As filed with the Securities and Exchange Commission on October 12, 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. ___ [ ]
Post-Effective Amendment No. 2 [X]
-
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 3
-
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:
PHILIP A. FEIGIN
ROTHGERBER JOHNSON & LYONS LLP
ONE TABOR CENTER, SUITE 3000
1200 SEVENTEENTH STREET
DENVER, COLORADO 80202
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ______ pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ X ] 75 days after filing pursuant to paragraph (a)(2)
<PAGE>
------------
CHOICE FUNDS
------------
P R O S P E C T U S
October 12, 2000
LONG - SHORT 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
5299 DTC Boulevard, Suite 1150
Englewood, Colorado 80111
(303) 488-2200
<PAGE>
CHOICE LONG-SHORT FUND
TABLE OF CONTENTS
Page
----
FUND OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
FUND FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . .2
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES, AND
RELATED RISKS . . . . . . . . . . . . . . . . . . . . . . . . . . .3
INVESTMENT OBJECTIVE. . . . . . . . . . . . . . . . . . . . . . . .4
PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS . . . . . . . . .4
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Adviser. . . . . . . . . . . . . . . . . . . . . . . . 12
Portfolio Manager . . . . . . . . . . . . . . . . . . . . . . . . 13
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 13
BUYING AND SELLING SHARES. . . . . . . . . . . . . . . . . . . . . . . 13
Determining Your Share Price. . . . . . . . . . . . . . . . . . . 13
Before You Invest . . . . . . . . . . . . . . . . . . . . . . . . 14
Purchasing Shares . . . . . . . . . . . . . . . . . . . . . . . . 15
Selling Shares. . . . . . . . . . . . . . . . . . . . . . . . . . 17
Making Changes to Your Account. . . . . . . . . . . . . . . . . . 20
Special Features and Services . . . . . . . . . . . . . . . . . . 20
Other Shareholder Information . . . . . . . . . . . . . . . . . . 21
Dividends and Distributions . . . . . . . . . . . . . . . . . . . 22
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
FOR MORE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 26
Page i
<PAGE>
FUND OVERVIEW
-------------
CHOICE LONG-SHORT FUND
INVESTMENT GOAL
The Fund seeks long-term growth of capital through all market conditions.
PRINCIPAL INVESTMENT STRATEGIES
The Fund will use sophisticated investment strategies to seek to achieve
returns in both rising and falling markets. The Fund's portfolio manager
will perform intense fundamental analysis of a pool of approximately 300
companies of all sizes, including small companies with little operating
history, initial public offerings and foreign companies. The Fund may have
a non-diversified portfolio and may be traded actively.
The Fund will buy stock "long" of those companies the portfolio manager
believes occupy a dominant position in a market due to size, products or
services and whose growth potential is not yet reflected fully in the price
of the company's stock.
The Fund will sell "short" the stock of companies the portfolio manager
believes are overvalued due to slowing growth, weakening financial
condition, declining cash flow or other similar factors. Selling "short"
will be used to hedge the Fund's long portfolio in periods of market
decline and to take advantage of negative information about companies
gained from the portfolio manager's research.
The Fund will also use other sophisticated investment approaches such as
leveraging, options and futures to attempt to enhance returns or hedge
against market decline.
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 the risk 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 the risk 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.
Because the Fund will use short selling, derivatives strategies and other
leveraging techniques speculatively to enhance returns, it is subject to
greater risks and its performance may be more volatile than that of other
funds. The Fund is appropriate for the sophisticated investor who
understands and is willing to assume the risks of the Fund's aggressive
investment strategies. The Fund is not a complete investment program and
investors should invest only a portion of their assets in the Fund.
The Fund may have a non-diversified portfolio, meaning it may invest in the
securities of fewer issuers than diversified portfolio funds 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 often may focus the Fund's investments in
Page 1
<PAGE>
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.
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.
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 like a deposit in a bank. It 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 THAT
APPLY TO THE FUND, PLEASE SEE INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT
STRATEGIES, AND RELATED RISKS ON PAGE 3.
FUND FEES AND EXPENSES
----------------------
The fees and expenses you may pay if you buy and hold shares of the Fund
are described in this table.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of offering
price) 5.50% None None
Maximum Contingent Deferred Sales Charge ("CDSC")
(Load) (as a percentage of original purchase price
or redemption proceeds, whichever is lower) None/1.00%* 4.00%** 1.00%***
Wire Redemption Fee $10 $10 $10
</TABLE>
* None for purchases of less than $1 million NAV; 1% for purchases of
more than $1 million NAV redeemed within one year
** Class B Shares automatically convert to Class A Shares after eight (8)
years. The CDSC decreases over time. For Class B shares the CDSC
decreases 1.00% annually to 0% after the sixth (6th) year.
*** For Class C shares, the CDSC is 0% after the first (1st) year.
Page 2
<PAGE>
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
OPERATING EXPENSES
CLASS A CLASS B CLASS C
------- ------- -------
Management Fees 2.50% 2.50% 2.50%
Distribution (12b-1) Fees 0.35% 1.00% 1.00%
Other Expenses 0.80% 0.80% 0.80%
Total Fund operating expenses* 3.65% 4.30% 4.30%
* "Other Expenses" are based on estimated expenses for the first fiscal year.
EXAMPLES: The Examples are to help you compare the cost of investing in
the Fund with the cost of investing in other funds. In formulating these
examples, it is assumed that:
* You invest $10,000 in the Fund for the time periods indicated, and
then redeem all of your shares at the end of those periods;
* Your investment has a 5.00% return each year; and
* The Fund's operating expenses stay the same and all dividends and
distributions are reinvested.
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>
CLASS A CLASS B+ CLASS B++ CLASS C+ CLASS C++
<S> <C> <C> <C> <C> <C>
AFTER 1 YR. $639 $692 $292 $392 $ 292
AFTER 3 YRS. $1,084 $1,095 $895 $895 $ 895
</TABLE>
+ ASSUMES REDEMPTION AT THE END OF PERIOD.
++ ASSUMES NO REDEMPTION AT END OF PERIOD.
INVESTMENT OBJECTIVE,
---------------------
PRINCIPAL INVESTMENT STRATEGIES,
--------------------------------
AND RELATED RISKS
-----------------
This section of the Prospectus is a more complete description of the Fund's
investment objective, principal investment strategies and principal,
related risks. Of course, there can be no assurance the Fund will achieve
its investment objective.
Page 3
<PAGE>
Please note:
* Additional descriptions of the Fund's strategies and investments, as
well as other strategies and investments not described below, may be
found in the Fund's Statement of Additional Information ("SAI").
* The Fund's INVESTMENT OBJECTIVE is "fundamental" and cannot be changed
without a shareholder vote. Except as noted, the Fund's INVESTMENT
POLICIES are not fundamental and thus can be changed without a
shareholder vote.
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek long-term growth of capital
through all market conditions.
PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS
The principal strategies and risks of investing in the Fund are described
below. This is a more detailed discussion of some of those risks than was
provided earlier.
The Fund will invest primarily in a non-diversified portfolio of common
stocks of companies of all sizes that have been analyzed intensely by the
portfolio manager.
In selecting stocks to buy "long," the portfolio manager will look 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 reflected fully in the company's stock price. In addition, the
portfolio manager will look 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's portfolio manager generally will sell a security when it no
longer meets the portfolio manager's investment criteria or when it has met
the manager's expectations for appreciation. The portfolio manager often
may sell portfolio stocks quickly to respond to short-term market price
movements, and expects to trade the portfolio actively in pursuit of the
Fund's investment goal. Due to this and the Fund's potentially relatively
small number of holdings, the Fund's annual portfolio turnover rate may be
significantly higher than that of many other mutual funds.
Generally, the Fund will almost always have a portion of the Fund short in
order partially to hedge long positions and attempt to obtain returns from
discoveries made by the portfolio manager in the course of his research. In
selecting short-sell candidates, the portfolio manager looks primarily for
growth companies where the growth is slowing, evaluations are high and
there is a technical or fundamental catalyst that indicates a decline in
the market.
In addition, balance sheet analysis will be utilized to identify weakening
financial conditions or a declining cash flow. Short sales may represent as
much as 50% of the Fund's net assets.
Page 4
<PAGE>
The Fund may engage in borrowing to fund the purchase of securities, a
practice known as "leveraging." Leveraging may result from ordinary
borrowings or may be inherent in the structure of certain investments. The
portfolio manager may "leverage" up to 33% of the Fund's total net assets.
In addition, the portfolio manager may use options and futures to enhance
returns.
NON-DIVERSIFICATION
The Fund may have a non-diversified portfolio, meaning 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 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.
COMMON STOCKS
Because the Fund invests in common stocks, it is subject to the risks
associated with common stock investing. These include the management risk
of selecting individual stocks that do not perform as the portfolio manager
anticipated, the risk the stock markets in which the Fund invests may
experience periods of turbulence and instability, and the general risk that
domestic and global economies may go through periods of decline and
cyclical change. If the stock market declines in value, the Fund is likely
to decline in value. Many factors affect an individual company's
performance, such as the strength of its management or the demand for its
products or services. Negative performance may affect the earnings growth
potential anticipated by the portfolio manager when the individual stock
was selected for a Fund's portfolio.
To the extent the Fund invests in stocks of small or unseasoned companies,
your investment is subject to the following additional risks:
* Unseasoned companies. These are companies 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
capitalization 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, the companies 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.
Normally, there is less publicly available information concerning the
issuers of these securities. Small companies in which the Fund invests
may have limited product lines, markets or financial resources or may
be dependent on a small management group.
SHORT SALES
The Fund will utilize short selling in order to attempt both to protect its
portfolio against the effects of potential downtrends in the securities
markets and as a means of enhancing its overall performance. A "short sale"
is a transaction in which the Fund sells a security it does not own but has
borrowed in anticipation that the market
Page 5
<PAGE>
price of that security will decline. The Fund may be required to pay a fee
to borrow the security and to pay over to the lender any payments received
on the security.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize
a capital gain. Although the Fund's gain is limited by the price at which
it sold the security short, its potential loss is unlimited.
In order to defer realization of gain or loss for U.S. federal income tax
purposes, the Fund may also make short sales "against the box." In this
type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the
identical security. The Fund will not make a short sale if, immediately
before the transaction, the market value of all securities sold would
exceed 100% of the value of the Fund's net assets.
SPECIAL SITUATIONS.
The Fund may also invest in securities of companies that have recently
experienced or are anticipated to experience a significant change in
structure, management, products or services or other special situations
that may affect the value of their securities significantly. Examples of
special situations are companies being reorganized or merged, companies
emerging from bankruptcy, companies introducing unusual new products or
that enjoy particular tax advantages. Other examples include companies
experiencing changes in senior management, extraordinary corporate events,
significant changes in cost or capital structure or 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.
INITIAL PUBLIC OFFERINGS
Companies involved in IPOs often are smaller and have a limited operating
history, which involves greater risk the value of their securities will be
impaired following the IPO. The portfolio manager may decide to sell an IPO
security more quickly, which may result in significant gains or losses to
the Fund.
FOREIGN SECURITIES
The securities markets of many foreign countries are relatively small, with
the majority of market capitalization and trading volume concentrated in a
limited number of companies representing a small number of industries.
Consequently, the Fund, whose investment portfolio includes foreign
securities, may experience greater price volatility and significantly lower
liquidity than a portfolio invested solely in equity securities of U.S.
companies. These markets may be subject to greater influences by adverse
events generally affecting the market and by large investors trading
significant blocks of securities than is usual in the United States.
Securities registration, custody and settlements may in some instances be
subject to delays and legal and administrative uncertainties.
Page 6
<PAGE>
Certain foreign countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons only
to a specified percentage of an issuer's outstanding securities or a
specific class of securities that may have less advantageous terms
(including price) than securities of the company available for purchase by
nationals. These restrictions or controls at times may limit or preclude
investment in certain securities and may increase the costs and expenses of
the Fund. In addition, the repatriation of investment income, capital or
the proceeds of sales of securities from certain countries is controlled
under regulations, including the need for certain advance government
notification or authority in some cases, and if a deterioration occurs in
a country's balance of payments, the country could impose temporary
restrictions on foreign capital remittances.
The Fund also could be affected adversely by delays in, or a refusal to
grant, any required governmental approval for repatriation, as well as by
the application of other restrictions on investment. Investing in local
markets may require the Fund to adopt special procedures that may involve
additional costs to the Fund. These factors may affect the liquidity of the
Fund's investments in any country and the portfolio manager will monitor
the effect of any such factor or factors on the Fund's investments.
Furthermore, transaction costs including brokerage commissions for
transactions both on and off the securities exchanges in many foreign
countries are generally higher than in the United States.
Issuers of securities in foreign jurisdictions generally are not subject to
the same degree of regulation as are U.S. issuers - with respect to such
matters as insider trading rules, restrictions on market manipulation,
shareholder proxy requirements and timely disclosure of information. The
reporting, accounting and auditing standards of foreign countries may
differ, in some cases significantly, from U.S. standards in important
respects and less information may be available to investors in foreign
securities than to investors in U.S. securities. Substantially less
information is available publicly about certain non-U.S. issuers than is
available about U.S. issuers.
The economies of individual foreign countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross
domestic product or gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Nationalization, expropriation or confiscatory taxation, currency blockage,
political changes, government regulation, political or social instability
or diplomatic developments could affect adversely the economy of a foreign
country and the Fund's investments. In the event of expropriation,
nationalization or other confiscation, the Fund could lose its entire
investment in the country involved. In addition, laws in foreign countries
governing business organizations, bankruptcy and insolvency may provide
less protection to security holders, such as the Fund, than that provided
by U.S. laws.
FUTURES AND OPTIONS ON FUTURES
The successful use of the investment strategies next described draws upon
special skills and experience and usually depends on the ability to
forecast price movements or currency exchange rate movements correctly.
Should prices or exchange rates move unexpectedly, the Fund may not achieve
the anticipated benefits of the transactions or may realize losses and thus
be in a worse position than if such strategies had not been used. Unlike-many
exchange-traded futures contracts and options on futures contracts,
there are no daily price fluctuation limits for certain options on
currencies and forward contracts, and adverse market movements could
continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the
Page 7
<PAGE>
prices of such instruments and movements in the prices of the securities
and currencies hedged or used for cover will not be perfect and could
produce unanticipated losses.
The Fund's ability to dispose of its positions in futures contracts,
options and forward contracts depends on the availability of liquid markets
in such instruments. Markets in options and futures with respect to a
number of types of securities and currencies are relatively new and still
developing, and there is no public market for forward contracts. It is
impossible to predict the amount of trading interest that may exist in
various types of futures contracts, options and forward contracts. If a
secondary market does not exist for an option purchased or written by the
Fund, it might not be possible to effect a closing transaction in the
option (i.e., dispose of the option) with the result that (i) an option
purchased by the Fund would have to be exercised in order for the Fund to
realize any profit, and (ii) the Fund may not be able to sell portfolio
securities or currencies covering an option written by the Fund until the
option expires or it delivers the underlying securities, currency or
futures contract upon exercise. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively.
A "sale" of a futures contract means the acquisition of a contractual
obligation to deliver the securities or foreign currency or other commodity
called for by the contract at a specified price on a specified date. A
"purchase" of a futures contract means the incurring of an obligation to
acquire the securities or foreign currency or other commodity called for by
the contract at a specified price on a specified date.
The Fund may purchase options on futures contracts written or purchased
that are traded on U.S. or foreign exchanges or over-the-counter. These
investment techniques will be used only to hedge against anticipated future
changes in market conditions and interest or exchange rates that otherwise
might either affect the value of the Fund's portfolio securities or the
prices of securities the Fund intends to purchase at a later date adversely.
The Fund will not buy or sell any futures contracts or options on futures
contracts if immediately thereafter the market values of the outstanding
futures contracts of the Fund and the currencies and futures contracts
subject to outstanding options written by the Fund would exceed 100% of its
net assets.
STOCK INDEX FUTURES
The Fund may purchase and sell stock index futures as a hedge against
movements in the equity markets. There are several risks in connection with
the use of stock index futures by the Fund as a hedging device. One risk
arises because of the imperfect correlation between movements in the price
of a stock index futures contract and movements in the price of the
securities that are the subject of the hedge. The price of a stock index
futures contract may move more than or less than the price of the
securities being hedged. If the price of a stock index futures contract
moves less than the price of the securities that are the subject of the
hedge, the hedge will not be fully effective but, if the price of the
securities being hedged has moved in an unfavorable direction, the Fund
will be in a better position than if it had not hedged at all. If the price
of the securities being hedged has moved in a favorable direction, this
advantage will be offset partially by the loss on the index futures
contract. If the price of the index futures contract moves more than the
price of the stock, the Fund will experience either a loss or gain on the
futures contract that will not be offset completely by movements in the
price of the securities that are subject to the hedge.
To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of a stock index futures
contract, the Fund may buy or sell stock index futures contracts
Page 8
<PAGE>
in a greater dollar amount than the dollar amount of securities being
hedged if the volatility over a particular time period of the prices of
such securities has been greater than the volatility over such time period
of the stock index, or if otherwise deemed to be appropriate by the
portfolio manager. Conversely, the Fund may buy or sell fewer stock index
futures contracts if the volatility of the prices of the securities being
hedged over a particular time period is less than the volatility of the
stock index over such time period, or it is otherwise deemed to be
appropriate by the portfolio manager. It is also possible that, where the
Fund has sold futures contracts to hedge its portfolio against a decline in
the market, the market may advance and the value of securities held in the
Fund may decline. If this occurs, the Fund will lose money on the futures
contracts and also experience a decline in value in its portfolio
securities. However, over time, the value of a diversified portfolio should
tend to move in the same direction as the market indices upon which the
index futures are based, although there may be deviations arising from
differences between the composition of the Fund and the stocks comprising
the index.
Where a stock index futures contract is purchased to hedge against a
possible increase in the price of stock before the Fund is able to invest
its cash (or cash equivalents) in stocks (or options) in an orderly
fashion, it is possible the market may decline instead. If the Fund then
concludes not to invest in stock or options at that time because of concern
as to possible further market decline or for other reasons, the Fund will
realize a loss on the futures contract that is not offset by a reduction in
the price of securities purchased.
In addition to the possibility there may be an imperfect correlation, or no
correlation at all, between movements in the price of stock index futures
contracts and the portion of the portfolio being hedged, the price of stock
index futures may not correlate perfectly with movement in the stock index
due to certain market distortions. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through
offsetting transactions that could distort the normal relationship between
the index and futures markets. From the point of view of speculators, the
deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation
by speculators in the futures market may also cause temporary price
distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in
a stock index and movements in the price of stock index futures, a correct
forecast of general market trends by the portfolio manager still may not
result in a successful hedging transaction over a short time frame.
Positions in stock index futures may be closed out only on an exchange or
board of trade, which provides a secondary market for such futures.
Although the Fund intends to purchase or sell futures only on exchanges or
boards of trade where there appear to be active secondary markets, there is
no assurance a liquid secondary market on any exchange or board of trade
will exist for any particular futures contract or at any particular time.
In such event, it may not be possible to close a futures investment
position and in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can
be terminated. In such circumstances, an increase in the price of the
securities, if any, may offset losses on the futures contract partially or
completely. As described above, however, there is no guarantee the price of
the securities will correlate in fact with the price movements in the
futures contract and thus provide an offset on a futures contract.
OPTIONS ON SECURITIES INDICES
An option on a securities index is similar to an option on a security
except that, rather than the right to take or make delivery of securities
at a specified price, an option on a securities index is settled in cash.
Upon exercise
Page 9
<PAGE>
of the option, in the case of a call, the holder the right to receive an
amount of cash if the closing level of the chosen index is greater than the
exercise ('strike') price or, in the case of a put, less than the strike
price of the option.
BORROWING ("LEVERAGING")
When the portfolio manager believes market conditions are appropriate, the
Fund may borrow in order to take full advantage of available investment
opportunities. This is the speculative activity known as "leveraging." The
Fund may "leverage" up to 33% of the value of the Fund's total assets. The
Fund may borrow money from a bank in a privately arranged transaction to
increase the money available to the Fund to invest in securities when the
Fund believes the return from the securities financed will be greater than
the interest expense paid on the borrowing. Borrowings may involve
additional risk to the Fund because the interest expense may be greater
than the income from or appreciation of the securities purchased with the
borrowings and the value of the securities carried may decline below the
amount borrowed.
Any investment gains made with the proceeds obtained from borrowings in
excess of interest paid on the borrowings will cause the net income per
share and the net asset value per share of the Fund's common stock to be
greater than would otherwise be the case. On the other hand, if the
investment performance of the additional securities purchased fails to
cover their cost (including any interest paid on the money borrowed) to the
Fund, then the net income per share and net asset value per share of the
Fund's common stock will be less than would otherwise be the case.
Utilization of leverage, which is usually considered speculative, involves
certain risks to the Fund's shareholders. These include a higher volatility
of the net asset value of the Fund's shares of common stock and the
relatively greater effect on the net asset value of the shares. So long as
the Fund is able to realize a net return on its investment portfolio that
is higher than the interest expense paid on borrowings, the effect of
leverage will be to cause the Fund's shareholders to realize a higher
current net investment income than if the Fund were not leveraged. On the
other hand, interest rates on U.S. Dollar-denominated and foreign currency-
denominated obligations change from time to time, as does their
relationship to each other, depending upon such factors as supply and
demand forces, monetary and tax policies within each country and investor
expectations. Changes in such factors could cause the relationship between
such rates to change so that rates on U.S. Dollar-denominated obligations
may substantially increase relative to the foreign currency-denominated
obligations in which the Fund may be invested. To the extent the interest
expense on borrowings approaches the net return on the Fund's investment
portfolio, the benefit of leverage to the Fund's shareholders will be
reduced, and if the interest expense on borrowing were to exceed the net
return to shareholders, the Fund's use of leverage would result in a lower
rate of return than if the Fund were not leveraged. Similarly, the effect
of leverage in a declining market could be a greater decrease in net asset
value per share than if the Fund were not leveraged. In an extreme case, if
the Fund's current investment income were not sufficient to meet the
interest expense on borrowings, it could be necessary for the Fund to
liquidate certain of its investments, thereby reducing the net asset value
of the Fund's shares.
OPTIONS ON SECURITIES
An option gives the purchaser of the option, upon payment of a premium, the
right to deliver to (in the case of a put) or receive from (in the case of
a call) the writer of the option a specified amount of securities on or
before a fixed date at a predetermined price. A call option written by the
Fund is "covered" if the Fund owns the
Page 10
<PAGE>
underlying securities, has an absolute and immediate right to acquire those
securities upon conversion or exchange of other securities it holds, or
holds a call option on the underlying securities with an exercise price
equal to or less than that of the call option it has written. A put option
written by the Fund is "covered" if the Fund holds a put on the underlying
securities with an exercise price equal to or greater than that of the put
option it has written.
A call option is for cross-hedging purposes if the Fund does not own the
underlying securities and is designed to provide a hedge against a decline
in value of other securities the Fund owns or has the right to acquire. The
Fund may write call options for cross-hedging purposes. The Fund may write
a call option for cross-hedging purposes, instead of writing a covered call
option, when the premium to be received from the cross-hedge transaction
exceeds that which would be received from writing a covered call option,
while at the same time achieving the desired hedge.
In purchasing an option, the Fund will be in a position to realize a gain
if, during the option period, the price of the underlying securities
increased (in the case of a call) or decreased (in the case of a put) by an
amount in excess of the premium paid. Otherwise, the Fund will experience
a loss equal to the premium paid for the option.
If an option written by the Fund is exercised, the Fund will be obligated
to purchase (in the case of a put) or sell (in the case of a call) the
underlying securities at the exercise price. The risk involved in writing
an option is that if the option is exercised, the underlying securities
then must be purchased or sold by the Fund at a disadvantageous price.
Entering into a closing transaction (i.e., by disposing of the option prior
to its exercise) reduces these risks. The Fund retains the premium received
from writing a put or call option whether or not the option is exercised.
The writing of call options can result in increases in the Fund's portfolio
turnover rate, especially during periods when market prices of the
underlying securities appreciate. The Fund will purchase or write options
on securities of the types in which it is permitted to invest in privately
negotiated (i.e., over-the-counter) transactions only with investment
dealers and other financial institutions (such as commercial banks or
savings and loan institutions) deemed creditworthy by the portfolio
manager. The Fund has adopted procedures for monitoring the
creditworthiness of such entities. Options purchased or written by the Fund
in negotiated transactions are illiquid and it may not be possible for the
Fund to effect a closing transaction at an advantageous time.
FOCUS RISK
At any one time, the portfolio manager may focus the 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 affect those types of companies generally.
TEMPORARY DEFENSIVE POSITION
For temporary defensive purposes, the Fund may reduce its position in
equity securities and increase without limit its position in short-term,
liquid, high-grade debt securities, which may include U.S. Government
securities, bank deposits, money market instruments, short-term debt
securities, including notes and bonds, or
Page 11
<PAGE>
hold its assets in cash. While the Fund is investing for temporary
defensive purposes, it may not meet its investment objective.
PORTFOLIO TURNOVER
The portfolio manager anticipates it will manage the Fund's portfolio
actively in pursuing the Fund's investment strategies. Portfolio securities
will be sold without regard to the length of time they have been held when
the portfolio manager believes it is appropriate to do so in light of the
Fund's investment goal. In general, the greater the volume of buying and
selling by a mutual fund, the greater the impact 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 Fund is managed actively and, in some cases in
response to market conditions, the Fund's portfolio turnover significantly
may exceed 100%. A higher rate of portfolio turnover increases brokerage
and other expenses, which must be borne by the Fund and its shareholders.
High portfolio turnover also may result in the realization of substantial
net short-term capital gains, which, when distributed, are taxable to
shareholders.
FUTURE DEVELOPMENTS
Following written notice to its shareholders, the Fund may take advantage
of other investment practices not currently contemplated for use by the
Fund or not available now but may yet be developed, to the extent such
investment practices are consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they
arise, may involve risks that exceed those involved in the activities
described above.
MANAGEMENT
----------
INVESTMENT ADVISER
The Fund has entered into an investment advisory agreement with Choice
Investment Management, LLC (the "Adviser"). The Adviser was organized on
August 27, 1999 as a Colorado limited liability company to become an
investment adviser to two mutual funds, the Choice Focus Fund and Choice
Balanced Fund. Although the Adviser, as a recently formed entity, has had
only approximately one year's experience advising registered investment
companies, Patrick S. Adams ("portfolio manager"), the founder, president
and a trustee of the Adviser, has had 15 years of experience as a portfolio
manager. In addition to the Fund, the Adviser will provide investment
management services to the two mutual funds noted. In addition to providing
investment and portfolio management services to the Adviser, Mr. Adams will
provide such services to private accounts. Under the investment advisory
agreement, the Adviser manages the Fund's investments and business affairs,
subject to the supervision of the Fund's board of trustees.
The Fund has agreed to pay the Adviser an annual management fee of 2.50% of
the Fund's average daily net assets.
PAGE 12
<PAGE>
PORTFOLIO MANAGER
Patrick S. Adams is the portfolio manager for the Fund. As portfolio
manager, he is responsible for the day-to-day management of the Fund and
the selection of the Fund's investments. He also is the portfolio manager
of the Choice Focus Fund and Choice Balanced Fund as well as other private
pooled investments. Prior to organizing the Adviser, 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.
LEGAL PROCEEDINGS
The Fund is not involved in any current litigation and is unaware of any
impending litigation or legal proceeding of any kind regarding the Fund,
the Adviser, the portfolio manager, or any persons or entities within their
employ or under their control.
BUYING AND SELLING SHARES
-------------------------
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 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. 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 fund's transfer agent, or other financial
intermediary with the authority to accept orders on the Fund's behalf.
Page 13
<PAGE>
The value of a fund's assets is based on the current market value of its
investments. For securities with readily available market quotations, funds
use those quotations to price a security. If a security does not have a
readily available market quotation, funds value the security based on fair
value, as determined in good faith in accordance with the guidelines
established by the fund's board of trustees. Funds may use pricing services
to assist in the determination of market value.
Foreign securities may trade during hours and on days 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.
BEFORE YOU INVEST
PROSPECTUS
This prospectus contains important information about the Fund. Please read
it carefully before you decide to invest.
ACCOUNT REGISTRATION
Once you have decided to invest in the Fund, you need to select the
appropriate form of account registration. There are many different types of
mutual fund ownership. How you register your account with the Fund can
affect your legal interests, as well as the rights and interests of your
family and beneficiaries. You should always consult with your legal and/or
tax adviser to determine what form of account registration best meets your
needs.
Available forms of registration include:
* Individual ownership. If you have reached the legal age of majority in
your state of residence, you may open an individual account.
* Joint ownership. Two or more individuals may open an account together
as joint tenants with right of survivorship, tenants in common or as
community property.
* Custodial account. You may open an account for a minor under the
Uniform Gift to Minors Act/Uniform Transfers to Minors Act for your
state of residence.
* Business/trust ownership. Corporations, trusts, charitable
organizations and other businesses may open accounts.
* IRAs and other tax-deferred accounts. The Fund offers a variety of
retirement accounts for individuals and institutions. Please refer to
"Retirement Account Options," below, for more information about these
types of accounts.
Page 14
<PAGE>
PURCHASING SHARES
You can buy shares directly from the Fund or through a broker-dealer or
other institution the Fund has authorized to sell shares. To open an
account or buy additional shares from the Fund, just follow these steps:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN EXISTING ACCOUNT
----------------------------------------------------------------------------------------
<S> <C>
BY MAIL: BY MAIL:
* Complete and sign the account * Complete the investment slip included in
application or an IRA application. If your account statement, and write your
you do not complete the application account number on your check.
properly, your purchase may be * If you no longer have your investment
delayed or rejected. slip, please reference your name, account
* Make your check payable to "The Choice number and address on your check.
Long-Short Fund." The Fund does not * Make your check payable to "The Choice
accept cash, third party checks, Long-Short Fund."
traveler's checks or checks drawn on
banks outside the U.S.
For IRA accounts, please specify the year
for which the contributions is made.
----------------------------------------------------------------------------------------
MAIL YOUR APPLICATION AND CHECK TO: MAIL THE SLIP AND THE CHECK TO:
Choice Funds Choice Funds
P.O. Box 759 P.O. Box 759
Milwaukee, WI 53201-0759 Milwaukee, WI 53201-0759
----------------------------------------------------------------------------------------
BY OVERNIGHT COURIER, SEND TO:
CHOICE FUNDS
803 W. Michigan Street
Suite A
Milwaukee, WI 53233
----------------------------------------------------------------------------------------
BY TELEPHONE: BY TELEPHONE:
You may not make your initial purchase * You automatically have the privilege to
by telephone. purchase additional shares by telephone
unless you have declined this service on
your account application. You may call 1-
800-392-7107 to purchase shares for an
existing account.
* Investments made by electronic funds
transfer must be in amounts of at least
$100 and not greater than $50,000.
----------------------------------------------------------------------------------------
Page 15
<PAGE>
----------------------------------------------------------------------------------------
BY WIRE: BY WIRE:
* To purchase shares by wire, the Send your investment to UMB Bank, N.A. by
transfer agent must have received a following the instructions listed in the
completed application and issued an column to the left.
account number to you. Call
1-800-392-7107 for instructions prior
to wiring the funds.
* Send your investment to UMB Bank,
N.A., with these instructions:
UMB Bank, N.A.
ABA #101000695
For Credit to the Choice Funds
A/C #9870983788
For further credit to: investor
account number; name(s) of investor(s);
SSN or TIN; name of Fund.
----------------------------------------------------------------------------------------
</TABLE>
If your purchase request is received by the Fund's transfer agent, broker-
dealer or other authorized agent before close of trading on the New York
Stock Exchange (typically 4:00 p.m. Eastern time) on a business day, your
request will be executed at that day's NAV, provided that your application
is in good order. "Good order" means that we have received your completed,
signed application, your payment and 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.
ACCOUNT MINIMUMS
You also need to decide how much money to invest. In the following chart
the minimum amounts that you will need to open or add to certain types of
accounts are shown. The Fund may waive the minimum investment amounts at
any time.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
TYPE OF ACCOUNT INITIAL MINIMUM ADDITIONAL MINIMUM
PURCHASE PURCHASE
-------------------------------------------------------------------------------
<S> <C> <C>
Regular (individual, joint,
business or trust) $10,000 $1,000
-------------------------------------------------------------------------------
IRA (including spousal, Roth
and SEP) $10,000 $1,000
-------------------------------------------------------------------------------
Gifts to Minors
(UTMA/UGMA) $10,000 $1,000
-------------------------------------------------------------------------------
</TABLE>
ADDITIONAL PURCHASE INFORMATION
* The Fund does not issue certificates for shares.
* If your check does not clear, your purchase will be cancelled. You
will be responsible for any resulting losses or expenses (including a
$20 fee) incurred by the Fund or the transfer agent. The Fund may
PAGE 16
<PAGE>
redeem shares you own in this or another identically registered Choice
Funds account as reimbursement for any such losses.
* You must provide the Fund with a Social Security Number or Taxpayer
Identification Number before your account can be established. If you
do not certify the accuracy of your Social Security or Taxpayer
Identification Number on your account application, the Fund will be
required to withhold Federal income tax at a rate of 31% from all of
your dividends, capital gain distributions and redemptions.
* The Fund is only offered and sold to residents of the United States.
Your application will be accepted only if it contains an U.S. address.
This prospectus should not be considered a solicitation to buy or an
offer to sell shares of the Fund in any jurisdiction where it would be
unlawful to do so under the securities laws of that jurisdiction.
* The Fund will not accept your application if you are investing for
another person as attorney-in-fact. The Fund will not accept
applications that list "Power of Attorney" or "POA" in the
registration section.
* Once you place your order, you may not cancel or revoke it. The Fund
may reject a purchase order for any reason.
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS
In addition to purchasing shares from the Fund, you may invest through a
financial 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 Fund offers.
SELLING SHARES
You may sell your shares on any day the Fund is open for business by
following the instructions below. You may elect to have redemption proceeds
sent to you by check, wire or electronic funds transfer. The Fund normally
pays redemption proceeds within two business days, but may take up to seven
days. You can redeem shares purchased by check at any time. However, while
the Fund will process your redemption on the day it receives your request,
it will not pay your redemption proceeds until your check has cleared,
which may take up to 15 days from the date of purchase. You can avoid this
delay by purchasing shares by a federal funds wire. Please note that this
provision is intended to protect the Fund and 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).
Page 17
<PAGE>
* Mail your request to:
REGULAR MAIL OVERNIGHT COURIER
------------ -----------------
Choice Funds Choice Funds
P.O. Box 759 803 W. Michigan Street, Suite A
Milwaukee, WI 53201-0759 Milwaukee, WI 53233
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.
PLEASE NOTE THAT THE FUND MAY REQUIRE ADDITIONAL DOCUMENTS FOR REDEMPTIONS
BY CORPORATIONS, EXECUTORS, ADMINISTRATORS, TRUSTEES AND GUARDIANS. IF YOU
HAVE ANY QUESTIONS ABOUT HOW TO REDEEM SHARES, OR TO DETERMINE IF A
SIGNATURE GUARANTEE OR OTHER DOCUMENTATION IS REQUIRED, PLEASE CALL
1-800-392-7107.
ADDITIONAL REDEMPTION PROVISIONS
* Once we receive your order to sell shares, you may not revoke or
cancel it. We cannot accept an order to sell that specifies a
particular date, price or any other special conditions.
* If you are redeeming from an IRA, please tell us the proper tax
withholding on your redemption request. If you did not make a tax
election on your IRA application, we will automatically withhold 10%
of your redemption proceeds.
* If your redemption request exceeds the amount that you currently have
in your account, your entire account will be redeemed.
* The Fund reserves the right to suspend the redemption of Fund shares
when the securities markets are closed, trading is restricted for any
reason, an emergency exists and disposal of securities owned by 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 the Fund's
operations, the Fund may pay your redemption "in kind." This means
that the Fund may pay you in portfolio securities rather than cash. If
this occurs, you may incur transaction costs when you sell the
securities you receive.
Page 18
<PAGE>
REDEEMING SHARES THROUGH THIRD PARTIES
A broker-dealer, financial institution or other service provider may charge
a fee to redeem your Fund shares. If the service provider is the
shareholder of record, the Fund may accept redemption requests only from
that provider.
TELEPHONE TRANSACTIONS
* In times of drastic economic or market conditions, you may have
difficulty selling shares by telephone. The Fund reserves the right
temporarily to discontinue or limit the telephone purchase, redemption
or exchange privileges at any time during such periods. If you are
unable to reach the Fund by telephone, please send your redemption
request via overnight courier.
* The Fund reserve the right to refuse a telephone redemption request if
they believe it is advisable to do so. The Fund uses procedures
reasonably designed to confirm that telephone redemption instructions
are genuine. These may include recording telephone transactions,
testing the identity of the caller by asking for account information
and sending prompt written confirmations. The Fund may implement other
procedures from time to time. If these procedures are followed, the
Fund and its service providers will not be liable for any losses due
to unauthorized or fraudulent instructions.
SIGNATURE GUARANTEES
The Fund will require the signature guarantee of each account owner to
redeem shares in the following situations:
* to change ownership on your account;
* to send redemption proceeds to a different address than is currently
on the account;
* to have the proceeds paid to someone other than the account's owner;
* to transmit redemption proceeds by federal wire transfer or ACH to a
bank other than your bank of record;
* if a change of address request has been received by the transfer agent
within the last 30 days; or
* if your redemption is for $50,000 or more.
The Fund requires signature guarantees to protect both you and the Fund
from possible fraudulent requests to redeem shares. You can obtain a
signature guarantee from most broker-dealers, national or state banks,
credit unions, federal savings and loan associations or other eligible
institutions. A notary public is not an acceptable signature guarantor.
Page 19
<PAGE>
SMALL ACCOUNTS
All Choice Funds account owners share the high cost of maintaining accounts
with low balances. To reduce this cost, the Fund reserves the right to
close an account when a redemption or exchange leaves your account balance
below $10,000, 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 $10,000 or to renew your automatic investment plan. This
provision does not apply to retirement plan accounts, automatic investment
plans or UGMA/UTMA accounts.
MAKING CHANGES TO YOUR ACCOUNT
You may call or write us to make changes to your account. Common changes
include:
NAME CHANGES
If your name has changed due to marriage or divorce, send us a letter of
instruction signed with both your old and new names. Include a certified
copy of your marriage certificate or have your signatures guaranteed.
ADDRESS CHANGES
The easiest way to notify us is to return the stub from a recent
confirmation or statement. You can also call the transfer agent with any
changes at 1-800-392-7107.
TRANSFER OF ACCOUNT OWNERSHIP
Send us a letter including your account number, the share class, number of
shares or dollar amount being transferred along with the name, address and
Taxpayer Identification Number of the person to whom the shares are being
transferred. All living registered owners must sign the letter. You will
also need to include a signature guarantee. Corporations, businesses and
trusts may have to provide additional documents. In order to avoid delays
in processing account transfers; please call the transfer agent at
1-800-392-7107 to determine what additional documents are required.
SPECIAL FEATURES AND SERVICES
RETIREMENT ACCOUNT OPTIONS
The Fund offers a variety of retirement accounts for individuals and
organizations. These accounts may offer you tax advantages. For information
on establishing retirement accounts, please call 1-800-392-7107. You should
consult with your legal and/or tax adviser before you establish a
retirement account.
Page 20
<PAGE>
The Fund currently accepts investments into the following kinds of
retirement accounts:
* Traditional IRA (including spousal IRA)
* "Rollover" IRA
* Roth IRA
* SEP-IRA
ACH TRANSACTIONS
If you would like to purchase shares electronically or have redemption
proceeds sent directly to your bank account, you must first have certain
bank account information on file with us so that funds can be transferred
electronically between your mutual fund and bank accounts. There is no
charge to you for this procedure. You can establish this privilege by
filling out the appropriate section of your account application. If you did
not select the electronic purchase or redemption options on your original
application, call us at 1-800-392-7107.
AUTOMATED TELEPHONE SERVICE
The Fund offers 24-hour, seven 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 Fund and gives you your account balance
and history (e.g., last transaction, latest dividend distribution). To
access the automated system, please call 1-800-392-7107.
WEBSITE
The Fund maintains a website at www.choicefunds.net. Prospectuses,
applications and net asset values are all available.
OTHER SHAREHOLDER INFORMATION
SHAREHOLDER COMMUNICATIONS
CONFIRMATIONS. You will receive a confirmation each time you buy, sell or
exchange Fund shares. Automatic investment plan participants receive
quarterly confirmations of all automatic transactions. Please review your
confirmation and notify us immediately if there are any discrepancies in
the information.
QUARTERLY AND ANNUAL STATEMENTS. You will receive a quarterly statement
listing all distributions, purchases and redemptions of Fund shares for the
preceding calendar quarter. Your December statement will include a listing
of all transactions for the entire year.
SEMI-ANNUAL AND ANNUAL REPORTS. The Fund sends semi-annual and annual
reports to its shareholders. These reports provide financial information on
your investments and give you a "snapshot" of the Fund's portfolio holdings
at the end of its semi-annual and fiscal year periods. Additionally, the
annual report discusses the factors that affected the Fund's performance
materially for its most recently completed year, including relevant market
conditions and the investment strategies and techniques that were used.
Page 21
<PAGE>
PROSPECTUS. Each year, the Fund sends all shareholders a new prospectus.
Please read the prospectus and keep it for future reference.
FORM 1099. Each year, you will receive a Form 1099-DIV on which is shown
the source of distributions for the preceding year and a Form 1099-B on
which is shown the number of 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.
TRANSACTIONS THROUGH FINANCIAL SERVICES AGENTS AND SUB-AGENTS
The Fund may authorize one or more broker-dealers or other financial
services agents or sub-agents to accept purchase, redemption and exchange
orders on the Fund's behalf. In these cases, the Fund will be deemed to
have received an order when an authorized financial services agent or sub-
agent accepts the order, and your order will be priced at the Fund's NAV
next computed after it is received in good order by the financial services
agent or sub-agent. Designated financial services agents and sub-agents are
responsible for transmitting accepted orders and payment for the purchase
of shares to the transfer agent within the time period agreed upon by them.
If payment is not received within the time specified, your transaction may
be cancelled and the financial services agent will be held responsible for
any resulting fees or losses.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute virtually all of its net investment income
and net realized capital gains at least once a year. The Fund will
automatically reinvest your dividends and capital gain distributions in
additional Fund shares unless you elect to have them paid to you in cash.
If you elect to have your distributions paid in cash, the Fund will send a
check to your address of record.
A DIVIDEND from net investment income represents the income the Fund earns
from dividends and interest paid on its investments, after payment of the
Fund's expenses. A CAPITAL GAIN is the increase in the value of a security
that the Fund holds. The Fund's gain is "unrealized" until it sells a
portfolio security. Each realized capital gain is either short-term or
long-term, depending on whether the Fund held the security for one year or
less or more than one year.
The Fund will distribute any net realized capital gains and dividends
annually, normally in December. If the Fund is not able to estimate capital
gains correctly, it will make an additional capital gains distribution in
the first quarter of the next calendar year.
----------------------------------------------------------------------------
BUYING A DIVIDEND. Unless you invest in a tax-deferred retirement account
(such as an IRA), it is not to your advantage to buy shares of the Fund
shortly before it makes a distribution. This is known as "buying a
dividend." Buying a dividend can cost you money in taxes because you will
receive, in the form of a taxable distribution, a portion of the money you
just invested (even if you elected to have it reinvested in additional Fund
shares). To avoid "buying a dividend," check the Fund's distribution
schedule before you invest by calling 1-800-392-7107.
----------------------------------------------------------------------------
Page 22
<PAGE>
DISTRIBUTION ARRANGEMENTS
SHARE CLASSES. The Fund offers three classes of shares.
CLASS A SHARES -- INITIAL SALES CHARGE ALTERNATIVE
You can purchase Class A shares at NAV plus an initial sales charge, as follows:
AMOUNT PURCHASED AS % OF AS % OF COMMISSION
OFFERING INVESTMENT TO DEALER/AGENT
PRICE AS % OF OFFERING
PRICE
--------------------------------------------------------------------------
Less than $25,000 5.50% 5.82% 5.25%
$25,000 but less than $50,000 5.25% 5.54% 5.00%
$50,000 but less than $100,000 4.75% 4.99% 4.50%
$100,000 but less than $250,000 3.75% 3.90% 3.50%
$250,000 but less than $500,000 3.00% 3.09% 2.75%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 or more NAV NAV *
*You pay no initial sales charge on purchases of Class A Shares in the
amount of $1,000,000 or more, BUT MAY PAY A 1.00% CDSC IF YOU REDEEM YOUR
SHARES WITHIN ONE (1) YEAR. The Fund may pay the dealer or agent a fee of
up to 1.00% of the dollar amount purchased. Certain purchases of Class A
shares may qualify for reduced or eliminated sales charges under the Fund's
Rights of Accumulation, Letter of Intent, Privilege for Certain Retirement
Plans, Reinstatement Privilege and Sales at Net Asset Value Programs.
Consult the Fund's SAI for additional information about these options.
CLASS B SHARES -- DEFERRED SALES CHARGE ALTERNATIVE
You can purchase Class B Shares at NAV without an initial sales charge. The
Fund will thus receive the full amount of your purchase. However, your
investment will be subject to a CDSC if you redeem shares within six (6)
years of purchase. The CDSC varies depending of the number of years you
hold the shares. The CDSC amounts are:
YEARS SINCE PURCHASE CDSC
-------------------- ----
First 5.00%
Second 4.00%
Third 3.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh None
Page 23
<PAGE>
The Fund's Class B shares purchased for cash convert automatically to Class
A shares eight (8) years after the end of the month of your purchase.
CLASS C SHARES -- ASSET-BASED SALES CHARGE ALTERNATIVE
You can purchase shares at NAV without an initial sales charge. The Fund
will thus receive the full amount of your purchase. However, your
investment will be subject to a 1.00% CDSC if you redeem your shares within
one (1) year.
Class C shares do not convert to any other Class of shares of the Fund.
The Fund reserves the authority to defer sales charges to the employees of
the Fund, the Adviser and the portfolio manager, such employees' immediate
family members and other individuals with substantive business or personal
relationships to such persons.
ASSET-BASED SALES CHARGE OR RULE 12b-1 FEES. The Fund has adopted a plan
under SEC Rule 12b-1 under which the Fund is allowed to pay asset-based
sales charges or distribution and service fees for the distribution and
sale of its shares. The amount of these fees for each Class of the Fund's
shares is:
Rule 12b-1 Fee (as a percentage of aggregate average daily net assets)
Class A 0.35%
Class B 1.00%
Class C 1.00%
Because these fees are paid out of the Fund's assets on an ongoing basis,
over time, these fees will increase the cost of your investment and may
cost you more than paying other types of sales fees. Class B and Class C
shares are subject to higher distribution fees than Class A shares (Class
B shares are subject to these higher fees for a period of eight (8) years,
after which they convert to Class A shares). The higher fees mean a higher
expense ratio, so Class B and Class C shares pay lower dividends
correspondingly and may have a lower net asset value than Class A shares.
CHOOSING A CLASS OF SHARES. The decision as to which class of shares is
more beneficial to you depends on the amount and intended length of your
investment. If you are making a large investment, thus qualifying for a
reduced sales charge, you might consider purchasing Class A shares. If you
are making a smaller investment, you might consider purchasing Class B
shares because 100% of your purchase is invested immediately. If you are
unsure of the length of your investment, you might consider Class C shares
because there is no initial sales charge and no CDSC as long as the shares
are held for one (1) year or more. Dealers and agents may receive differing
compensation for selling Class A, Class B or Class C shares. There is no
maximum size limit on purchases of Class A or Class C shares. The maximum
purchase of Class B shares is $250,000.
You should consult your financial adviser to assist in choosing a class of
Fund shares.
APPLICATION OF THE CDSC. The CDSC is applied to the lesser of the original
cost of shares being redeemed or NAV at the time of redemption. Shares
obtained from dividend or distribution reinvestment are not subject to the
Page 24
<PAGE>
CDSC. The Fund may waive the CDSC on redemptions of shares following the
death or disability of a shareholder or to meet the requirements of certain
qualified retirement plans.
OTHER. A transaction, service, administrative or other similar fee may be
charged by your broker-dealer, agent, financial intermediary or other
financial representative with respect to the purchase, sale or exchange of
Class A, Class B or Class C shares made through your financial
representative. The financial intermediaries also may impose requirements
on the purchase, sale or exchange of shares that are different from, or in
addition to, those imposed by a fund, including requirements as to the
minimum initial and subsequent investment amounts.
Shares obtained from dividend or distribution reinvestment are not subject
to the CDSC. The CDSC is deducted from the amount of the redemption and is
paid to the Fund. The CDSC will be waived on redemptions of shares
following the death or disability of a shareholder or to meet the
requirements of certain qualified retirement plans.
TAXES
You will be subject to income tax on all Fund distributions regardless of
whether you receive them in cash or elect to have them reinvested in Fund
shares. Dividend distributions and distributions of the Fund's net short-term
capital gains are taxable to you as ordinary income. Distributions of
the Fund's net long-term capital gains are taxable to you as long-term
capital gains. This is true regardless of how long you have held your Fund
shares.
If you sell or exchange your shares, any gain or loss is a taxable event.
You may also be subject to state and local income taxes on dividends or
capital gains from the sale or exchange of Fund shares.
This tax information provides only a general overview. It does not apply if
you invest in a tax-deferred retirement account such as an IRA. Please
consult your own tax adviser about the tax consequences of an investment in
the Fund.
DISTRIBUTION PLAN
The Fund has adopted a plan under Rule 12b-1 under which the Fund is
allowed to pay distribution fees for activities generally intended to
result in the sale of their shares. These activities include advertising,
compensation to the distributor and others for sales and marketing
activities and materials and shareholder account servicing. Under the plan,
the Fund may pay a fee of up to 1.00% of its average daily net assets
(computed on an annual basis). To the extent these fees are paid by the
Fund, its expenses will increase. Because 12b-1 fees are paid out of the
Fund's net assets on an ongoing basis, over time, these fees will increase
the cost of your investment and could cost long-term investors more than
paying other types of sales charges.
Page 25
<PAGE>
FOR MORE INFORMATION
--------------------
For more information about the Choice Long-Short Fund, ask for a free copy
of the following:
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
The Statement of Additional Information ("SAI") contains more detailed
information about the Fund. It is incorporated by reference into this
prospectus, which means it is legally part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
------------------------------
Once the Fund is up and running, the annual and semi-annual reports will
contain a discussion of the Fund's holdings. In the annual report, the
market conditions, economic trends and investment strategies that
significantly affected the Fund's performance during its last fiscal year
will be described.
---------------------------------------------------------------------------
To obtain copies of the SAI, annual or semi-annual reports, or to get other
information about the Fund, please write or call us at:
Choice Funds
P.O. Box 759
803 W. Michigan Street, Suite A (for overnight deliveries)
Milwaukee, WI 53233
1-800-392-7107
---------------------------------------------------------------------------
You can also review and copy the SAI and other information about the Fund
at the SEC Public Reference Room in Washington, D.C., or download a free
text-only version on the SEC's website at www.sec.gov. Call 1-202-942-8090
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 via mail to:
SEC Public Reference Room, Washington, D.C. 20549-0102 or by e-mail to
[email protected].
Investment Company Act No. 811-09485
Page 26
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
CHOICE FUNDS
LONG - SHORT FUND
This Statement of Additional Information should be read in conjunction
with the Prospectus for the Choice Funds dated October 12, 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, 5299 DTC Boulevard, Suite 1150, Englewood, Colorado 80111.
This Statement of Additional Information is dated October 12, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
FUND HISTORY AND CLASSIFICATION. . . . . . . . . . . . . . . . . . . . .1
INVESTMENT STRATEGIES AND RISKS. . . . . . . . . . . . . . . . . . . . .1
FUND POLICIES AND INVESTMENT RESTRICTIONS . . . . . . . . . . . . 27
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . 30
TRUSTEES AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . 30
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES . . . . . . . 32
CODE OF ETHICS. . . . . . . . . . . . . . . . . . . . . . . . . . 32
INVESTMENT ADVISORY AND OTHER SERVICES . . . . . . . . . . . . . . . . 33
DISTRIBUTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . 35
BROKERAGE ALLOCATION AND OTHER PRACTICES . . . . . . . . . . . . . . . 36
CAPITAL STRUCTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
PURCHASE, REDEMPTION AND PRICING OF SHARES . . . . . . . . . . . . . . 39
TAXATION OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . 47
CALCULATION OF PERFORMANCE DATA. . . . . . . . . . . . . . . . . . . . 52
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 55
Page i
<PAGE>
FUND HISTORY AND CLASSIFICATION
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. Currently, the Trust
offers three series of shares, the Focus Fund, Balanced Fund and the Long-
Short Fund (collectively, the "Funds"). This Statement of Additional
Information deals solely with the Long-Short Fund (the "Fund").
NON-DIVERSIFICATION. The Fund is classified as a "non-diversified"
fund under the Investment Company Act of 1940 (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. This 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.
INVESTMENT STRATEGIES AND RISKS
The Fund seeks long-term growth of capital through all market
conditions. The Fund's investment objective is described in the Prospectus,
as well as the principal investment strategies used to achieve that
objective and the principal risks associated with such strategy. The
following information supplements the discussion about the Fund set forth
in the Prospectus under the headings FUND OVERVIEW, PRINCIPAL INVESTMENT
STRATEGIES and PRINCIPAL RISKS OF INVESTING.
SECURITIES OF COMPANIES WITH LIMITED OPERATING HISTORIES. In addition
to securities of well-established companies and other securities traded on
exchanges, such as real estate investment trusts ("REITs") and unit
investment trusts ("UITs"), the Fund 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 Fund may invest in securities of
companies with small or mid-sized market capitalizations. An investment in
companies with smaller capitalizations involves greater risks than
investing in larger, more established companies. Smaller company stocks may
be subject to more abrupt or erratic price movements because the
Page 1
<PAGE>
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.
SHORT SALES. The Fund may seek to realize additional gains through
short sales. Short sales are transactions in which the Fund sells a
security it does not own in anticipation of a decline in the market value
of that security. To complete such a transaction, the Fund must acquire the
security to make delivery to the buyer, usually by borrowing it from a
third party. The Fund is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The price at
such time may be more or less than the price at which the security was sold
by the Fund. Until the security is replaced, the Fund is required to repay
the lender any dividends or interest that accrue during the period of the
loan. To borrow the security, the Fund also may be required to pay a
premium, which would increase the cost of the security sold. The net
proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed
out. The Fund also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of a short sale if the price of
the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain
if the price of the security declines in price between those dates. The
amount of any gain will be decreased, and the amount of any loss increased,
by the amount of the premium, dividends or interest the Fund may be
required to pay, if any, in connection with a short sale.
The Fund may make short sales "against the box," i.e., when a security
identical to or convertible or exchangeable into one owned by the Fund is
borrowed and sold short.
Whenever the Fund engages in short sales, it segregates liquid
securities in an amount that, when combined with the amount of collateral
deposited with the broker in connection with the short sale, equals the
current market value of the security sold short. The segregated assets are
marked to market daily.
SPECIAL SITUATIONS. The Fund may also invest in securities of
companies that have recently experienced or are anticipated to experience
a significant change in structure, management, products or services or
other special situations that may affect the value of their securities
significantly. Examples of special situations are companies being
reorganized or merged, companies emerging from bankruptcy, companies
introducing unusual new products or that enjoy particular tax advantages.
Other examples include companies experiencing changes in senior management,
extraordinary corporate events, significant changes in cost or capital
structure or 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
Page 2
<PAGE>
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.
INITIAL PUBLIC OFFERINGS. The Fund may invest in a company's
securities at the time of the company's initial public offering ("IPO").
Companies involved in IPOs are often smaller and have a limited operating
history, which involves a greater risk that the value of their securities
will be impaired following the IPO. In addition, market psychology
prevailing at the time of an IPO can have a substantial and unpredictable
effect on the price of an IPO security, causing the price of a company's
securities to be particularly volatile at the time of its IPO and for a
period thereafter. As a result, the Fund's Adviser might decide to sell an
IPO security more quickly than it would otherwise, which may result in
significant gains or losses to the Fund.
FOREIGN SECURITIES. The Fund may invest without limitation in
securities of foreign issuers that 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, information available concerning the
issuer may not be as current or reliable as the information for sponsored
ADRs, and the price of unsponsored ADRs may be more volatile.
Investments in foreign securities involve special risks and costs in
addition to those inherent in domestic investments. Political, economic or
social instability of the issuer or the country of issue, the possibility
of expropriation or confiscatory taxation, limitations on the removal of
assets or diplomatic developments and the possibility of adverse changes in
investment or exchange control regulations are among the inherent risks.
Foreign companies are not subject to the regulatory requirements of U.S.
companies and, as such, there may be less publicly available information
about such companies. Moreover, foreign companies are not subject to
uniform accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies. Dividends
and interest payable on the Fund's foreign portfolio securities may be
subject to foreign withholding taxes. To the extent such taxes are not
offset by credits or deductions allowed to investors under U.S. federal
income tax law, such taxes may reduce the net return to shareholders.
Because of these and other factors, securities of foreign companies
acquired by the Fund may be subject to greater fluctuation than securities
of domestic companies.
Changes in foreign currency exchange rates will affect the value of
the Fund's portfolio securities denominated or quoted in currencies other
than the U.S. dollar, as well as the unrealized appreciation or
depreciation of such investments insofar as U.S. investors are concerned.
If the foreign currency in which a security is denominated appreciates
against the U.S. dollar, the dollar value of the security will increase.
Conversely, a decline in the exchange rate of the foreign currency against
the U.S. dollar would adversely affect the dollar value of the foreign
securities. Foreign currency exchange rates are determined by forces of
supply and
Page 3
<PAGE>
demand on the foreign exchange markets, which are affected in turn by the
international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors.
ILLIQUID AND RESTRICTED SECURITIES. The Fund is authorized to invest
up to 15% of their net assets in securities that are illiquid or not
readily marketable because they are subject to restrictions on their resale
("restricted securities") or because, based upon their nature or the market
for such securities, no ready market is available. Illiquid securities
generally include (I) direct placements or other securities subject to
legal or contractual restrictions on resale or for which there is no
readily available market (e.g., when trading in the security is suspended
or, in the case of unlisted securities, when market makers do not exist or
will not entertain bids or offers), including many individually negotiated
currency swaps and any assets used to cover currency swaps, (II) over-the-
counter options and assets used to cover over-the-counter options, and
(III) repurchase agreements not terminable within seven days.
Because of the absence of a trading market for illiquid securities,
the Fund may not be able to realize the price at which they are carried on
the Fund's books upon sale. The portfolio manager will monitor the
illiquidity of the Fund's investments in such securities. Rule 144A
securities will not be treated as 'illiquid' for purposes of this limit on
investments if they meet certain liquthe Adviserty guidelines established
by the Fund or the Adviser.
The Fund may not be able readily to sell securities for which there is
no ready market. To the extent these securities are foreign securities,
there is no law in many of the countries in which the Fund may invest
similar to the Securities Act of 1933 under which an issuer is required to
register an offering of securities with a governmental agency or imposing
legal restrictions on the resale of securities, either as to length of time
the securities may be held or manner of resale. There may, however, be
contractual restrictions on the resale of securities.
Investments in illiquid securities involve certain risks to the extent
that the Fund may be unable to dispose of such a security at the time
desired or at a reasonable price or, in some cases, may be unable to
dispose of it at all. In addition, in order to resell a restricted
security, the Fund might have to incur the potentially substantial expense
and delay associated with effecting registration. The Fund may have to
lower the price, sell other portfolio securities instead or forego an
investment opportunity, any of which could have a negative impact on Fund
management or performance. Because illiquid and restricted securities may
be difficult to sell at an acceptable price, they may be subject to greater
volatility and may result in a loss to the Fund.
The Board has delegated to the Adviser the day-to-day determination of
the liquidity of a security, although it has retained oversight and
ultimate responsibility for such determinations. Although no definite
quality criteria are used, the Adviser considers such factors as (i) the
nature of the market for a security (including the institutional, private
or international resale market), (ii) the terms of these securities or
other instruments allowing for the disposition to a third party or the
issuer thereof (e.g., certain repurchase obligations and demand
instruments), (iii) the availability of market quotations (e.g., for
securities quoted in PORTAL system), and (iv) other permissible relevant
factors. Certain securities are deemed illiquid by the SEC, including
repurchase agreements maturing in more than seven days and options not listed
Page 4
<PAGE>
on a securities exchange or not issued by the Options Clearing Corporation.
These securities will be treated as illiquid and subject to the Fund's
limitation on illiquid securities. Because an active market may not exist
for illiquid securities, the Fund may experience delays and additional cost
when trying to sell illiquid securities.
Restricted securities may be sold in privately negotiated or other
exempt transactions, qualified non-U.S. transactions, such as under
Regulation S, or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933. Where registration
is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable time may elapse between the
decision to sell and the sale date. If, during such period, adverse market
conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell. Restricted securities will be
priced at fair value as determined in good faith by the Board.
If, through the appreciation of illiquid securities or the
depreciation of liquid securities, the Fund should be in a position where
more than 15% of the value of its net assets is invested in illiquid
assets, including restricted securities that 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.
HEDGING TRANSACTIONS IN GENERAL. The Fund is authorized to make use of
certain types of futures, forwards and/or options and certain other
exchange-traded securities like REITs and UITs, but only for the purpose of
hedging, that is, to protect against market risk due to market movements
that may affect adversely the value of the Fund's securities or the price
of securities the Fund is considering purchasing. The utilization of
futures, forwards, options and certain other exchange-traded securities is
also subject to policies and procedures that may be established by the
Trustees from time to time. In addition, the Fund is not required to hedge.
Decisions regarding hedging are subject to the Adviser's judgment of the
cost of the hedge, its potential effectiveness and other factors the
Adviser considers pertinent. No assurance can be given that any of these
instruments will be available to the Fund on a cost-effective basis, that
they will be used or, if used, will achieve the intended result.
A hedging transaction may protect the Fund partially from a decline in
the value of a particular security or its portfolio generally, although
hedging may also limit the Fund's opportunity to profit from favorable
price movements, and the cost of the transaction will reduce the potential
return on the security or the portfolio. Use of these instruments by the
Fund involves the potential for a loss that may exceed the amount of
initial margin the Fund would be permitted to commit to the contracts under
its investment limitation, or in the case of a call option written by the
Fund, may exceed the premium received for the option. However, the Fund is
permitted to use such instruments for hedging purposes only, and only if
the aggregate amount of its obligations under these contracts does not
exceed the total market value of the assets the Fund is attempting to
hedge, such as a portion or all of its exposure to equity securities or its
holding in a specific foreign currency. To help ensure that the Fund will
be able to meet its obligations under its futures and forward contracts and
its obligations under options written by the Fund, the Fund will be
required to maintain liquid assets in a segregated account with their
custodian bank or to set aside portfolio securities to "cover" their
positions in these contracts.
Page 5
<PAGE>
The principal risks of the Fund's utilizing futures transactions,
forward contracts, options and other exchange-traded securities are: (a)
losses resulting from market movements not anticipated by the Fund; (b)
possible imperfect correlation between movements in the prices of futures,
forwards, options and exchange-traded securities and movements in the
prices of the securities or currencies hedged or used to cover such
positions; (c) lack of assurance 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 the counter-party to a forward contract would be willing to
negotiate an offset or termination of the contract when so desired; and (e)
the need for additional information and skills beyond those required for
the management of a portfolio of traditional securities. In addition, when
the Fund enters into an over-the-counter contract with a counter-party, the
Fund will assume counter-party credit risk, that is, the risk that the
counter-party will fail to perform its obligations, in which case the Fund
could be worse off than if the contract had not been entered into.
The Fund may utilize the futures, forwards, options and other
exchange-traded securities described in this Statement of Additional
Information provided that no more than 5% of the Fund's net assets at the
time the contract is entered into may be used for initial margins for
financial futures transactions and premiums paid for the purchase of
options. In addition, the Fund may only write call options that are covered
and only up to 25% of the Fund's total assets.
SECURITIES OPTIONS. The Fund may purchase and write (i.e., sell) put
and call options. Such options may relate to particular securities or stock
indices, 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
indices. 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
Page 6
<PAGE>
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. Indices 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 indices are traded currently on the Chicago Board
Options Exchange, the New York Stock Exchange, the American Stock Exchange,
the Pacific Stock Exchange and the Philadelphia Stock Exchange.
The Fund's obligation to sell an instrument subject to a call option
written by it, or to purchase an instrument subject to a put option written
by it, may be terminated prior to the expiration date of the option by the
Fund's execution of a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same
underlying instrument, exercise price and expiration date) as the option
previously written. A closing purchase transaction will be effected
ordinarily 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 a liquid
secondary market will exist for any particular option. An option writer
unable to effect a closing purchase transaction will not be able to sell
the underlying instrument or liquidate the assets held in a segregated
account, as described below, until the option expires or the optioned
instrument is delivered upon exercise. In such circumstances, the writer
will be subject to the risk of market decline or appreciation in the
instrument during such period.
If an option purchased by the Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If the Fund enters into a
closing sale transaction on an option purchased by it, the Fund will
realize a gain if the premium received by the Fund on the closing
transaction is more than the premium paid to purchase the option, or a loss
if it is less. If an option written by the Fund expires on the stipulated
expiration date or if the Fund enters into a closing purchase transaction,
it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold). If
an option written by the Fund is exercised, the proceeds of the sale will
be increased by the net premium received originally 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 that 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
Page 7
<PAGE>
interrupt normal operations on an exchange; the facilities of an exchange
or the Options Clearing Corporation may not at all times be adequate to
handle current trading value; or one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue
the trading of options (or a particular class or series of options), in
which event the secondary market on that exchange (or in that class or
series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Successful use by the Fund of options on stock indices will be subject
to the ability of the Adviser correctly to predict movements in the
directions of the stock market. This requires different skills and
techniques than predicting changes in the prices of individual securities.
In addition, the Fund's ability effectively to 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 indices, depends on
the degree to which price movements in the underlying index correlate with
the price movements of the securities held by the Fund. Inasmuch as the
Fund's securities will not duplicate the components of an index, the
correlation will not be perfect. Consequently, the Fund will bear the risk
the prices of its securities being hedged will not move in the same amount
as the prices of its put options on the stock indices. It is also possible
there may be a negative correlation between the index and the Fund's
securities that would result in a loss on both such securities and the
options on stock indices acquired by the Fund.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent 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 that involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. The purchase of stock index options involves the risk the
premium and transaction costs paid by the Fund in purchasing an option will
be lost as a result of unanticipated movements in prices of the securities
comprising the stock index on which the option is based.
There is no assurance a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time, and for
some options no secondary market on an exchange or elsewhere may exist. If
the Fund is unable to close out a call option on securities it has written
before the option is exercised, the Fund may be required to purchase the
optioned securities in order to satisfy its obligation under the option to
deliver such securities. If the Fund is unable to effect a closing sale
transaction with respect to options on securities 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 the Fund has purchased) expose the Fund to an obligation to another
party. The Fund will not enter into any such transactions unless it owns
either (1) an offsetting ("covered") position in securities or other
options or (2) cash or liquid securities with a value sufficient at all
times to cover its potential obligations not covered as provided in (1)
above. The Fund will comply with SEC guidelines regarding cover for these
instruments and, if the guidelines so require, set aside cash or liquid
Page 8
<PAGE>
securities in a segregated account with the Custodian in the prescribed
amount. Under current SEC guidelines, the Fund will segregate assets to
cover transactions in which it writes or sells options.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding option is open, unless they are
replaced with similar assets. As a result, the commitment of a large
portion of the Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
FUTURES CONTRACTS. Financial futures contracts are exchange-traded
contracts on financial instruments (such as securities and foreign
currencies) and securities indices that obligate the holder to take or make
delivery of a specified quantity of the underlying financial instrument, or
the cash value of an index, at a future date. Although futures contracts by
their terms call for the delivery or acquisition of the underlying
instruments or a cash payment based on the mark-to-market value of the
underlying instruments, in most cases, the contractual obligation will be
offset before the delivery date by buying (in the case of an obligation to
sell) or selling (in the case of an obligation to buy) an identical futures
contract. Such a transaction cancels the original obligation to make or
take delivery of the underlying securities.
The Fund may enter into contracts for the purchase or sale for future
delivery of financial instruments, such as securities and foreign
currencies, or contracts based on financial indices including indices of
U.S. Government securities, foreign government securities or equity
securities. U.S. futures contracts are traded on exchanges that have been
designated as "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 entering into a futures contract. Initial
margin deposits are equal to a percentage of the contract's value, as set
by the exchange on which the contract is traded, and may be maintained in
cash or other liquid assets. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to the other party to settle the change in value on a daily basis.
Initial and variation margin payments are similar to good faith deposits or
performance bonds or party-to-party payments resulting from daily changes
in the value of the contract, unlike margin extended by a securities
broker, and would be released or credited to the Fund upon termination of
the futures contract, assuming all contractual obligations have been
satisfied. Unlike margin extended by a securities broker, initial and
variation margin payments do not constitute purchasing securities on margin
for purposes of the Fund's investment limitations. The Fund will incur
brokerage fees when it buys or sells futures contracts.
In the event of the bankruptcy of the FCM that holds margin on behalf
of the Fund, the Fund may be entitled to return of margin owed to the Fund
only in proportion to the amount received by the FCM's other customers. The
Fund will attempt to minimize the risk by careful
Page 9
<PAGE>
monitoring of the creditworthiness of the FCMs with which the Fund does
business and by depositing margin payments in a segregated account with the
Fund's custodian for the benefit of the FCM when practical or otherwise
required by law.
Where applicable, the Fund intends to comply with guidelines of
eligibility for exclusion from the definition of the term "commodity pool
operator" with the CFTC and the National Futures Association, which
regulate trading in the U.S. futures markets. Accordingly, the Fund will
not enter into any futures contract or option on a futures contract if, as
a result, the aggregate initial margin and premiums required to establish
such positions would exceed 5% of the Fund's net assets.
Although the Fund would hold cash and liquid assets in a segregated
account with a mark-to-market value sufficient to cover the Fund's open
futures obligations, the segregated assets would be available to the Fund
immediately upon closing out the futures position.
The acquisition or sale of a futures contract may occur, for example,
when the Fund is considering purchasing or holds equity securities and
seeks to protect itself from fluctuations in prices without buying or
selling those securities. For example, if prices were expected to decrease,
the Fund might sell equity index futures contracts, thereby hoping to
offset a potential decline in the value of equity securities in the
portfolio by a corresponding increase in the value of the futures contract
position held by the Fund and thereby preventing the Fund's net asset value
from declining as much as it otherwise would have. The Fund also could
protect against potential price declines by selling portfolio securities
and investing in money market instruments. However, the use of futures
contracts as a hedging technique allows the Fund to maintain a defensive
position without having to sell portfolio securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts may be bought to attempt to hedge against the possibility
of having to buy equity securities at higher prices. This technique is
sometimes known as an anticipatory hedge. Since the fluctuations in the
value of futures contracts should be similar to those of equity securities,
the Fund could take advantage of the potential rise in the value of equity
securities without buying them until the market has stabilized. At that
time, the futures contracts could be liquidated and the Fund could buy
equity securities on the cash market.
The ordinary spreads between prices in the cash and futures markets,
due to differences in the nature of those markets, are subject to
distortions. First, all participants in the futures market are subject to
initial margin and variation margin requirements. Rather than meeting
additional variation margin requirements, investors may close out futures
contracts through offsetting transactions, which could distort the normal
price relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in
the futures market could be reduced and prices in the futures 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
Page 10
<PAGE>
cause temporary price distortions. Due to the possibility of the foregoing
distortions, a correct forecast of general price trends by the Fund still
may not result in a successful use of futures.
Futures contracts entail additional risks. Although the Fund will only
utilize futures contracts when it believes that use of such contracts will
benefit the Fund, if the Fund's investment judgment is incorrect, the
Fund's overall performance could be worse than if the Fund had not entered
into futures contracts. For example, if the Fund has hedged against the
effects of a possible decrease in prices of securities held in the Fund's
portfolio and prices increase instead, the Fund will lose part or all of
the benefit of the increased value of these securities because of
offsetting losses in the Fund's futures positions. In addition, if the Fund
has insufficient cash, it may have to sell securities from its portfolio to
meet daily variation margin requirements. Those sales may be, but will not
necessarily be, at increased prices that reflect the rising market and may
occur at a time when the sales are disadvantageous to the Fund. Although
the buyer of an option cannot lose more than the amount of the premium plus
related transaction costs, a buyer or seller of futures contracts could
lose amounts substantially in excess of any initial margin deposits made,
due to the potential for adverse price movements resulting in additional
variation margin being required by such positions. However, the Fund
intends to monitor its investments closely and will attempt to close its
positions when the risk of loss to the Fund becomes unacceptably high.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of
futures contracts, it is possible that the standardized futures contracts
available to the Fund will not match exactly the Fund's current or
potential investments. The Fund may buy and sell futures contracts based on
underlying instruments with different characteristics from the securities
in which it typically invests -- for example, by hedging investments in
portfolio securities with a futures contract based on a broad index of
securities -- which involves a risk that the futures position will not
correlate precisely with the performance of the Fund's investments.
Futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments correlate closely with the
Fund's investments. Futures prices are affected by such factors as current
and anticipated short-term interest rates, changes in volatility of the
underlying instruments and the time remaining until expiration of the
contract. Those factors may affect securities prices differently from
futures prices. Imperfect correlations between the Fund's investments and
its futures positions may also result from differing levels of demand in
the futures markets and the securities markets, from structural differences
in how futures and securities are traded, and from imposition of daily
price fluctuation limits for futures contracts. The Fund may buy or sell
futures contracts with a value less than or equal to the securities it
wishes to hedge or is considering purchasing. If price changes in the
Fund's futures positions are correlated poorly with its other investments,
its futures positions may fail to produce desired gains or result in losses
not offset by the gains in the Fund's other investments.
Because futures contracts are settled generally 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 liquidity superior to
that of the securities markets. Nevertheless, there is no assurance a liquid
secondary market will exist for any particular futures contract at any
particular
Page 11
<PAGE>
time. In addition, futures exchanges may establish daily price fluctuation
limits for futures contracts and may halt trading if a contract's price
moves upward or downward more than the limit in a given day. On volatile
trading days when the price fluctuation limit is reached, it may be
impossible for the Fund to enter into new positions or close out existing
positions. If the secondary market for a futures contract is not liquid
because of price fluctuation limits or otherwise, the Fund may not be able
promptly to liquidate unfavorable futures positions and potentially could
be required to continue to hold a futures position until the delivery date,
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its futures positions also could be impaired.
OPTIONS ON FUTURES CONTRACTS. The Fund may buy and write options on
futures contracts for hedging purposes. An option on a futures contract
gives the Fund the right (but not the obligation) to buy or sell a futures
contract at a specified price on or before a specified date. The purchase
of a call option on a futures contract is similar in some respects to the
purchase of a call option on an individual security. Depending on the
pricing of the option compared either to the price of the futures contract
upon which it is based or to the price of the underlying instrument,
ownership of the option may or may not be less risky than ownership of the
futures contract or the underlying instrument. As with the purchase of
futures contracts, the Fund may buy a call option on a futures contract to
hedge against a market advance, and the Fund might buy a put option on a
futures contract to hedge against a market decline.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign currency
that is deliverable under, or of the index comprising, the futures
contract. If the futures price at the expiration of the call option is
below the exercise price, the Fund will retain the full amount of the
option premium that provides a partial hedge against any decline that may
have occurred in the Fund's portfolio holdings. If a call option the Fund
has written is exercised, the Fund will incur a loss that will be reduced
by the amount of the premium it received. Depending on the degree of
correlation between change in the value of its portfolio securities and
changes in the value of the futures positions, the Fund's losses from
existing options on futures to some extent may be reduced or increased by
changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities.
For example, the Fund may buy a put option on a futures contract to hedge
the Fund's portfolio against the risk of falling prices.
The amount of risk the Fund assumes when it buys an option on a
futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above,
the purchase of an option also entails the risk that changes in the value
of the underlying futures contract will not be reflected fully in the value
of the options bought.
OPTIONS ON FOREIGN CURRENCIES. As in the case of other kinds of
options, the writing of an option on a foreign currency constitutes only a
partial hedge, up to the amount of the premium received, and the Fund could
be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on a
foreign currency may constitute an effective hedge against fluctuations in
exchange rates, although, in
Page 12
<PAGE>
the event of rate movements adverse to the Fund's position, the Fund may
forfeit the entire amount of the premium plus related transaction costs.
CURRENCY SWAPS. Currency swaps involve the individually rated exchange
by the Fund with another party of a series of payments in specified
currencies. A currency swap may involve delivery at the end of the exchange
period of a substantial amount of one designated currency in exchange for
the other designated currency. Therefore, the entire principal value of a
currency swap is subject to the risk that the swap counter-party will
default on its contractual delivery obligations. The Fund may not enter
into any currency swap unless the credit quality of the unsecured senior
debt or the claims-paying ability of the counter-party is rated in the
highest rating category of at least one nationally recognized rating
organization at the time of entry into the transaction. If there is a
default by the counter-party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transactions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS.
A forward contract is a privately negotiated agreement between two
parties in which one party is obligated to deliver a stated amount of a
stated asset at a specified time in the future and the other party is
obligated to pay a specified invoice amount for the assets at the time of
delivery. The Fund intends currently to use forward contracts or
commitments for hedging purposes only and will only use forward foreign
currency exchange contracts, although the Fund may enter into additional
forms of forward contracts or commitments in the future if they become
available and advisable in light of the Fund's objectives and investment
policies. Forward contracts generally are negotiated in an Interbank market
conducted directly between traders (usually large commercial banks) and
their customers. Unlike futures contracts, which are standardized exchange-
traded contracts, forward contracts can be drawn specifically to meet the
needs of the parties entering 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 Fund may enter into forward currency contracts ("forward currency
contracts") with stated contract values of up to the value of the Fund's
assets. A forward currency contract is an obligation to buy or sell an
amount of a specified currency for an agreed price (which may be in U.S.
dollars or a foreign currency) on a specified date. The Fund may exchange
foreign currencies for U.S. dollars and for other foreign currencies in the
normal course of business and may buy and sell currencies through forward
currency contracts in order to fix a price (in terms of a specified
currency) for securities it has agreed to buy or sell ("transaction
hedge"). The Fund also may hedge some or all of its investments denominated
in foreign currency against a decline in the value of that currency (or a
proxy currency whose price movements are expected to have a high degree of
correlation with the currency being hedged) relative to the U.S. dollar by
entering into forward currency contracts to sell an amount of that currency
approximating the value of some or all of its portfolio securities
denominated in that currency ("position hedge") or by participating in
futures contracts (or options on such futures) with respect to the
currency. The Fund also may enter into a forward currency contract with
respect to a currency where the Fund is considering the purchase or sale of
investments denominated in that currency but has not yet selected the
specific investments ("anticipatory hedge").
Page 13
<PAGE>
These types of hedging strategies minimize the effects of currency
appreciation as well as depreciation, but do not eliminate fluctuations in
the underlying U.S. dollar equivalent value of the proceeds of or rates of
return on the Fund's foreign currency-denominated portfolio securities. The
matching of the increase in value of a forward contract and the decline in
the U.S. dollar equivalent value of the foreign currency-denominated asset
that is the subject of the hedge generally will not be precise. Shifting
the Fund's currency exposure from one foreign currency to another limits
the Fund's opportunity to profit from increases in the value of the
original currency and involves a risk of increased losses to the Fund if
its portfolio manager's projection of future exchange rates is inaccurate.
Unforeseen changes in currency prices may result in poorer overall
performance for the Fund than if it had not entered into such contracts.
The Fund will cover outstanding forward currency contracts by
maintaining liquid portfolio securities denominated in the currency
underlying the forward contract or the currency being hedged. To the extent
the Fund is not able to cover its forward currency positions with
underlying portfolio securities, the Fund's Custodian will segregate cash
or liquid assets having a value equal to the aggregate amount of the Fund's
commitments under forward contracts entered into. If the value of the
securities used to cover a position or the value of segregated assets
declines, the Fund must find alternative cover or segregate additional cash
or liquid assets on a daily basis so that the value of the covered and
segregated assets will be equal to the amount of the Fund's commitments
with respect to such contracts.
While forward contracts are not regulated by the CFTC currently, the
CFTC may in the future assert authority to regulate forward contracts. In
such event, the Fund's ability to utilize forward contracts may be
restricted. The Fund may not always be able to enter into forward contracts
at attractive prices and may be limited in their ability to use these
contracts to hedge Fund assets. In addition, when the Fund enters into a
privately negotiated forward contract with a counter-party, the Fund
assumes counter-party credit risk, that is, the risk that the counter-party
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,
therefore, adverse market movements could continue to an unlimited extent
over a period of time. However, the Fund intends to monitor its investments
closely and will attempt to renegotiate or close its positions when the
risk of loss to the Fund becomes unacceptably high.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in securities
issued by real estate investment trusts, i.e., "REITs." Such investments
will not exceed 25% of the total assets of the Fund. REITs are trusts that
sell equity or debt securities to investors using the proceeds to acquire
real estate and interests in it. They may focus on particular regions and
particular projects, or both, such as apartment complexes, the Southeast,
or apartment complexes in the Southeast.
Through REIT ownership, the Fund could own real estate directly as a
result of a REIT default. The Fund may be subject to the risks of real
estate ownership as a result, including the difficulties associated with
valuation, declines in real estate values, risks related to general
Page 14
<PAGE>
economic conditions, environmental liability risks, tax increases,
increased operational costs, and interest rate risk.
The value of a REIT security is vulnerable to changes in the value of
the underlying real estate. REITs are dependent on the skills of their
management, and are not diversified. REITs are subject also to heavy cash
flow dependency, defaults of borrowers, self-liquidation and, if not
registered as an investment company, the possibility of failing to maintain
exemption from the registration requirements of the Investment Company Act.
Interest rate fluctuations may also affect the value of any debt securities
held by the REIT.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities.
Securities rated below investment grade particularly are subject to credit
risk. These securities are considered speculative and are commonly referred
to as "junk bonds." Although the Fund will not invest in defaulted
securities, it may invest in convertible securities of all other grades,
including securities rated as low as C. To the extent the Fund purchases or
holds convertible or other securities below investment grade (securities
rated BB/Ba or lower), there is a greater risk payments of principal,
interest and dividends will not be made. In addition, the value of lower
quality securities is subject to greater volatility and generally is 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 strong financially as those
issuing bonds with higher credit ratings. To the extent the portfolio
manager invests assets of the Fund in convertible securities below
investment grade, your investment is subject to additional risk.
Prior to conversion, convertible securities have the same general
characteristics as non-convertible debt securities, which generally provide
a stable stream of income with generally higher yields than those of equity
securities of the same or similar issuers. The price of a convertible
security normally will vary with changes in the price of the underlying
equity security, although the higher yield tends to make the price of the
convertible security less volatile than that of the underlying equity
security. As with debt securities, the market values of convertible
securities tend to decrease as interest rates rise and increase as interest
rates fall. While convertible securities generally offer lower interest
yields than non-convertible debt securities of similar quality, they offer
investors the potential to benefit from increases in the market prices of
underlying common stocks.
The Fund will not invest in any convertible debt securities rated
below Baa by Moody's or BBB by S&P, or, if not rated, determined by the
portfolio manager to be of equivalent quality. Securities rated Baa by
Moody's or BBB by S&P, and comparable unrated securities are considered to
have speculative characteristics. Sustained periods of deteriorating
economic conditions or rising interest rates are more likely to lead to
weakening in the issuer's capacity to pay interest and repay principal than
in the case of higher-rated securities. The Fund will not retain a
convertible debt security that, after being acquired by the Fund, is
downgraded below Baa or BBB, or, if unrated, determined by the portfolio
manager to have undergone similar credit quality deterioration subsequent
to purchase by the Fund.
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
Page 15
<PAGE>
securities, the Fund seeks the opportunity, through the conversion feature,
to participate in a portion of the capital appreciation of the common stock
into which the securities are convertible, while earning higher current
income than is available from the common stock. Convertible securities
entitle the holder to receive interest paid or accrued on debt or the
dividend paid on preferred stock until the convertible securities mature or
are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities or
preferred stocks in that they normally provide a stable stream of income
with generally higher yields than those of common stock of the same or
similar issuers. Convertible securities rank senior to common stock in a
corporation's capital structure.
In selecting convertible securities for the Fund, the Adviser will
consider, among other factors, its evaluation of the creditworthiness of
the issuers of the securities; the interest or dividend income generated by
the securities; the potential for capital appreciation of the securities
and the underlying common stocks; the prices of the securities relative to
other comparable securities and to the underlying common stocks; whether
the securities are entitled to the benefits of sinking funds or other
protective conditions; the diversification of the Fund's portfolio as to
issuers; and whether the securities are rated by a rating agency and, if
so, the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a conversion
privilege) and their conversion value (their worth, at market value, if
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
influenced increasingly by their conversion value. In addition, convertible
securities generally sell at a premium over their conversion value
determined by the extent to which investors place value on the right to
acquire the underlying common stock while holding fixed income securities.
The Fund may realize capital appreciation from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from
a general lowering of interest rates, or a combination of both. Conversely,
a reduction in the credit standing of an issuer whose securities are held
by the Fund or a general increase in interest rates may be expected to
result in capital depreciation to the Fund.
U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
Some of the obligations purchased by the Fund, such as U.S. Treasury bills,
notes and bonds, are backed by the full faith and credit of the U.S.
Government and are guaranteed as to both principal and interest by the U.S.
Treasury. While the obligations of many of the agencies and
instrumentalities of the U.S. Government are not direct obligations of the
U.S. Treasury, generally, they are backed indirectly by the U.S.
Page 16
<PAGE>
Government. Some of the agencies are backed indirectly by their right to
borrow from the U.S. Government. Others are supported solely by the credit
of the agency or instrumentality itself, but are given additional support
due to the U.S. Treasury's authority to purchase their outstanding debt
obligations. However, no assurance can be given that the U.S. Government
would provide financial support to U.S. Government-established or sponsored
agencies where it is not obligated to do so by law. The U.S. Government
does not guarantee the market value or current yield of these obligations,
and the U.S. Government's guarantee does not extend to the Fund itself.
FIXED-INCOME SECURITIES. To the extent the portfolio manager invests
assets of the Fund in fixed-income securities, your investment is subject
to the following risks:
* Credit Risk. An issuer of fixed-income securities may default on
its obligation to pay interest and repay principal. Also, changes
in the financial strength of an issuer or changes in the credit
rating of a security may affect its value.
* Interest Rate Risk. When interest rates increase, fixed-income
securities tend to decline in value and when interest rates
decrease, fixed-income securities tend to increase in value. A
change in interest rates could cause the value of your investment
to change. Fixed-income securities with longer maturities are
more susceptible to interest rate fluctuations than those with
shorter maturities. Changes in interest rates may also extend or
shorten the duration of certain types of instruments, such as
asset-backed securities, thereby affecting their value and the
return on your investment. "Duration" measures how a change in
interest rates could affect a bond's price by considering its
yield, scheduled interest payments and years to maturity.
Generally, the longer a bond's duration, the greater the exposure
to interest rate risk.
* 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-BACKED AND ASSET-BACKED SECURITIES. The Fund may purchase
residential and commercial mortgage-backed as well as other asset-backed
securities. The Fund will only invest in mortgage-backed securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities,
or in privately issued mortgaged-backed or asset-backed securities 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
counter-party. Like other fixed-income securities, when interest rates
rise, the value of an asset-backed security will generally decline.
However, when interest rates decline, the value of a mortgage-backed
security with prepayment features may not
Page 17
<PAGE>
increase as much as that of other fixed-income securities. These securities
are also subject to the risk that, as interest rates rise, borrowers are
less likely to refinance their mortgages and other debts. As a result, the
principal on mortgage- or asset-backed securities may be paid later than
expected, which could cause the value of the securities to go down. In
times of financial stress, the secondary market for asset-backed securities
may not be as liquid as the market for other types of securities.
"Mortgage-backed securities" are securities that represent directly or
indirectly a participation in, or are secured by and payable from, mortgage
loans secured by real property. "Asset-backed securities" are similar,
except 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 insured or guaranteed by the U.S. Government or its
agencies or instrumentalities, or in privately issued mortgage-backed or
asset-backed securities 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.
Currently, there are three basic types of mortgage-backed securities:
(i) those issued or guaranteed by the United States Government or one of
its agencies or instrumentalities, such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Corporation ("FHLMC"); (ii) those issued
by private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the United States
Government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are
collateralized by whole mortgage loans or mortgage-backed securities
without a government guarantee but usually having some form of private
credit enhancement.
U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES. The Fund may invest in
mortgage-backed securities issued or guaranteed by GNMA, FNMA and FHLMC.
GNMA certificates are backed by the "full faith and credit" of the United
States. FNMA and FHLMC certificates are not backed by the full faith and
credit of the United States, but the issuing agency or instrumentality has
the right to borrow, to meet its obligations, from an existing line of
credit with the U.S. Treasury. The U.S. Treasury has no legal obligation to
provide such line of credit and may choose not to do so. Each of GNMA, FNMA
and FHLMC guarantee timely distribution of interest to certificate holders.
GNMA and FNMA also guarantee timely distribution of scheduled principal
payments. Generally, FHLMC guarantees only the ultimate collection of
principal of the underlying mortgage loans.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. The Fund may also invest in collateralized mortgage obligations
("CMOs"). CMOs are debt
Page 18
<PAGE>
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 subssidiaries of the foregoing. The Fund may
invest in CMOs issued by private entities only if the CMOs are rated at
least investment grade (at least BBB by S&P or Baa by Moody's) or, if
unrated, are determined to be of comparable quality.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at
a specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Interest is paid or accrues on all classes of the CMOs
on a monthly, quarterly or semiannual basis. Certain CMOs may have variable
or floating interest rates. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a
number of different ways.
Generally, the purpose of the allocation of the cash flow of a CMO to
the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO.
As a general rule, the more predictable the cash flow is on a CMO tranche,
the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on mortgage-backed
securities. As part of the process of creating more predictable cash flows
on most of the tranches in a series of CMOs, one or more tranches generally
must be created that absorb most of the volatility in the cash flows on the
underlying mortgage loans. The yields on these tranches may be higher than
prevailing market yields on mortgage-backed securities with similar
maturities. As a result of the uncertainty of the cash flows of these
tranches, generally, the market prices of and yield on these tranches 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. Generally, PAC Bonds 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."
Page 19
<PAGE>
ADJUSTABLE RATE MORTGAGES. The Fund may also invest in adjustable rate
mortgage securities ("ARMs"), which are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. ARMs,
like fixed rate mortgages, have a specified maturity date, and the
principal amount of the mortgage is repaid over the life of the mortgage.
Unlike 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. Usually, these securities are backed by a pool of conventional
fixed rate or adjustable rate mortgage loans. Since private mortgage pass-
through securities are not guaranteed typically by an entity having the
credit status of GNMA, FNMA and FHLMC, these securities are structured
generally with one or more types of credit enhancement to make them more
secure, which may be through guarantees, insurance policies or letters of
credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of
those approaches. The Fund may invest in private mortgage pass-through
securities only if they are rated AA/Aa (S&P/Moody's) or above.
SPECIAL RISKS OF MORTGAGE-BACKED SECURITIES. Mortgage-backed
securities have certain different characteristics than traditional debt
securities. As a result of the risks associated with these securities, the
Fund could realize a loss by investing in them, regardless of their rating
or their credit enhancement features.
Among the major differences between mortgage-backed securities and
traditional debt securities are that on mortgage-backed securities,
interest and principal payments are made more frequently, usually monthly,
and principal may be prepaid at any time because the underlying mortgage
loans or other assets may be prepaid generally at any time, usually without
penalty. Generally, changes in the rate of prepayments will 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 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 that when distributed to
shareholders, will be taxable as ordinary income.
Page 20
<PAGE>
Mortgage-backed securities, like all fixed-income securities,
generally decrease in value as a result of increases in interest rates. In
addition, although the value of fixed-income securities generally 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 are likely to have to
reinvest those amounts at lower interest rates than during a period of
rising interest rates. Generally, mortgage-backed securities 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 involving 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 reflect the price volatility of such
securities accurately. 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 effectively may change a security that was
considered short or intermediate-term at the time of purchase into a long-
term security. Generally, long-term securities fluctuate more widely in
response to changes in interest rates than short or intermediate-term
securities.
In addition, CMOs and other mortgage-backed securities issued by
private entities are not U.S. government securities and are not guaranteed
by any government agency, although the pool of securities underlying a
privately issued mortgage-backed security may be subject to a guarantee.
Therefore, if the collateral securing a privately issued mortgage-backed
security held by the Fund, in addition to any third party credit support or
guarantees, is insufficient to make payment, the Fund could sustain a loss
on its investment in that security. However, as stated above, the Fund will
invest in CMOs and other mortgage-backed securities issued by private
entities only if they are rated AA/Aa (S&P/Moody's) or above.
ASSET-BACKED SECURITIES. The Fund may also invest in asset-backed
securities. "Asset-backed securities" are securities that represent direct
or indirect participation in, or are secured by and payable from, assets
other than mortgage-backed assets, such as motor vehicle installment sales
contracts, installment loan contracts, leases of various types of real and
personal property and receivables from revolving credit agreements (credit
cards). Asset-backed securities
Page 21
<PAGE>
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 usually
do not contain the complete benefit of a security interest in the related
collateral. For example, generally, credit card receivables 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 their investment objectives and policies and
applicable legal requirements.
NON-INVESTMENT GRADE SECURITIES. The Fund has the authority to invest
in convertible debt securities of a quality less than investment grade (so-
called "junk bonds"). The Fund has no pre-established minimum quality
standards for convertible securities and may invest in convertible
securities of any quality, including lower rated or unrated securities.
However, the Fund will not invest in any securities in default at the time
of purchase, and will limit its investment in non-investment grade
convertible debt securities to no more than 20% of its net assets at the
time of purchase. In addition, investment grade bonds in which the Fund
invests may be downgraded. If convertible securities purchased by the Fund
are downgraded following purchase, or if other circumstances cause more
than 20% of the Fund's assets to be invested in convertible securities
rated below investment grade, the Trustees of the Fund will consult with
the Adviser to determine what action, if any, is appropriate in light of
all relevant circumstances.
Junk bonds, while generally offering higher yields than investment
grade securities with similar maturities, involve greater risks, including
the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. The special risk considerations in connection
with investments in these securities are discussed below. Refer to Appendix
A of this Statement of Additional Information for a discussion of
securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. There remains some
uncertainty about the performance level of the market for lower quality
securities. A prolonged recession or economic downturn could disrupt
severely the market for, and affect adversely the value of, such securities.
Typically, all interest-bearing securities 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
Page 22
<PAGE>
significantly greater than issuers of higher-rated securities because such
securities generally are unsecured and often are subordinated to other
creditors. Further, if the issuer of a junk bond security defaulted, the
Fund might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility
in the market prices of these securities and thus in the Fund's net asset
value.
As previously stated, the value of a junk bond security generally will
decrease in a rising interest rate market. If the Fund experiences
unexpected net redemptions in such a market, it may be forced to liquidate
a portion of its portfolio securities without regard to their investment
merits. Due to the limited liquidity and valuation of junk bond securities,
the Fund may be forced to liquidate these securities at a substantial
discount. Any such liquidation would reduce the Fund's asset base over
which expenses could be allocated and could result in a reduced rate of
return for the Fund.
PAYMENT EXPECTATIONS. Typically, junk bond securities contain
redemption, call or prepayment provisions that permit the issuer of such
securities containing such provisions to redeem the securities at its
discretion. During periods of falling interest rates, issuers of these
securities are likely to redeem or prepay the securities and refinance them
with debt securities with a lower interest rate. To the extent an issuer is
able to refinance the securities, or otherwise redeem them, the Fund may
have to replace the securities with a lower yielding security, which could
result in a lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of junk bond
securities and, therefore may not reflect fully 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 monitors the Fund's investments continually
and evaluates carefully whether to dispose of or to retain junk bond
securities whose credit ratings or credit quality may have changed.
LIQUIDITY AND VALUATION. The Fund may have difficulty disposing of
certain junk bond securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all junk bond
securities, there may not be an established retail secondary market for
certain of these securities. Generally, the secondary trading market is not
as liquid as the secondary market for higher-rated securities, which may
have an adverse impact on the market price of the security and may also
make it more difficult for the Fund to obtain accurate market quotations
for purposes of valuing the Fund. Market quotations for certain junk bond
issues may only be available from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and
Page 23
<PAGE>
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 also are 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 tend generally 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. Generally, the Fund will reduce risk to the investor by
diversification, credit analysis and attention to current developments in
trends of both the economy and financial markets. However, while
diversification reduces the effect on the Fund of any single investment, it
does not reduce the overall risk of investing in lower-rated securities.
ZEROS/STRIPS. The Fund may invest in zero coupon bonds or in strips.
Zero coupon bonds are sold at a discount from face value and do not make
regular interest payments. Such bonds pay principal and accreted discount
(representing interest accrued but not paid) at maturity. "Strips" are debt
securities that are stripped of their interest coupons after the securities
are issued, but are otherwise comparable to zero coupon bonds. These
securities are issued at a discount from their face value because
typically, interest payments are postponed until maturity. The amount of
discount rate varies depending on factors including the time remaining
until maturity, prevailing interest rates, the security's liquidity and
the issuer's credit quality. The market values of zero coupon bonds and
strips fluctuate generally in response to changes in interest rates to a
greater degree than do interest-paying securities of comparable terms and
quality.
RIGHTS AND WARRANTS. If the market price of the underlying security is
below the exercise price of the warrant on the expiration date, the warrant
will expire worthless. Moreover, a right or warrant ceases to have value if
it is not exercised prior to the expiration date. The Fund will invest in
rights or warrants only if the underlying equity securities themselves are
deemed appropriate by the portfolio manager for inclusion in the Fund's
portfolio. Rights and warrants entitle the holder to buy equity securities
at a specific price for a specific period of time. Rights are similar to
warrants except that they have a substantially shorter duration. Rights and
warrants may be considered more speculative than certain other types of
investments in that they do not entitle a holder to dividends or voting
rights with respect to the underlying securities nor do they represent any
rights in the assets of the issuing company. The value of a right or
warrant does not necessarily change with the value of the underlying
securities, although the value of a right or warrant may decline because of
a decrease in the value of the underlying stock, the passage of time, a
change in perception as to the potential of the underlying stock or any
combination of these factors.
REPURCHASE AGREEMENTS. The Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Under a repurchase agreement, a buyer purchases a security
and agrees at the same time to resell it to the vendor at an agreed-upon
Page 24
<PAGE>
future date, normally a day or a few days later. The resale price is
greater than the purchase price, reflecting an agreed-upon interest rate
for the period the buyer's money is invested in the security. Such
agreements permit the Fund to keep all of its assets at work while
retaining 'overnight' flexibility in pursuit of investments of a longer-term
nature. If a vendor defaults on its repurchase obligation, the Fund
would suffer a loss to the extent the proceeds from the sale of the
collateral were less than the repurchase price. If a vendor goes bankrupt,
the Fund might be delayed in, or be prevented from, selling the collateral
for its benefit.
Although the securities subject to a repurchase agreement may bear
maturities exceeding one year, settlement for the repurchase agreement will
never be more than one year after the Fund's acquisition of the securities
and normally will be within a shorter period of time. The Fund will not
enter into a repurchase agreement maturing in more than seven days if, as
a result, more than 15% of the Fund's total assets would be invested in
repurchase agreements and other illiquid securities.
Securities subject to repurchase agreements are held either by the
Fund's custodian or sub-custodian (if any), or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement
is required to maintain the value of the securities subject to the
agreement in an amount at least equal to the repurchase price (including
accrued interest). Repurchase agreements may be considered loans to the
seller, collateralized by the underlying securities. The risk to the Fund
is limited to the ability of the seller to pay the agreed upon sum on the
repurchase date; in the event of default, the repurchase agreement provides
that the Fund is entitled to sell the underlying collateral. If the value
of the collateral declines after the agreement is entered into, however,
and if the seller defaults under a repurchase agreement when the value of
the underlying collateral is less than the repurchase price, the Fund could
incur a loss of both principal and interest. The Adviser monitors the value
of the collateral at the time the agreement is entered into and at all
times during the term of the repurchase agreement in an effort to determine
that the value of the collateral always equals or exceeds the agreed upon
repurchase price to be paid to the Fund. If the seller were to be subject
to a federal bankruptcy proceeding, the ability of the Fund to liquidate
the collateral could be delayed or impaired because of certain provisions
of the bankruptcy laws. The Adviser will acquire repurchase agreements in
accordance with procedures established by the Trust's Board of Trustees
that are designed to evaluate the creditworthiness of the other parties to
the repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase and
sell securities on a when-issued or delayed delivery basis. However, the
Fund does not intend currently 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 Fund) are purchased or sold by the Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price or yield. However, the yield
available on a comparable security when delivery takes place may vary from
the yield on the security at the time that the when-issued or delayed
delivery transaction was entered into. Any failure to consummate a when-
issued or delayed delivery transaction may result in the Fund missing the
opportunity to obtain a price or yield considered to be advantageous. When-
issued and delayed delivery
Page 25
<PAGE>
transactions generally may be expected to settle within one month
from the date the transactions are entered into, but in no event later than
90 days. However, no payment or delivery is made by the Fund until it
receives delivery or payment from the other party to the transaction.
When the Fund purchases securities on a when-issued basis, it will
maintain in a segregated account with its Custodian cash, U.S. government
securities or other liquid assets having an aggregate value equal to the
amount of such purchase commitments, until payment is made. If necessary,
additional assets will be placed in the account daily so that the value of
the account will equal or exceed the amount of the Fund's purchase
commitments.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend its securities to
qualified institutional investors (such as brokers, dealers or other
financial organizations) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to
deliver securities or completing arbitrage operations. By lending its
securities, the Fund will be attempting to generate income through the
receipt of interest on the loan that, in turn, can be invested in
additional securities to pursue the Fund's investment objective. Any
gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Fund.
The Fund may lend its portfolio securities to qualified brokers,
dealers, banks or other financial institutions, so long as the terms, the
structure and the aggregate amount of such loans are not inconsistent with
the Investment Company Act, or the rules and regulations or interpretations
of the SEC promulgated thereunder, which currently require that (a) the
borrower pledge and maintain with the Fund collateral consisting of cash,
an irrevocable letter of credit or securities issued or guaranteed by the
United States government having a value at all times not less than 100% of
the value of the securities loaned, (b) the borrower add to such collateral
whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time, (d) the Fund receives reasonable
interest on the loan, which interest may include the Fund's investing cash
collateral in interest-bearing short-term investments, and (e) the Fund
receives all dividends and distributions on the loaned securities and any
increase in the market value of the loaned securities. The Fund may make
secured loans of its portfolio securities to entities with which it can
enter into repurchase agreements, provided that cash and/or liquid, high-
grade debt securities equal to at least 100% of the market value of the
securities loaned are deposited and maintained by the borrower with the Fund.
The Fund bears the risk of loss in the event the other party to a
securities lending transaction defaults on its obligations and the Fund is
delayed in or prevented from exercising its rights to dispose of the
collateral, including the risk of a possible decline in the value of the
collateral securities during the period in which the Fund seeks to assert
these rights, the risk of incurring expenses associated with asserting
these rights and the risk of losing all or a part of the income from the
transaction. The Fund will not lend its portfolio securities if, as a
result, the aggregate value of such loans would exceed 50% of the value of
the Fund's total assets. Loan arrangements made by the Fund will comply
with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange, which rules presently require the borrower,
after notice, to redeliver the securities within the normal settlement time
of three business days. All relevant facts and circumstances, including
creditworthiness of the broker, dealer or
Page 26
<PAGE>
institution, will be considered in making decisions with respect to the
lending of securities, subject to review by the Fund's trustees.
STANDBY COMMITMENT AGREEMENTS. These agreements commit the Fund, for
a stated period of time, to purchase a stated amount of a security that may
be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security are fixed at the time of the commitment. At the time
of entering into the agreement, the Fund is paid a commitment fee,
regardless of whether the security ultimately is issued, typically equal to
approximately 0.50% of the aggregate purchase price of the security the
Fund has committed to purchase. The Fund will enter into such agreements
only for the purpose of investing in the security underlying the commitment
at a yield and price considered advantageous to the Fund and unavailable on
a firm commitment basis. The Fund will limit its investment in such
commitments so that the aggregate purchase price of the securities subject
to the commitments will not exceed 50% of its assets taken at the time of
making the commitment.
There is no guarantee the securities subject to a standby commitment will
be issued, and the value of the security, if issued, on the delivery date
may be more or less than its purchase price. Since the issuance of the
security underlying the commitment is at the option of the issuer, the Fund
will bear the risk of capital loss in the event the value of the security
declines and may not benefit from an appreciation in the value of the
security during the commitment period if the issuer decides not to issue
and sell the security to the Fund.
FUND POLICIES AND INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions consistent with
their respective investment objectives. Unless otherwise noted, whenever an
investment restriction states a maximum percentage of the Fund's assets
that may be invested in any security or other asset, such percentage
restriction will be determined immediately after and as a result of the
Fund's acquisition of such security or other asset. Accordingly, any
subsequent change in values, net assets or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment limitations except with respect to the Fund's restrictions on
borrowings as set forth in restriction 6 below.
None of the Fund's fundamental restrictions can be changed without the
approval of the holders of the lesser of: (i) 67% of the Fund's shares
present or represented at a shareholders meeting at which the holders of
more than 50% of such shares are present or represented; or (ii) more than
50% of the outstanding shares of the Fund.
The following are the Fund's fundamental investment restrictions.
Except as otherwise noted, the Fund may not:
1. Issue senior securities, except as permitted under the Investment
Company Act; provided, however, the Fund may engage in transactions
involving options, futures and options on futures contracts.
Page 27
<PAGE>
2. Lend money or securities (except by purchasing debt securities or
entering into repurchase agreements or lending portfolio securities);
provided, however, that the Fund may make loans to affiliated investment
companies to the extent permitted by the Investment Company Act or any
exemptions therefrom that may be granted by the SEC.
3. 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 engaged primarily in the same industry.
4. Act as an underwriter or distributor of securities other than
shares of the Fund except to the extent that the Fund's participation as
part of a group in bidding or by bidding alone, for the purchase of
permissible investments directly from an issuer or selling shareholders for
the Fund's own portfolio may be deemed to be an underwriting, and except to
the extent that the Fund may be deemed an underwriter under the Securities
Act of 1933, by virtue of disposing of portfolio securities.
5. Purchase or sell real estate (but this shall not prevent the Fund
from investing in securities backed by real estate or issued by companies
that invest or deal in real estate or in participation interests in pools
of real estate mortgage loans exclusive of investments in real estate
limited partnerships).
6. Borrow money, except that the Fund may borrow money from a bank
or affiliated investment companies to the extent permitted by the
Investment Company Act or any exemption therefrom that may be granted by
the SEC or for temporary or emergency purposes in an amount not exceeding
33% 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.
7. Purchase or sell physical commodities or commodities contracts
unless acquired as a result of ownership of securities or other instruments
(but this shall not prevent the Fund from engaging in transactions
involving foreign currencies, futures contracts, options on futures
contracts or options, or from investing in securities or other instruments
backed by physical commodities).
The Trustees have adopted additional investment restrictions for the
Fund. These restrictions are operating policies of the Fund and may be
changed by the Trustees without shareholder approval.
The Fund may not:
1. Purchase securities of other investment companies except to the
extent permitted by the Investment Company Act and the rules and
regulations promulgated thereunder.
Page 28
<PAGE>
2. Make investments for the purpose of exercising control or
management of any company except that the Fund may vote portfolio
securities in the Fund's discretion.
3. Acquire illiquid securities if, as a result of such investments,
more than 15% of the Fund's net assets (taken at market value at the time
of each investment) would be invested in illiquid securities. "Illiquid
securities" means securities that cannot be disposed of within seven days
in the normal course of business at approximately the amount at which the
Fund has valued the securities.
4. Purchase securities on margin (except to obtain such short-term
credits as are necessary for the clearance of purchases and sales of
securities) or participate in a joint trading account; provided, however,
the Fund may (i) purchase or sell futures contracts and options on futures,
(ii) make initial and variation margin payments in connection with
purchases or sales of futures contracts or options on futures contracts,
(iii) write or invest in put or call options on securities and indices, 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 the 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 the Fund's net assets at the time of
purchase may be invested initial margins for financial futures transactions
and premiums for options, and provided further that the Fund may only write
call options that are covered and only up to 25% of the Fund's total
assets.
In determining industry classifications with respect to the Fund, the
Adviser intends to use the industry classification titles in the Standard
Industrial Classification Manual.
A security is considered to be issued by the entity, or entities,
whose assets and revenues back the security. A guarantee of a security is
not deemed to be a security issued by the guarantor when the value of all
securities issued and guaranteed by the guarantor, and owned by the Fund,
does not exceed 10% of the value of the Fund's assets.
TEMPORARY DEFENSIVE MEASURES. The Fund may increase its investment in
government securities and other short-term, interest-bearing securities
without regard to the Fund's otherwise applicable percentage limits,
policies or its normal investment emphasis when its Adviser believes market
conditions warrant a temporary defensive position. Taking larger positions
in such short-term investments may serve as a means of preserving capital
in unfavorable market conditions. When in a defensive position, the Fund
could miss the opportunity to participate in any stock or bond market
advances that occur during those periods, which the Fund might have been
able to participate in if it had remained more fully invested.
Page 29
<PAGE>
PORTFOLIO TURNOVER RATE. The Fund 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 Fund is 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 Fund. Although the existence
of a higher portfolio turnover rate has no direct correlation to the tax
liability of the Fund, sales of certain stocks will result in realized
gains, and, possibly, in increased taxable distributions to shareholders.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
As a Delaware business trust, the business and affairs of the Trust
are managed by its officers under the direction of its Board of Trustees.
Information regarding the Board of Trustees and officers of the Fund,
including their principal business occupations during at least the last
five years, is set forth below. Each Trustee who is an "interested person,"
as defined in the Investment Company Act, is indicated by an asterisk.
Except where otherwise indicated, each of the individuals below has served
in his or her present capacity with the Trust since September 30, 1999.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
NAME, ADDRESS AND AGE POSITIONS HELD PRINCIPAL OCCUPATION
WITH TRUST
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Patrick S. Adams* President, CEO, President and Director, Choice Investment
DOB: 1960 Trustee, Chairman Management, LLC, since August, 1999.
5299 DTC Boulevard of the Board Senior Vice President to Berger Associates,
Englewood, Colorado 80111 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. President and co-
portfolio manager of the Berger Balanced
Fund from August 1997, and President and
portfolio manager of the Berger Select Fund
----------------------------------------------------------------------------------------------------
Page 30
<PAGE>
----------------------------------------------------------------------------------------------------
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
DOB: 1942 Investments from February 1998 to present.
5299 DTC Boulevard Senior Managing Director of EquiServ from
Englewood, Colorado 80111 February 2000 to present. President and 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.
(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
DOB: 1961 1992. Dr. Hathaway is a board certified
2045 Franklin Street orthopedic surgeon.
Denver, Colorado 80205
----------------------------------------------------------------------------------------------------
Gregory S. Drose Treasurer, effective Chief Operating Officer of Choice Investment
DOB: 1964 April 1, 2000 Management, LLC since November 1999.
5299 DTC Boulevard Vice President of Marketing/Due Diligence,
Englewood, Colorado 80111 D.E. Frey & Company, Inc. 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
----------------------------------------------------------------------------------------------------
Page 31
<PAGE>
----------------------------------------------------------------------------------------------------
May 1995.
----------------------------------------------------------------------------------------------------
Sharon E. Adams* Secretary Vice President of Choice Investment
DOB: 1963 Management, LLC since August 1999. Full-
5299 DTC Boulevard time homemaker from 1993 until August
Englewood, Colorado 80111 1999. Account executive - outside sales for
Sprint from 1990 to 1993. Sales manager for
Allnet Communications from 1989 to 1990.
----------------------------------------------------------------------------------------------------
</TABLE>
*Shareholder of record, not beneficial owner.
The Trustees of the Trust who are officers of the Adviser receive no
remuneration from the Fund. Each of the other Trustees will be paid an
annual retainer fee of $2,500, will be paid the sum of $1,000 per meeting
attended and will be reimbursed for the expenses of attending meetings.
COMPENSATION TABLE**
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
AGGREGATE COMPENSATION FROM TOTAL COMPENSATION FROM
NAME OF PERSON TRUST TRUST PAID TO TRUSTEES
<S> <C> <C>
Patrick S. Adams $0 $0
Gerard M. Lavin $ $
Dr. Richard A. Hathaway $ $
-------------------------------------------------------------------------------
</TABLE>
** 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 to be
any annual benefits upon retirement.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of October 12, 2000, Mr. Adams owned all of the outstanding shares
of the Fund. It is contemplated that soon after the initial public offering
of the Fund, Mr. Adams' ownership share will represent less than 25% of the
Fund's outstanding shares.
CODE OF ETHICS
The Trust, the Adviser and the Fund's principal underwriter each have
adopted Codes of Ethics under Rule 17j-1 of the Investment Company Act.
Under each such Code, the personnel subject to such Code are permitted to
invest in securities that may be purchased or held by the Fund.
Page 32
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. The investment adviser to the Fund is Choice
Investment Management, LLC (the "Adviser"). The Adviser was organized as a
Colorado limited liability company on August 27, 1999. Patrick S. Adams is
the founder and President of the Adviser and owns 50.25% of the outstanding
membership interests of the Adviser. As such, he controls the Adviser.
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 Fund and the Adviser (the "Investment Advisory
Agreement"), the Adviser provides continuous investment advisory services
to the Fund. The Adviser also provides the Fund with office space,
equipment and personnel necessary to operate and administer the Fund's
business and to supervise the provision of services by third parties.
The Advisory Agreement is dated October 31, 1999. The Investment
Advisory Agreement has an initial term of two years and thereafter is
required to be re-approved annually by the Board of Trustees of the Trust
or by vote of a majority of the Fund's outstanding voting securities (as
defined in the Investment Company Act). Each annual renewal must also be
approved by the vote of a majority of the Fund's Trustees who are not
parties to the Investment Advisory Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on
such approval. The Investment Advisory Agreement was approved by the vote
of a majority of the Trustees who are not parties to the Investment
Advisory Agreement or interested persons of any such party on September 30,
1999 by the initial shareholder of the Focus Fund on September 30, 1999, by
the initial shareholder of the Balanced Fund on March 25, 2000, and by the
initial shareholder of the Fund on October 12, 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 voting
securities, or by the Adviser, and will terminate automatically in the
event of its assignment.
As compensation for its services, the Fund will pay to the Adviser an
advisory fee at the annual rate of 2.50% of the Fund's average daily net
assets. The advisory fee is accrued daily and paid monthly.
In the Investment Advisory Agreement, it is provided that the Adviser
shall not be liable to the Fund or its shareholders for any error of
judgment or mistake of law or for anything other than willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or
duties. It is also provided in the Investment Advisory Agreement 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.
Under the Investment Advisory Agreement, the Adviser is permitted to
seek reimbursement of any reductions made to its management fee and
payments made to limit expenses that are the responsibility of the Fund
within the three-year period following such reduction, subject to the
Fund's abilities to effect such reimbursement and remain in compliance with
applicable expense limitations. Any such management fee or expense
reimbursement will be accounted for on the financial statement of the Fund
as a contingent liability of the Fund until such time as it appears the
Fund will be able to effect such reimbursement. At such time as it
Page 33
<PAGE>
appears probable the Fund is able to effect such reimbursement, the amount
of reimbursement the Fund is able to effect will be accrued as an expense
of the Fund for that current period.
ADMINISTRATION AND FUND ACCOUNTING. Sunstone Financial Group, Inc.,
803 West Michigan Street, Suite A, Milwaukee, Wisconsin 53233 ("Sunstone")
has agreed to provide various administrative and fund accounting services
to the Fund under an Administration and Fund Accounting Agreement dated
October 31, 1999 (the "Administration Agreement"). Sunstone's services
include, but are not limited to, the following: calculating daily net asset
values for the 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 statements; preparing notice and renewal securities filings
pursuant to state securities laws; compiling data for and preparing notices
to the SEC; preparing financial statements for the annual and semi-annual
reports to the SEC and current investors; monitoring the Funds' expenses;
monitoring the Funds' status as a regulated investment company under
Subchapter M of the Internal Revenue 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. In the Administration
Agreement it is also provided 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% 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 the
Funds' securities.
Page 34
<PAGE>
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 Funds-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. ("Custodian") serves as the custodian for
the Funds. Under the terms of the Custody Agreement, the Custodian is
responsible for the receipt and 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, 803 West Michigan Street, Suite A,
Milwaukee, Wisconsin 53233 (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. Rothgerber Johnson & Lyons LLP, with offices at 1200
17th Street, Suite 3000, Denver, CO 80202, serves as counsel to the Fund.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP is the independent
accountant 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 Fund has adopted a Distribution and Services Plan (the "Plan")
pursuant to Rule 12b-1 under the Investment Company Act. The Plan
authorizes payments by the Fund in connection with the distribution of its
shares at an annual rate, as determined from time to time by the Board of
Trustees, of 0.35% for Class A and 1.00% for Classes B and C respectively
of the Fund's average daily net assets attributable to each such class.
Payments may be made by the Fund under the Plan for the purpose of
financing any activity primarily intended to result in the sales of shares
of the Fund as determined by the Board of Trustees. Such activities include
advertising, shareholder account servicing, compensation to the
Distributor, production and dissemination of prospectuses and sales and
marketing materials, and capital or other expenses of associated
Page 35
<PAGE>
equipment, rent, salaries, bonuses, interest and other overhead. To the
extent any activity is one that the Fund may finance without the Plan, the
Fund may also make payments to finance such activity outside of the Plan
and not be subject to its limitations. The Plan provides for compensation
to the Distributor regardless of the expenses incurred by the Distributor.
The Plan was adopted in anticipation that the Fund will benefit from
the Plan through increased sales of shares of the Fund, thereby reducing
the Fund's expense ratios and proving an asset size that allows the Adviser
greater flexibility in management. The Plan may be terminated at any time
by a vote of the Trustees of the Fund who are not interested persons of the
Fund and who have no direct or indirect financial interest in the Plan or
any agreement related thereto (the "Rule 12b-1 Trustees") or by a vote of
a majority of the Trust's outstanding shares. Any change in the Plan that
would increase the distribution expenses of the Fund materially provided
for in the Plan requires approval of the shareholders and the Board of
Trustees, including the Rule 12b-1 Trustees.
While the Plan is in effect, the selection and nomination of Trustees
who are not interested persons of the Fund will be committed to the
discretion of the Trustees of the Fund who are not interested persons of
the Fund. The Board of Trustees must review the amount and purposes of
expenditures pursuant to the Plan quarterly as reported to it by the
officers of the Trust. Unless otherwise terminated, the Plan will continue
in effect for as long as its continuance is approved specifically at least
annually by the Board of Trustees, including the Rule 12b-1 Trustees. As of
October 12, 2000, no payments had been made under the Plan with respect to
the Fund.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE TRANSACTIONS. The Adviser is responsible for decisions to
buy and sell securities for the Fund, for the placement of its portfolio
business and the negotiation of the commissions to be paid on such
transactions, subject to the supervision of the Trust's Board of Trustees.
It is the policy of the Adviser to seek the best execution at the best
security price available with respect to each transaction, in light of the
overall quality of brokerage and research services provided to the Adviser.
The Adviser will place orders pursuant to its investment determination
for the Fund either directly with the issuer or with any broker or dealer.
In executing portfolio transactions and selecting brokers or dealers, the
Adviser will use its best efforts to seek on behalf of the Fund the best
overall terms available. In selecting brokers and assessing the best
overall terms available for any transaction, the Adviser shall consider all
factors 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. Generally,
over-the-counter securities are 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"
Page 36
<PAGE>
when the market maker sells a security and "markdowns" when the market
maker purchases a security). In some instances, the Adviser may determine
that better prices are available from non-principal market makers who are
paid commissions directly. Subject to obtaining the best price and
execution, the Adviser may consider the sales of shares of the Fund when
allocating the Fund's portfolio transactions to brokers.
ALLOCATION. The Adviser may service advisory clients in addition to
the Fund and place portfolio transactions for these accounts. Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its accounts;
not all of such services may be used by the Adviser in connection with the
Fund. In the opinion of the Adviser, it will not be possible to measure the
benefits separately from research services to each of the accounts
(including the Fund) to be managed by the Adviser. Because the volume and
nature of the trading activities of the accounts will not be uniform, the
amount of commissions in excess of those charged by another broker paid by
each account for brokerage and research services will vary. However, such
costs to the Fund will not, in the opinion of the Adviser, be
disproportionate to the benefits to be received by the Fund on a continuing
basis.
The Adviser intends to seek to allocate portfolio transactions
equitably among its accounts whenever concurrent decisions are made to
purchase or sell securities by the Fund and another advisory account. In
some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations
between the Fund and other advisory accounts, if any, the main factors to
be considered by the Adviser will be the respective investment objectives,
the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held, and the opinions of the persons responsible for
recommending the investment.
On occasions when the Adviser deems the purchase or sale of a security
to be in the best interests of the Fund as well as other fiduciary or
agency accounts managed by it, it is provided in the Investment Advisory
Agreement that the Adviser, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be sold or purchased for the
Fund with those to be sold or purchased for other Funds or such other
accounts in order to obtain the best overall terms available with respect
to common and preferred stocks and the best net price and execution with
respect to other securities. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction,
will be made by the Adviser in the manner it considers to be most equitable
and consistent with its fiduciary obligations to the Fund and other
accounts involved. In some instances, this procedure may affect adversely
the size of the position obtainable for the Fund or the amount of the
securities that may be sold for the Fund.
BROKERAGE SELECTION. In evaluating the best overall terms available,
and in selecting the broker-dealer to execute a particular transaction, the
Adviser may also consider the brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934)
provided to the Fund and/or other accounts over which the Adviser 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
Page 37
<PAGE>
of the Adviser may benefit indirectly from the availability of these
services to the Adviser, and the Fund may benefit indirectly from services
available to the Adviser as a result of transactions for other clients. The
Adviser is authorized to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Fund that is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction
if, but only if, the Adviser determines in good faith that such commission
was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer viewed in terms of that
particular transaction or in terms of the overall responsibilities the
Adviser has to the Fund. In no instance, however, will portfolio securities
be purchased from or sold to the Adviser, or any affiliated person of
either the Trust or the Adviser, acting as principal in the transaction,
except to the extent permitted by the SEC through rules, regulations,
decisions and "no action" letters.
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 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 that 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 generally will 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.
Under Rule 18f-2 promulgated under the Investment Company Act, 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 acted upon effectively 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 the interests of the Fund in the matter are
substantially identical or that
Page 38
<PAGE>
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 acted upon
effectively with respect to the Fund only if approved by a majority of the
outstanding shares of the Fund. However, it is also provided in the Rule
that the ratification of independent public accountants, the approval of
principal underwriting contracts and the election of Trustees may be acted
upon effectively 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 promulgated thereunder. In addition,
in the Declaration of Trust, it is provided that, to the extent consistent
with Delaware law and other applicable law, the By-Laws may include further
provisions relating to shareholders' votes and related matters.
As a business trust, the Trust is not required to hold annual
shareholder meetings. If requested to do so by the holders of at least 10%
of the Trust's outstanding shares, the Trust will call a meeting of
shareholders for the purpose of voting upon the question of removal of a
Trustee, and to assist in communications with other shareholders as
required by Section 16(c) of the Investment Company Act.
PURCHASE, REDEMPTION AND PRICING OF SHARES
OFFERING PRICE. The Fund's net asset value per share will be
calculated separately from the per share net asset value of the other Funds
of the Trust. "Assets belonging to" the Fund consist of the consideration
received upon the issuance of shares of the Fund together with all net
investment income, earnings, profits, realized gains/losses and proceeds
derived from the investment thereof, including any proceeds from the sale
of such investments, any funds or payments derived from any reinvestment of
such proceeds and a portion of any general assets of the Trust not
belonging to a particular series. The Fund will be charged with the direct
liabilities of the 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.
As set forth in the Prospectus, the net asset value of the Fund will
be determined as of the close of trading on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is open for
trading Monday through Friday except New Year's Day, Dr. Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. Additionally, if any of
the aforementioned holidays falls on a Saturday, the New York Stock
Exchange will not be open for trading on the preceding Friday, and when any
such holiday falls on a Sunday, the New York Stock Exchange will not be
Page 39
<PAGE>
open for trading on the following Monday unless unusual business conditions
exist, such as the ending of a monthly or the yearly accounting period.
In connection with the determination of the Fund's net asset value,
securities traded on a recognized stock exchange are valued at the last
sale price on the securities exchange on which such securities are
primarily traded. Securities traded on only over-the-counter markets are
valued on the basis of closing over-the-counter trade prices. Securities
for which there were no transactions are valued at the closing bid prices.
Options written or purchased by the Fund are valued at the last sales price
if such last sales price is between the current bid and asked prices.
Otherwise, options are valued at the mean between the current bid and asked
prices. Debt securities (other than short-term instruments) are valued at
prices furnished by a pricing service, subject to review and possible
revision by the Fund's Adviser. Any modification of the price of a debt
security furnished by a pricing service is made pursuant to procedures
adopted by the Trust's Board of Trustees. Debt instruments maturing within
60 days are valued by the amortized cost method. Any securities for which
market quotations are not readily available are valued at their fair value
as determined in good faith by the Adviser under the supervision of the
Trust's Board of Trustees.
Generally, trading in foreign securities, as well as U.S. Government
securities and certain cash equivalents and repurchase agreements, is
substantially completed each day at various times prior to the close of the
New York Stock Exchange. The values of such securities used in computing
the net asset value of the shares of the Fund are determined as of such
times. Foreign currency exchange rates are also determined generally prior
to the close of the New York Stock Exchange. Occasionally, events affecting
the value of such securities and such exchange rates may occur between the
times at which they are determined and at the close of the New York Stock
Exchange, which will not be reflected in the computation of net asset
value. If during such periods, events occur that affect the value of such
securities materially, the securities will be valued at their fair market
value as determined by management and approved in good faith by the Trustees.
For purposes of determining the net asset value per share of the Fund,
all assets and liabilities expressed in foreign currencies initially 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.
There is no sales charge on purchases of $1,000,000 or more; however,
the Fund may pay a dealer concession and/or advance a service fee on such
transactions as set forth below.
The Fund may elect to re-allow the entire initial sales charge to
dealers for all sales with respect to which orders are placed with the Fund
during a particular period. Dealers to whom substantially the entire sales
charge is re-allowed may be deemed to be "underwriters" as that term is
defined under the Securities Act of 1933.
In addition to amounts paid to dealers as a dealer concession out of
the initial sales charge paid by investors, the Fund may, from time to
time, at its expense or as an expense for which it may be compensated under
a distribution plan, if applicable, pay a bonus or other consideration
Page 40
<PAGE>
or incentive to dealers who sell a minimum dollar amount of the shares of
the Funds during a specified period of time. At the option of the dealer,
such incentives may take the form of payment for travel expenses, including
lodging, incurred in connection with trips taken by qualifying registered
representatives and their families to places within or outside the United
States. The total amount of such additional bonus payments or other
consideration shall not exceed 0.25% of the public offering price of the
shares sold. Any such bonus or incentive programs will not change the price
paid by investors for the purchase of the Fund's shares or the amount the
Fund will receive as proceeds from such sales. Dealers may not use sales of
the Fund's shares to qualify for any incentives to the extent that such
incentives may be prohibited by the laws of any state.
The Fund may make payments to dealers and institutions that are
dealers of record for purchases of $1 million or more of Class A shares
that are sold at net asset value and are subject to a contingent deferred
sales charge as follows: 1.00% of the first $2 million of such purchase,
plus 0.80% of the next $1 million of such purchase, plus 0.50% of the next
$17 million of such purchase, plus 0.25% of amounts in excess of $20
million of such purchase.
The Fund may pay sales commissions to dealers and institutions that
sell Class B shares of the Fund at the time of such sales. Payments with
respect to Class B shares will equal 4.00% of the purchase price of the
Class B shares sold by the dealer or institution, and will consist of a
sales commission equal to 3.75% of the purchase price of the Class B shares
sold plus an advance of the first year service fee of 0.25% with respect to
such shares. The portion of the payments to the Adviser under the Class B
Plan that constitutes an asset-based sales charge (0.75%) is intended in
part to permit the Adviser to recoup a portion of such sales commissions
plus financing costs.
The Fund may pay sales commissions to dealers and institutions that
sell Class C shares of the Fund at the time of such sales. Payments with
respect to Class C shares will equal 1.00% of the purchase price of the
Class C shares sold by the dealer or institution, and will consist of a
sales commission of 0.75% of the purchase price of the Class C shares sold
plus an advance of the first year service fee of 0.25% with respect to such
shares. The Adviser will retain all payments received by it relating to
Class C shares for the first year after they are purchased. The portion of
the payments to the Adviser under the Class C Plan that constitutes an
asset-based sales charge (0.75%) is intended in part to permit the Adviser
to recoup a portion of on-going sales commissions to dealers plus financing
costs, if any. After the first full year, the Fund will make such payments
quarterly to dealers and institutions based on the average net asset value
of Class C shares that are attributable to shareholders for whom the
dealers and institutions are designated as dealers of record. These
commissions are not paid on sales to investors who may not pay the CDSC and
in circumstances where the Fund grants an exemption on particular
transactions.
The Fund may pay investment dealers or other financial service firms
for share purchases (measured on an annual basis) of Class A shares of the
Fund sold at net asset value to an employee benefit plan as follows: 1.00%
of the first $2 million of such purchases, plus 0.80% of the next $1
million of such purchases, plus 0.50% of the next $17 million of such
purchases, plus 0.25% of amounts in excess of $20 million of such purchases.
Page 41
<PAGE>
REDUCTIONS IN INITIAL SALES CHARGES. Reductions in the initial sales
charges shown in the sales charges table of the Fund prospectus apply to
purchases of shares of the Fund that are otherwise subject to an initial
sales charge, provided that such purchases are made by a "purchaser" as
hereinafter defined.
The term "purchaser" means:
1. an individual and his or her spouse and children, including any trust
established exclusively for the benefit of any such person; or a pension,
profit-sharing, or other benefit plan established exclusively for the
benefit of any such person, such as an IRA, Roth IRA, a single-participant
money purchase/profit sharing plan or an individual participant in a 403(b)
Plan (unless such 403(b) plan qualifies as the purchaser as defined below);
2. a 403(b) plan, the employer/sponsor of which is an organization
described under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended (the "Code"), if:
a. the employer/sponsor must submit contributions for all
participating employees in a Single contribution transmittal (i.e.,
the Fund will not accept contributions submitted with respect to
individual participants);
b. each transmittal must be accompanied by a single check or wire
transfer; and
c. all new participants must be added to the 403(b) plan by
submitting an application on behalf of each new participant with the
contribution transmittal;
3. a trustee or fiduciary purchasing for a single trust, estate or single
fiduciary account (including a pension, profit-sharing or other employee
benefit trust created pursuant to a plan qualified under Section 401 of the
Code) and 457 plans, although more than one beneficiary or participant is
involved;
4. a Simplified Employee Pension (SEP), Salary Reduction and other
Elective Simplified Employee Pension account (SAR-SEP) or Savings Incentive
Match Plans for Employees IRA (SIMPLE IRA), where the employer has notified
the Fund in writing that all of its related employee SEP, SAR-SEP or SIMPLE
IRA accounts should be linked; or
5. any other organized group of persons, whether incorporated or not,
provided the organization has been in existence for at least six months and
has some purpose other than the purchase at a discount of redeemable
securities of a registered investment company.
Investors or dealers seeking to qualify orders for a reduced initial
sales charge must identify such orders and, if necessary, support their
qualification for the reduced charge. The Adviser reserves the right to
determine whether any purchaser is entitled, by virtue of the foregoing
definition, to the reduced sales charge. No person or entity may distribute
shares of the Fund without payment of the applicable sales charge other
than to persons or entities that qualify for a reduction in the sales
charge as provided herein.
Page 42
<PAGE>
LETTERS OF INTENT. A purchaser, as previously defined, may pay reduced
initial sales charges by completing the appropriate section of the account
application and by fulfilling a Letter of Intent ("LOI"). The LOI confirms
such purchaser's intention as to the total investment to be made in Class
A shares of the Fund (not applicable to Class B and Class C shares of the
Fund) within the following 13 consecutive months. By marking the LOI
section on the account application and by signing the account application,
the purchaser indicates that he/she understands and agrees to the terms of
the LOI and is bound by the provisions described below.
Each purchase of Fund shares subject normally to an initial sales
charge made during the 13-month period will be made at the public offering
price applicable to a single transaction of the total dollar amount
indicated by the LOI. It is the purchaser's responsibility at the time of
purchase to specify the account numbers that should be considered in
determining the appropriate sales charge. The offering price may be further
reduced as described under RIGHTS OF ACCUMULATION if the Transfer Agent is
advised of all other accounts at the time of the investment. Shares
acquired through reinvestment of dividends and capital gains distributions
will not be applied to the LOI. At any time during the 13-month period
after meeting the original obligation, a purchaser may revise his or her
intended investment amount upward by submitting a written and signed
request. Such a revision will not change the original expiration date. By
signing an LOI, a purchaser is not making a binding commitment to purchase
additional shares, but if purchases made within the 13-month period do not
total the amount specified, the investor will pay the increased amount of
sales charge as described below. Purchases made within 90 days before
signing an LOI will be applied toward completion of the LOI. The LOI
effective date will be the date of the first purchase within the 90-day
period. The Transfer Agent will process necessary adjustments upon the
expiration or completion date of the LOI. Purchases made more than 90 days
before signing an LOI will be applied toward completion of the LOI based on
the value of the shares purchased calculated at the public offering price
on the effective date of the LOI.
To assure compliance with the provisions of the Investment Company
Act, out of the initial purchase (or subsequent purchases if necessary) the
Transfer Agent will escrow in the form of shares an appropriate dollar
amount (computed to the nearest full share). All dividends and any capital
gain distributions on the escrowed shares will be credited to the
purchaser. All shares purchased, including those escrowed, will be
registered in the purchaser's name. If the total investment specified under
this LOI is completed within the 13-month period, the escrowed shares will
be released promptly. If the intended investment is not completed, the
purchaser will pay the Transfer Agent the difference between the sales
charge on the specified amount and the amount actually purchased. If the
purchaser does not pay such difference within 20 days of the expiration
date, he/she constitutes and appoints the Transfer Agent irrevocably as
his/her attorney to surrender for redemption any or all shares, to make up
such difference within 60 days of the expiration date.
If at any time before completing the LOI Program, the purchaser wishes
to cancel the agreement, he/she must give written notice to the Transfer
Agent. If at any time before completing the LOI Program, the purchaser
requests the Transfer Agent to liquidate or transfer beneficial ownership
of his/her total shares, a cancellation of the LOI will automatically be
effected. If the total
Page 43
<PAGE.
amount purchased is less than the amount specified in the LOI, the Transfer
Agent will redeem an appropriate number of escrowed shares equal to the
difference between the sales charge actually paid and the sales charge that
would have been paid if the total purchases had been made at a single time.
RIGHTS OF ACCUMULATION. A "purchaser" as previously defined, may also
qualify for reduced initial sales charges based upon such purchaser's
existing investment in Class A shares of the Fund at the time of the
proposed purchase. To determine whether a reduced initial sales charge
applies to a proposed purchase, the Transfer Agent takes into account not
only the money invested upon such proposed purchase, but also the value of
all Class A shares of the Fund owned by such purchaser, calculated at the
then current maximum public offering price. If a purchaser so qualifies for
a reduced sales charge, the reduced sales charge applies to the total
amount of money then being invested by such purchaser, calculated at the
then current public offering price, and not just to the portion that
exceeds the breakpoint above which a reduced sales charge applies.
For example, if a purchaser already owns Class A shares with a value
of $20,000 and wishes to invest an additional $20,000 in Class A shares,
with a maximum initial sales charge of 5.50%, the reduced initial sales
charge of 5.25% will apply to the full $20,000 purchase and not just to the
$15,000 in excess of the $25,000 breakpoint. To qualify for obtaining the
discount applicable to a particular purchase, the purchaser or his dealer
must furnish the Transfer Agent with a list of the account numbers and the
names in which such accounts of the purchaser are registered at the time
the purchase is made.
PURCHASES AT NET ASSET VALUE. Purchases of shares of the Fund at net
asset value (without payment of an initial sales charge) may be made in
connection with: (a) the reinvestment of dividends and distributions from
the Fund; (b) exchanges of shares of certain funds; (c) use of the
reinstatement privilege; or (d) a merger, consolidation or acquisition of
assets of the Fund.
The following purchasers will not pay initial sales charges on
purchases of Class A shares because there is a reduced sales effort
involved in sales to these purchasers:
1. The Adviser and its affiliates, or their clients;
2. Any current or retired officer, director or employee (and members of
their immediate family) of the Adviser, its affiliates or the Funds and any
foundation, trust or employee benefit plan established exclusively for the
benefit of, or by, such persons;
3. Sales representatives and employees (and members of their immediate
family) of selling group members or financial institutions that have
arrangements with such selling group members;
4. Purchases through approved fee-based programs;
Page 44
<PAGE>
5. Employee benefit plans designated as purchasers as defined above, and
non-qualified plans offered in conjunction therewith, provided the initial
investment in the plan(s) is at least $1 million; the sponsor signs a $1
million LOI; the employer-sponsored plan(s) has at least 100 eligible
employees; or all plan transactions are executed through a single omnibus
account and the financial institution or service organization has entered
into the appropriate agreements with the distributor. Section 403(b) plans
sponsored by public educational institutions are not eligible for a sales
charge exception based on the aggregate investment made by the plan or the
number of eligible employees. Purchases of the Fund by such plans are
subject to initial sales charges; and
6. A shareholder of a fund that merges or consolidates with the Fund or
that sells its assets to the Fund in exchange for shares of the Fund.
As used above, immediate family includes an individual and his or her
spouse, children, parents and parents of spouse.
CONTINGENT DEFERRED SALES CHARGE EXCEPTIONS. CDSCs will not apply to the
following:
1. Redemptions following the death or post-purchase disability of (1) any
registered shareholders on an account or (2) a settlor of a living trust,
of shares held in the account at the time of death or initial determination
of post-purchase disability;
2. Certain distributions from individual retirement accounts, Section
403(b) retirement plans, Section 457 deferred compensation plans and
Section 401 qualified plans, where redemptions result from (i) required
minimum distributions to plan participants or beneficiaries who are age
70-1/2 or older, and only with respect to that portion of such distributions
that does not exceed 10% annually of the participant's or beneficiary's
account value in the Fund; (ii) in kind transfers of assets where the
participant or beneficiary notifies the distributor of the transfer not
later than the time the transfer occurs; (iii) tax-free rollovers or
transfers of assets to another plan of the type described above invested in
Class B or Class C shares of the Fund; (iv) tax-free returns of excess
contributions or returns of excess deferral amounts; and (v) distributions
on the death or disability (as defined in the Internal Revenue Code) of the
participant or beneficiary;
3. Liquidation by the Fund when the account value falls below the minimum
required account size of $10,000;
4. Investment account(s) of the Adviser; and
5. Class C shares if the investor's dealer of record notifies the Fund
prior to the time of investment that the dealer waives the payment
otherwise payable to him.
Upon the redemption of Class A shares purchased in amounts of $1
million or more, no CDSC will be applied in the following situations:
1. Shares held more than 18 months;
Page 45
<PAGE>
2. Redemptions from employee benefit plans designated as qualified
purchasers, as defined above, where the redemptions are in connection with
employee terminations or withdrawals, provided the total amount invested in
the plan is at least $1,000,000; the sponsor signs a $1 million LOI; or the
employer-sponsored plan has at least 100 eligible employees; provided,
however, that 403(b) plans sponsored by public educational institutions
shall qualify for the CDSC waiver on the basis of the value of each plan
participant's aggregate investment in the Fund, and not on the aggregate
investment made by the plan or on the number of eligible employees;
3. Private foundations or endowment funds; and
4. Redemption of shares by the investor where the investor's dealer
waives the amounts otherwise payable to it by the distributor and notifies
the distributor prior to the time of investment.
RETIREMENT ACCOUNTS. The Fund offers several retirement account
options to shareholders. Qualifying shareholders may establish the
following tax deferred retirement accounts: traditional IRA, spousal IRA,
SEP IRA and Roth IRA. The shareholder's employer must establish a plan
before the shareholder opens a SEP account.
A description of accounts currently offered, applicable service fees
and certain limitations on account contributions and withdrawals, as well
as application forms, are available from the transfer agent upon request at
1-800-392-7107. The IRA documents contain a disclosure statement that the
IRS requires to be furnished to individuals who are adopting the IRA.
Because a retirement program involves commitments covering future years, it
is important that the investment objective of the Fund be consistent with
the participant's retirement objectives. Premature withdrawals from a
retirement account will result in adverse tax consequences. Consultation
with a competent financial and tax adviser regarding the foregoing
retirement accounts is recommended.
SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended,
or the date of payment postponed beyond the normal seven-day period by the
Fund, under the following conditions authorized by the Investment Company
Act: (1) for any period during which the New York Stock Exchange is closed,
other than customary weekend or holiday closings, or during which trading
on the Exchange is restricted; (2) for any period during which an emergency
exists as the result of which the disposal by the Fund of securities owned
by it is not reasonably practical, or it is not reasonably practical for
the Fund to determine the fair value of its net assets; or (3) for such
other periods as the SEC may by order permit for the protection of the
Fund's shareholders.
REDEMPTIONS IN KIND. It is possible conditions may exist in the future
that would, in the opinion of the Board of Trustees, make it undesirable
for the Fund to pay for redemptions in cash. In such cases, the Board may
authorize payment to be made in portfolio securities of the Fund.
Securities delivered in payment of redemptions are valued at the same value
assigned to
Page 46
<PAGE>
them in computing the net asset value per share. Shareholders receiving
such securities generally will incur brokerage costs when selling such
securities.
TAXATION OF THE FUND
GENERAL. The Fund intends to qualify for treatment as a regulated
investment company ("RIC") under Subchapter M of the Internal Revenue Code
(the "Code"). To so qualify, the Fund must meet the following requirements:
(1) the Fund must derive at least 90% of its gross income each taxable year
from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business
of investing in such stock, securities or those currencies; (2) at the
close of each quarter of the Fund's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs, and other securities, with
these other securities limited, with respect to any one issuer, to an
amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities or the securities of
other RICs) of any one issuer.
As an RIC, the Fund generally will not be subject to U.S. Federal
income tax on income and gains that it distributes to shareholders, if at
least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
If the Fund fails to qualify for treatment as an RIC in any fiscal
year, it will be treated as a corporation for federal income tax purposes.
As such, the Fund would be required to pay income taxes on its net
investment income and net realized capital gains, if any, at the rates
applicable generally to corporations. Shareholders of a fund that did not
qualify for treatment as an RIC would not be liable for income tax on the
fund's net investment income or net realized capital gains in their
individual capacities. Distributions to shareholders, whether from the
fund's net investment income or net realized capital gains, would be
treated as taxable dividends to the extent of current or accumulated
earnings and profits of the Fund.
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by the Fund
may be treated as debt securities that were originally issued at a
discount. Original issue discount can be defined generally as the
difference between the price at which a security was issued and its stated
redemption price at maturity. Although no cash income actually is received
by the Fund, the original issue discount that accrues on a debt security in
a given year is treated generally for federal income tax purposes as
interest and, therefore, such income would be subject to the distribution
requirements applicable to regulated investment companies.
Page 47
<PAGE>
Some debt securities may be purchased by the Fund at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax
purposes. The gain realized on the disposition of any taxable debt security
having market discount will be treated generally 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 that takes into account the semi-annual
compounding of interest.
OPTIONS, FUTURES AND FOREIGN CURRENCY FORWARD CONTRACTS; STRADDLES.
The Fund's transactions in foreign currencies, forward contracts, options
and futures contact (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among
other things, may affect the character of gains and losses realized by the
Fund, defer Fund losses, and affect the determination of whether capital
gains and losses are characterized as long-term or short-term capital gains
or losses. These rules could therefore, in turn, affect the character,
amount and timing of distributions to shareholders. These provisions also
may require the Fund to mark-to-market certain types of the positions in
its portfolio (i.e., treat them as if they were closed out), which may
cause the Fund to recognize income without receiving cash with which to
make distributions in amount necessary to satisfy its distribution
requirements for relief from income and excise taxes. The Fund will monitor
its transactions and may make such tax elections as Fund management deems
appropriate with respect to foreign currency, options, futures contracts,
forward contracts or hedged investments. The Fund's status as a regulated
investment company may limit its transactions involving foreign currency,
futures, options and forward contracts.
Certain option transactions have special tax results for the Fund.
Expiration of a call option written by the Fund will result in short-term
capital gain. If the call option is exercised, the Fund will realize a gain
or loss from the sale of the security covering the call option and, in
determining such gain or loss, the option premium will be included in the
proceeds of the sale.
If the Fund writes options other than "qualified covered call
options," as defined in Section 1092 of the Code, or purchases puts, any
losses on such options transactions, to the extent they do not exceed the
unrealized gains on the securities covering the options, may be subject to
deferral until the securities covering the options have been sold.
In the case of transactions involving "nonequity options," as defined
in and subject to the rules of Code Section 1256, the Fund will treat any
gain or loss arising from the lapse, closing out or exercise of such
positions as 60% long-term and 40% short-term capital gain or loss as
required by Section 1256 of the Code. In addition, such positions must be
marked-to-market as of the last business day of the year, and gain or loss
must be recognized for federal income tax purposes in accordance with the
60%/40% rule discussed above even though the position has not been
terminated. A "nonequity option" subject to the rules of Code Section 1256
includes options involving stock indices such as the Standard & Poor's 500
and 100 indices.
Certain transactions undertaken by the Fund may result in "straddles"
for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the
Page 48
<PAGE>
Fund, and losses realized by the Fund on positions that are part of a
straddle may be deferred under the straddle rules, rather than being taken
into account in calculating the taxable income for the taxable year in
which the losses are realized. In addition, certain carrying charges
(including interest expense) associated with positions in a straddle may be
required to be capitalized rather than deducted currently. Certain
elections that the Fund may make with respect to its straddle positions may
also affect the amount, character and timing of the recognition of gains or
losses from the affected positions.
Under certain circumstances, the Fund may recognize gain from a
constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
reduces the risk of loss with respect to the appreciated position
substantially. In that event, the Fund would be treated as if it had sold
and immediately repurchased the property and would be taxed on any gain
(but not loss) from the constructive sale. The character of gain from a
constructive sale would depend upon the Fund's holding period in the
property. Loss from a constructive sale would be recognized when the
property was subsequently disposed of, and its character would depend on
the Fund's holding period and the application of various loss deferral
provisions of the Code. Constructive sale treatment does not apply to
transaction closed in the 90-day period ending with the 30th day after the
close of the taxable year, if certain conditions are met.
CURRENCY FLUCTUATIONS - "SECTION 988" GAINS OR LOSSES. The Fund will
maintain accounts and calculate income by reference to the U.S. dollar for
U.S. federal income tax purposes. Some of the Fund's investments will be
maintained and income therefrom calculated by reference to certain foreign
currencies, and such calculations will not correspond necessarily to the
Fund's distributable income and capital gains for U.S. federal income tax
purposes as a result of fluctuations in currency exchange rates.
Furthermore, exchange control regulations may restrict the ability of the
Fund to repatriate investment income or the proceeds of sales of
securities. These restrictions and limitations may limit the Fund's ability
to make sufficient distributions to satisfy the 90% distribution
requirement for qualification as a regulated investment company. Even if
the Fund so qualified, these restrictions could inhibit its ability to
distribute all of its income in order fully to be relieved of tax liability.
Gains or losses attributable to fluctuations in exchange rates that
occur between the time the Fund accrues income or other receivables
(including dividends) or accrues expenses or other liabilities denominated
in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary
income or ordinary loss. Similarly, on disposition of some investments,
including debt securities and certain forward contracts denominated in a
foreign currency, gains or losses attributable to fluctuations in the value
of the foreign currency between the date of the acquisition of the security
or other instrument and the date of disposition also are treated as
ordinary gain or loss. These gains and losses, referred to under the Code
as "Section 988" gains and losses, increase or decrease the amount of the
Fund's investment company taxable income available to be distributed to its
shareholders as ordinary income. If Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not
be able to make any ordinary dividend distributions, or distributions made
before the losses were realized would be recharacterized as a
Page 49
<PAGE>
return of capital to shareholders, or, in some cases, as capital gain,
rather than as an ordinary dividend.
PASSIVE FOREIGN INVESTMENT COMPANIES. The Fund may invest in shares of
foreign corporations that may be classified under the Code as passive
foreign investment companies ("PFICs"). In general, a foreign corporation
is classified as a PFIC if at least one-half of its assets constitute
investment-type assets, or 75% or more of its gross income is investment-type
income. If the Fund receives a so-called "excess distribution" with
respect to PFIC stock, the Fund itself may be subject to a tax on a portion
of the excess distribution, whether or not the corresponding income is
distributed by the Fund to shareholders. In general, under the PFIC rules,
an excess distribution is treated as having been realized ratably over the
period during which the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added
to the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the
PFIC rules, certain distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that is available currently in
some circumstances, the Fund would be required generally to include in its
gross income its share of the earnings of the PFIC in a five year period.
If this election were made, the special rules, discussed above, relating to
the taxation of excess distributions, would not apply. In addition, another
election would involve marking to market the Fund's PFIC shares at the end
of each taxable year, with the result that unrealized gains would be
treated as though they were realized and reported as ordinary income. Any
mark-to-market losses and any loss from an actual disposition of Fund
shares would be deductible as ordinary losses to the extent of any net
mark-to-market gains included in income in prior years.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing
of the recognition of income with respect to PFIC shares, as well as
subject the Fund itself to tax on certain income from PFIC shares, the
amount that must be distributed to shareholders, and that 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 paid by the Fund to a corporate shareholder, to the
extent such dividends are attributable to dividends received from U.S.
corporations by the Fund, may qualify for the dividends received deduction.
However, the revised alternative minimum tax applicable to corporations may
reduce the value of the dividends received deduction. Distributions of net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, designated by the Fund as capital gain dividends,
are taxable to shareholders at the applicable long-term capital gains rate,
whether paid in cash or in shares, regardless of how long the shareholder
has held the Fund's shares, and they are not eligible for the dividends
received deduction. Shareholders will be notified annually as to
Page 50
<PAGE>
the U.S. federal tax status of distributions, and shareholders receiving
distributions in the form of newly issued shares will receive a report as
to the net asset value of the shares received.
Dividends and other distributions declared by the Fund in, and payable
to, shareholders of record as of a date in October, November or December of
any year will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by
the Fund during January of the following calendar year. Accordingly, those
distributions will be taxed to shareholders for the year in which that
December 31 falls.
If the net asset value of shares is reduced below a shareholder's cost
as the result of a distribution by the Fund, such distribution generally
will be taxable even though it represents a return of invested capital.
Investors also should be aware that if shares are purchased shortly before
the record date for any distribution, the shareholder will pay full price
for the shares and receive some portion of the price back as a taxable
dividend or capital gain distribution.
The Fund will be subject to a nondeductible 4% excise tax to the
extent it fails to distribute, by the end of any calendar year,
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus
certain other amounts. The Fund intends to declare and distribute dividends
during each year sufficient to prevent imposition of the excise tax.
DISPOSITION OF SHARES. Upon a redemption or sale of shares of the
Fund, a shareholder will realize a taxable gain or loss that will be
treated as a capital gain or loss if the shares are capital assets in the
shareholder's hands and generally will be long-term or short-term,
depending upon the shareholder's holding period for the shares. Any loss
realized on a redemption, sale or exchange will be disallowed to the extent
the shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending
30 days after the disposal of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on the disposition of a fund's shares held by the
shareholder for six months or less will be treated for tax purposes as a
long-term capital loss to the extent of any distributions of capital gain
dividends received or treated as having been received by the shareholder
with respect to such shares.
BACKUP WITHHOLDING. The Fund will be required to report to the
Internal Revenue Service (the "IRS") all distributions and gross proceeds
from the redemption of the Fund's shares, except in the case of certain
exempt shareholders. All distributions and proceeds from the redemption of
the Fund's shares will be subject to withholding of federal income tax at
a rate of 31% ("backup withholding") in the case of non-exempt shareholders
if (1) the shareholder fails to furnish the Fund with a Form W-9 to certify
the shareholder's correct taxpayer identification number or social security
number, (2) the IRS notifies the shareholder or the Fund that the
shareholder has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (3) when
required to do so, that shareholder fails to certify that he or she is not
subject to backup withholding. If the withholding provisions are
applicable, any such distributions or proceeds, whether reinvested in
additional shares or taken in cash, will be reduced by the amounts required
to be withheld.
Page 51
<PAGE>
OTHER TAXATION. Distributions may also be subject to additional state,
local and foreign taxes depending on each shareholder's particular
situation. Non-U.S. shareholders may be subject to U.S. tax rules that
differ significantly from those summarized above. This discussion does not
address all of the tax consequences applicable to the Fund or shareholders,
and shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Fund.
CALCULATION OF PERFORMANCE DATA
From time to time, the Fund may advertise its "average annual total
return" over various periods of time. An average annual total return refers
to the rate of return that, if applied to an initial investment at the
beginning of a stated period and compounded over the period, would result
in the redeemable value of the investment at the end of the stated period
assuming reinvestment of all dividends and distributions and reflecting the
effect of all recurring fees. A shareholder's investment in the Fund and
its return are not guaranteed and will fluctuate according to market
conditions. When considering "average" annual total return figures for
periods longer than one year, shareholders should note that the Fund's
annual total return for any one year in the period might have been greater
or less than the average for the entire period. The Fund also may use
"aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in the Fund for a specific
period (again reflecting changes in the Fund's share price and assuming
reinvestment of dividends and distributions).
To facilitate the comparability of historical performance data from
one mutual fund to another, the SEC 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:
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.
Page 52
<PAGE>
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 that represents the change in value of an investment over a
stated period and may be quoted as a percentage or as a dollar amount.
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending
redeemable value is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
The Fund's performance figures will be based upon historical results
and will not necessarily be indicative of future performance. The Fund's
returns and net asset value will fluctuate and the net asset value of
shares when sold may be more or less than their original cost. Any
additional fees charged by a dealer or other financial services firm would
reduce the Fund's returns.
From time to time, in marketing and other literature, the Fund's
performance may be compared to the performance of other mutual funds in
general or to the performance of particular types of mutual funds with
similar investment goals, as tracked by independent organizations. Among
these organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm that ranks mutual funds by overall
performance, investment objective and assets, may be cited. Lipper
performance figures are based on changes in net asset value, with all
income and capital gains dividends reinvested. Such calculations do not
include the effect of any sales charges imposed by other funds. The Fund
will be compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings.
The Fund's performances may also be compared to the performance of
other mutual funds by Morningstar, Inc., which ranks funds on the basis of
historical risk and total return. Morningstar's rankings range from five
stars (highest) to one star (lowest) and represent Morningstar's assessment
of the historical risk level and total return of a fund as a weighted
average for 3, 5, and 10 year periods. Rankings are not absolute or
necessarily predictive of future performance.
Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning the Fund, including reprints of or
selections from, editorials or articles about the Fund. Sources for Fund
performance and articles about the Fund may include
Page 53
<PAGE>
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 Fund may compare its 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 the Fund may purchase for its
portfolio and the investments measured by these indices.
Occasionally, statistics may be used to specify the Fund's volatility
or risk. Measures of volatility or risk generally are used to compare the
Fund's net asset value or performance relative to a market index. One
measure of volatility is beta. "Beta" is the volatility of a fund relative
to the total market as represented by the Standard & Poor's 500 Stock
Index. A beta of more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation.
Standard deviation is used to measure variability of net asset value or
total return around an average, over a specified period of time. The
premise is that greater volatility connotes greater risk undertaken in
achieving performance.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" in which the Fund is
compared to broad categories of funds, such as money market, bond or equity
funds, in terms of potential risks and returns. Risk/return spectrums also
may depict funds that invest in both domestic and foreign securities or a
combination of bond and equity securities. Money market funds are designed
to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The
share price and return of an equity fund also will fluctuate. The
description may also compare the Fund to bank products, such as
certificates of deposit. Unlike mutual funds, certificates of deposit are
insured up to $100,000 by the U.S. government and offer a fixed rate of return.
MISCELLANEOUS
The Prospectus and this Statement of Additional Information do not
contain all the information included in the Registration Statement filed
with the SEC under the Securities Act of 1933 with respect to the
securities offered by the Fund's Prospectus. Certain portions of the
Registration Statement have been omitted from the Prospectus and this
Statement of Additional Information, pursuant to the rules and regulations
of the SEC. The Registration Statement including the exhibits filed
therewith may be examined at the office of the SEC 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.
Page 54
<PAGE>
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
Page 55
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
--------
EXHIBIT NO. EXHIBIT
----------- -------
(a) Declaration of Trust of Choice 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 Rothgerber Johnson & Lyons LLP
(i) Consent of Independent Accountants (to be submitted)
(j) None
(k) Initial Capital Agreement**
(l) Distribution Plan and form of dealer agreement**
(m) None
(p.1) Code of Ethics of Registrant (to be submitted)
*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.
***Incorporated by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A, as filed with the
Commission on March 31, 2000
<PAGE>
(p.2) Code of Ethics of Choice Investment Management, LLC***
(q) Powers of Attorney for Gerard M. Lavin and Richard A. Hathaway***
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
Registrant neither controls any person nor is under common control with any
other person.
ITEM 25. INDEMNIFICATION
---------------
Article VII, Section 2 of the Registrant's Declaration of Trust provides
that, to the fullest extent that limitations on the liability of Trustees
and officers are permitted by the Delaware Business Trust Act, the officers
and Trustees shall not be responsible or liable in any event for any act or
omission of any agent, employee, the adviser or principal underwriter of
the Registrant; or with respect to each Trustee and officer, the act or
omission of any other Trustee or officer, respectively. The Registrant, out
of its property, shall indemnify and hold harmless each and every officer
and Trustee from and against any and all claims and demands whatsoever
arising out of or related to such officer's or Trustee's performance of his
or her duties as an officer or Trustee of the Registrant. This limitation
on liability applies to events occurring at the time a person serves as a
Trustee or officer of the Registrant whether or not such person is a
Trustee or officer at the time of any proceeding in which liability is
asserted. Nothing contained in Article VII, Section 2 shall indemnify, hold
harmless or protect any officer or Trustee from or against any liability to
the Registrant or any shareholder to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such person's
office.
Section 4 of the Distribution Agreement between the Registrant and Sunstone
Distribution Services, LLC provides for indemnification of Sunstone
Distribution Services, LLC, an affiliate of Sunstone, in connection with
certain claims and liabilities to which Sunstone Distribution Services,
LLC, in its capacity as the Registrant's Distributor, may be subject. A
copy of the Distribution Agreement is incorporated by reference herein as
Exhibit (e).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant by the Registrant pursuant to the Trust Instrument or
otherwise, the Registrant is aware that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Investment Company Act and, therefore, is unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by
trustees, officers or controlling persons of the Registrant in connection
with the successful defense of any act, suit or proceeding) is asserted by
such trustees, officers or controlling persons in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Investment Company Act
and will be governed by the final adjudication of such issues.
<PAGE>
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 ("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, Johnson
Family 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 803 W. Michigan Street,
Suite A, Milwaukee, Wisconsin 53233. To the best of the
Registrant's knowledge, the following are the members and
officers of Sunstone Distribution Services, LLC:
--------------------------------------------------------------------------
Name POSITIONS AND OFFICES WITH POSITIONS AND OFFICES
UNDERWRITER WITH REGISTRANT
--------------------------------------------------------------------------
Miriam M. Allison President, Treasurer, Secretary None
--------------------------------------------------------------------------
Peter Hammond Vice President None
--------------------------------------------------------------------------
(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>
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 12th
day of October, 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.
SIGNATURE Title Date
/s/ Patrick S. Adams Trustee; President; October 12, 2000
-------------------- Principal Executive
Patrick S. Adams Officer; Chairman of the
Board
GERARD M. LAVIN* Trustee October 12, 2000
---------------
Gerard M. Lavin
RICHARD A. HATHAWAY* Trustee October 12, 2000
-------------------
Richard A. Hathaway
/s/Gregory S. Drose Treasurer; Principal October 12, 2000
------------------- Accounting Officer
Gregory S. Drose
*By /s/ Patrick S. Adams
--------------------
Patrick S. Adams
*Pursuant to a Power of Attorney filed herewith.
