You agree to
indemnify us and the Funds against any claim, liability, expense or loss in any
way arising out of any sale or exchange of shares by you in any state or
jurisdiction in which you are not so registered or qualified.
10. You represent and warrant that you are a member of the Securities Investor
Protection Corporation ("SIPC") in good standing and agree to notify us of any
changes in your status with the SIPC. Notwithstanding the aforementioned, you
agree to make a notation on all confirmations for transactions stating, when
appropriate, that you are not a member of the SIPC as required by Rule 10b-10 of
the Securities Exchange Act of 1934.
11. You agree to maintain all records required by law relating to transactions
involving the shares, and upon the request of us, or the Trust, promptly make
such of these records available to us or the Trust's administrator as are
requested. In addition you hereby agree to establish appropriate procedures and
reporting forms and/or mechanisms and schedules in conjunction with us and the
Trust's administrator, to enable the Trust to identify the location, type of,
and sales to all accounts opened and maintained by your customers or by you on
behalf of your customers.
12. This Agreement may be terminated with respect to any Fund at any time
without payment of any penalty, upon notice to the other party, by the
Distributor or the vote of a majority of the Trustees of such Fund who are not
interested persons of that Fund (the "Independent Trustees") or by a vote of a
majority of the Fund's outstanding shares. It will be terminated, without
notice, by any act which terminates either the Distribution Agreement with us or
the Distribution [and Service] Plan, upon your expulsion or suspension from the
NASD, and in any event, it shall terminate automatically in the event of its
assignment as that term is defined in the 1940 Act. We may in our sole
discretion modify or amend this Agreement upon written notice to you of such
modification or amendment, which shall be effective on the date stated in such
notice.
13. The provisions of the Plan and the Distribution Agreement, insofar as they
relate to our obligations and the payment of fees hereunder, are incorporated
herein by reference. This Agreement shall become effective upon acceptance and
execution by us. Unless sooner terminated as provided herein, this Agreement
shall continue in full force and effect as long as the continuance of the Plan
and this related Agreement are approved at least annually by a vote of the
Trustees, including a majority of the Independent Trustees, cast in person at a
meeting called for the purpose of voting thereon. All communications to us
should be sent to the address shown on the first page of this Agreement. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
<PAGE> 6
14. This Agreement shall be construed in accordance with the laws of the State
of Wisconsin, excluding the laws on conflicts of laws.
- -------------------------------------- SUNSTONE DISTRIBUTION SERVICES, LLC
Name of Dealer (Please Print or Type)* 207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
- --------------------------------------
Address of Dealer
- --------------------------------------
By: By:
----------------------------------- -----------------------------------
Authorized Officer Authorized Officer
----------------------------------- -----------------------------------
Print Name Print Name
Date: Date:
--------------------------------- -------------------------------
Phone :
-------------------------------
*NOTE: Please sign and return both copies of this Agreement to Sunstone
Distribution Services, LLC, Attention ___________. Upon acceptance,
one countersigned copy will be returned to you for your files.
