<PAGE> 1
As filed with the Securities and Exchange Commission on March 31, 2000
Securities Act Registration No. 333-83419
Investment Company Act Registration No. 811-09485
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
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Post-Effective Amendment No. 1 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2
CHOICE FUNDS
(Exact Name of Registrant as Specified in Charter)
5299 DTC BOULEVARD, SUITE 1150
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, SUITE 1150
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
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):
[X] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b)
[ ] ON PURSUANT TO PARAGRAPH (b)
------
[ ] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(1)
[ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(2)
[ ] ON PURSUANT TO PARAGRAPH (a)(2) OF RULE 485.
-------
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE
FOR A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
<PAGE> 2
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CHOICE
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P R O S P E C T U S
APRIL 1, 2000
FOCUS FUND
BALANCED FUND
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.
Choice Funds
P.O. Box 759 - 207 East Buffalo Street - Suite 400
Milwaukee, WI 53202
(800) 392-7107
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TABLE OF CONTENTS
THE FUNDS
FUND OVERVIEW........................................................... 1
FOCUS FUND......................................................... 1
BALANCED FUND...................................................... 2
FUND PERFORMANCE........................................................ 4
FUND FEES AND EXPENSES.................................................. 4
INVESTMENT PRACTICES AND RISKS.......................................... 5
PRINCIPAL RISKS.................................................... 5
OTHER INVESTMENT PRACTICES AND RISKS............................... 8
MANAGEMENT OF THE FUNDS
MANAGEMENT.............................................................. 9
INVESTMENT ADVISER................................................. 9
PORTFOLIO MANAGER.................................................. 9
BUYING AND SELLING FUNDS
BUYING, SELLING AND EXCHANGING SHARES................................... 10
BEFORE YOU INVEST.................................................. 10
PURCHASING SHARES.................................................. 11
SELLING SHARES..................................................... 13
EXCHANGING SHARES.................................................. 15
MAKING CHANGES TO YOUR ACCOUNT..................................... 16
ADDITIONAL INFORMATION
SPECIAL FEATURES AND SERVICES........................................... 17
OTHER SHAREHOLDER INFORMATION .......................................... 18
DIVIDENDS, DISTRIBUTIONS AND TAXES...................................... 19
<PAGE> 4
FUND OVERVIEW
FOCUS FUND
INVESTMENT GOAL
The Focus Fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
The Focus Fund will invest primarily in the common stocks of companies that the
portfolio manager believes have superior potential for earnings growth. The
Fund's portfolio will typically consist of a core of 20-30 common stocks. As a
result, the Fund will be non-diversified. 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. 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 portfolio manager may often sell portfolio
stocks quickly to respond to short-term market price movements, and expects to
actively trade the portfolio in pursuit of the Fund's investment goal. Due to
this and the Fund's relatively small number of holdings, the Fund's annual
portfolio turnover rate will be higher than that of many other mutual funds.
PRINCIPAL RISKS OF INVESTING
There are two basic risks for all mutual funds that invest in stocks -
management risk and market risk. Management risk means that the portfolio
manager's stock selections and other investment decisions may produce losses or
may not achieve the Fund's investment objectives. Market risk means that the
price of common stocks may move up or down in response to many factors. As a
result of these two risks, the price of the Fund's investments may go up or down
and you could lose money on your investment.
The 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.
Investment grade securities rated in the lowest investment grade category (i.e.,
BBB/Baa) have speculative characteristics. Investments in securities that are
below investment grade (i.e., junk bonds) carry greater risks than investments
in investment grade securities. In particular, issuers
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of lower rated bonds are less financially secure, are less likely to repay such
bonds and are more likely to be hurt by interest rate movements.
The Focus Fund is a non-diversified portfolio, which means that it will 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 number of companies with similar characteristics. The
types of companies in which the Fund's assets may be invested may underperform
other companies with different characteristics or the market as a whole. Because
of these factors, the Fund's share price may fluctuate more than most equity
funds and the market in general.
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 Focus Fund, please see "Investment Practices
and Risks," on page 5.
BALANCED FUND
INVESTMENT GOALS
The Balanced Fund's investment goals are capital appreciation and current
income.
PRINCIPAL INVESTMENT STRATEGIES
The Balanced 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 balanced 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.
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Fixed Income Securities: The Balanced 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 grate (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
expectation 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 RISK 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 selection and other investment decisions may produce losses or
may not achieve the Fund's investment objectives. Market risk means that the
price of common stocks may move up or down in response to many factors.
Fixed-income securities in which the Fund invests are also subject to credit
risk and interest rate risk. 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
investment 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 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 below investment grade (i.e., junk bonds)
carry greater risks than investments in investment grade securities. In
particular, issuers of lower rated bonds are less financially secure, are less
likely to repay such bonds 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 government
entity.
For a more detailed discussion of these principal investment risks, as well as
additional risks that apply to the Balanced Fund, please see "Investment
Practices and Risks," on page 5.
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FUND PERFORMANCE
The Focus Fund commenced operations on October 31, 1999, and has a limited
operating history. The Balanced Fund had not commenced operations as of the date
of this prospectus and, therefore, has no performance information to report.
Information on each Fund's performance will be included in future amendments to
this prospectus and in periodic reports to shareholders.
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 either
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. A
Fund's operating expenses will vary from year to year.
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the Funds.
<TABLE>
<CAPTION>
--------------------------------------------------------------- -------------- -------------
SHAREHOLDER FEES FOCUS FUND BALANCED
(fees paid directly from your investment) FUND
--------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Wire redemption fee $10 $10
--------------------------------------------------------------- -------------- -------------
--------------------------------------------------------------- -------------- -------------
ANNUAL FUND OPERATING EXPENSES (a) FOCUS FUND BALANCED
(expenses deducted directly from fund assets) FUND
--------------------------------------------------------------- -------------- -------------
Management fee 1.0% 0.75%
--------------------------------------------------------------- -------------- -------------
Distribution (12b-1) fee (b) 0.25% 0.25%
--------------------------------------------------------------- -------------- -------------
Other expenses 0.79% 1.05%
--------------------------------------------------------------- -------------- -------------
Total Annual Fund Operating Expenses 2.04% 2.05%
--------------------------------------------------------------- -------------- -------------
Expense Reimbursement (c) N/A (0.05%)
--------------------------------------------------------------- -------------- -------------
Net Expenses N/A 2.00%
--------------------------------------------------------------- -------------- -------------
</TABLE>
(a) Because the Funds were established on July 16, 1999 and have limited
operating histories, the management fee is the fee to which the adviser is
entitled under its contract with the Funds, 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
Funds) based on the adviser's projections of what those expenses will be in
each Fund's first fiscal year ended October 31, 2000.
(b) The Funds have adopted a Distribution Plan under Rule 12b-1 that permits
each Fund to pay distribution fees for the sale and distribution of its
shares. Because these fees are paid out of a Fund's assets on an ongoing
basis, over time these fees will increase the cost of your investment and
could cost long-term investors in a Fund more than other types of sales
charges.
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<PAGE> 8
(c) Pursuant to an expense limitation agreement between the adviser and the
Balanced Fund, the adviser has agreed to limit the total operating expenses
of the Balanced Fund to an annual rate of 2.00% of the Balanced 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 Funds to the cost of investing in other mutual funds. The example
assumes that:
- - You invest $10,000 for the time periods indicated, and then redeem all
of your shares at the end of those periods;
- - Your investment has a 5% return each year; and
- - Each Fund's operating expenses remain the same for each period.
Your actual costs may be higher or lower, so this example should be used for
comparison only. Based on these assumptions your cost at the end of each period
would be:
<TABLE>
<CAPTION>
- ---------------------------------------- -------------------------------------- --------------------------------------
FUND 1 YEAR 3 YEARS
- ---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Focus Fund $207 $640
- ---------------------------------------- -------------------------------------- --------------------------------------
Balanced Fund $208 $643
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
INVESTMENT PRACTICES AND RISKS
The principal strategies and risks of investing in the Funds 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 Funds may follow, and the risks associated with those particular
practices.
PRINCIPAL RISKS
COMMON STOCKS. Because each 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 Funds are likely to decline
in value. Many factors affect an individual company's performance, such as the
strength of its management or the demand for its products or services. Negative
performance may affect the earnings growth potential anticipated by the
portfolio manager when the individual stock was selected for a Fund's portfolio.
To the extent a Fund invests in stocks of small or unseasoned companies, your
investment is subject to the following additional risks:
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<PAGE> 9
- - 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 a Fund invests may have limited
product lines, markets or financial resources, or may be dependent on a
small management group.
PORTFOLIO TURNOVER. Portfolio securities will be sold without regard to the
length of time they have been held when the portfolio manager believes it is
appropriate to do so in light of a Fund's investment goal. In general, the
greater the volume of buying and selling by a mutual fund, the greater the
impact that brokerage commissions and other transaction costs will have on its
return. High portfolio turnover rates may also cause substantial net short-term
gains and any distributions resulting from such gains will be ordinary income to
you for purposes of federal income tax. The portfolio manager anticipates that
it will actively manage the Funds' portfolios in pursuing the Funds' respective
investment strategies.
CONVERTIBLE 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 Funds will not invest in
defaulted securities, they may invest in convertible securities of all other
grades, including securities rated as low as C. To the extent a 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. To the extent that the portfolio manager invests assets of the
Funds in convertible securities that are not investment grade, your investment
is subject to additional risk.
THE FOLLOWING ADDITIONAL PRINCIPAL RISKS APPLY TO AN INVESTMENT IN THE FOCUS
FUND:
NON-DIVERSIFICATION. The Focus 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.
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FOCUS RISK. At any one time, the portfolio manager may focus the Focus Fund's
investments in a number of companies with similar characteristics. If companies
with these types of characteristics underperform companies with different
characteristics or the market as a whole, the potential negative impact to the
Fund could be magnified. As the portfolio manager allocates more of the Fund's
portfolio holdings to companies with similar characteristics, the Fund's
performance will be more susceptible to any economic, business or other
developments that generally affect that those types of companies.
THE FOLLOWING ADDITIONAL PRINCIPAL RISKS APPLY TO AN INVESTMENT IN THE BALANCED
FUND:
FIXED-INCOME SECURITIES. To the extent that the portfolio manager invests assets
of the Balanced 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.
- - 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.
MORTGAGE- AND ASSET-BACKED SECURITIES. The Balanced Fund may purchase
residential and commercial mortgage-backed as well as other asset-backed
securities. The Fund will only invest in mortgage-backed securities that are
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or in privately issued mortgaged-backed or asset-backed
securities that are rated in the top two categories (i.e., AAA/AA) by a
nationally recognized rating agency. In addition to credit and market risk,
mortgage- and asset-backed securities involve prepayment risk because the
underlying assets (loans) may be prepaid at any time.
The value of these securities may also be changed because of actual or perceived
changes in the creditworthiness of the originator, the servicing agent, the
financial institution providing the credit support, or the counterparty. Like
other fixed-income securities, when interest rates rise, the value of an
asset-backed security will generally decline. However, when interest rates
decline, the value of mortgage-backed security with prepayment features may not
increase as
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<PAGE> 11
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.
OTHER INVESTMENT PRACTICES AND RISKS
FOREIGN SECURITIES. Each Fund may invest without limit in foreign securities in
an effort to achieve its investment objective; however, neither Fund intends to
allocate a significant portion of its assets to this non-principal strategy. To
the extent a 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 Focus Fund is capital
appreciation. The investment objectives of the Balanced Fund are capital
appreciation and current income. Each Fund's objective may be changed by the
Funds' board of trustees without shareholder approval. You will receive advance
written notice of any material changes to your Fund's investment objective.
TEMPORARY DEFENSIVE POSITIONS. Each 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 Funds 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 a Fund. To the extent a Fund holds cash
or invests defensively in short-term instruments, it may not achieve its
investment objective.
MANAGEMENT
INVESTMENT ADVISER
The Funds have 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 Funds' 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
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<PAGE> 12
experience as a portfolio manager. In addition to the Funds, the adviser will
provide investment management services to private accounts.
Under the investment advisory agreement, the adviser manages the Funds'
investments and business affairs, subject to the supervision of the Funds' board
of trustees. The Focus Fund has agreed to pay the adviser an annual management
fee of 1.0% of the Fund's average daily net assets, and the Balanced 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.
Pursuant to an expense limitation agreement between the adviser and the Funds,
the adviser has agreed to limit the total operating expenses of the Focus Fund
and the Balanced Fund, respectively, to an annual rate of 2.25% and 2.00% of
each Fund's average net assets until October 31, 2000. Although the Focus Fund's
expenses are estimated to be lower than 2.25% of the Focus Fund's average daily
net assets, the expense limitation would apply in the event the Focus Fund's
expenses exceed 2.25% for any reason. After October 31, 2000, the expense
limitation may be terminated at any time.
PORTFOLIO MANAGER
Patrick S. Adams is the portfolio manager for the Funds. As portfolio manager,
he is responsible for the day to day management of the Funds and the selection
of the Funds' investments. Prior to organizing the adviser and managing the
Funds, 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. Adams 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 Funds.
Please read it carefully before you decide to invest.
ACCOUNT REGISTRATION. Once you have decided to invest in the Funds, you need to
select the appropriate form of account registration. There are many different
types of mutual fund
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<PAGE> 13
ownership. How you register your account with the Funds can affect your legal
interests, as well as the rights and interests of your family and beneficiaries.
You should always consult with your legal and/or tax adviser to determine what
form of account registration best meets your needs.
Available forms of registration include:
- - Individual ownership. If you have reached the legal age of majority in
your state of residence, you may open an individual account.
- - Joint ownership. Two or more individuals may open an account together
as joint tenants with right of survivorship, tenants in common or as
community property.
- - Custodial account. You may open an account for a minor under the Uniform
Gift to Minors Act/Uniform Transfers to Minors Act for your state
of residence.
- - Business/trust ownership. Corporations, trusts, charitable organizations
and other businesses may open accounts.
- - IRAs and other tax-deferred accounts. The Funds offer a variety of
retirement 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 Funds 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 a Fund's
shares is called the Fund's net asset value (NAV) per share. Each Fund
calculates NAV by taking the total value of its assets, subtracting its
liabilities, and dividing the total by the number of Fund shares that are
outstanding. Each Fund calculates its NAV as of the close of trading on the New
York Stock Exchange (usually 4:00 p.m. Eastern time) on each day the Exchange is
open for trading. The Funds do 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 Funds' transfer agent, or other financial intermediary with
the authority to accept orders on the Funds' behalf.
The value of a Fund's assets is based on the current market value of its
investments. For securities with readily available market quotations, the Funds
use those quotations to price a security. If a security does not have a readily
available market quotation, the Funds value the security based on fair value, as
determined in good faith in accordance with the guidelines
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<PAGE> 14
established by the Funds' board of trustees. The Funds 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 a 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 Funds or through a broker-dealer or other
institution that the Funds have authorized to sell shares. To open an account or
buy additional shares from the Funds, just follow these steps:
<TABLE>
<CAPTION>
- ------------------------------------------------------- -----------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN EXISTING ACCOUNT
- ------------------------------------------------------- -----------------------------------------------------
<S><C> <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 slip,
- - Make your check payable to "The Choice please reference your name, account
Funds." The Funds do not accept cash, third number and address on your check.
party 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 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.
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
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<PAGE> 15
<TABLE>
<S><C> <C>
BY WIRE: BY WIRE:
- - To purchase shares by wire, the transfer Send your 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>
If your purchase request is received by the Funds' 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 your tax identification number information. 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 Funds do not issue certificates for shares.
- - If your check does not clear, your purchase will be cancelled. You will
be responsible for any resulting losses or expenses (including a $20 fee)
incurred by the Funds or the transfer agent. The Funds may redeem shares
you own in this or another identically registered Choice Funds account as
reimbursement for any such losses.
- - You must provide the Funds with a Social Security Number or Taxpayer
Identification Number before your account can be established. If you do not
certify the accuracy of your Social Security or Taxpayer Identification
Number on your account application, the Funds will be required to withhold
Federal income tax at a rate of 31% from all of your dividends, capital
gain distributions and redemptions.
- - The Funds are only offered and sold to residents of the United States.
Your application will be accepted only if it contains a U.S. address. This
prospectus should not be considered a solicitation to buy or an offer to
sell shares of the Funds in any jurisdiction where it would be unlawful to
do so under the securities laws of that jurisdiction.
- - The Funds will not accept your application if you are investing for
another person as attorney-in-fact. The Funds will not accept applications
that list "Power of Attorney" or "POA" in the registration section.
- - Once you place your order, you may not cancel or revoke it. The Funds
may reject a purchase order for any reason.
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<PAGE> 16
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS. In addition to purchasing shares
from the Funds, you may invest through a financial service agent. Financial
advisers, broker-dealers and other financial service agents may charge
transaction and other fees and may set different minimum investments or
limitations on buying and selling shares, than those described in the
prospectus. In addition, these intermediaries may place limits on your ability
to use services the Funds offer.
SELLING SHARES
You may sell your shares on any day the Funds are open for business by following
the instructions below. You may elect to have redemption proceeds sent to you by
check, wire or electronic funds transfer. The Funds normally pay redemption
proceeds within two business days, but may take up to seven days. You can redeem
shares purchased by check at any time. However, while a 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 Funds and
their 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 $1,000 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 the request includes the Fund's name and
your account number, the amount of the transaction (in dollars or shares), the
signatures of all owners exactly as registered on the account, and any required
signature guarantees. Redemption requests sent by facsimile will not be honored.
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<PAGE> 17
Please note that the Funds may require additional documents for redemptions by
corporations, executors, administrators, trustees and guardians. If you have any
questions about how to redeem shares, or to determine if a signature guarantee
or other documentation is required, please call 1-800-392-7107.
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 Funds reserve the right to suspend the redemption of Fund shares
when the securities markets are closed, trading is restricted for any
reason, an emergency exists and disposal of securities owned by a Fund is
not reasonably practicable, a Fund cannot fairly determine the value of its
net assets or the Securities and Exchange Commission permits the suspension
of the right of redemption or postpones the date of payment of a
redemption.
- - If the amount you redeem is large enough to affect a Fund's operations,
the Fund may pay your redemption "in kind." This means that the Fund may pay
you in portfolio securities rather than cash. If this occurs, you may incur
transaction costs when you sell the securities you receive.
REDEEMING SHARES THROUGH THIRD PARTIES. A broker-dealer, financial institution
or other service provider may charge a fee to redeem your Fund shares. If the
service provider is the shareholder of record, the Funds may accept redemption
requests only from that provider.
TELEPHONE TRANSACTIONS
- - In times of drastic economic or market conditions, you may have difficulty
selling shares by telephone. The Funds reserve the right to temporarily
discontinue or limit the telephone purchase, redemption or exchange
privileges at any time during such periods. If you are unable to reach the
Funds by telephone, please send your redemption request via overnight
courier.
- - The Funds reserve the right to refuse a telephone redemption request
if they believe it is advisable to do so. The Funds use procedures reasonably
designed to confirm that telephone redemption instructions are genuine. These
may include recording telephone transactions, testing the identity of the
caller by asking for account information and sending prompt written
confirmations. The Funds may implement other procedures from time to time. If
these procedures are followed, the Funds and their service providers will not
be liable for any losses due to unauthorized or fraudulent instructions.
SIGNATURE GUARANTEES. The Funds 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;
14
<PAGE> 18
- - 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 Funds require signature guarantees to protect both you and the Funds from
possible fraudulent requests to redeem shares. You can obtain a signature
guarantee from most broker-dealers, national or state banks, credit unions,
federal savings and loan associations or other eligible institutions. A notary
public is not an acceptable signature guarantor.
SMALL ACCOUNTS. All Choice Funds account owners share the high cost of
maintaining accounts with low balances. To reduce this cost, the Funds reserve
the right to close an account when a redemption or exchange leaves your account
balance below $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
FUND TO FUND EXCHANGE. You may exchange shares in one Fund for shares in another
Fund in writing or by calling the transfer agent at 1-800-392-7107 between 8:00
a.m. and 8:00 p.m. Eastern time. The minimum amount you may exchange is $2,500
for initial exchanges and $100 for subsequent exchanges.
The following additional rules and guidelines apply:
- - Each account must be registered identically;
- - You must meet the Fund's initial and subsequent investment minimums;
- - You must obtain and read the prospectus for the Fund into which you are
exchanging;
- - You may only exchange into Funds that are legally available for sale in
your state.
If your order is received before close of trading on the New York Stock Exchange
(typically 4:00 p.m. Eastern time), it will be processed at that day's NAV.
Please note that the exchange of shares results in the sale of one Fund's shares
and the purchase of another Fund's shares. As a result, an exchange could result
in a gain or loss and become a taxable event for you.
MONEY MARKET EXCHANGES. You may exchange all or a portion of your shares in a
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 a 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
Funds.
15
<PAGE> 19
When you exchange from a Fund into the Money Market Fund or make an initial
purchase, dividends begin to accrue the day after the exchange or purchase. When
you exchange a partial balance out of the Money Market Fund, your proceeds will
exclude accrued and unpaid income from the Money Market Fund through the date of
exchange. When exchanging your entire balance from the Money Market Fund,
accrued income will automatically be exchanged into the Fund you exchanged into
when the income is collected and paid from the Money Market Fund, at the end of
the month.
LIMITATIONS ON EXCHANGES. The Funds believe that use of the exchange privilege
by investors utilizing market-timing strategies adversely affects the Funds and
their shareholders. Therefore, the Funds generally will not honor requests for
exchanges by shareholders who identify themselves or are identified as "market
timers." Market timers are investors who repeatedly make exchanges within a
short period of time. The Funds reserve the right to suspend, limit or terminate
the exchange privilege of any investor who uses the exchange privilege more than
six times during any twelve month period, or, in the Funds' opinion, engages in
excessive trading that would be disadvantageous to the Funds or their
shareholders. The Funds may change or temporarily suspend the exchange privilege
during unusual market conditions.
MAKING CHANGES TO YOUR ACCOUNT
You may call or write us to make changes to your account. Common changes
include:
Name changes. If your name has changed due to marriage or divorce, send us a
letter of instruction signed with both your old and new names. Include a
certified copy of your marriage certificate or have your signatures guaranteed.
Address changes. The easiest way to notify us is to return the stub from a
recent confirmation or statement. You can also call the transfer agent with any
changes at 1-800-392-7107.
Transfer of account ownership. Send us a letter including your account number,
the 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 Funds offer a variety of retirement accounts for individuals and
organizations. These accounts may offer you tax advantages. For information on
establishing retirement accounts, please call 1-800-392-7107. You should consult
with your legal and/or tax adviser before you establish a retirement account.
16
<PAGE> 20
The Funds currently accept 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 Funds offer 24-hour, seven days a week access to Fund and account
information via a toll-free line. The system provides total returns, share
prices and price changes for the Funds and gives you account balances and
history (e.g., last transaction, latest dividend distribution). To access the
automated system, please call 1-800-392-7107.
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 Funds. You can terminate your
automatic investment plan at any time by calling the Funds at least 10 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.
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<PAGE> 21
OTHER SHAREHOLDER INFORMATION
SHAREHOLDER COMMUNICATIONS
Confirmations. You will receive a confirmation each time you buy, sell or
exchange Fund shares. Automatic investment plan participants receive quarterly
confirmations of all automatic transactions. Please review your confirmation and
notify us immediately if there are any discrepancies in the information.
Quarterly and annual statements. You will receive a quarterly statement listing
all distributions, purchases and redemptions of Fund shares for the preceding
calendar quarter. Your December statement will include a listing of all
transactions for the entire year.
Semi-annual and annual reports. The Funds send semi-annual and annual reports to
their shareholders. These reports provide financial information on your
investments and give you a "snapshot" of each 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 a 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 Funds send all shareholders a new prospectus. Please
read the prospectus and keep it for future reference.
Form 1099. Each year you will receive a Form 1099-DIV, showing the source of
distributions for the preceding year and a Form 1099-B showing shares you sold
during the year.
Form 5498. If you contributed to an IRA during the year, you will receive a Form
5498 verifying your contribution.
DISTRIBUTION PLAN
The Funds have adopted a plan under Rule 12b-1 that allows the Funds to pay
distribution fees for activities generally intended to result in the sale of
their shares. These activities include advertising and compensation to the
distributor and others for sales and marketing activities and materials. Under
the plan, each 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 a Fund, its
expenses will increase. Because 12b-1 fees are paid out of a Fund's net assets
on an ongoing basis, over time these fees will increase the cost of your
investment and could cost long-term investors more than paying other types of
sales charges.
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS AND SUB-AGENTS
The Funds may authorize one or more broker-dealers or other financial services
agents or sub-agents to accept purchase, redemption and exchange orders on the
Funds' behalf. In these cases, a Fund will be deemed to have received an order
when an authorized financial services agent or sub-agent accepts the order, and
your order will be priced at the Fund's NAV next computed after it is received
in good order by the financial services agent or sub-agent. Designated financial
services agents and sub-agents are responsible for transmitting accepted orders
and
18
<PAGE> 22
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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Funds intend to distribute virtually all of their net investment income and
net realized capital gains at least once a year. The Funds will automatically
reinvest your dividends and capital gain distributions in additional Fund shares
unless you elect to have them paid to you in cash. If you elect to have your
distributions paid in cash, the Funds will send a check to your address of
record.
A dividend from net investment income represents the income a Fund earns from
dividends and interest paid on its investments, after payment of the Fund's
expenses. A capital gain is the increase in the value of a security that a Fund
holds. A 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 Funds will distribute any net realized capital gains annually, and the Focus
Fund will distribute dividends annually, normally in December. The Balanced Fund
will distribute dividends on a quarterly basis, typically in March, June,
September and December. If a Fund is not able to correctly estimate capital
gains, it will make an additional capital gains distribution in the first
quarter of the next calendar year.
Buying a dividend. Unless you invest in a tax-deferred retirement account (such
as an IRA), it is not to your advantage to buy shares of a Fund shortly before
it makes a distribution. This is known as "buying a dividend." Buying a dividend
can cost you money in taxes because you will receive, in the form of a taxable
distribution, a portion of the money you just invested (even if you elected to
have it reinvested in additional Fund shares). To avoid "buying a dividend,"
check a Fund's distribution schedule before you invest by calling
1-800-392-7107.
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 a Fund's net short-term
capital gains are taxable to you as ordinary income. Distributions of a Fund's
net long-term capital gains are taxable to you as long-term capital gains. This
is true regardless of how long you have held your Fund shares.
If you sell or exchange your shares, any gain or loss is a taxable event. You
may also be subject to state and local income taxes on dividends or capital
gains from the sale or exchange of Fund shares.
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<PAGE> 23
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 a Fund.
20
<PAGE> 24
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 Funds. It is incorporated by reference into this prospectus, which
means that it is legally part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
The annual and semi-annual reports discuss the Funds' holdings. The annual
report describes the market conditions, economic trends and investment
strategies that significantly affected each 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 Funds, 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 Funds at
the SEC Public Reference Room in Washington, D.C., or download a free text-only
version on the SEC's website at www.sec.gov. Call 1-800-SEC-0330 for information
on the operation of the Public Reference Room. For a fee, the SEC will mail you
a copy of the SAI. Send your request to: SEC Public Reference Room, Washington,
D.C. 20549-6009.
Investment Company Act No. 811-09485
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<PAGE> 25
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
CHOICE FUNDS
FOCUS FUND
BALANCED FUND
This Statement of Additional Information should be read in conjunction
with the Prospectus for the Choice Funds dated April 1, 2000, 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 Funds based solely on the information
contained herein. You may obtain copies of the Prospectus for the Choice Funds
without charge by calling 1-800-392-7107 or by writing to Choice Funds, P.O. Box
759, Milwaukee, Wisconsin 53201-0759.
This Statement of Additional Information is dated April 1, 2000.
<PAGE> 26
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FUND ORGANIZATION................................................................................1
INVESTMENT POLICIES AND PRACTICES................................................................1
Investment Restrictions.................................................................1
Investment Strategies and Risks.........................................................3
MANAGEMENT OF THE FUND...........................................................................26
Trustees and Officers...................................................................26
Control Persons and Principal Holders of Securities.....................................29
Code of Ethics..........................................................................29
INVESTMENT ADVISORY AND OTHER SERVICES...........................................................29
Investment Adviser......................................................................29
Administration and Fund Accounting......................................................30
Transfer Agent and Dividend-Paying Agent................................................31
Custodian...............................................................................31
Distributor.............................................................................32
Legal Counsel ..........................................................................32
Independent Accountants.................................................................32
DISTRIBUTION OF SHARES...........................................................................32
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................................................33
CAPITAL STRUCTURE................................................................................35
TAXES............................................................................................36
General.................................................................................36
Original Issue Discount.................................................................36
Options, Futures and Foreign Currency Forward Contracts; Straddles......................37
Currency Fluctuations - "Section 988" Gains or Losses...................................38
Passive Foreign Investment Companies....................................................39
Distributions...........................................................................39
Disposition of Shares...................................................................40
Back-up Withholding.....................................................................40
Other Taxation..........................................................................41
PURCHASE, REDEMPTION AND PRICING OF SHARES.......................................................41
Determination of Net Asset Value........................................................41
Exchanging Shares.......................................................................42
Retirement Accounts.....................................................................42
Suspension of Redemptions...............................................................42
Redemptions in Kind.....................................................................43
PERFORMANCE INFORMATION..........................................................................43
MISCELLANEOUS....................................................................................45
FINANCIAL STATEMENTS.............................................................................46
APPENDIX A (Description of Securities Ratings)...................................................A-1
</TABLE>
----------------
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectus in connection with the offering made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Funds. The Prospectus does not constitute an
offering by the Funds in any jurisdiction in which such offering may not
lawfully be made.
<PAGE> 27
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 and the Balanced Fund (collectively, the "Funds").
INVESTMENT POLICIES AND PRACTICES
INVESTMENT RESTRICTIONS
The Funds have adopted certain investment restrictions consistent with
their respective investment objectives. Unless otherwise noted, whenever an
investment restriction states a maximum percentage of a Fund's assets that may
be invested in any security or other asset, such percentage restriction will be
determined immediately after and as a result of 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 a Fund's investment limitations except with respect
to the Fund's restrictions on borrowings as set forth in restriction 7 below.
A Fund's fundamental restrictions cannot be changed without the
approval of the holders of the lesser of: (i) 67% of the Fund's shares present
or represented at a shareholders meeting at which the holders of more than 50%
of such shares are present or represented; or (ii) more than 50% of the
outstanding shares of the Fund.
The following are the Funds' fundamental investment restrictions.
Except as otherwise noted, a 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 Funds 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 Funds 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. (Focus Fund only) 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 that 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.
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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.
5. Act as an underwriter or distributor of securities other than shares
of the Funds except to the extent that a Fund's participation as part of a group
in bidding or by bidding alone, for the purchase of permissible investments
directly from an issuer or selling shareholders for the Fund's own portfolio may
be deemed to be an underwriting, and except to the extent that 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 a Fund from
investing in securities that are backed by real estate or issued by companies
that invest or deal in real estate or in participation interests in pools of
real estate mortgage loans exclusive of investments in real estate limited
partnerships).
7. Borrow money, except that a Fund may borrow money from a bank or
affiliated investment companies to the extent permitted by the Investment
Company Act or any exemption therefrom 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. A Fund will not purchase securities while its borrowings exceed 5%
of its total assets.
8. Purchase or sell physical commodities or commodities contracts
unless acquired as a result of ownership of securities or other instruments (but
this shall not prevent a Fund from engaging in transactions involving foreign
currencies, futures contracts, options on futures contracts or options, or from
investing in securities or other instruments backed by physical commodities).
The Trustees have adopted additional investment restrictions for the
Funds. These restrictions are operating policies of the Funds and may be changed
by the Trustees without shareholder approval.
The Funds 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 Funds may vote portfolio securities in the Funds'
discretion.
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3. Acquire illiquid securities if, as a result of such investments,
more than 15% of a 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, a 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 a Fund's 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 a 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 a Fund may only write call options that are
covered and only up to 25% of the Fund's total assets.
7. (Balanced Fund only) 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 Funds, the
Adviser intends to use the industry classification titles in the Standard
Industrial Classification Manual.
A security is considered to be issued by the entity, or entities, whose
assets and revenues back the security. A guarantee of a security is not deemed
to be a security issued by the guarantor when the value of all securities issued
and guaranteed by the guarantor, and owned by a Fund, does not exceed 10% of the
value of the Fund's assets.
INVESTMENT STRATEGIES AND RISKS
The Focus Fund is a non-diversified fund that seeks capital
appreciation. The Balanced Fund is a diversified Fund that seeks both capital
appreciation and current income. The Balanced Fund emphasizes capital
appreciation, but invests at least 25% of its total assets in fixed income
securities and at least 25% of its total assets in equity securities. The
Prospectus
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<PAGE> 30
describes each 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 Funds set forth in the Prospectus under the headings "Fund
Overview" and "Investment Practices and Risks."
TEMPORARY DEFENSIVE MEASURES. Each 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, a 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 (FOCUS FUND). The Focus Fund is classified as a
"non-diversified" Fund under the Investment Company Act, which means that the
Fund is not limited by that Act in the proportion of its assets that it may
invest in the securities of a single issuer. The Fund's net asset value may be
more volatile than that of a more-widely diversified fund because the Fund
invests more of its assets in a smaller number of issuers. Consequently, the
Fund may be more vulnerable to any single economic, political or regulatory
occurrence, and the gains or losses on a single stock will have a greater impact
on the Fund's net asset value.
PORTFOLIO TURNOVER RATE. The Funds may engage in a high level of
trading in seeking to achieve their investment objectives. The portfolio
turnover rate for a 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 a Fund's portfolio are replaced in a one year period. The
calculation excludes all securities, including options, whose maturities or
expiration dates at the time of acquisition are one year or less. Portfolio
turnover may vary greatly from year to year as well as within a particular year,
and may be affected by cash requirements for redemption of shares. The Funds are
not restricted by policy with regard to portfolio turnover and will make changes
in their investment portfolios from time to time as business and economic
conditions as well as market prices may dictate. Higher portfolio turnover rates
result in correspondingly higher brokerage costs for the Funds. Although the
existence of a higher portfolio turnover rate has no direct correlation to the
tax liability of a Fund, sales of certain stocks will result in realized gains,
and, possibly, in increased taxable distributions to shareholders.
INITIAL PUBLIC OFFERINGS. The Funds may invest in a company's
securities at the time of the company's initial public offering (IPO). Companies
involved in IPOs are often smaller and have a limited operating history, which
involves a greater risk that the value of their securities will be impaired
following the IPO. In addition, market psychology prevailing at the time of an
IPO can have a substantial and unpredictable effect on the price of an IPO
security, causing the price of a company's securities to be particularly
volatile at the time of its IPO and for a period thereafter. As a result, the
Funds' Adviser might decide to sell an IPO security more quickly than it would
otherwise, which may result in significant gains or losses to the Funds.
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<PAGE> 31
U.S. GOVERNMENT OBLIGATIONS. The Funds may invest in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities (the
Focus Fund may do so only as a temporary defensive measure). Some of the
obligations purchased by the Funds, 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 a Fund itself.
FOREIGN SECURITIES. The Funds may invest without limitation in
securities of foreign issuers which are publicly traded in the United States,
either directly or through sponsored and unsponsored American Depositary
Receipts ("ADRs"). ADRs typically are issued by a U.S. bank or trust company and
evidence ownership of underlying securities issued by a foreign corporation.
Unsponsored ADRs differ from sponsored ADRs in that the establishment of
unsponsored ADRs is not approved by the issuer of the underlying securities. As
a result, available information concerning the issuer may not be as current or
reliable as the information for sponsored ADRs, and the price of unsponsored
ADRs may be more volatile.
Investments in foreign securities involve special risks and costs in
addition to those inherent in domestic investments. Political, economic or
social instability of the issuer or the country of issue, the possibility of
expropriation or confiscatory taxation, limitations on the removal of assets or
diplomatic developments, and the possibility of adverse changes in investment or
exchange control regulations are among the inherent risks. Foreign companies are
not subject to the regulatory requirements of U.S. companies and, as such, there
may be less publicly available information about such companies. Moreover,
foreign companies are not subject to uniform accounting, auditing and financial
reporting standards and requirements comparable to those applicable to U.S.
companies. Dividends and interest payable on a Fund's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such taxes
are not offset by credits or deductions allowed to investors under U.S. federal
income tax law, such taxes may reduce the net return to shareholders. Because of
these and other factors, securities of foreign companies acquired by a Fund may
be subject to greater fluctuation than securities of domestic companies.
Changes in foreign currency exchange rates will affect the value of a
Fund's portfolio securities that are denominated or quoted in currencies other
than the U.S. dollar, as well as the unrealized appreciation or depreciation of
such investments insofar as U.S. investors are concerned. If the foreign
currency in which a security is denominated appreciates against the U.S. dollar,
the dollar value of the
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<PAGE> 32
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 Funds may
invest in securities of companies with limited operating histories. The Adviser
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 Funds may invest in securities of
companies with small or mid-sized market capitalizations. An investment in
companies with smaller capitalizations involves greater risks than investing in
larger, more established companies. Smaller company stocks may be subject to
more abrupt or erratic price movements, because the stocks are traded in lower
volumes in fewer markets and their issuers are more sensitive to changing
conditions and have less certain growth prospects. Smaller companies in which
the Funds invest may have limited product lines, markets or financial resources,
or may be dependent on a small management group. Smaller companies also may be
less significant factors within their industries and may have difficulty
withstanding competition from larger companies. While smaller companies may be
subject to these additional risks, they may also realize more substantial growth
than larger or more established companies.
SPECIAL SITUATIONS. The Funds may also invest in securities of
companies that have recently experienced or are anticipated to experience a
significant change in structure, management, products or services or other
special situation that may significantly affect the value of their securities.
Examples of special situations are companies being reorganized or merged,
companies emerging from bankruptcy, companies introducing unusual new products
or which enjoy particular tax advantages. Other examples include companies
experiencing changes in senior management, extraordinary corporate events,
significant changes in cost or capital structure or which are believed to be
probable takeover candidates. The opportunity to invest in special situations,
however, is limited and depends in part on the market's assessment of these
companies and their circumstances. By its nature, a "special situation" company
involves to some degree a break with the company's past experience. This creates
greater uncertainty and potential risk of loss than if the company were
operating according to long-established patterns. In addition, stocks of
companies in special situations may decline or not appreciate as expected if an
anticipated change or development does not occur or is not assessed by the
market as favorably as expected.
ILLIQUID AND RESTRICTED SECURITIES. Each 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
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<PAGE> 33
restrictions on their resale ("restricted securities") or because, based upon
their nature or the market for such securities, no ready market is available.
Investments in illiquid securities involve certain risks to the extent that a
Fund may be unable to dispose of such a security at the time desired or at a
reasonable price or, in some cases, may be unable to dispose of it at all. In
addition, in order to resell a restricted security, a Fund might have to incur
the potentially substantial expense and delay associated with effecting
registration. A Fund may have to lower the price, sell other portfolio
securities instead or forego an investment opportunity, any of which could have
a negative impact on Fund management or performance. Because illiquid and
restricted securities may be difficult to sell at an acceptable price, they may
be subject to greater volatility and may result in a loss to a Fund.
The Board has delegated to the Adviser the day-to-day determination of
the liquidity of a security, although it has retained oversight and ultimate
responsibility for such determinations. Although no definite quality criteria
are used, the Adviser considers such factors as (i) the nature of the market for
a security (including the institutional, private or international resale
market), (ii) the terms of these securities or other instruments allowing for
the disposition to a third party or the issuer thereof (e.g., certain repurchase
obligations and demand instruments), (iii) the availability of market quotations
(e.g., for securities quoted in PORTAL system), and (iv) other permissible
relevant factors. Certain securities are deemed illiquid by the Securities and
Exchange Commission, including repurchase agreements maturing in more than seven
days and options not listed on a securities exchange or not issued by the
Options Clearing Corporation. These securities will be treated as illiquid and
subject to the Funds' limitation on illiquid securities. Because an active
market may not exist for illiquid securities, the Funds may experience delays
and additional cost when trying to sell illiquid securities.
Restricted securities may be sold in privately negotiated or other
exempt transactions, qualified non-U.S. transactions, such as under Regulation
S, or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Funds may
be obligated to pay all or part of the registration expenses and a considerable
time may elapse between the decision to sell and the sale date. If, during such
period, adverse market conditions were to develop, a Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in good faith by the Board.
If, through the appreciation of illiquid securities or the depreciation
of liquid securities, a Fund should be in a position where more than 15% of the
value of its net assets are invested in illiquid assets, including restricted
securities which are not readily marketable, the Fund will take such steps as it
deems advisable, if any, to reduce the percentage of such securities to 15% or
less of the value of its net assets.
CONVERTIBLE SECURITIES. The Funds may invest in convertible securities.
A convertible security may be converted either at a stated price or rate within
a specified period of time into a specified number of shares of common stock. By
investing in convertible securities, a Fund seeks the opportunity, through the
conversion feature, to participate in a portion of the capital appreciation of
the common stock into which the securities are convertible, while earning higher
current income than is available from the common stock. Convertible securities
entitle the
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<PAGE> 34
holder to receive interest paid or accrued on debt or the dividend paid on
preferred stock until the convertible securities mature or are redeemed,
converted or exchanged. Prior to conversion, convertible securities have
characteristics similar to ordinary debt securities or preferred stocks in that
they normally provide a stable stream of income with generally higher yields
than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in a corporation's capital structure.
In selecting convertible securities for the Funds, the Adviser will
consider, among other factors, its evaluation of the creditworthiness of the
issuers of the securities; the interest or dividend income generated by the
securities; the potential for capital appreciation of the securities and the
underlying common stocks; the prices of the securities relative to other
comparable securities and to the underlying common stocks; whether the
securities are entitled to the benefits of sinking funds or other protective
conditions; the diversification of a Fund's portfolio as to issuers; and whether
the securities are rated by a rating agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common stock
approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
A Fund may realize capital appreciation from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from a
general lowering of interest rates, or a combination of both. Conversely, a
reduction in the credit standing of an issuer whose securities are held by a
Fund or a general increase in interest rates may be expected to result in
capital depreciation to the Fund.
NON-INVESTMENT GRADE SECURITIES. The Funds have the authority to invest
in convertible debt securities that are of a quality less than investment grade
(so-called "junk bonds"). The Funds have no pre-established minimum quality
standards for convertible securities and may invest in convertible securities of
any quality, including lower rated or unrated securities. However, a 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 no more
than 20% of its net assets at the time of purchase. In addition, investment
grade bonds in which a Fund invests may be downgraded. If convertible securities
purchased by a Fund are downgraded following purchase, or if other circumstances
cause more than 20% of the Fund's
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<PAGE> 35
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 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 Funds might incur additional expenses to
seek recovery. Periods of economic uncertainty and changes would also generally
result in increased volatility in the market prices of these securities and thus
in a Fund's net asset value.
As previously stated, the value of a junk bond security will generally
decrease in a rising interest rate market. If a Fund experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of junk bond securities, a Fund may be forced to liquidate
these securities at a substantial discount. Any such liquidation would reduce
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, a Fund may have to replace
the securities with a lower yielding security, which could result in a lower
return for the Fund.
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<PAGE> 36
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 Funds' 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 Funds 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 Funds to obtain accurate market quotations for purposes of valuing the
Funds. 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 Funds 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 Funds of any single investment, it
does not reduce the overall risk of investing in lower-rated securities.
ZEROS/STRIPS. The Funds may invest in zero coupon bonds or in strips.
Zero coupon bonds are sold at a discount from face value and do not make regular
interest payments. Such bonds pay principal and accreted discount (representing
interest accrued but not paid) at maturity. "Strips" are debt securities that
are stripped of their interest coupons after the securities are issued, but are
otherwise comparable to zero coupon bonds. These securities are issued at a
discount from their face value because interest payments are typically postponed
until maturity. The amount of discount rate varies depending on factors
including the time remaining
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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 Funds 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 Funds' acquisition of the securities and
normally will be within a shorter period of time. A 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
Funds' custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be required to
maintain the value of the securities subject to the agreement in an amount at
least equal to the repurchase price (including accrued interest). Repurchase
agreements may be considered loans to the seller, collateralized by the
underlying securities. The risk to a Fund is limited to the ability of the
seller to pay the agreed upon sum on the repurchase date; in the event of
default, the repurchase agreement provides that 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, a Fund could incur a loss of both principal and interest.
The Adviser monitors the value of the collateral at the time the agreement is
entered into and at all times during the term of the repurchase agreement in an
effort to determine that the value of the collateral always equals or exceeds
the agreed upon repurchase price to be paid to the Fund. If the seller were to
be subject to a federal bankruptcy proceeding, the ability of a Fund to
liquidate the collateral could be delayed or impaired because of certain
provisions of the bankruptcy laws. The Adviser will acquire repurchase
agreements in accordance with procedures established by the Trust's Board of
Trustees that are designed to evaluate the creditworthiness of the other parties
to the repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Funds may purchase and
sell securities on a when-issued or delayed delivery basis. However, the Funds
do not currently intend to purchase or sell securities on a when-issued or
delayed delivery basis, if as a result, more than 5% of their respective 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 Funds) are
purchased or sold by a Fund with payment and delivery taking place in the future
in order to secure what is considered to be an advantageous price or yield.
However, the yield available on a comparable security when delivery takes place
may vary from the yield on the security at the time that the when-issued or
delayed delivery transaction was entered into. Any failure to consummate a
when-issued or delayed delivery transaction may result in a Fund missing the
opportunity to obtain a price or yield considered to be advantageous.
When-issued and delayed delivery transactions may generally be expected to
settle within one month from the date the transactions
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are entered into, but in no event later than 90 days. However, no payment or
delivery is made by a Fund until it receives delivery or payment from the other
party to the transaction.
When a Fund purchases securities on a when-issued basis, it will
maintain in a segregated account with its Custodian cash, U.S. government
securities or other liquid assets having an aggregate value equal to the amount
of such purchase commitments, until payment is made. If necessary, additional
assets will be placed in the account daily so that the value of the account will
equal or exceed the amount of a Fund's purchase commitments.
LENDING OF PORTFOLIO SECURITIES. Each 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, a Fund
will be attempting to generate income through the receipt of interest on the
loan which, in turn, can be invested in additional securities to pursue the
Fund's investment objective. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund.
A 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.
A 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. A 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 Funds 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 Funds' trustees.
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HEDGING TRANSACTIONS. Each Fund is authorized to make limited use of
certain types of futures, forwards and/or options, but only for the purpose of
hedging, that is, to protect against market risk due to market movements that
may adversely affect the value of 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 Funds are 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 Funds on a cost-effective basis, that they
will be used or, if used, will achieve the intended result.
A hedging transaction may partially protect a Fund from a decline in
the value of a particular security or its portfolio generally, although hedging
may also limit 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 a Fund involves the potential for
a loss that may exceed the amount of initial margin the Fund would be permitted
to commit to the contracts under its investment limitation, or in the case of a
call option written by the Fund, may exceed the premium received for the option.
However, a Fund is permitted to use such instruments for hedging purposes only,
and only if the aggregate amount of its obligations under these contracts does
not exceed the total market value of the assets the Fund is attempting to hedge,
such as a portion or all of its exposure to equity securities or its holding in
a specific foreign currency. To help ensure that a 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 Funds utilizing futures transactions,
forward contracts and options are: (a) losses resulting from market movements
not anticipated by the Funds; (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 a 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 a 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, a Fund may only write call options that are
covered and only up to 25% of the Fund's total assets.
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Options. The Funds 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 index
option, settlement does not occur by delivery of the securities comprising the
index. The option holder who exercises the index option receives an amount of
cash if the closing level of the stock index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the stock index and the exercise price of the
option expressed in dollars times a specified multiple. A stock index fluctuates
with changes in the market value of the stocks included in the index. For
example, some stock index options are based on a broad market index, such as the
Standard & Poor's 500 Index or the Value Line Composite Index or a narrower
market index, such as the Standard & Poor's 100. Indexes may also be based on an
industry or market segment, such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. Options on stock indexes are currently traded on
the Chicago Board Options Exchange, the New York Stock Exchange, the American
Stock Exchange, the Pacific Stock Exchange, and the Philadelphia Stock Exchange.
A Fund's obligation to sell an instrument subject to a call option
written by it, or to purchase an instrument subject to a put option written by
it, may be terminated prior to the expiration date of the option by the Fund's
execution of a closing purchase transaction, which is effected by purchasing on
an exchange an option of the same series (i.e., same underlying instrument,
exercise price and expiration date) as the option previously written. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying instrument from being called, to
permit the sale of the underlying instrument or to permit the writing of a new
option containing different terms on such underlying instrument. The cost of
such a liquidation purchase plus transactions costs may be greater than the
premium received upon the original option, in which event the Fund will have
incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer unable
to effect a closing purchase transaction will not be
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<PAGE> 41
able to sell the underlying instrument or liquidate the assets held in a
segregated account, as described below, until the option expires or the optioned
instrument is delivered upon exercise. In such circumstances, the writer will be
subject to the risk of market decline or appreciation in the instrument during
such period.
If an option purchased by a Fund expires unexercised, the Fund realizes
a loss equal to the premium paid. If a Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by a
Fund expires on the stipulated expiration date or if 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 a 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 include the following: there may be insufficient trading interest in
certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Successful use by the Funds of options on stock indexes will be subject
to the ability of the Adviser to correctly predict movements in the directions
of the stock market. This requires different skills and techniques than
predicting changes in the prices of individual securities. In addition, a Fund's
ability to effectively hedge all or a portion of the securities in its
portfolio, in anticipation of or during a market decline, through transactions
in put options on stock indexes, depends on the degree to which price movements
in the underlying index correlate with the price movements of the securities
held by the Fund. Inasmuch as a Fund's securities will not duplicate the
components of an index, the correlation will not be perfect. Consequently, a
Fund will bear the risk that the prices of its securities being hedged will not
move in the same amount as the prices of its put options on the stock indexes.
It is also possible that there may be a negative correlation between the index
and a Fund's securities which would result in a loss on both such securities and
the options on stock indexes acquired by the Fund.
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The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. The
purchase of stock index options involves the risk that the premium and
transaction costs paid by a Fund in purchasing an option will be lost as a
result of unanticipated movements in prices of the securities comprising the
stock index on which the option is based.
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or elsewhere may exist. If a
Fund is unable to close out a call option on securities that it has written
before the option is exercised, the Fund may be required to purchase the
optioned securities in order to satisfy its obligation under the option to
deliver such securities. If a Fund is unable to effect a closing sale
transaction with respect to options on securities that it has purchased, it
would have to exercise the option in order to realize any profit and would incur
transaction costs upon the purchase and sale of the underlying securities.
Cover for Options Positions. Transactions using options (other than
options that a Fund has purchased) expose the Fund to an obligation to another
party. A Fund will not enter into any such transactions unless it owns either
(1) an offsetting ("covered") position in securities or other options or (2)
cash or liquid securities with a value sufficient at all times to cover its
potential obligations not covered as provided in (1) above. The Funds 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 the Custodian in the prescribed amount. Under current SEC
guidelines, the Funds will segregate assets to cover transactions in which the
Funds write or sell options.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding option is open, unless they are replaced
with similar assets. As a result, the commitment of a large portion of a Fund's
assets to cover or segregated accounts could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
Futures Contracts. Financial futures contracts are exchange-traded
contracts on financial instruments (such as securities and foreign currencies)
and securities indices that obligate the holder to take or make delivery of a
specified quantity of the underlying financial instrument, or the cash value of
an index, at a future date. Although futures contracts by their terms call for
the delivery or acquisition of the underlying instruments or a cash payment
based on the mark-to-market value of the underlying instruments, in most cases
the contractual obligation will be offset before the delivery date by buying (in
the case of an obligation to sell) or selling (in the case of an obligation to
buy) an identical futures contract. Such a transaction cancels the original
obligation to make or take delivery of the instruments.
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The Funds may enter into contracts for the purchase or sale for future
delivery of financial instruments, such as securities and foreign currencies, or
contracts based on financial indices including indices of U.S. Government
securities, foreign government securities or equity securities. U.S. futures
contracts are traded on exchanges which have been designated "contract markets"
by the Commodity Futures Trading Commission ("CFTC") and must be executed
through a futures commission merchant (an "FCM"), or brokerage firm, which is a
member of the relevant contract market. Through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing members
of the exchange.
Both the buyer and seller are required to deposit "initial margin" for
the benefit of the FCM when a futures contract is entered into. Initial margin
deposits are equal to a percentage of the contract's value, as set by the
exchange on which the contract is traded, and may be maintained in cash or other
liquid assets. If the value of either party's position declines, that party will
be required to make additional "variation margin" payments to the other party to
settle 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 a 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 Funds' investment
limitations. A Fund will incur brokerage fees when it buys or sells futures
contracts.
In the event of the bankruptcy of the FCM that holds margin on behalf
of a Fund, the Fund may be entitled to return of margin owed to the Fund only in
proportion to the amount received by the FCM's other customers. The Funds will
attempt to minimize the risk by careful monitoring of the creditworthiness of
the FCMs with which the Funds do business and by depositing margin payments in a
segregated account with the Funds' custodian for the benefit of the FCM when
practical or otherwise required by law.
Where applicable, the Funds intend to comply with guidelines of
eligibility for exclusion from the definition of the term "commodity pool
operator" with the CFTC and the National Futures Association, which regulate
trading in the futures markets. Accordingly, a Fund will not enter into any
futures contract or option on a futures contract if, as a result, the aggregate
initial margin and premiums required to establish such positions would exceed 5%
of the Fund's net assets.
Although a Fund would hold cash and liquid assets in a segregated
account with a mark-to-market value sufficient to cover the Fund's open futures
obligations, the segregated assets would be available to the Fund immediately
upon closing out the futures position.
The acquisition or sale of a futures contract may occur, for example,
when a Fund is considering purchasing or holds equity securities and seeks to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, a 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
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value from declining as much as it otherwise would have. A Fund also could
protect against potential price declines by selling portfolio securities and
investing in money market instruments. However, the use of futures contracts as
a hedging technique allows a Fund to maintain a defensive position without
having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts may be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, a Fund could take
advantage of the potential rise in the value of equity securities without buying
them until the market has stabilized. At that time, the futures contracts could
be liquidated and a 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 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
Funds still may not result in a successful use of futures.
Futures contracts entail additional risks. Although a Fund will only
utilize futures contracts when it believes that use of such contracts will
benefit the Fund, if the Fund's investment judgment is incorrect, the Fund's
overall performance could be worse than if the Fund had not entered into futures
contracts. For example, if a 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 a 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 a
Fund. Although the buyer of an option cannot lose more than the amount of the
premium plus related transaction costs, a buyer or seller of futures contracts
could lose amounts substantially in excess of any initial margin deposits made,
due to the potential for adverse price movements resulting in additional
variation margin being required by such positions. However, each Fund intends to
monitor its investments closely and will attempt to close its positions when the
risk of loss to the Fund becomes unacceptably high.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of futures
contracts, it is possible that
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<PAGE> 45
the standardized futures contracts available to a Fund will not match exactly
the Fund's current or potential investments. A Fund may buy and sell futures
contracts based on underlying instruments with different characteristics from
the securities in which it typically invests -- for example, by hedging
investments in portfolio securities with a futures contract based on a broad
index of securities -- which involves a risk that the futures position will not
correlate precisely with the performance of the Fund's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments closely correlate with a Fund's
investments. Futures prices are affected by such factors as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments and the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures prices. Imperfect
correlations between a Fund's investments and its futures positions may also
result from differing levels of demand in the futures markets and the securities
markets, from structural differences in how futures and securities are traded,
and from imposition of daily price fluctuation limits for futures contracts. A
Fund may buy or sell futures contracts with a value less than or equal to the
securities it wishes to hedge or is considering purchasing. If price changes in
a Fund's futures positions are poorly correlated with its other investments, its
futures positions may fail to produce desired gains or result in losses that are
not offset by the gains in the Fund's other investments.
Because futures contracts are generally settled within a day from the
date they are closed out, compared with a longer settlement period for most
types of securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance a liquid secondary
market will exist for any particular futures contract at any particular time. In
addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for a Fund to enter
into new positions or close out existing positions. If the secondary market for
a futures contract is not liquid because of price fluctuation limits or
otherwise, a Fund may not be able to promptly liquidate unfavorable futures
positions and potentially could be required to continue to hold a futures
position until the delivery date, regardless of changes in its value. As a
result, the Fund's access to other assets held to cover its futures positions
also could be impaired.
Options On Futures Contracts. The Funds may buy and write options on
futures contracts for hedging purposes. An option on a futures contract gives a
Fund the right (but not the obligation) to buy or sell a futures contract at a
specified price on or before a specified date. The purchase of a call option on
a futures contract is similar in some respects to the purchase of a call option
on an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying instrument, ownership of the option may or may not be less risky
than ownership of the futures contract or the underlying instrument. As with the
purchase of futures contracts, a Fund may buy a call option on a futures
contract to hedge against a market advance, and a Fund might buy a put option on
a futures contract to hedge against a market decline.
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The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign currency which
is deliverable under, or of the index comprising, the futures contract. If the
futures price at the expiration of the call option is below the exercise price,
a Fund will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Fund's portfolio
holdings. If a call option a Fund has written is exercised, the Fund will incur
a loss that will be reduced by the amount of the premium it received. Depending
on the degree of correlation between change in the value of its portfolio
securities and changes in the value of the futures positions, a Fund's losses
from existing options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Fund may buy a put option on a futures contract to hedge the Fund's
portfolio against the risk of falling prices.
The amount of risk a Fund assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
Forward Foreign Currency Exchange Contracts. A forward contract is a
privately negotiated agreement between two parties in which one party is
obligated to deliver a stated amount of a stated asset at a specified time in
the future and the other party is obligated to pay a specified invoice amount
for the assets at the time of delivery. Each 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 Funds may enter into
additional forms of forward contracts or commitments in the future if they
become available and advisable in light of the Funds' objectives and investment
policies. Forward contracts generally are negotiated in an interbank market
conducted directly between traders (usually large commercial banks) and their
customers. Unlike futures contracts, which are standardized exchange-traded
contracts, forward contracts can be specifically drawn to meet the needs of the
parties that enter into them. The parties to a forward contract may agree to
offset or terminate the contract before its maturity, or may hold the contract
to maturity and complete the contemplated exchange.
The following discussion summarizes the Funds' possible principal uses
of forward foreign currency exchange contracts ("forward currency contracts"). A
Fund may enter into forward currency contracts with stated contract values of up
to the value of the Fund's assets. A forward currency contract is an obligation
to buy or sell an amount of a specified currency for an agreed price (which may
be in U.S. dollars or a foreign currency) on a specified date. A Fund will
exchange foreign currencies for U.S. dollars and for other foreign currencies in
the normal course of business and may buy and sell currencies through forward
currency contracts in order to fix a price (in terms of a specified currency)
for securities it has agreed to buy or sell ("transaction hedge"). A Fund also
may hedge some or all of its investments denominated in foreign currency against
a decline in the value of that currency (or a proxy currency whose price
movements are expected to have a high degree of correlation with the currency
being hedged) relative to the U.S. dollar by entering into forward currency
contracts to sell an amount of that
20
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currency approximating the value of some or all of its portfolio securities
denominated in that currency ("position hedge") or by participating in futures
contracts (or options on such futures) with respect to the currency. A Fund also
may enter into a forward currency contract with respect to a currency where the
Fund is considering the purchase or sale of investments denominated in that
currency but has not yet selected the specific investments ("anticipatory
hedge").
These types of hedging minimize the effect of currency appreciation as
well as depreciation, but do not eliminate fluctuations in the underlying U.S.
dollar equivalent value of the proceeds of or rates of return on a Fund's
foreign currency denominated portfolio securities. The matching of the increase
in value of a forward contract and the decline in the U.S. dollar equivalent
value of the foreign currency denominated asset that is the subject of the hedge
generally will not be precise. Shifting a Fund's currency exposure from one
foreign currency to another limits 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 a Fund than if it had not entered into such contracts.
A Fund will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in the currency underlying the forward
contract or the currency being hedged. To the extent that a Fund is not able to
cover its forward currency positions with underlying portfolio securities, the
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, a 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
Funds may not always be able to enter into forward contracts at attractive
prices and may be limited in their ability to use these contracts to hedge Fund
assets. In addition, when a Fund enters into a privately negotiated forward
contract with a counterparty, the Fund assumes counterparty credit risk, that
is, the risk that the counterparty will fail to perform its obligations, in
which case the Fund could be worse off than if the contract had not been entered
into. Unlike many exchange-traded futures contracts and options on futures,
there are no daily price fluctuation limits with respect to forward contracts
and other negotiated or over-the-counter instruments, and with respect to those
contracts, adverse market movements could therefore continue to an unlimited
extent over a period of time. However, each Fund intends to monitor its
investments closely and will attempt to renegotiate or close its positions when
the risk of loss to the Fund becomes unacceptably high.
SHORT SALES. The Funds may seek to realize additional gains through
short sales. Short sales are transactions in which a Fund sells a security it
does not own in anticipation of a decline in the market value of that security.
To complete such a transaction, a 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
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<PAGE> 48
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, a 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. A Fund also will incur transaction costs in
effecting short sales.
A Fund will incur a loss as a result of a short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. A 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 a Fund may be required to pay, if any, in
connection with a short sale.
The Funds may make short sales "against the box," i.e., when a security
identical to or convertible or exchangeable into one owned by a Fund is borrowed
and sold short.
Whenever a Fund engages in short sales, it segregates liquid securities
in an amount that, when combined with the amount of collateral deposited with
the broker in connection with the short sale, equals the current market value of
the security sold short. The segregated assets are marked to market daily.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES (BALANCED FUND). The
Balanced Fund may invest in certain mortgage-backed and asset-backed securities.
Mortgage-backed securities are securities that directly or indirectly represent
a participation in, or are secured by and payable from, mortgage loans secured
by real property. Asset-backed securities are similar, except that they are
backed by assets other than mortgages, such as motor vehicle installment sales
contracts, installment loan contracts, leases of various types of real and
personal property and receivables from revolving credit agreements (credit
cards). The Fund will only invest in mortgage-backed securities that are insured
or guaranteed by the U.S. Government or its agencies or instrumentalities, or in
privately issued mortgage-backed or asset-backed securities that are rated in
the top two investment categories by a nationally recognized rating agency.
The primary risk of any mortgage-backed or asset-backed security is the
uncertainty of the timing of cash flows from the assets underlying the
securities. See the subheading "Special Risks of Mortgage-Backed Securities"
below for more information about prepayment and extension risks. Also, see the
subheading "Asset-Backed Securities" below for more information about
asset-backed securities.
There are currently three basic types of mortgage-backed securities:
(i) those issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, such as the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC); (ii) those issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the United States Government or one of its
agencies or instrumentalities; and (iii) those issued by private issuers that
represent an interest in or are
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<PAGE> 49
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 Balanced 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 Balanced Fund may also invest in collateralized mortgage
obligations (CMOs). CMOs are debt obligations collateralized by mortgage loans
or mortgage pass-through securities. Typically, CMOs are collateralized by GNMA,
FNMA or FHLMC certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (such collateral is referred to in this
section as Mortgage Assets). Multiclass pass-through securities are equity
interests in a trust composed of Mortgage Assets. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U. S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. The Fund may invest in CMOs issued by private entities only if
the CMOs are rated at least investment grade (at least BBB by S&P or Baa by
Moody's) or, if unrated, are determined to be of comparable quality.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semiannual basis. Certain CMOs may have variable or
floating interest rates. The principal of and interest on the Mortgage Assets
may be allocated among the several classes of a CMO series in a number of
different ways.
Generally, the purpose of the allocation of the cash flow of a CMO to
the various classes is to obtain a more predictable cash flow to the individual
tranches than exists with the underlying collateral of the CMO. As a general
rule, the more predictable the cash flow is on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on mortgage-backed securities. As part of the process
of creating more predictable cash flows on most of the tranches in a series of
CMOs, one or more tranches generally must be created that absorb most of the
volatility in the cash flows on the underlying mortgage loans. The yields on
these tranches may be higher than prevailing market yields on mortgage-backed
securities with similar maturities. As a result of the uncertainty of
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<PAGE> 50
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 Balanced Fund may also invest in
adjustable rate mortgage securities (ARMs), which are pass-through mortgage
securities collateralized by mortgages with adjustable rather than fixed rates.
ARMs, like fixed rate mortgages, have a specified maturity date, and the
principal amount of the mortgage is repaid over the life of the mortgage. Unlike
fixed rate mortgages, the interest rate on ARMs is adjusted at regular intervals
based on a specified, published interest rate "index" such as a Treasury rate
index. The new rate is determined by adding a specific interest amount, the
"margin," to the interest rate of the index. Investment in ARM securities allows
the Fund to participate in changing interest rate levels through regular
adjustments in the coupons of the underlying mortgages, resulting in more
variable current income and lower price volatility than longer-term fixed rate
mortgage securities. ARM securities are a less effective means of locking in
long-term rates than fixed rate mortgages since the income from rate mortgages
will increase during periods of rising interest rates and decline during periods
of falling rates.
Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities are structured similarly to the GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed by a pool of conventional fixed rate or adjustable rate
mortgage loans. Since private mortgage pass-through securities typically are not
guaranteed by an entity having the credit status of GNMA, FNMA and FHLMC, these
securities generally are structured with one or more types of credit enhancement
to make them more secure, which may be through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of those
approaches. The Fund may invest in private mortgage pass-through securities only
if they are rated AA/Aa (S&P/Moody's) or above.
Special Risks Of Mortgage-Backed Securities. Mortgage-backed securities
have certain different characteristics than traditional debt securities. As a
result of the risks associated with
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<PAGE> 51
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 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
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<PAGE> 52
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 Balanced Fund may also invest in
asset-backed securities. Asset-backed securities are securities that represent
direct or indirect participation in, or are secured by and payable from, assets
other than mortgage-backed assets, such as motor vehicle installment sales
contracts, installment loan contracts, leases of various types of real and
personal property and receivables from revolving credit agreements (credit
cards). Asset-backed securities have yield characteristics similar to those of
mortgage-backed securities and are subject to many of the same risks. See the
subheading "Special Risks of Mortgage-Backed Securities" above for a discussion
of those risks. In addition, asset-backed securities involve certain risks that
are not posed by mortgage-backed securities, since asset-backed securities do
not usually contain the complete benefit of a security interest in the related
collateral. For example, credit card receivables generally are unsecured and the
debtors are entitled to the protection of a number of state and federal consumer
credit laws, including the bankruptcy laws, some of which may reduce the ability
to obtain full payment. In the case of automobile receivables, due to various
legal and economic factors, proceeds for repossessed collateral may not always
be sufficient to support payments on these securities. New instruments and
variations of existing mortgage-backed securities and asset-backed securities
continue to be developed. The Fund may invest in any such instruments or
variations as may be developed, to the extent consistent with its investment
objective and policies and applicable legal requirements.
MANAGEMENT OF THE FUNDS
TRUSTEES AND OFFICERS
As a Delaware business trust, the business and affairs of the Trust are
managed by its officers under the direction of its Board of Trustees.
Information regarding the Board of Trustees and officers of the Funds, including
their principal business occupations during at least the last five years, is set
forth below. Each Trustee who is an "interested person," as defined in the
Investment Company Act, is indicated by an asterisk. Except where otherwise
indicated, each of the individuals below has served in his or her present
capacity with the Trust since September 30, 1999.
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<PAGE> 53
<TABLE>
<CAPTION>
- -------------------------------------- ------------------------- --------------------------------------------------------
NAME, ADDRESS AND AGE POSITIONS HELD WITH PRINCIPAL OCCUPATION
TRUST
- -------------------------------------- ------------------------- --------------------------------------------------------
<S> <C> <C>
Patrick S. Adams* President, CEO, President and Director, Choice Investment Management,
DOB: 1960 Trustee, Chairman of LLC, since August, 1999. Senior Vice President to
5299 DTC Boulevard the Board Berger Associates, Executive Vice President and
Englewood, Colorado 80111 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 director of West Side Investments from
DOB: 1942 February 1998 to present. Senior Managing Director of
5299 DTC Boulevard EquiServ from February 2000 to present. President and
Englewood, Colorado 80111 a director of Berger 100 Fund and Berger Growth and
Income Fund, and President and a trustee of Berger
Investment Portfolio Trust 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. Director of First of Michigan from May 1996 to
August 1998. A Vice President of DST Systems, Inc.
- -------------------------------------- ------------------------- --------------------------------------------------------
</TABLE>
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<PAGE> 54
<TABLE>
- -------------------------------------- ------------------------- --------------------------------------------------------
<S> <C> <C>
(data processing) from July 1995 to February 1998.
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. Dr.
DOB: 1961 Hathaway is a board certified orthopedic surgeon.
2045 Franklin Street
Denver, Colorado 80205
- -------------------------------------- ------------------------- --------------------------------------------------------
Gregory S. Drose Treasurer, as of April Chief Operating Officer of Choice Investment
DOB: 1964 1, 2000 Management, LLC since November 1999. Vice President of
5299 DTC Boulevard Marketing/Due Diligence, D.E. Frey & Company, Inc.
Englewood, Colorado 80111 from September 1998 to November 1999. Vice
President/Branch Manager for Owen-Joseph Securities
from June 1995 to June 1998. Director of Student
Loans and Accounts, The Colorado College from November
1993 to May 1995.
- -------------------------------------- ------------------------- --------------------------------------------------------
Sharon E. Adams Secretary Vice President of Choice Investment Management, LLC
DOB: 1963 since August 1999. Full-time homemaker from 1993
5299 DTC Boulevard until August 1999. Account executive - outside sales
Englewood, Colorado 80111 for Sprint from 1990 to 1993. Sales manager for
Allnet Communications from 1989 to 1990.
Communications from 1989 to 1990.
- -------------------------------------- ------------------------- --------------------------------------------------------
</TABLE>
The Trustees of the Trust who are officers of the Adviser receive no
remuneration from the Funds. Each of the other Trustees will be paid an annual
retainer fee of $2,500, will be paid 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 TRUST TOTAL COMPENSATION FROM TRUST PAID
NAME OF PERSON 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 Funds' 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.
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<PAGE> 55
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 15, 2000, Charles Schwab & Co., Inc.*, 101 Montgomery
Street, San Francisco, CA 94104, owned 49.14% of the outstanding shares of the
Focus Fund. As of March 30, 2000, Patrick S. Adams owned all of the outstanding
shares of the Balanced Fund, which is expected to commence operations on or
about April 1, 2000. It is contemplated that soon after the initial public
offering of shares of the Balanced Fund, Mr. Adam's ownership of the shares of
the Balanced Fund will represent less than 25% of such Fund's outstanding
shares.
*Shareholder of record, not beneficial owner.
As of March 15, 2000, the officers and directors of the Focus Fund, as
a group, owned 3.1% of the outstanding securities of the Focus Fund.
CODE OF ETHICS
The Trust, the Adviser and the Funds' principal underwriter have each
adopted Codes of Ethics under Rule 17j-1 of the Investment Company Act. Each
such Code permits the personnel subject to such Code to invest in securities
that may be purchased or held by a Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. The investment adviser to the Funds 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. Patrick
Adams also serves as President and Chief Executive Officer of the Trust.
Pursuant to an Investment Advisory Agreement entered into between the Trust on
behalf of the Funds and the Adviser (the "Investment Advisory Agreement"), the
Adviser provides continuous investment advisory services to the Funds. The
Adviser also provides the Funds with office space, equipment and personnel
necessary to operate and administer the Funds' business and to supervise the
provision of services by third parties.
The Advisory Agreement is dated October 31, 1999. The Investment
Advisory Agreement has an initial term of two years and thereafter is required
to be re-approved annually by the Board of Trustees of the Trust or by vote of a
majority of each 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 Funds' 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, by the initial shareholder of the Focus
Fund on September 30, 1999, and by the initial shareholder of the Balanced Fund
on March 25, 2000. 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
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<PAGE> 56
voting securities, or by the Adviser, and will terminate automatically in the
event of its assignment.
As compensation for its services, the Focus Fund and the Balanced Fund
pay to the Adviser an advisory fee at the annual rate, respectively, of 1.0% and
0.75% of such Funds' 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 Funds' operating expenses to the
extent necessary to ensure that the total annual operating expenses for the
Focus Fund and the Balanced Fund will not exceed, respectively, 2.25% and 2.0%
of such Funds' 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
applicable Fund by reducing the Adviser's fee, subject to later adjustment,
month by month, for the remainder of such Fund's fiscal year. The Adviser may
from time to time voluntarily absorb expenses for a 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 Funds or their 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 Funds within the three-year
period following such reduction, subject to the Funds' 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 a Fund as a contingent liability of such Fund until such
time as it appears that the Fund will be able to effect such reimbursement. At
such time as it appears probable that a Fund is able to effect such
reimbursement, the amount of reimbursement that such 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
Funds 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 Funds;
overseeing the Funds' Custodian; assisting in preparing and filing all federal
income and excise tax filings (other than those to be made by the Funds'
Custodian); overseeing the Funds' fidelity insurance relationships;
participating in the preparation of the Funds' registration statement; preparing
notice and renewal securities filings pursuant to state
30
<PAGE> 57
securities laws; compiling data for and preparing notices to the SEC; preparing
financial statements for the annual and semi-annual reports to the SEC and
current investors; monitoring the Funds' expenses; monitoring the Funds' status
as a regulated investment company under Subchapter M of the Code; monitoring
compliance with the Funds' investment policies and restrictions and generally
assisting the Funds' administrative operations.
Sunstone, at its own expense, and without reimbursement from the Funds,
furnishes office space and all necessary office facilities, equipment, supplies
and clerical and executive personnel for performing the services required to be
performed by it under the Administration Agreement. The Administration Agreement
will remain in effect until October 31, 2000 (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 a 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 each 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 $59,500.00, plus
out-of-pocket expenses.
TRANSFER AGENT AND DIVIDEND-PAYING AGENT. Sunstone also acts as the
Funds' transfer agent and dividend-paying agent. As such, Sunstone processes
purchase and redemption requests for the securities of the Funds, 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 Funds pay 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
Funds or the purchase and sale of Fund securities.
From time to time, the Trust, on behalf of the Funds, either directly
or indirectly through arrangements with the Adviser, the Distributor (as
hereinafter defined) or Sunstone, in its capacity as transfer agent, may pay
amounts to third parties that provide transfer agent-type services and other
administrative services relating to the Funds to persons who have a beneficial
interest in the Funds, such as 401(k) plan participants. These services may
include, among other things, sub-accounting services, transfer agent type
activities, answering Fund-related inquiries, transmitting proxy statements,
annual reports, updated prospectuses and other communications regarding the
Funds and other related services as the Funds may request.
CUSTODIAN. UMB Bank, n.a. (the "Custodian") serves as the custodian
for the Funds. Under the terms of the Custody Agreement, the Custodian is
responsible for the receipt and
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<PAGE> 58
delivery of the Funds' securities and cash. The Custodian does not exercise any
supervisory functions over the management of the Funds or the purchase and sale
of securities.
DISTRIBUTOR. Under a distribution agreement dated October 31, 1999,
Sunstone Distribution Services, LLC, 207 East Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202 (the "Distributor") acts as principal underwriter for
the Funds and acts as exclusive agent for the Funds in selling their shares to
the public. The Distributor shall offer shares of the Funds on a continuous
basis and may engage in advertising and solicitation activities in connection
therewith. The Distributor is not obligated to sell any certain number of shares
of the Funds. For marketing and distribution services provided, each Fund pays
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 Funds.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP are the independent
accountants for the Funds. They are responsible for performing an audit of the
Funds' year-end financial statements as well as providing accounting and tax
advice to the management of the Funds.
DISTRIBUTION OF SHARES
The Funds have adopted a Distribution Plan (the "Plan") pursuant to
Rule 12b-1 under the Investment Company Act. The Plan authorizes payments by
each 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 Funds under the
Plan for the purpose of financing any activity primarily intended to result in
the sales of shares of the Fund as determined by the Board of Trustees. Such
activities include advertising, shareholder account servicing, compensation to
the Distributor, production and dissemination of prospectuses and sales and
marketing materials, and capital or other expenses of associated equipment,
rent, salaries, bonuses, interest and other overhead. To the extent any activity
is one that a Fund may finance without the Plan, such 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 Funds will benefit from
the Plan through increased sales of shares of the Funds, thereby reducing the
Funds' expense ratios and providing an asset size that allows the Adviser
greater flexibility in management. The Plan may be terminated at any time by a
vote of the Trustees of the Funds who are not interested persons of the Funds
and who have no direct or indirect financial interest in the Plan or any
agreement related thereto (the "Rule 12b-1 Trustees") or by a vote of a majority
of the Trust's outstanding shares. Any change in the Plan that would materially
increase the distribution expenses of a Fund provided for in the Plan requires
approval of the shareholders and the Board of Trustees, including the Rule 12b-1
Trustees.
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While the Plan is in effect, the selection and nomination of Trustees
who are not interested persons of the Funds will be committed to the discretion
of the Trustees of the Funds who are not interested persons of the Funds. The
Board of Trustees must review the amount and purposes of expenditures pursuant
to the Plan quarterly as reported to it by the officers of the Trust. Unless
otherwise terminated, the Plan will continue in effect for as long as its
continuance is specifically approved at least annually by the Board of Trustees,
including the Rule 12b-1 Trustees. As of 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
each Fund, for the placement of its portfolio business and the negotiation of
the commissions to be paid on such transactions, subject to the supervision of
the Trust's Board of Trustees. It is the policy of the Adviser to seek the best
execution at the best security price available with respect to each transaction,
in light of the overall quality of brokerage and research services provided to
the Adviser.
The Adviser will place orders pursuant to its investment determination
for the Funds either directly with the issuer or with any broker or dealer. In
executing portfolio transactions and selecting brokers or dealers, the Adviser
will use its best effort to seek on behalf of the Funds the best overall terms
available. In selecting brokers and assessing the best overall terms available
for any transaction, the Adviser shall consider all factors that it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. The most favorable price to a Fund means
the best net price without regard to the mix between purchase or sale price and
commission, if any. Over-the-counter securities are generally purchased or sold
directly with principal market makers who retain the difference in their cost in
the security and its selling price (i.e., "markups" when the market maker sells
a security and "markdowns" when the market maker purchases a security). In some
instances, the Adviser may determine that better prices are available from
non-principal market makers who are paid commissions directly. Subject to
obtaining the best price and execution, the Adviser may consider the sales of
shares of the Funds 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 Funds and/or other
accounts over which the Adviser exercises investment discretion. While the
Adviser believes these services have substantial value, they are considered
supplemental to its own efforts in the performance of its duties. Other clients
of the Adviser may indirectly benefit from the availability of these services to
the Adviser, and the Funds may indirectly benefit from services available to the
Adviser as a result of transactions for other clients. The Adviser is authorized
to pay to a broker or dealer who provides such brokerage and research services a
commission for executing a portfolio transaction for a Fund which is
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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 such 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 Funds and
place portfolio transactions for these accounts. Research services furnished by
firms through which the Funds effects their securities transactions may be used
by the Adviser in servicing all of its accounts; not all of such services may be
used by the Adviser in connection with the Funds. In the opinion of the Adviser,
it will not be possible to separately measure the benefits from research
services to each of the accounts (including the Funds) to be managed by the
Adviser. Because the volume and nature of the trading activities of the accounts
will not be uniform, the amount of commissions in excess of those charged by
another broker paid by each account for brokerage and research services will
vary. However, such costs to the Funds will not, in the opinion of the Adviser,
be disproportionate to the benefits to be received by the Funds on a continuing
basis.
The Adviser intends to seek to allocate portfolio transactions
equitably among its accounts whenever concurrent decisions are made to purchase
or sell securities by a Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Funds. In making such allocations between the Funds and other
advisory accounts, if any, the main factors to be considered by the Adviser will
be the respective investment objectives, the relative size of portfolio holdings
of the same or comparable securities, the availability of cash for investment,
the size of investment commitments generally held, and the opinions of the
persons responsible for recommending the investment.
On occasions when the Adviser deems the purchase or sale of a security
to be in the best interests of a Fund as well as other fiduciary or agency
accounts managed by it, the Investment Advisory Agreement provides that the
Adviser, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased for the Funds 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 Funds and other
accounts involved. In some instances, this procedure may adversely affect the
size of the position obtainable for a Fund or the amount of the securities that
are able to be sold for a Fund.
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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. Shareholders of any
series of the Trust shall be entitled to receive dividends and distributions as
such may be declared from time to time. 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.
The assets of the Trust which are held with respect to each of its
series shall be charged with the liabilities of the Trust relating to that
series. All expenses, costs, charges and reserves attributable to the series,
and any general liabilities of the Trust which are not readily identifiable as
being held in respect of a series, shall be allocated and charged by the
Trustees to any one or more series as the Trustees deem fair and equitable. Each
allocation of liabilities shall be binding on the shareholders of the series.
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. A 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 a 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 Trust outstanding (or
of a class or series of the Trust, 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
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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.
TAXES
GENERAL. Each Fund intends to qualify for treatment as a regulated
investment company ("RIC") under Subchapter M of the Code. To so qualify, each
Fund must meet the following requirements: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities or foreign currencies, or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or those
currencies; (2) at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its total assets must be represented by cash and cash
items, U.S. government securities, securities of other RICs, and other
securities, with these other securities limited, with respect to any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer.
As a RIC, a Fund generally will not be subject to U.S. Federal income
tax on income and gains that it distributes to shareholders, if at least 90% of
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 Funds intend
to distribute substantially all of such income.
If a Fund fails to qualify for treatment as a RIC in any fiscal year,
it will be treated as a corporation for federal income tax purposes. As such, a
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 Funds
may be treated as debt securities that were originally issued at a discount.
Original issue discount can generally be defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income is actually received by the Funds, original
issue discount that accrues on a debt security in a given year is generally
treated for
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federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements applicable to regulated investment
companies.
Some debt securities may be purchased by the Funds at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount generally will be treated as ordinary income to the extent it does not
exceed the accrued market discount of such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by a
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of 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.
Each 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 a Fund to
mark-to-market certain types of the positions in its portfolio (i.e., treat them
as if they were closed out), which may cause the Fund to recognize income
without receiving cash with which to make distributions in amount necessary to
satisfy its distribution requirements for relief from income and excise taxes.
Each Fund will monitor its transactions and may make such tax elections as Fund
management deems appropriate with respect to foreign currency, options, futures
contracts, forward contracts, or hedged investments. The Funds' status as
regulated investment companies may limit their transactions involving foreign
currency, futures, options, and forward contracts.
Certain option transactions have special tax results for the Funds.
Expiration of a call option written by a Fund will result in short-term capital
gain. If the call option is exercised, the Fund will realize a gain or loss from
the sale of the security covering the call option and, in determining such gain
or loss, the option premium will be included in the proceeds of the sale.
If a Fund writes options other than "qualified covered call options,"
as defined in Section 1092 of the Code, or purchases puts, any losses on such
options transactions, to the extent they do not exceed the unrealized gains on
the securities covering the options, may be subject to deferral until the
securities covering the options have been sold.
In the case of transactions involving "nonequity options," as defined
in and subject to the rules of Code Section 1256, a 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.
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Certain transactions undertaken by the Funds may result in "straddles"
for federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Funds, and losses realized by the Funds on
positions that are part of a straddle may be deferred under the straddle rules,
rather than being taken into account in calculating the taxable income for the
taxable year in which the losses are realized. In addition, certain carrying
charges (including interest expense) associated with positions in a straddle may
be required to be capitalized rather than deducted currently. Certain elections
that a Fund may make with respect to its straddle positions may also affect the
amount, character and timing of the recognition of gains or losses from the
affected positions.
Under certain circumstances, a 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 Funds will
maintain accounts and calculate income by reference to the U.S. dollar for U.S.
federal income tax purposes. Some of the Funds' investments will be maintained
and income therefrom calculated by reference to certain foreign currencies, and
such calculations will not necessarily correspond to the Funds' distributable
income and capital gains for U.S. federal income tax purposes as a result of
fluctuations in currency exchange rates. Furthermore, exchange control
regulations may restrict the ability of a Fund to repatriate investment income
or the proceeds of sales of securities. These restrictions and limitations may
limit a Fund's ability to make sufficient distributions to satisfy the 90%
distribution requirement for qualification as a regulated investment company.
Even if a Fund so qualified, these restrictions could inhibit its ability to
distribute all of its income in order to be fully relieved of tax liability.
Gains or losses attributable to fluctuations in exchange rates which
occur between the time a Fund accrues income or other receivables (including
dividends) or accrues expenses or other liabilities denominated in a foreign
currency and the time 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 a Fund's investment company taxable income available to
be distributed to its shareholders as ordinary income. If Section 988 losses
exceed other investment company
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taxable income during a taxable year, a Fund would not be able to make any
ordinary dividend distributions, or distributions made before the losses were
realized would be recharacterized as a return of capital to shareholders, or, in
some cases, as capital gain, rather than as an ordinary dividend.
PASSIVE FOREIGN INVESTMENT COMPANIES. The Funds 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 a 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 Funds may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, a 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 a 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 a Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gains, may be increased or decreased substantially
as compared to a fund that did not invest in PFIC shares.
DISTRIBUTIONS. Distributions of investment company taxable income are
taxable to a U.S. shareholder as ordinary income, whether paid in cash or
shares. Dividends pay by a Fund to a corporate shareholder, to the extent such
dividends are attributable to dividends received from U.S. corporations by 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 a 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
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are not eligible for the dividends received deduction. Shareholders will be
notified annual as to the U.S. federal tax status of distributions, and
shareholders receiving distributions in the form of newly issued shares will
receive a report as to the net asset value of the shares received.
Dividends and other distributions declared by a Fund in, and payable to
shareholders of record as of a date in, October, November or December of any
year will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during January of the following calendar year. Accordingly, those
distributions will be taxed to shareholders for the year in which that December
31 falls.
If the net asset value of shares is reduced below a shareholder's cost
as the result of a distribution by a Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors also
should be aware that if shares are purchased shortly before the record date for
any distribution, the shareholder will pay full price for the shares and receive
some portion of the price back as a taxable dividend or capital gain
distribution.
A 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 Funds
intend to declare and distribute dividends during each year sufficient to
prevent imposition of the excise tax.
DISPOSITION OF SHARES. Upon a redemption, sale or exchange of shares of
a Fund, a shareholder will realize a taxable gain or loss that will be treated
as a capital gain or loss if the shares are capital assets in the shareholder's
hands and generally will be long-term or short-term, depending upon the
shareholder's holding period for the shares. Any loss realized on a redemption,
sale or exchange will be disallowed to the extent the shares disposed of are
replaced (including through reinvestment of dividends) within a period of 61
days beginning 30 days before and ending 30 days after the disposal of the
shares. In such a case, the basis of the shares acquired will be adjusted to
reflect the disallowed loss. Any loss realized by a shareholder on the
disposition of a Fund's shares held by the shareholder for six months or less
will be treated for tax purposes as a long-term capital loss to the extent of
any distributions of capital gain dividends received or treated as having been
received by the shareholder with respect to such shares.
BACKUP WITHHOLDING. Each 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 a Fund's
shares will be subject to withholding of federal income tax at a rate of 31%
("backup withholding") in the case of non-exempt shareholders if (1) the
shareholder fails to furnish the 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
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applicable, any such distributions or proceeds, whether reinvested in additional
shares or taken in cash, will be reduced by the amounts required to be withheld.
OTHER TAXATION. Distributions may also be subject to additional
state, local and foreign taxes depending on each shareholder's particular
situation. Non-U.S. shareholders may be subject to U.S. tax rules that differ
significantly from those summarized above. This discussion does not address all
of the tax consequences applicable to the Funds or shareholders, and
shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Funds.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DETERMINATION OF NET ASSET VALUE. As set forth in the Prospectus, the
net asset value of the Funds will be determined as of the close of trading on
each day the New York Stock Exchange is open for trading. The New York Stock
Exchange is open for trading Monday through Friday except New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Additionally,
if any of the aforementioned holidays falls on a Saturday, the New York Stock
Exchange will not be open for trading on the preceding Friday, and when any such
holiday falls on a Sunday, the New York Stock Exchange will not be open for
trading on the following Monday unless unusual business conditions exist, such
as the ending of a monthly or the yearly accounting period.
In connection with the determination of a 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 a 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 Funds' Adviser. Any
modification of the price of a debt security furnished by a pricing service is
made pursuant to procedures adopted by the Trust's Board of Trustees. Debt
instruments maturing within 60 days are valued by the amortized cost method. Any
securities for which market quotations are not readily available are valued at
their fair value as determined in good faith by the Adviser under the
supervision of the Trust's Board of Trustees.
Generally, trading in foreign securities, as well as U.S. Government
securities and certain cash equivalents and repurchase agreements, is
substantially completed each day at various times prior to the close of the New
York Stock Exchange. The values of such securities used in computing the net
asset value of the shares of the Funds are determined as of such times. Foreign
currency exchange rates are also generally determined prior to the close of the
New York Stock Exchange. Occasionally, events affecting the value of such
securities and such exchange rates may occur between the times at which they are
determined and at the close of the
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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 Funds,
all assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the mean between the bid and offer prices of such
currencies against U.S. dollars furnished by a pricing service approved by the
Trustees.
A Fund's net asset value per share will be calculated separately from
the per share net asset value of the other 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. A 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 each Fund may be exchanged for shares of
the other Fund or for shares of the Northern Money Market Fund as provided in
the Prospectus. Sunstone, the Funds' administrator and transfer agent, receives
a service fee from the Northern Money Market Fund at the annual rate of 0.25 of
1% of the average daily net asset value of the shares of the Funds exchanged
into the Northern Money Market Fund pursuant to the expanded exchange privilege
offered by the Trust.
RETIREMENT ACCOUNTS. The Funds offer several retirement account options
to shareholders. Qualifying shareholders may establish the following tax
deferred retirement accounts: traditional IRA, spousal IRA, SEP IRA and Roth
IRA. The shareholder's employer must establish a plan before the shareholder
opens a SEP account.
A description of accounts currently offered, applicable service fees
and certain limitations on account contributions and withdrawals, as well as
application forms, are available from the transfer agent upon request at
1-800-392-7107. 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 a 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 a Fund,
under the following
42
<PAGE> 69
conditions authorized by the Investment Company Act: (1) for any period during
which the New York Stock Exchange is closed, other than customary weekend or
holiday closings, or during which trading on the Exchange is restricted; (2) for
any period during which an emergency exists as the result of which the disposal
by a Fund of securities owned by it is not reasonably practical, or it is not
reasonably practical for a Fund to determine the fair value of its net assets;
or (3) for such other periods as the Securities and Exchange Commission may by
order permit for the protection of a 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 a 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, a 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 a Fund and its return are not
guaranteed and will fluctuate according to market conditions. When considering
"average" annual total return figures for periods longer than one year,
shareholders should note that a Fund's annual total return for any one year in
the period might have been greater or less than the average for the entire
period. A 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 a Fund for a specific period is found by first taking a
hypothetical $1,000 investment ("initial investment") in the Fund's shares on
the first day of the period and computing the "redeemable value" of that
investment at the end of the period. The redeemable value is then divided by the
initial investment, and this quotient is taken to the Nth root (N representing
the number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage. The calculation assumes that all income and
capital gains dividends paid by a Fund have been reinvested at net asset value
on the reinvestment dates during the period. This calculation can be expressed
as follows:
43
<PAGE> 70
P(1 + T)N = ERV
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made at
the beginning of the period.
P = hypothetical initial payment of $1,000.
N = period covered by the computation, expressed in terms of
years.
Total return performance for a specific period is calculated by first
taking an investment ("initial investment") in a Fund's shares on the first day
of the period and computing the "ending value" of that investment at the end of
the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The calculation
assumes that all income and capital gains dividends paid by a 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.
A Fund's performance figures will be based upon historical results and
will not necessarily be indicative of future performance. A 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 a Fund's returns.
From time to time, in marketing and other literature, the Funds'
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely used
independent research firm which ranks mutual funds by overall performance,
investment objective and assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income and capital gains dividends
reinvested. Such calculations do not include the effect of any sales charges
imposed by other funds. The Funds will be compared to Lipper's appropriate fund
category, that is, by fund objective and portfolio holdings.
The Funds' performance may also be compared to the performance of other
mutual funds by Morningstar, Inc., which ranks funds on the basis of historical
risk and total return.
44
<PAGE> 71
Morningstar's rankings range from five stars (highest) to one star (lowest) and
represent Morningstar's assessment of the historical risk level and total return
of a fund as a weighted average for 3, 5, and 10 year periods. Rankings are not
absolute or necessarily predictive of future performance.
Evaluations of Fund performance made by independent sources may also be
used in advertisements concerning the Funds, including reprints of or selections
from, editorials or articles about the Funds. Sources for Fund performance and
articles about the Funds may include publications such as Money, Forbes,
Kiplinger's, Financial World, Business Week, U.S. News and World Report, the
Wall Street Journal, Barron's and a variety of investment newsletters.
The Funds may compare their performance to a wide variety of indices
and measures of inflation including the Standard & Poor's 500 Stock Index and
the Nasdaq Over-the-Counter Composite Index. There are differences and
similarities between the investments that a Fund may purchase for its portfolio
and the investments measured by these indices.
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a Fund's net
asset value or performance relative to a market index. One measure of volatility
is beta. Beta is the volatility of a fund relative to the total market as
represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less than 1.00
indicates volatility less than the market. Another measure of volatility or risk
is standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average, over a specified period of time.
The premise is that greater volatility connotes greater risk undertaken in
achieving performance.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares the Funds 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 Funds to bank products,
such as certificates of deposit. Unlike mutual funds, certificates of deposit
are insured up to $100,000 by the U.S. government and offer a fixed rate of
return.
MISCELLANEOUS
The Prospectus and this Statement of Additional Information do not
contain all the information included in the Registration Statement filed with
the Commission under the Securities Act with respect to the securities offered
by the Funds' Prospectus. Certain portions of the Registration Statement have
been omitted from the Prospectus and this Statement of Additional Information,
pursuant to the rules and regulations of the Commission. The
45
<PAGE> 72
Registration Statement including the exhibits filed therewith may be examined at
the office of the Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of
Additional Information as to the contents of any contract or other documents
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectus and this Statement of Additional
Information form a part, each such statement being qualified in all respects by
such reference.
FINANCIAL STATEMENTS
The following financial 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
46
<PAGE> 73
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 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 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> 74
CHOICE FUNDS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 1, 1999
ASSETS
<TABLE>
<CAPTION>
FOCUS FUND
----------
<S> <C>
Cash............................................................................$100,000
Receivable from sponsor.........................................................$43,475
Prepaid initial registration expenses...........................................$20,740
TOTAL ASSETS....................................................................$164,215
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND NET ASSETS
<S> <C>
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 asset/shares outstanding)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(FOR THE PERIOD FROM JULY 16, 1999 (INCEPTION) TO OCTOBER 1, 1999)
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> 75
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 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 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 the average daily net assets of
the Fund until October 1, 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 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
<PAGE> 76
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> 77
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 Balanced 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 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> 78
CHOICE FUNDS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 1, 1999
ASSETS
<TABLE>
<CAPTION>
BALANCED FUND
-------------
<S> <C>
Receivable from sponsor.........................................................$43,475
TOTAL ASSETS....................................................................$43,475
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND NET ASSETS
<S> <C>
Payable to sponsor..............................................................$43,475
TOTAL LIABILITIES...............................................................$43,475
NET ASSETS......................................................................$---
NET ASSETS CONSIST OF:
Capital shares outstanding; no par value, indefinite shares authorized..........---
Net asset value, redemption price and offering price per share..................$---
(net asset/shares outstanding)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(FOR THE PERIOD FROM JULY 16, 1999 (INCEPTION) TO OCTOBER 1, 1999)
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> 79
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 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 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 the average daily net assets of
the Fund until October 1, 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 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
<PAGE> 80
The Company is authorized to issue an unlimited number of shares with no par
value.
<PAGE> 81
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> 82
"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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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
AA strong. Risk is modest, but may vary slightly
AA- from time to time because of economic
conditions.
- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic uncertainty.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BBB+ Below average protection factors but still
BBB considered sufficient for prudent
BBB- investment. Considerable variability in risk
during economic cycles.
- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely
BB to meet obligations when due. Present or
BB- prospective financial 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
B- protection 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> 90
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DD Default debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
- --------------------------------------------------------------------------------
A-10
<PAGE> 91
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) (1) Articles III, V and VI of the Registrant's
Declaration of Trust*
(2) Article II of the Registrant's By-Laws*
(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 October 31, 1999.**
(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.**
(h) Opinion of Stradley, Ronon, Stevens & Young, LLP**
(i) Consent of Independent Accountants
(j) None
(k) Initial Capital Agreement**
(l) Distribution Plan and form of dealer agreement**
(m) None
(p.1) Code of Ethics of Registrant
(p.2) Code of Ethics of Choice Investment Management, LLC
(q) Powers of Attorney for Gerard M. Lavin and Richard A.
Hathaway
*Incorporated by reference to Registrant's initial Registration Statement on
Form N-1A, as filed with the Commission on July 21, 1999
**Incorporated by reference to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A, as filed with the Commission on October 8,
1999.
<PAGE> 92
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.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Choice Investment Management, LLC (the "Adviser") serves as the investment
adviser for the Registrant and other privately managed separate accounts. The
business and other connections of the Adviser are set forth in the Uniform
Application for Investment Adviser Registration
<PAGE> 93
("Form ADV") (File No. 801-56907) 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, La Crosse
Funds, Lend Lease Funds and RREEF Securities Trust.
(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, Secretary 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.
ITEM 30. UNDERTAKINGS
None.
<PAGE> 94
SIGNATURES
Pursuant to the requirement of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement under rule
485(b) under the Securities Act and 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 March, 2000.
CHOICE FUNDS,
a Delaware business trust
By: /s/ Patrick S. Adams
-----------------------------
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/ Patrick S. Adams Trustee; President; Principal March 30, 2000
- -------------------- Executive Officer; Chairman of
Patrick S. Adams the Board
GERARD M. LAVIN* Trustee March 30, 2000
- ---------------
Gerard M. Lavin
RICHARD A. HATHAWAY* Trustee March 30, 2000
- -------------------
Richard A. Hathaway
/s/ Christelle C. Beck Treasurer; Principal Accounting March 30, 2000
- ---------------------- Officer
Christelle C. Beck
</TABLE>
*By /s/ Patrick S. Adams
- ------------------------
Patrick S. Adams
*Pursuant to a Power of Attorney filed herewith.
<PAGE> 1
EXHIBIT (i)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-1A of our
reports dated October 5, 1999, relating to the financial statements of Choice
Funds Focused Fund and Balanced Fund, which appear in such Registration
Statement. We also consent to the references to us under the heading
"Independent Accountants" in such Registration Statement.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
March 29, 2000
<PAGE> 1
CHOICE FUNDS
CODE OF ETHICS
PREAMBLE
This Code of Ethics is being adopted for the Choice Funds (the
Choice Funds and each of its series shall be referred to herein, collectively,
as the "Trust") in compliance with the requirements of Rule 17j-1, as amended
(the "Rule"), adopted by the U.S. Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "Act") to effectuate
the purposes and objectives of that Rule. The Rule makes it unlawful for certain
persons, including officers, trustees and Advisory Persons of the Trust, in
connection with the purchase or sale by such persons of securities held or to be
acquired by the Trust:
(1) to employ a device, scheme or artifice to defraud the
Trust;
(2) to make to the Trust any untrue statement of a material
fact or omit to state to the Trust a material fact
necessary in order to make the statements made, in light
of the circumstances in which they are made, not
misleading;
(3) to engage in any act, practice or course of business which
operates or would operate as a fraud or deceit upon the
Trust; or
(4) to engage in a manipulative practice with respect to the
Trust.
The Rule also requires that the Trust, its investment adviser
and its principal underwriter shall each adopt a written Code of Ethics, which
shall be approved by the Trust's Board of Trustees ("Board"), including a
majority of the independent trustees, and contain provisions reasonably
necessary to prevent Access Persons from engaging in acts which violate the
above standard.
Set forth below is the Code of Ethics adopted by the Board, in
compliance with the Rule. This Code of Ethics is based upon the principle that
the trustees, officers and Advisory Persons of the Trust, and certain affiliated
persons of the Trust and any investment adviser or principal underwriter of the
Trust, owe a fiduciary duty to, among others, the shareholders of the Trust to
conduct their affairs, including their personal securities transactions, in such
a manner to avoid (i) serving their own personal interests ahead of
shareholders; (ii) taking inappropriate advantage of their position with the
Trust; and (iii) any actual or potential conflicts of interest or any abuse of
their position of trust and responsibility.
This Code of Ethics does not apply to any Access Person or
Investment Personnel employed by any investment adviser, sub-adviser or
principal underwriter of the Trust. Those
<PAGE> 2
individuals are covered by the Codes of Ethics which have been adopted by those
entities in accordance with the provisions of the Rule.
I. DEFINITIONS
(a) "Access Person" means any trustee (excluding any trustee
who is not also an officer of the Trust's investment adviser or its affiliates),
officer, or Advisory Person (defined immediately below) of the Trust.
(b) "Advisory Person" means (i) any employee of the Trust (or
of any company in a control relationship to the Trust) who, in connection with
his regular functions or duties, normally makes, participates in, or obtains
current information regarding the purchase or sale of Covered Securities by the
Trust, or whose functions relate to the making of any recommendations with
respect to such purchases or sales; and (ii) any natural person in a control
relationship to the Trust who regularly obtains current information concerning
recommendations made to the Trust with regard to the purchase or sale of a
Covered Security by the Trust.
(c) "Beneficial ownership" shall be interpreted in the same
manner as it would be in determining whether a person is considered a
"beneficial owner" as defined in Rule 16a-1(a)(2) under the Securities Exchange
Act of 1934, as amended, which, generally speaking, encompasses those situations
where the beneficial owner has the right to enjoy some economic benefit from the
ownership of the Covered Security. A person is normally regarded as the
beneficial owner of securities held in the name of his or her spouse or minor
children living in his or her household.
(d) "Control" shall have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(e) "Covered Security" shall have the meaning set forth in
Section 2(a)(36) of the Act, except that it shall not include direct obligations
of the United States government, bankers' acceptances, bank certificates of
deposit, commercial paper, high quality short-term debt instruments (including
repurchase agreements), and shares of registered open-end investment companies.
(f) "Disinterested Trustee" means a Trustee of the Trust who
is not an "interested person" of the Trust within the meaning of Section
2(a)(19) of the Act.
(g) "Investment Personnel" means (a) Portfolio Managers as
well as any other employee such as a securities analyst and/or trader of the
Trust (or of any company in a control relationship to the Trust) who, in
connection with his or her regular functions or duties, makes or participates in
the making of recommendations regarding a Trust's purchase or sale of Covered
Securities or (b) any natural person who controls the Trust and who obtains
information concerning recommendations to the Trust regarding the purchase or
sale of Covered Securities by the Trust.
(h) "Purchase or sale of a Covered Security" includes, among
other things, the writing of an option to purchase or sell a Covered Security.
2
<PAGE> 3
(i) "Portfolio Managers" means those individuals entrusted
with the direct responsibility and authority to make investment decisions
affecting the Trust.
(j) A "security held or to be acquired" by the Trust is
defined under Rule 17j-1 to include: (1) any Covered Security which within the
most recent fifteen (15) days (a) is or has been held by the Trust, or (b) is
being or has been considered by the Trust or its investment adviser for purchase
by the Trust; and (2) any option to purchase or sell, and any Covered Security
which is convertible into or exchangeable for a Covered Security described in
subparts (1)(a) or (1)(b).
II. PERSONAL TRADING RESTRICTIONS
(1) No Access Person shall:
(a) engage in any act, practice or course of conduct, which
would violate the provisions of Rule 17j-1 set forth above.
(b) execute a personal Covered Securities transaction on the
same day that the Trust has a pending "buy" or "sell" order in
that same Covered Security, unless the Access Person
aggregates his or her personal trade with the Trust's trades
in accordance with an Aggregation and Allocation Policy which
merits the requirements outlined by the SEC staff (trades made
in violation of this policy should be unwound, if possible,
and if they cannot be unwound, they should be disgorged to the
Trust);
(c) disclose to other persons the securities activities
engaged in or contemplated for the Trust;
(d) purchase or sell securities directly or indirectly without
prior approval from the Compliance Officer or other officer
designated by the Board of Trustees.
(2) No Investment Personnel shall
(a) directly or indirectly acquire beneficial ownership in any
Covered Securities in a limited offering ("private placement")
or initial public offering without prior approval from the
appropriate compliance officer. (In determining whether to
grant such prior approval, the appropriate officer shall
determine (among other factors) whether the investment
opportunity should be reserved for the Trust and its
shareholders, and whether the opportunity is being offered to
the individual by virtue of his or her position with the
Trust. Any Investment Personnel who has been authorized to
acquire Covered Securities in a private placement, must
disclose that investment when he or she is involved in any
subsequent consideration of an investment by the Trust in that
issuer. In such circumstances, Investment Personnel with no
personal interest in the particular issuer shall independently
review the Trust's decision to purchase that issuer's Covered
Securities.)
3
<PAGE> 4
(b) profit from the purchase and sale, or sale and purchase,
of the same (or equivalent) Covered Securities within sixty
(60) calendar days. Trades made in violation of this policy
should be unwound, if possible. In the event such trades
cannot be unwound, any profits realized on such short-term
trades shall be subject to disgorgement to the Trust.
(c) seek or accept anything of more than de minimis value,
either directly or indirectly, from broker-dealers or other
persons, which to the actual knowledge of the Investment
Personnel, do business or might do business with the Trust.
For purposes of this provision, the following gifts will not
be considered to be in violation of this section: (a) an
occasional meal; (b) an occasional ticket to a sporting event,
the theater or comparable entertainment, for which the
employee will reimburse the host; and (c) other gifts of
nominal cost.
(3) No Portfolio Manager shall execute any personal Covered Securities
transactions within seven (7) calendar days before or after the day the Trust
trades in that Covered Security. Trades made in violation of this black-out
period should be unwound, if possible. Otherwise, any profits realized on such
trades shall be subject to disgorgement to the Trust.
III. EXEMPTED TRANSACTIONS
The prohibitions of Sections II(1)(b), II(1)(d), II(2)(b) and II(3)
shall not apply to:
(1) purchases or sales effected in any account over which the Access
Person or Investment Personnel has no direct or indirect influence or control;
(2) purchases or sales which are non-volitional(1) on the part of
either the Access Person, Investment Personnel or the Trust;
(3) purchases which are part of an automatic dividend reinvestment
plan;
(4) purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its Covered Securities, to the extent such
rights were acquired from such issuer, and sales of such rights so acquired; and
(5) purchases or sales which are only remotely potentially harmful to
the Trust because they would be very unlikely to affect a highly institutional
market or clearly are not related economically to the Covered Securities to be
purchased, sold or held by the Trust.
IV. REPORTING, DISCLOSURE AND CERTIFICATION REQUIREMENTS
(1) Initial Holdings Reports. All Access Persons (excluding
Disinterested Trustees who would be required to make a report solely by reason
of being a trustee) shall disclose all personal Covered Securities holdings to
the appropriate compliance officer upon commencing
- ----------
(1) Nonvolitional purchases or sales include those transactions which do not
involve a willing act or conscious decision on the part of the employee. For
example, shares received or disposed of by Access Persons, Investment Personnel
or the Trust in a merger, recapitalization or similar transaction are considered
nonvolitional.
4
<PAGE> 5
employment. The Initial Report shall be made on the form attached as Exhibit A
and shall contain the following information:
(a) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
(b) the name of any broker, dealer or bank with whom the Access Person
maintained an account in which any Covered Securities were held for the
direct or indirect benefit of the Access Person as of the date the
person became an Access Person; and
(c) the date that the report is submitted by the Access Person.
All Access Persons currently employed by the Trust shall
submit an Initial Report to the appropriate compliance officer within ten days
of the date of this Code of Ethics. All other Initial Reports shall be made no
later than 10 days after the person becomes an Access Person.
(2) Quarterly Reports.
(a) All Access Persons shall report to the appropriate compliance
officer, the information described below in Sub-paragraph (2)(c) of
this Section with respect to transactions in any Covered Security in
which such person has, or by reason of such transaction acquires, any
direct or indirect beneficial ownership in the Covered Security;
provided, however, that all Access Persons shall not be required to
make a report with respect to transactions effected for any account
over which such person does not have any direct or indirect influence
or Covered Security transactions which are not eligible for purchase or
sale by the Trust.
(b) Each Disinterested Trustee who would be required to make a report
solely by reason of being a trustee, need only submit a Quarterly
Report if such trustee knew or, in the ordinary course of fulfilling
his or her official duties as a trustee, should have known that during
the 15-day period immediately before or after the trustee's transaction
in a Covered Security, that the Trust purchased or sold the Covered
Security, or the Trust or its investment adviser considered purchasing
or selling the Covered Security.
(c) Reports required to be made under this Paragraph (2) shall be made
not later than 10 days after the end of the calendar quarter in which
the transaction to which the report relates was effected. All Access
Persons shall be required to submit a report for all periods, including
those periods in which no Covered Securities transactions were
effected. A report shall be made on the form attached hereto as Exhibit
B or on any other form containing the following information:
(i) the date of the transaction, the title of the Covered
Security, the interest rate and maturity date (if
applicable), the number of shares, and the principal
amount of each Covered Security involved;
5
<PAGE> 6
(ii) the nature of the transaction (i.e., purchase, sale or
any other type of acquisition or disposition);
(iii) the price at which the transaction was effected;
(iv) the name of the broker, dealer or bank with or through
whom the transaction was effected; and
(v) the date the report is submitted.
(d) Any such report may contain a statement that the report shall not
be construed as an admission by the person making such report that he
or she has any direct or indirect beneficial ownership in the Covered
Security to which the report relates.
(e) All Access Persons shall direct their brokers to supply duplicate
copies of all monthly brokerage statements for all Covered Securities
accounts maintained by the Access Person to the appropriate compliance
officer, on a timely basis. In addition, with respect to any account
established by the Access Person in which any Covered Securities were
held during the quarter for the direct or indirect benefit of the
Access Person, the Access Person shall report the following
information:
(i) the name of the broker, dealer or bank with whom the
Access Person established the account;
(ii) the date the account was established; and
(iii) the date the report is submitted.
(3) Annual Holdings Reports. All Access Persons (excluding any
disinterested trustee who would be required to make a report solely by reason of
being a trustee) shall disclose all personal Covered Securities holdings on an
annual basis on the Form attached as Exhibit C within 30 days after the end of
the calendar year. All Annual Reports shall provide information on personal
Covered Securities holdings that is current as of a date no more than 30 days
before the Annual Report is submitted. Such Annual Reports shall contain the
following information:
(a) the title, number of shares and principal amount of each Covered
Security in which the Access Person had any direct or indirect
beneficial ownership;
(b) the name of any broker, dealer or bank with whom the Access Person
maintains an account in which any Covered Securities are held for the
direct or indirect benefit of the Access Person; and
(c) the date that the report is submitted by the Access Person.
6
<PAGE> 7
(4) Certification of Compliance with Code of Ethics. With the exception
of the Disinterested Trustees, every Access Person shall certify in their Annual
Report (Attached as Exhibit C) that:
(a) they have read and understand the Code of Ethics and recognize that
they are subject thereto;
(b) they have complied with the requirements of the Code of Ethics; and
(c) they have reported all personal securities transactions required to
be reported pursuant to the requirements of the Code of Ethics.
(5) Conflict of Interest. Every Access Person shall notify the
compliance officer of any personal conflict of interest relationship which may
involve the Trust, such as the existence of any economic relationship between
their transactions and securities held or to be acquired by the Trust. Such
notification shall occur in the pre-clearance process (See Section II(1)(d)).
V. REPORTING OF VIOLATIONS TO THE BOARD OF TRUSTEES
(1) Any person, including the compliance officer, shall promptly report
all violations and apparent violations of this Code of Ethics and the reporting
requirements thereunder to the Board of Trustees.
(2) The Board of Trustees, or a committee of trustees created by the
Board of Trustees for that purpose, shall consider reports made to the Board of
Trustees hereunder and shall determine whether or not this Code of Ethics has
been violated and what sanctions, if any, should be imposed.
VI. ANNUAL REPORTING TO THE BOARD OF TRUSTEES
The compliance officer shall prepare an annual report relating
to this Code of Ethics to the Board of Trustees. Such annual report shall:
(a) summarize existing procedures concerning personal investing and any
changes in the procedures made during the past year;
(b) identify any violations requiring significant remedial action
during the past year; and
(c) identify any recommended changes in the existing restrictions or
procedures based upon the Trust's experience under its Code of Ethics,
evolving industry practices or developments in applicable laws or
regulations.
(d) certify that the Fund has adopted procedures reasonably necessary
to prevent Access Persons from violating this Code of Ethics.
7
<PAGE> 8
VII. ANNUAL REPORTING OF INVESTMENT ADVISERS AND PRINCIPAL
UNDERWRITERS TO THE BOARD2
Any investment adviser, sub-adviser or principal underwriter
to the Trust shall also prepare an annual report to the Board which contains
that information described in Section VI (as it pertains to their particular
Code of Ethics).
VIII. SANCTIONS
Upon discovering a violation of this Code, the Board of
Trustees may impose such sanctions as they deem appropriate, including, among
other things, a letter of censure or suspension or termination of the employment
of the violator.
IX. RETENTION OF RECORDS
The Trust must, at its principal place of business, maintain
records in the manner and to the extent set out below and must make these
records available to the SEC or any representative of the SEC at any time and
from time to time for reasonable periodic, special or other examination:
(1) A copy of this Code of Ethics, or any Code of Ethics which within
the past five (5) years has been in effect, shall be preserved in an easily
accessible place;
(2) A record of any violation of this Code of Ethics, and of any action
taken as a result of such violation, shall be preserved in an easily accessible
place for a period of not less than five (5) years following the end of the
fiscal year in which the violation occurs;
(3) A copy of each report made by an Access Person pursuant to this
Code of Ethics shall be preserved for a period of not less than five (5) years
from the end of the fiscal year in which it is made, the first two years in an
easily accessible place;
(4) A list of all persons who are, or within the past five (5) years
have been, required to make reports pursuant to this Code of Ethics shall be
maintained in an easily accessible place;
(5) A record of any decision, and the reasons supporting the decision,
to approve the acquisition by Investment Personnel of securities in a private
placement or IPO, as described in Section II(2)(a) of this Code of Ethics, for
at least five (5) years after the end of the fiscal year in which the approval
is granted.
- ----------
(2) The requirements of Section VII apply to principal underwriters only where:
- the principal underwriter is an affiliated person of the Trust or the
Trust's investment advisor; or
- an officer, director of general partner of the principal underwriter
serves as an officer, director or general partner of the Trust or of the Trust's
investment advisor.
8
<PAGE> 9
(6) A copy of each annual report required under Section VI or VII for
at least five (5) years after the end of the fiscal year in which it is made,
the first two in an accessible place.
Dated:
9
<PAGE> 10
Exhibit A
CHOICE FUNDS
CODE OF ETHICS
INITIAL REPORT
To the Compliance Officer of CHOICE FUNDS (the "Trust"):
1. I hereby acknowledge receipt of a copy of the Code of Ethics for the
Trust.
2. I have read and understand the Code and recognize that I am subject
thereto in the capacity of an "Access Person."
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve the Trust, such as any economic relationship between my transactions and
Covered Securities held or to be acquired by the Trust or any of its series.
4. As of the date below I had a direct or indirect beneficial ownership
in the following Covered Securities:
<TABLE>
<CAPTION>
Dollar Amount Type of Interest
Title of Security Number of Shares of Transaction (Direct or Indirect)
----------------- ---------------- -------------- --------------------
<S> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain account(s) as of the
date this report is submitted in which Covered Securities are held for my direct
or indirect benefit with the brokers, dealers or banks listed below.
A-1
<PAGE> 11
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
------------------ ----------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
Date Report Submitted:
-------------------------------
A-2
<PAGE> 12
Exhibit B
CHOICE FUNDS
CODE OF ETHICS
Quarterly Securities Transactions Report
For the Calendar Quarter Ended:_________
To the Compliance Officer of the CHOICE FUNDS (the "Trust"):
During the quarter referred to above, the following transactions were
effected in Covered Securities of which I had, or by reason of such transaction
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics adopted by the Trust.
<TABLE>
<CAPTION>
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
INTEREST RATE DOLLAR NATURE OF BROKER/
TITLE OF DATE OF NO. OF AND MATURITY AMOUNT OF TRANSACTION PRICE DEALER
SECURITY TRANSACTION SHARES DATE (if TRANSACTION (Purchase, Sale, OR BANK THROUGH
applicable) Other) WHOM EFFECTED
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
================ ================= =========== ================= ================== ================= ========= =================
</TABLE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) other transactions not required to
be reported, and (iii) is not an admission that I have or had any direct or
indirect beneficial ownership in the Covered Securities listed above.
I hereby represent that I established the brokerage accounts listed
below, in which Covered Securities were held during the quarter referenced above
for my indirect or direct benefit.
B-1
<PAGE> 13
Name of Broker, Dealer or Bank with Whom
Account Established Date Established
------------------- ----------------
Except as noted in this report, I hereby certify that I have no
knowledge of the existence of any personal conflict of interest relationship
which may involve the Trust, such as the existence of any economic relationship
between my transactions and Covered Securities held or to be acquired by the
Trust or any of its series.
Name:
------------------------------------------------
Title:
-----------------------------------------------
Date Report Submitted:
-------------------------------
B-2
<PAGE> 14
EXHIBIT C
CHOICE FUNDS
CODE OF ETHICS
ANNUAL REPORT
To the Compliance Officer of the CHOICE FUNDS (the "Trust"):
1. I have read and understand the Code of Ethics and recognize that I
am subject thereto in the capacity of an "Access Person."
2. I hereby certify that, during the year ended December 31, 200__, I
have complied with the requirements of the Code of Ethics and I have reported
all Covered Securities transactions required to be reported pursuant to the
Code.
3. Except as noted below, I hereby certify that I have no knowledge of
the existence of any personal conflict of interest relationship which may
involve the Trust, such as any economic relationship between my transactions and
Covered Securities held or to be acquired by the Trust or any of its series.
4. As of December 31, 200__, I had a direct or indirect beneficial
ownership in the following Covered Securities:
<TABLE>
<CAPTION>
Principal Amount Type of Interest Broker/Dealer or Bank
Title of Security Number of Shares of Securities Sold (Direct or Indirect) Through Whom Effected
<S> <C> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain the account(s) with the brokers,
dealers or banks listed below in which Covered Securities are held for my direct
or indirect benefit.
C-1
<PAGE> 15
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
Name:
------------------------------------------------
Title:
-----------------------------------------------
Date Report Submitted:
-------------------------------
C-2
<PAGE> 1
EXHIBIT (P.2)
CHOICE INVESTMENT MANAGEMENT, LLC
CODE OF ETHICS
PREAMBLE
This Code of Ethics is being adopted for Choice Investment Management,
LLC (the "Adviser") in compliance with the requirements of Rule 17j-1, as
amended (the "Rule"), adopted by the U.S. Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended (the "Act") to
effectuate the purposes and objectives of that Rule. The Rule makes it unlawful
for certain persons, including officers, directors and Advisory Persons of the
Adviser, in connection with the purchase or sale by such persons of securities
held or to be acquired by Choice Funds or any of its series (the Choice Funds
and each of its series shall be referred to herein, collectively, as the
"Trust"):
(1) to employ a device, scheme or artifice to defraud the Trust;
(2) to make to the Trust any untrue statement of a material fact or
omit to state to the Trust a material fact necessary in order to
make the statements made, in light of the circumstances in which
they are made, not misleading;
(3) to engage in any act, practice or course of business which
operates or would operate as a fraud or deceit upon the Trust; or
(4) to engage in a manipulative practice with respect to the Trust.
The Rule also requires that the Trust, the Adviser and the Trust's
principal underwriter shall each adopt a written Code of Ethics, which shall be
approved by the Trust's Board of Trustees ("Board"), including a majority of the
independent trustees, and contain provisions reasonably necessary to prevent
Access Persons from engaging in acts which violate the above standard.
Set forth below is the Code of Ethics adopted by the Adviser, in
compliance with the Rule. This Code of Ethics is based upon the principle that
the trustees, officers and Advisory Persons of Adviser, and certain affiliated
persons of the Adviser, the Trust and any other investment adviser or principal
underwriter of the Trust, owe a fiduciary duty to, among others, the
shareholders of the Trust to conduct their affairs, including their personal
securities transactions, in such a manner to avoid (i) serving their own
personal interests ahead of shareholders; (ii) taking inappropriate advantage of
their position with the Trust; and (iii) any actual or potential conflicts of
interest or any abuse of their position of trust and responsibility.
<PAGE> 2
I. DEFINITIONS
(a) "Access Person" means any director (excluding any
director who is not also an officer of the Adviser or its affiliates), officer,
or Advisory Person (defined immediately below) of the Adviser.
(b) "Advisory Person" means (i) any employee of the
Adviser (or of any company in a control relationship to the Adviser) who, in
connection with his regular functions or duties, normally makes, participates
in, or obtains current information regarding the purchase or sale of Covered
Securities by the Trust, or whose functions relate to the making of any
recommendations with respect to such purchases or sales; and (ii) any natural
person in a control relationship to the Adviser who regularly obtains current
information concerning recommendations made to the Trust with regard to the
purchase or sale of a Covered Security by the Trust.
(c) "Beneficial ownership" shall be interpreted in the
same manner as it would be in determining whether a person is considered a
"beneficial owner" as defined in Rule 16a-1(a)(2) under the Securities Exchange
Act of 1934, as amended, which, generally speaking, encompasses those situations
where the beneficial owner has the right to enjoy some economic benefit from the
ownership of the Covered Security. A person is normally regarded as the
beneficial owner of securities held in the name of his or her spouse or minor
children living in his or her household.
(d) "Control" shall have the same meaning as that set
forth in Section 2(a)(9) of the Act.
(e) "Covered Security" shall have the meaning set forth
in Section 2(a)(36) of the Act, except that it shall not include direct
obligations of the United States government, bankers' acceptances, bank
certificates of deposit, commercial paper, high quality short-term debt
instruments (including repurchase agreements), and shares of registered open-end
investment companies.
(f) "Investment Personnel" means (a) Portfolio Managers
as well as any other employee such as a securities analyst and/or trader of the
Adviser (or of any company in a control relationship to the Adviser) who, in
connection with his or her regular functions or duties, makes or participates in
the making of recommendations regarding a Trust's purchase or sale of Covered
Securities or (b) any natural person who controls the Adviser and who obtains
information concerning recommendations to the Trust regarding the purchase or
sale of Covered Securities by the Trust.
(g) "Purchase or sale of a Covered Security" includes,
among other things, the writing of an option to purchase or sell a Covered
Security.
(h) "Portfolio Managers" means those individuals
entrusted with the direct responsibility and authority to make investment
decisions affecting the Trust.
(i) A "security held or to be acquired" by the Trust is
defined under Rule 17j-1 to include: (1) any Covered Security which within the
most recent fifteen (15) days (a) is
2
<PAGE> 3
or has been held by the Trust, or (b) is being or has been considered by the
Trust or the Adviser for purchase by the Trust; and (2) any option to purchase
or sell, and any Covered Security which is convertible into or exchangeable for
a Covered Security described in subparts (1)(a) or (1)(b).
II. PERSONAL TRADING RESTRICTIONS
(1) No Access Person shall:
(a) engage in any act, practice or course of conduct,
which would violate the provisions of Rule 17j-1 set forth
above.
(b) execute a personal Covered Securities transaction on
the same day that the Trust has a pending "buy" or "sell"
order in that same Covered Security, unless the Access Person
aggregates his or her personal trade with the Trust's trades
in accordance with an Aggregation and Allocation Policy which
merits the requirements outlined by the SEC staff (trades made
in violation of this policy should be unwound, if possible,
and if they cannot be unwound, they should be disgorged to the
Trust);
(c) disclose to other persons the securities activities
engaged in or contemplated for the Trust;
(d) purchase or sell securities directly or indirectly
without prior approval from the Compliance Officer or other
officer designated by the Board of Directors.
(2) No Investment Personnel shall
(a) directly or indirectly acquire beneficial ownership
in any Covered Securities in a limited offering ("private
placement") or initial public offering without prior approval
from the appropriate compliance officer. (In determining
whether to grant such prior approval, the appropriate officer
shall determine (among other factors) whether the investment
opportunity should be reserved for the Trust and its
shareholders, and whether the opportunity is being offered to
the individual by virtue of his or her position with the
Trust. Any Investment Personnel who has been authorized to
acquire Covered Securities in a private placement, must
disclose that investment when he or she is involved in any
subsequent consideration of an investment by the Trust in that
issuer. In such circumstances, Investment Personnel with no
personal interest in the particular issuer shall independently
review the Trust's decision to purchase that issuer's Covered
Securities.)
(b) profit from the purchase and sale, or sale and
purchase, of the same (or equivalent) Covered Securities
within sixty (60) calendar days. Trades made in violation of
this policy should be unwound, if possible. In the event such
trades cannot be unwound, any profits realized on such
short-term trades shall be subject to disgorgement to the
Trust.
3
<PAGE> 4
(c) seek or accept anything of more than de minimis
value, either directly or indirectly, from broker-dealers or
other persons, which to the actual knowledge of the Investment
Personnel, do business or might do business with the Trust.
For purposes of this provision, the following gifts will not
be considered to be in violation of this section: (a) an
occasional meal; (b) an occasional ticket to a sporting event,
the theater or comparable entertainment, for which the
employee will reimburse the host; and (c) other gifts of
nominal cost.
(3) No Portfolio Manager shall execute any personal Covered
Securities transactions within seven (7) calendar days before or after the day
the Trust trades in that Covered Security. Trades made in violation of this
black-out period should be unwound, if possible. Otherwise, any profits realized
on such trades shall be subject to disgorgement to the Trust.
III. EXEMPTED TRANSACTIONS
The prohibitions of Sections II(1)(b), II(1)(d), II(2)(b) and II(3)
shall not apply to:
(1) purchases or sales effected in any account over which the
Access Person or Investment Personnel has no direct or indirect influence or
control;
(2) purchases or sales which are non-volitional1 on the part of
either the Access Person, Investment Personnel or the Trust;
(3) purchases which are part of an automatic dividend reinvestment
plan;
(4) purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its Covered Securities, to the
extent such rights were acquired from such issuer, and sales of such rights so
acquired; and
(5) purchases or sales which are only remotely potentially harmful
to the Trust because they would be very unlikely to affect a highly
institutional market or clearly are not related economically to the Covered
Securities to be purchased, sold or held by the Trust.
IV. REPORTING, DISCLOSURE AND CERTIFICATION REQUIREMENTS
(1) Initial Holdings Reports. All Access Persons shall disclose
all personal Covered Securities holdings to the appropriate compliance officer
upon commencing employment. The Initial Report shall be made on the form
attached as Exhibit A and shall contain the following information:
(a) the title, number of shares and principal amount of
each Covered Security in which the Access Person had any
direct or indirect beneficial ownership when the person became
an Access Person;
- -----------------------------
1 Nonvolitional purchases or sales include those transactions which do not
involve a willing act or conscious decision on the part of the employee. For
example, shares received or disposed of by Access Persons, Investment Personnel
or the Trust in a merger, recapitalization or similar transaction are considered
nonvolitional.
4
<PAGE> 5
(b) the name of any broker, dealer or bank with whom the
Access Person maintained an account in which any Covered
Securities were held for the direct or indirect benefit of the
Access Person as of the date the person became an Access
Person; and
(c) the date that the report is submitted by the Access
Person.
All Access Persons currently employed by the Trust shall
submit an Initial Report to the appropriate compliance officer within ten days
of the date of this Code of Ethics. All other Initial Reports shall be made no
later than 10 days after the person becomes an Access Person.
(2) Quarterly Reports.
(a) All Access Persons shall report to the appropriate
compliance officer, the information described below in
Sub-paragraph (2)(c) of this Section with respect to
transactions in any Covered Security in which such person has,
or by reason of such transaction acquires, any direct or
indirect beneficial ownership in the Covered Security;
provided, however, that all Access Persons shall not be
required to make a report with respect to transactions
effected for any account over which such person does not have
any direct or indirect influence or Covered Security
transactions which are not eligible for purchase or sale by
the Trust.
(b) Notwithstanding Section 2(a), an Access Person need
not make a Quarterly Transaction Report if the information
would duplicate information required to be reported under Rule
204(a)(12) under the Investment Advisers Act of 1940, as
amended, or information contained in brokerage statements
submitted by the Access Person to the Adviser if all of the
information required by the Quarterly Report is contained in
the brokerage statement.
(c) Reports required to be made under this Paragraph (2)
shall be made not later than 10 days after the end of the
calendar quarter in which the transaction to which the report
relates was effected. All Access Persons shall be required to
submit a report for all periods, including those periods in
which no Covered Securities transactions were effected. A
report shall be made on the form attached hereto as Exhibit B
or on any other form containing the following information:
(i) the date of the transaction, the title of
the Covered Security, the interest rate and
maturity date (if applicable), the number of
shares, and the principal amount of each
Covered Security involved;
(ii) the nature of the transaction (i.e.,
purchase, sale or any other type of
acquisition or disposition);
(iii) the price at which the transaction was
effected;
(iv) the name of the broker, dealer or bank with
or through whom the transaction was
effected; and
5
<PAGE> 6
(v) the date the report is submitted.
(d) Any such report may contain a statement that the
report shall not be construed as an admission by the person
making such report that he or she has any direct or indirect
beneficial ownership in the Covered Security to which the
report relates.
(e) All Access Persons shall direct their brokers to
supply duplicate copies of all monthly brokerage statements
for all Covered Securities accounts maintained by the Access
Person to the appropriate compliance officer, on a timely
basis. In addition, with respect to any account established by
the Access Person in which any Covered Securities were held
during the quarter for the direct or indirect benefit of the
Access Person, the Access Person shall report the following
information:
(i) the name of the broker, dealer or bank with
whom the Access Person established the
account;
(ii) the date the account was established; and
(iii) the date the report is submitted.
(3) Annual Holdings Reports. All Access Persons shall disclose all
personal Covered Securities holdings on an annual basis on the Form attached as
Exhibit C within 30 days after the end of the calendar year. All Annual Reports
shall provide information on personal Covered Securities holdings that is
current as of a date no more than 30 days before the Annual Report is submitted.
Such Annual Reports shall contain the following information:
(a) the title, number of shares and principal amount of
each Covered Security in which the Access Person had any
direct or indirect beneficial ownership;
(b) the name of any broker, dealer or bank with whom the
Access Person maintains an account in which any Covered
Securities are held for the direct or indirect benefit of the
Access Person; and
(c) the date that the report is submitted by the Access
Person.
(4) Certification of Compliance with Code of Ethics. With the
exception of the Disinterested Trustees, every Access Person shall certify in
their Annual Report (Attached as Exhibit C) that:
(a) they have read and understand the Code of Ethics and
recognize that they are subject thereto;
(b) they have complied with the requirements of the Code
of Ethics; and
(c) they have reported all personal securities
transactions required to be reported pursuant to the
requirements of the Code of Ethics.
6
<PAGE> 7
(5) Conflict of Interest. Every Access Person shall notify the
compliance officer of any personal conflict of interest relationship which may
involve the Trust, such as the existence of any economic relationship between
their transactions and securities held or to be acquired by the Trust. Such
notification shall occur in the pre-clearance process (See Section II(1)(d)).
V. REPORTING OF VIOLATIONS TO THE BOARD OF DIRECTORS
(1) Any person, including the compliance officer, shall promptly
report all violations and apparent violations of this Code of Ethics and the
reporting requirements thereunder to the Board of Directors.
(2) The Board of Directors, or a committee of trustees created by
the Board of Directors for that purpose, shall consider reports made to the
Board of Directors hereunder and shall determine whether or not this Code of
Ethics has been violated and what sanctions, if any, should be imposed.
VI. ANNUAL REPORTING TO THE TRUST
The compliance officer shall prepare an annual report relating
to this Code of Ethics to the Board of Trustees of the Trust. Such annual report
shall:
(a) summarize existing procedures concerning personal
investing and any changes in the procedures made during the
past year;
(b) identify any violations requiring significant
remedial action during the past year; and
(c) identify any recommended changes in the existing
restrictions or procedures based upon the Adviser's experience
under its Code of Ethics, evolving industry practices or
developments in applicable laws or regulations.
(d) certify that the Adviser has adopted procedures
reasonably necessary to prevent Access Persons from violating
this Code of Ethics.
VII. SANCTIONS
Upon discovering a violation of this Code, the Board of
Directors may impose such sanctions as they deem appropriate, including, among
other things, a letter of censure or suspension or termination of the employment
of the violator.
VIII. RETENTION OF RECORDS
The Adviser must, at its principal place of business, maintain
records in the manner and to the extent set out below and must make these
records available to the SEC or any representative of the SEC at any time and
from time to time for reasonable periodic, special or other examination:
7
<PAGE> 8
(1) A copy of this Code of Ethics, or any Code of Ethics which
within the past five (5) years has been in effect, shall be preserved in an
easily accessible place;
(2) A record of any violation of this Code of Ethics, and of any
action taken as a result of such violation, shall be preserved in an easily
accessible place for a period of not less than five (5) years following the end
of the fiscal year in which the violation occurs;
(3) A copy of each report made by an Access Person pursuant to
this Code of Ethics shall be preserved for a period of not less than five (5)
years from the end of the fiscal year in which it is made, the first two years
in an easily accessible place;
(4) A list of all persons who are, or within the past five (5)
years have been, required to make reports pursuant to this Code of Ethics shall
be maintained in an easily accessible place;
(5) A record of any decision, and the reasons supporting the
decision, to approve the acquisition by Investment Personnel of securities in a
private placement or IPO, as described in Section II(2)(a) of this Code of
Ethics, for at least five (5) years after the end of the fiscal year in which
the approval is granted.
(6) A copy of each annual report required under Section VI for at
least five (5) years after the end of the fiscal year in which it is made, the
first two in an accessible place.
Dated:
8
<PAGE> 9
Exhibit A
CHOICE INVESTMENT MANAGEMENT, LLC
CODE OF ETHICS
INITIAL REPORT
To the Compliance Officer of CHOICE INVESTMENT, LLC (the "Adviser"):
1. I hereby acknowledge receipt of a copy of the Code of Ethics
for the Adviser.
2. I have read and understand the Code and recognize that I am
subject thereto in the capacity of an "Access Person."
3. Except as noted below, I hereby certify that I have no
knowledge of the existence of any personal conflict of interest relationship
which may involve the Adviser, such as any economic relationship between my
transactions and Covered Securities held or to be acquired by Choice Funds or
any of its series.
4. As of the date below I had a direct or indirect beneficial
ownership in the following Covered Securities:
<TABLE>
<CAPTION>
Dollar Amount Type of Interest
Title of Security Number of Shares of Transaction (Direct or Indirect)
----------------- ---------------- -------------- --------------------
<S> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain account(s) as of the
date this report is submitted in which Covered Securities are held for my direct
or indirect benefit with the brokers, dealers or banks listed below.
A-1
<PAGE> 10
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
------------------ ----------------
Name:
-------------------------------
Title:
------------------------------
Date Report Submitted:
--------------
A-2
<PAGE> 11
Exhibit B
CHOICE INVESTMENT MANAGEMENT, LLC
CODE OF ETHICS
Quarterly Securities Transactions Report
For the Calendar Quarter Ended:
---------
To the Compliance Officer of the CHOICE INVESTMENT MANAGEMENT, LLC (the
"Adviser"):
During the quarter referred to above, the following transactions were
effected in Covered Securities of which I had, or by reason of such transaction
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics adopted by the Adviser.
<TABLE>
<CAPTION>
================ ================= =========== ================= ================== ================= ========= =================
INTEREST RATE DOLLAR NATURE OF BROKER/
TITLE OF DATE OF NO. OF AND MATURITY AMOUNT OF TRANSACTION PRICE DEALER
SECURITY TRANSACTION SHARES DATE (if TRANSACTION (Purchase, Sale, OR BANK THROUGH
applicable) Other) WHOM EFFECTED
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
- ---------------- ----------------- ----------- ----------------- ------------------ ----------------- --------- -----------------
================ ================= =========== ================= ================== ================= ========= =================
</TABLE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) other transactions not required to
be reported, and (iii) is not an admission that I have or had any direct or
indirect beneficial ownership in the Covered Securities listed above.
I hereby represent that I established the brokerage accounts listed
below, in which Covered Securities were held during the quarter referenced above
for my indirect or direct benefit.
B-1
<PAGE> 12
Name of Broker, Dealer or Bank with Whom
Account Established Date Established
------------------- ----------------
Except as noted in this report, I hereby certify that I have no
knowledge of the existence of any personal conflict of interest relationship
which may involve the Adviser, such as the existence of any economic
relationship between my transactions and Covered Securities held or to be
acquired by the Choice Funds or any of its series.
Name:
--------------------------------------
Title:
-------------------------------------
Date Report Submitted:
---------------------
B-2
<PAGE> 13
Exhibit C
CHOICE INVESTMENT MANAGEMENT, LLC
CODE OF ETHICS
ANNUAL REPORT
To the Compliance Officer of the CHOICE INVESTMENT MANAGEMENT, LLC (the
"Adviser"):
1. I have read and understand the Code of Ethics and recognize
that I am subject thereto in the capacity of an "Access Person."
2. I hereby certify that, during the year ended December 31,
200__, I have complied with the requirements of the Code of Ethics and I have
reported all Covered Securities transactions required to be reported pursuant to
the Code.
3. Except as noted below, I hereby certify that I have no
knowledge of the existence of any personal conflict of interest relationship
which may involve the Adviser, such as any economic relationship between my
transactions and Covered Securities held or to be acquired by the Choice Funds
or any of its series.
4. As of December 31, 200__, I had a direct or indirect
beneficial ownership in the following Covered Securities:
<TABLE>
<CAPTION>
Principal Amount Type of Interest Broker/Dealer or Bank
Title of Security Number of Shares of Securities Sold (Direct or Indirect) Through Whom Effected
----------------- ---------------- ------------------ -------------------- ---------------------
<S> <C> <C> <C> <C>
</TABLE>
5. I hereby represent that I maintain the account(s) with the
brokers, dealers or banks listed below in which Covered Securities are held for
my direct or indirect benefit.
C-1
<PAGE> 14
Name of Broker, Bank or Dealer with Whom
Account Maintained Date Established
------------------ ----------------
Name:
--------------------------------------
Title:
-------------------------------------
Date Report Submitted:
---------------------
C-2
<PAGE> 1
POWER OF ATTORNEY
The undersigned Officers and Trustees of Choice Funds (the "Trust")
hereby appoint Patrick S. Adams, Sharon E. Adams and Christelle C. Beck as
attorneys-in-fact and agents, with the power to execute and to file any of the
documents referred to below relating to the initial registration of the Trust as
an investment company under the Investment Company Act of 1940, as amended (the
"Act") and the registration of the Trust's securities under the Securities Act
of 1933, as amended (the "Securities Act") including the Trust's Registration
Statement on Form N-1A, any and all amendments thereto, including all exhibits
and any documents required to be filed with respect thereto with any regulatory
authority, including applications for exemptive order rulings. Each of the
undersigned grants to the said attorneys full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents
and purposes, as he could do if personally present, thereby ratifying all that
said attorneys-in-fact and agents may lawfully do or cause to be done by virtue
hereof.
The undersigned Officers and Trustees hereby execute this Power of
Attorney as of this 30th day of September, 1999.
Name Title
/s/ Patrick S. Adams President, CEO, Chairman, Trustee
------------------------
Patrick S. Adams
/s/ Gerard M. Lavin Trustee
------------------------
Gerard M. Lavin
/s/ Richard A. Hathaway Trustee
------------------------
Dr. Richard A. Hathaway
/s/ Christelle C. Beck Treasurer/Principal Accounting
------------------------ Officer
Christelle C. Beck
/s/ Sharon E. Adams Secretary
------------------------
Sharon E. Adams
