AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 2000
(FILE NOS. 333-86647 AND 811-09573).
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM N-1A
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No. __
AND/OR
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 1
___________________
LELAND FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
C/O ASB CAPITAL MANAGEMENT, INC.
1101 PENNSYLVANIA AVENUE, N.W.
SUITE 300
WASHINGTON, D.C. 20004
(Address of Principal Executive Offices)
___________________
REGISTRANT'S TELEPHONE NUMBER: (800) 544-8850
WALTER R. FATZINGER, JR., DIRECTOR
LELAND FUNDS, INC.
C/O ASB CAPITAL MANAGEMENT, INC.
1101 PENNSYLVANIA AVENUE, N.W.
SUITE 300
WASHINGTON, D.C. 20004
(Name and Address of Agent for Service)
COPIES TO:
THOMAS H. MCCORMICK, ESQUIRE
CECELIA A. CALABY, ESQUIRE
SHAW PITTMAN
2300 N STREET, N.W.
WASHINGTON, D.C. 20037
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
Pursuant to Regulation 270.24f-2 under the Investment Company Act of 1940, the
Registrant hereby elects to register an indefinite amount of units of its
beneficial interests.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant files a further
amendment that specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933, or until this Registration Statement becomes effective on such date
as the Commission, acting pursuant to Section 8(a) of the Securities Act of
1933, may determine.
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<PAGE>
[FRONT COVER]
LELAND FUNDS, INC.
LELAND EQUITY FUND
LELAND BOND FUND
LELAND INTERMEDIATE BOND FUND
LELAND TWO-YEAR GOVERNMENT BOND FUND
LELAND SHORT-TERM INVESTMENT FUND
CLASS I AND CLASS N
PROSPECTUS
[prospectus date]
AS WITH ANY MUTUAL FUND, THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") HAS
NOT APPROVED OR DISAPPROVED THE FUNDS' SHARES OR DETERMINED WHETHER THIS
PROSPECTUS IS ADEQUATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
FUND SHARES ARE NOT DEPOSITS OF CHEVY CHASE BANK, F.S.B. ("CHEVY CHASE BANK") OR
ANY OF ITS AFFILIATES. FUND SHARES ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH
THE LELAND SHORT-TERM INVESTMENT FUND SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THIS
FUND. AN INVESTMENT IN A FUND INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
OVERVIEW OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Equity and Bond Funds. . . . . . . . . . . . . . . . . . . . . . 1
The Money Market Fund . . . . . . . . . . . . . . . . . . . . . . . . 1
The Funds' Investment Objectives and Principal Strategies. . . . . 2
Principal Risks of Investing in the Funds. . . . . . . . . . . . . 2
PRIOR PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 4
FEES AND EXPENSES OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . 4
Shareholder Transaction Fees . . . . . . . . . . . . . . . . . . . . . 4
Annual Fund Operating Expenses. . . . . . . . . . . . . . . . . . . . 4
Example. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES AND IMPORTANT RISKS. . . . . . . 6
The Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
General Investment Risks . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Practices and Related Risks . . . . . . . . . . . . . . . 13
ORGANIZATION AND MANAGEMENT OF THE FUNDS . . . . . . . . . . . . . . . . 15
Investment Adviser. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Administrator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Shareholder Servicing Plan . . . . . . . . . . . . . . . . . . . . . . 15
SHAREHOLDER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
How to Buy and Sell Shares. . . . . . . . . . . . . . . . . . . . . 15
Other Shareholder Services and Account Policies . . . . . . . . . . 18
Dividends and Capital Gains Distributions. . . . . . . . . . . . . . 20
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Where to go for Additional Information about the Funds . . . Back Cover
Obtaining Information from the Securities
and Exchange Commission . . . . . . . . . . . . . . . . . . . Back Cover
<PAGE>
OVERVIEW OF THE FUNDS
Each Leland fund (each a "Fund" and, collectively, the "Funds") is a separate
portfolio of Leland Funds, Inc., ("Leland"), an open-end management investment
company, and has its own investment objectives which it pursues through separate
investment strategies. The difference in objectives and strategies among the
Funds affects the degree of risk and potential return of each Fund.
THE EQUITY AND BOND FUNDS
The Leland Equity Fund, the Leland Bond Fund, the Leland Intermediate Bond Fund
and the Leland Two-Year Government Bond Fund are actively managed funds.
Actively managed funds are managed by investment advisers who buy and sell
securities based on research and analysis in an attempt to outperform a
particular benchmark or a combination of benchmarks.
THE MONEY MARKET FUND
The Leland Short-Term Investment Fund is a money market fund. Money market
funds invest in short-term, high-grade securities, such as commercial paper,
bankers' acceptances, repurchase agreements, government securities and
certificates of deposit ("CDs"). Money market funds limit the average maturity
of their portfolio to 90 days or less. They seek to generate monthly income and
to maintain a constant net asset value of $1.00 per share.
<TABLE>
<CAPTION>
THE FUNDS' INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
THE EQUITY AND BOND FUNDS
==============================================================================================================
FUND OBJECTIVE PRINCIPAL STRATEGY
==============================================================================================================
<S> <C> <C>
LELAND EQUITY FUND Seeks to achieve a total return that We invest primarily in equity securities of
exceeds that of the Russell 1000 Value large- and medium-capitalization
Index over a full market cycle. A full companies. We invest in a well-diversified
market cycle refers to a multi-year period portfolio of equity securities that we believe
(typically 3 to 5 years) that encompasses are undervalued but have good prospects for
a phase of economic growth followed by improving their future earnings and
a period of economic contraction. profitability.
==============================================================================================================
LELAND BOND FUND Seeks to achieve a total return exceeding We invest primarily in government notes
the Lehman Brothers Aggregate Bond and bonds, mortgage-backed securities
Index. issued by a U.S. Government Agency or
government-sponsored enterprises, and also
investment-grade corporate bonds. When
making our investments, we adjust the
proportion of long-term and short-term
bonds in our portfolio based on our forecast
of interest rates and our judgment of the
differences in interest rates for different
terms of bonds. We adjust the proportion of
U.S. Government, corporate and mortgage-
backed securities in our portfolio based on
our judgment of the valuation of those
sectors of the bond market.
==============================================================================================================
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
THE FUNDS' INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES (CONT'D)
THE EQUITY AND BOND FUNDS
FUND OBJECTIVE PRINCIPAL STRATEGY
=============================================================================================================
<S> <C> <C>
LELAND INTERMEDIATE Seeks to achieve a total return exceeding We invest primarily in intermediate-term
BOND FUND the Lehman Brothers government notes and bonds, mortgage-
Government/Corporate Intermediate backed securities issued by a U.S.
Bond Index. Government Agency or government-
sponsored enterprise, and also investment-
grade corporate bonds. We maintain the
average maturity of our portfolio between 3
and 8 years.
=============================================================================================================
LELAND TWO-YEAR Seeks to outperform over time a blended, We invest in U.S. Treasury, Agency and
GOVERNMENT BOND FUND 50/50-weighted index of the Salomon government-sponsored enterprise securities
Smith Barney 1-3 Year Government Index that mature within 2 years.
And the IBC Money Fund - All Taxable
Average Index.
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
THE MONEY MARKET FUND
=============================================================================================================
FUND OBJECTIVE PRINCIPAL STRATEGY
=============================================================================================================
<S> <C> <C>
LELAND SHORT-TERM Seeks to provide high current income, We invest in high-quality, short-term
INVESTMENT FUND safety of principal and liquidity. securities with maturities of 1 year or less.
We maintain an average dollar-weighted
portfolio maturity of 90 days or less.
=============================================================================================================
</TABLE>
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
This section summarizes important risks that are common to all of the Funds
described in this Prospectus and important risks that relate specifically to
particular Funds. Both are important to your investment choice. Additional
information about these and other risks is included in the individual Fund
Descriptions later in this Prospectus and under "General Investment Risks"
beginning on page __.
Risks FOR THE FUNDS
================================================================================
FUND INVESTING IN - The Equity Fund's total return, like stock prices
EQUITY SECURITIES generally, will fluctuate within a wide range, so you
could lose money over short or even long periods.
LELAND EQUITY FUND - The Equity Fund is also subject to investment style
(the "Equity Fund") risk, which is the risk that returns from stocks
comprising the Fund's portfolio will trail returns from
other asset classes or the overall stock market.
- Because the equity fund invests in equity securities
that appear undervalued, there is the risk that the
market will not recognize a security's intrinsic value
for a long time, or that an equity security judged to
be undervalued may actually be appropriately priced.
================================================================================
2
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUNDS (CONT'D)
RISKS FOR THE FUNDS
================================================================================
FUNDS INVESTING IN - Each Bond Fund is subject to interest rate risk, which
DEBT SECURITIES is the risk that bond prices overall will decline over
short or even long periods due to rising interest
rates.
LELAND BOND FUND - Each Bond Fund is subject to call risk, which is the
LELAND INTERMEDIATE risk that an issuer of a bond will redeem the bond
BOND FUND before its maturity date. A Fund which is invested in
LELAND TWO-YEAR the redeemed bond may have to reinvest the proceeds
GOVERNMENT BOND from the issuer at lower market rates.
FUND
(the "Bond Funds") - Each Bond Fund is subject to income risk, which is the
risk that falling interest rates will cause a Fund's
income to decline. Income risk is generally higher for
short-term bonds, and lower for long-term bonds.
- Each Bond Fund is subject to credit risk, which is the
risk that a bond issuer will fail to pay interest and
principal in a timely manner, reducing the Fund's
return.
- Each Bond Fund is subject to prepayment risk, which is
the risk that during periods of falling interest rates,
a mortgage-backed bond issuer will repay a
higher-yielding bond before its maturity date. Forced
to invest the unanticipated proceeds at lower rates, a
Bond Fund would experience a decline in income and lose
the opportunity for additional price appreciation
associated with falling rates.
- Each Bond Fund is subject to extension risk, which is
the risk that during periods of rising interest rates,
issuers may pay off certain types of mortgage-backed
securities more slowly than originally anticipated,
which causes the value of these securities to fall.
- Each Bond Fund is subject to event risk, which is the
risk that corporate issuers may undergo restructurings,
such as mergers, leveraged buyouts, takeovers, or
similar events, which may be financed by increased
debt. As a result of the added debt, the credit quality
and market value of a company's bonds may decline
significantly.
- Each Bond Fund may invest a portion of its assets in
U.S. Government obligations. The U.S. Government does
not guarantee the market value or current yield of its
obligations. Not all U.S. Government obligations are
backed by the full faith and credit of the U.S.
Government.
================================================================================
MONEY MARKET FUND - Although this Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose
Leland Short-term money by investing in this Fund.
Investment
================================================================================
3
<PAGE>
PRIOR PERFORMANCE INFORMATION
As of the date of this prospectus, the Funds have not yet commenced operations
and do not have performance histories.
FEES AND EXPENSES OF THE FUNDS
This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the funds.
SHAREHOLDER TRANSACTION FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
As a shareholder of a Fund, you will pay no fees directly from your investment.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
Leland Leland Two-Year
THE EQUITY AND Leland Equity Leland Bond Intermediate Bond Government Bond
BOND FUNDS Fund Fund Fund Fund
---- ---- ---- ----
Class N Class I Class N Class I Class N Class I Class N Class I
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Distribution and Service (12b-1) [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Fees
Other Expenses/1/ [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Total Operating Expenses [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
</TABLE>
<TABLE>
<CAPTION>
Leland Short-Term
Investment
THE MONEY MARKET FUND Fund
----
Class N Class I
-------- --------
<S> <C> <C>
Management Fees [ ]% [ ]%
Distribution and Service (12b-1) Fees [ ]% [ ]%
Other Expenses/1/ [ ]% [ ]%
Total Operating Expenses [ ]% [ ]%
</TABLE>
/1/ "Other Expenses" are based on estimated amounts for the current fiscal year.
4
<PAGE>
FEES AND EXPENSES OF THE FUNDS (CONT'D)
EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN A FUND
WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS.
THE EXAMPLE ASSUMES THAT YOU INVEST $10,000 IN A FUND FOR THE TIME PERIODS
INDICATED AND THEN REDEEM ALL OF YOUR SHARES AT THE END OF THOSE PERIODS. THE
EXAMPLE ALSO ASSUMES THAT YOUR INVESTMENT HAS A 5% RETURN EACH YEAR AND THAT THE
OPERATING EXPENSES OF THE RELEVANT FUND REMAIN THE SAME. ALTHOUGH YOUR ACTUAL
COSTS MAY BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS YOUR COSTS WOULD BE:
<TABLE>
<CAPTION>
Leland Leland Two-Year
THE EQUITY AND Leland Equity Leland Bond Intermediate Bond Government Bond
BOND FUNDS Fund Fund Fund Fund
---- ---- ---- ----
Class N Class I Class N Class I Class N Class I Class N Class I
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 YEAR [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
3 YEARS [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
</TABLE>
<TABLE>
<CAPTION>
Leland Short-Term
Investment
Fund
----
THE MONEY MARKET FUND Class N Class I
------- -------
<S> <C> <C>
1 YEAR [ ] [ ]
3 YEARS [ ] [ ]
</TABLE>
YOU WOULD PAY THE FOLLOWING EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
<TABLE>
<CAPTION>
Leland Leland Two-Year
THE EQUITY AND Leland Equity Leland Bond Intermediate Bond Government Bond
BOND FUNDS Fund Fund Fund Fund
---- ---- ---- ----
Class N Class I Class N Class I Class N Class I Class N Class I
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 YEAR [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
3 YEARS [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
</TABLE>
<TABLE>
<CAPTION>
Leland Short-Term
Investment
Fund
----
THE MONEY MARKET FUND Class N Class I
------- -------
<S> <C> <C>
1 YEAR [ ] [ ]
3 YEARS [ ] [ ]
</TABLE>
5
<PAGE>
INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES AND IMPORTANT RISKS
The summary information on the previous pages is designed to provide you with an
overview of each Fund. The sections that follow provide more detailed
information about the investments and management of each Fund.
IMPORTANT INFORMATION YOU SHOULD LOOK FOR:
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGY
What is the Fund trying to achieve? How do we intend to invest your money?
What makes a Fund different from the other Funds offered in this Prospectus?
IMPORTANT RISK FACTORS
What are the key risk factors for the Fund? They include the principal risk
factors listed for the Fund and the factors included in the "General Investment
Risks" section.
6
<PAGE>
LELAND EQUITY FUND
INVESTMENT OBJECTIVE
The Leland Equity Fund seeks to achieve a total return that exceeds that of the
Russell 1000 Value Index over a full market cycle. A full market cycle refers
to a multi-year period that encompasses a phase of economic growth followed by a
period of economic contraction. Historically, a full market cycle has been
typically defined as 3 to 5 years.
PRINCIPAL STRATEGY
We seek to outperform the Russell 1000 Value Index by investing in a
well-diversified portfolio of undervalued equity securities with good prospects
for improving fundamentals. Equity securities include common and preferred
stocks, and securities convertible into common stocks. We use a relative value
investment style in our selection of specific equity securities. We look for
equity securities that we determine are undervalued relative to their economic
market sector or to their own historical valuations, but where we see strong
potential for improvement in their future earnings and profitability. We invest
primarily in large- and mid-capitalization equity securities.
Under normal market conditions, our principal strategy is to invest:
- at least 65% of our total assets in an actively managed,
broadly-diversified portfolio of equity securities.
- in approximately 50 to 60 individual equity securities spread across
multiple industry groups and sectors of the economy.
Pending the selection and purchase of suitable investments, we may invest up to
10% of our total assets in commercial paper, money market or similar funds,
obligations of the U.S. Government or other assets.
IMPORTANT RISK FACTORS
The principal risks of investing in this Fund include the following:
- - The Equity Fund's total return, like stock prices generally, will fluctuate
within a wide range, so you could lose money over short or even long
periods. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Equity Fund is also subject to investment style risk, which is the risk
that returns from stocks comprising the Fund's portfolio will trail returns
from other asset classes or the overall stock market. For example,
large-capitalization stocks, such as those in which the Equity Fund
invests, tend to go through cycles of performing better -- or worse -- than
the stock market in general. These periods have, in the past, lasted for as
long as several years. In addition, medium-capitalization stocks, in which
the Equity Fund also invests, historically have been more volatile in price
than large-capitalization stocks and perform differently than the overall
stock market.
- - Because the Fund invests in equity securities that appear undervalued,
there is the risk that the market will not recognize a security's intrinsic
value for a long time, or that an equity security judged to be undervalued
may actually be appropriately priced.
In addition to the principal risks specified here, you should consider the
"Risks for the Funds" section on page __ and the "General Investment Risks"
section beginning on page __. They are all important to your investment choice.
PORTFOLIO MANAGER
- - HARRIET A. FOSTER
Ms. Foster will manage the Leland Equity Fund upon inception. Ms. Foster is
a Managing Director at ASB Capital Management, Inc. ("ASBCM"). She has been
with ASBCM since 1982 and has over 17 years of investment management
experience.
7
<PAGE>
LELAND BOND FUND
INVESTMENT OBJECTIVE
The Leland Bond Fund seeks to achieve a total return exceeding the Lehman
Brothers Aggregate Bond Index.
PRINCIPAL STRATEGY
We invest primarily in marketable, investment-grade debt securities with no
restrictions on maturity. Investment-grade debt securities are types of bonds
rated in the top four investment categories by a nationally recognized ratings
organization. Generally, these are bonds whose issuers are considered to have a
strong ability to pay interest and repay principal, although some investment
grade debt securities may have some speculative characteristics.
We seek to outperform the Lehman Brothers Aggregate Bond Index through our
active management approach, which includes adjusting the proportion of long-term
and short-term bonds in our portfolio based on our forecast of interest rates
and our judgment of the differences in interest rates for different terms of
bonds. Our management approach also involves adjusting the proportion of U.S.
Government, corporate and mortgage-backed securities in our portfolio based on
our judgment of the valuation of those sectors of the bond market. The Fund
will maintain a duration between 80% and 100% of the Lehman Brothers Aggregate
Bond Index.
Under normal market conditions, our principal strategy is to invest:
- at least 65% of our total assets in an actively managed portfolio
consisting primarily of intermediate-term and longer-term U.S.
Government notes and bonds, mortgage-backed securities issued by a
U.S. Government Agency or government-sponsored enterprise and
investment-grade corporate bonds.
We may also invest in asset-backed securities and below investment-grade
corporate bonds. We will not invest more than 20% of our total assets in
asset-backed securities or more than 15% of our total assets in below
investment-grade corporate bonds. Pending the selection and purchase of
suitable investments, we may also invest in commercial paper, money market or
similar funds, obligations of the U.S. Government or other assets.
IMPORTANT RISK FACTORS
The principal risks of investing in this Fund include the following:
- - This Fund is subject to interest rate risk, which is the risk that bond
prices overall will decline over short or even long periods due to rising
interest rates. Interest rate risk is generally higher for long-term bonds,
and lower for shorter-term bonds. As a result, interest rate risk may be
more pronounced for Bond Funds with longer maturities like this Fund as
compared to funds like the Leland Two-Year Government Bond Fund which may
have a shorter maturity strategy.
- - This Fund is subject to credit risk, which is the risk that a bond issuer
will fail to pay interest and principal in a timely manner, reducing the
Fund's return.
- - Mortgage-backed securities may not be guaranteed by the U.S. Treasury.
Mortgage- and asset-backed securities are subject to prepayment risk, which
can reduce the rate of return on such securities.
- - The U.S. Government does not guarantee the market value or current yield of
its obligations. Not all U.S. Government obligations are backed by the full
faith and credit of the U.S. Government.
In addition to the principal risks specified here, you should consider the
"Risks for the Funds" section on page __ and the "General Investment Risks"
section beginning on page __. They are all important to your investment choice.
PORTFOLIO MANAGER
- - ROBERT A. WASILEWSKI
Mr. Wasilewski will manage the Leland Bond Fund upon inception. Mr.
Wasilewski is the Director of the Fixed Income Group at ASBCM. He has been
with ASBCM since 1986 and has over 14 years of investment management
experience.
8
<PAGE>
LELAND INTERMEDIATE BOND FUND
INVESTMENT OBJECTIVE
The Leland Intermediate Bond Fund seeks to provide relative stability of
principal through investment in fixed income securities of short- to
intermediate-term maturities and to achieve a total return exceeding the Lehman
Brothers Government/Corporate Intermediate Bond Index.
PRINCIPAL STRATEGY
We invest primarily in intermediate-term U.S. Government securities and
investment-grade corporate bonds. Our portfolio's average maturity generally is
maintained between 3 and 8 years.
Under normal market conditions, our principal strategy is to invest:
- at least 65% of our total assets in an actively managed portfolio
consisting primarily of intermediate-term U.S. Government notes and
bonds, mortgage-backed securities issued by a U.S. Government Agency
or government-sponsored enterprise and investment-grade corporate
bonds.
We may also invest in asset-backed securities and below investment-grade
corporate bonds. We will not invest more than 20% of our total assets in
asset-backed securities or more than 15% of our total assets in below
investment-grade corporate bonds.
IMPORTANT RISK FACTORS
The principal risks of investing in this Fund include the following:
- - This Fund is subject to interest rate risk, which is the risk that bond
prices overall will decline over short or even long periods due to rising
interest rates. Interest rate risk is generally higher for long-term bonds,
and lower for shorter-term bonds. As a result, interest rate risk may be
more pronounced for Bond Funds with longer maturities like this Fund as
compared to funds like the Leland Two-Year Government Bond Fund which may
have a shorter maturity strategy.
- - This Fund is subject to credit risk, which is the risk that a bond issuer
will fail to pay interest and principal in a timely manner, reducing the
Fund's return.
- - Mortgage-backed securities may not be guaranteed by the U.S. Treasury.
Mortgage- and asset-backed securities are subject to prepayment risk, which
can reduce the rate of return on such securities.
- - The U.S. Government does not guarantee the market value or current yield of
its obligations. Not all U.S. Government obligations are backed by the full
faith and credit of the U.S. Government. - In addition to the principal
risks specified here, you should consider the "Risks for the Funds" section
on page __ and the "General Investment Risks" section beginning on page __
. They are all important to your investment choice.
PORTFOLIO MANAGER
- - ANDREW PALMER
Mr. Palmer will manage the Leland Intermediate Bond Fund upon inception.
Mr. Palmer is a Managing Director at ASBCM. He has been with ASBCM since
1985 and has over 14 years of investment management experience.
9
<PAGE>
LELAND TWO-YEAR GOVERNMENT BOND FUND
INVESTMENT OBJECTIVE
The Leland Two-Year Government Bond Fund seeks to provide relatively stable
income, liquidity and safety of principal by investing in obligations directly
issued or guaranteed by the U.S. Government. This Fund also seeks to outperform
over time a blended, 50/50-weighted index of the Salomon Smith Barney 1-3 Year
Government Index and the IBC Money Fund - All Taxable Index.
The Salomon Smith Barney 1-3 Year Government Index consists of fixed-rate U.S
Treasury and U.S. Government - sponsored agency securities with a maximum
maturity of 3 years weighted by market capitalization. The IBC Money Fund-All
Taxable Index is an average of the returns of approximately 850 money market
mutual funds surveyed weekly by IBC Financial Data, Inc.
PRINCIPAL STRATEGY
We invest in U.S. Treasury, U.S. Government Agency and government-sponsored
enterprise securities that carry a maximum maturity of 2 years.
Government-sponsored enterprise securities include Ginnie Maes, Fannie Maes and
Freddie Macs.
Under normal market conditions, our principal strategy is to invest:
- at least 65% of our total assets in an actively managed portfolio
consisting of U.S. Treasury, U.S. Government Agency and
government-sponsored enterprise securities that mature within 2 years.
Some of the securities in which we invest, such as Ginnie Maes, are supported by
the full faith and credit of the U.S. Treasury. Others, such as Freddie Macs,
are supported by the right of the issuer to borrow from the U.S. Treasury.
Other securities, such as Fannie Maes, are supported by the discretionary
authority of the U.S. Government to purchase certain obligations of the issuer,
and still others are supported by the issuer's own credit.
IMPORTANT RISK FACTORS
The principal risks of investing in this Fund include the following:
- - This Fund is subject to interest rate risk, which is the risk that bond
prices overall will decline over short or even long periods due to rising
interest rates. Interest rate risk is generally higher for long-term bonds,
and lower for shorter-term bonds. As a result, interest rate risk may be
more pronounced for Bond Funds with longer maturities like the Leland Bond
Fund and the Leland Intermediate Bond Fund as compared to this Fund and
similar funds which may have a shorter maturity strategy.
- - This Fund is subject to credit risk, which is the risk that a bond issuer
will fail to pay interest and principal in a timely manner, reducing the
Fund's return. Securities issued or guaranteed by the U.S. Government and
its agencies have historically involved little risk of loss of principal if
held to maturity.
- - The U.S. Government does not guarantee the market value or current yield of
its obligations. Not all U.S. Government obligations are backed by the full
faith and credit of the U.S. Government.
In addition to the principal risks specified here, you should consider the
"Risks for the Funds" section on page __ and the "General Investment Risks"
section beginning on page __. They are all important to your investment choice.
PORTFOLIO MANAGER
- - ELIZABETH O'DONOGHUE
Ms. O'Donoghue will manage the Leland Two-Year Government Bond Fund upon
inception. Ms. O'Donoghue is a Vice President at ASBCM. She has been with
ASBCM since 1981 and has over 18 years of investment management experience.
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LELAND SHORT-TERM INVESTMENT FUND
INVESTMENT OBJECTIVE
The Leland Short-Term Investment Fund (the "Money Market Fund") seeks to provide
high current income, safety of principal and liquidity.
PRINCIPAL STRATEGY
We invest in high-quality, short-term money market instruments. Our asset
maturities are limited to 13 months or less, and we maintain an average
dollar-weighted portfolio maturity of 90 days or less. The average maturity for
our assets is typically between 15 and 45 days.
Under normal market conditions, our principal strategy is to invest in:
- commercial paper; CDs; bankers' acceptances; and repurchase
agreements.
IMPORTANT RISK FACTORS
The principal risks of investing in this Fund include the following:
- - Although we seek to maintain a $1.00 per share net asset value, there is no
guarantee that we will be able to do so. Fluctuations in share value may
cause a loss or gain in principal. Generally, short-term funds do not earn
as high a level of income as funds that invest in longer-term instruments.
In addition to the principal risk specified here, you should consider the "Risks
for the Funds" section on page __ and the "General Investment Risks" section
beginning on page __. They are all important to your investment choice.
PORTFOLIO MANAGER
- - TOAN NGUYEN
Mr. Nguyen will manage the Money Market Fund upon inception. Mr. Nguyen is
a Vice President at ASBCM. He has been with ASBCM since 1987 and has over 4
years of investment management experience.
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<PAGE>
GENERAL INVESTMENT RISKS
Understanding the risks involved in mutual fund investing will help you make an
informed decision that takes into account your risk tolerance and preferences.
You should carefully consider the risks common to investing in all mutual funds,
including the Leland Funds. Certain common risks are identified in the
"Principal Risks of Investing in the Funds" summary on page ___. Other risks of
mutual fund investing include the following:
- An investment in a Fund is not a deposit of Chevy Chase Bank or its
affiliates. Unlike bank deposits such as CDs or savings accounts,
mutual funds are not insured or guaranteed by the FDIC or any other
government agency.
- You could lose your investment in a Fund, or a Fund could underperform
its benchmark or other securities.
- We cannot guarantee that we will meet our investment objectives.
- We do not guarantee the performance of a Fund, nor can we assure you
that the market value of your investment will not decline. We will not
"make good" any investment loss you may suffer, nor can anyone we
contract with to provide certain services, such as selling agents or
investment advisers, offer or promise to make good any such losses.
- Share prices -- and therefore the value of your investment -- will
increase and decrease with changes in the value of the underlying
securities and other investments.
- Investing in any mutual fund, including those deemed conservative,
involves risk, including the possible loss of any money you invest.
- An investment in a single Fund, by itself, does not constitute a
complete investment plan.
- The Funds may temporarily hold assets in cash or in money market
instruments, including U.S. Government obligations, shares of other
mutual funds and repurchase agreements, or make other short-term
investments, either to maintain liquidity or for short-term defensive
purposes when we believe it is in the best interests of shareholders
to do so. This practice is expected to have limited, if any, effect on
Fund objectives over the long term. -
Investment practices and risk levels are carefully monitored. Every attempt is
made to ensure that the risk exposure for each Fund remains within the
parameters of its objective. No Fund uses futures or options to manage its
risks.
What follows is a general list of the types of risks (some of which are
described above) that may apply to a given Fund and a table showing some of the
additional investment practices that each Fund may use and the risks associated
with them. Additional information about these practices is available in the
Statement of Additional Information.
CALL RISK--The risk that an issuer of a bond will redeem the bond before
its maturity date. A bond investor may have to reinvest the proceeds from
the issuer at lower market rates.
COUNTER-PARTY RISK--The risk that the other party in a repurchase agreement
or other transaction will not fulfill its contract obligation.
CREDIT RISK--The risk that the issuer of a debt security will be unable to
make interest payments or repay principal on schedule. If an issuer does
default, the affected security could lose all of its value, or be
renegotiated at a lower interest rate or principal amount. Affected
securities might also lose liquidity. Credit risk also includes the risk
that a party in a transaction may not be able to complete the transaction
as agreed.
EXPERIENCE RISK--The risk presented by a new or innovative security. The
risk is that insufficient experience exists to forecast how the security's
value might be affected by various economic conditions.
INFORMATION RISK--The risk that information about a security is either
unavailable, incomplete or is inaccurate.
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INTEREST RATE RISK--The risk that changes in interest rates can reduce the
value of an existing security. Generally, when interest rates increase, the
value of a debt security decreases. The effect is usually more pronounced
for securities with longer maturities.
LEVERAGE RISK--The risk that a Fund's borrowings, or leverage, can magnify
the potential for gain or loss on amounts the Fund has invested. With
leverage, an increase in the Fund's consolidated asset value would cause a
sharper increase in its net asset value, while a decrease in its
consolidated asset value would cause a sharper decline in its net asset
value. Leverage is a speculative investment technique which could increase
the other risks associated with investing in a Fund.
LIQUIDITY RISK--The risk that a security cannot be sold, or cannot be sold
without adversely affecting the price.
MARKET RISK--The risk that the value of a stock, bond or other security
will be reduced by market activity. This is a basic risk associated with
all securities.
PREPAYMENT RISK--The risk that consumers will pre-pay mortgage loans, which
can alter the maturity of a mortgage-backed security, increase
interest-rate risk, and reduce rates of return.
INVESTMENT PRACTICES AND RELATED RISKS
The following table lists some of the additional investment practices of the
Funds, including some not disclosed in the "Investment Objective" and "Principal
Strategy" sections for each Fund above. The risks indicated after the
description of the practice are NOT the only potential risks associated with
that practice, but are among the more prominent. Market risk is assumed for
each. See the "Investment Objective" and "Principal Strategy" sections for each
Fund or the Statement of Additional Information for more information on these
practices.
THESE INVESTMENT PRACTICES AND RISKS ARE COMMON TO ALL THE FUNDS:
<TABLE>
<CAPTION>
============================================================================================================================
INVESTMENT PRACTICE RISK
============================================================================================================================
<S> <C>
FLOATING AND VARIABLE RATE DEBT
Instruments with interest rates that are adjusted either on a Interest Rate and Credit Risk
schedule or when an index or benchmark changes.
============================================================================================================================
REPURCHASE AGREEMENTS
A transaction in which the seller of a security agrees to buy back Credit and Counter-Party Risk
a security at an agreed upon time and price, usually with interest.
============================================================================================================================
OTHER MUTUAL FUNDS
The temporary investment in shares of another mutual fund. A Market Risk
pro rata portion of the other fund's expenses, in addition to the
expenses paid by the Funds, will be borne by Fund shareholders.
============================================================================================================================
PRIVATELY ISSUED SECURITIES
Securities that are not publicly traded but which Liquidity Risk
may or may not be resold in accordance with Rule 144A
of the Securities Act of 1933.
============================================================================================================================
LOANS OF PORTFOLIO SECURITIES
The practice of loaning securities to brokers, dealers and financial Credit, Counter-Party and Leverage Risk
institutions to increase return on those securities. Loans may be
made up to 1940 Act limits (currently 33 1/3% of total assets).
============================================================================================================================
13
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INVESTMENT PRACTICES AND RELATED RISKS (CONT'D)
THESE INVESTMENT PRACTICES AND RISKS ARE COMMON TO ALL THE FUNDS:
============================================================================================================================
BORROWING POLICIES
The ability to borrow from banks for temporary purposes to meet Leverage Risk
shareholder redemptions.
============================================================================================================================
ILLIQUID SECURITIES
A security that cannot be readily sold, or cannot be readily sold Liquidity Risk
without negatively affecting its fair price. Limited to 15% of
total assets (10% for money market funds).
============================================================================================================================
THESE INVESTMENT PRACTICES AND RISKS ARE COMMON TO THE BOND FUNDS:
============================================================================================================================
INVESTMENT PRACTICE RISK
============================================================================================================================
BONDS
A bond is an interest-bearing security issued by a company or Call Risk
governmental unit. The issuer of a bond has a contractual
obligation to pay interest at a stated rate on specific dates and to
repay principal (the bond's face value) periodically or on a
specified maturity date. An issuer may have the right to redeem
or "call" a bond before maturity.
============================================================================================================================
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES
DELAYED DELIVERY TRANSACTIONS Interest Rate, Leverage, Credit and Experience Risk
Securities bought or sold for delivery at a later date or bought or
sold for a fixed price at a fixed date.
============================================================================================================================
MORTGAGE- AND ASSET-BACKED SECURITIES
Securities consisting of an undivided fractional interests in pools Interest Rate, Credit, Prepayment and Experience Risk
of consumer loans, such as mortgage loans, car loans, credit card
debt, or receivables held in trust.
============================================================================================================================
LOAN PARTICIPATIONS
Debt obligations that represent a portion of a larger loan made by Credit Risk
a bank. Generally sold without guarantee or recourse, some
participations sell at a discount because of the borrower's credit
problems. Limited to 5% of total assets.
============================================================================================================================
</TABLE>
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ORGANIZATION AND MANAGEMENT OF THE FUNDS
INVESTMENT ADVISER
Leland's portfolios are managed by ASB Capital Management, Inc. ("ASBCM"), 1101
Pennsylvania Avenue, N.W., Suite 300, Washington, D.C. 20004, an investment
adviser registered under the Investment Advisers Act of 1940, as amended. ASBCM
oversees the investment programs for the Funds, places orders for the Funds'
purchases and sales of portfolio securities and maintains records relating to
such purchases and sales.
ASBCM is a wholly owned subsidiary of Chevy Chase Bank. ASBCM was established
in 1983 and is one of the largest SEC-registered investment advisors
headquartered in the greater Washington area. ASBCM has a solid reputation as a
skilled investment manager for institutional portfolios. It specializes in the
management of corporate, public, endowment, foundation, and non-profit funds,
with a primary focus on Taft-Hartley Funds. It offers equity and fixed-income
products, as well as a proprietary real estate investment product and currently
manages approximately $3 billion in institutional assets. ASBCM's knowledgeable
professionals handle each institution's needs with the personal care often
afforded only to individual clients.
The Equity Fund and Bond Funds are managed by teams of market sector specialists
and analysts. ASBCM believes that its approach of bringing together and
leveraging the experience and knowledge of the team members benefits Fund
investors.
For its services, ASBCM receives an annual fee of [ ]% of each Fund's average
daily net assets.
ADMINISTRATOR
As administrator, [ ] (the "Administrator") provides certain administrative and
management services to the Funds. The Investment Adviser, and not the Funds,
compensates the Administrator for providing these services. The Administrator
has entered into an agreement with [ ] (the "Distributor") whereby the
Distributor performs certain administrative services for the Funds. The
Administrator pays the Distributor's fees for providing these services.
DISTRIBUTOR
The Distributor acts as distributor of the Funds' shares.
SHAREHOLDER SERVICING PLAN
We have a shareholder servicing plan for each Fund. Under this plan, we have
engaged various shareholder servicing agents to process purchase and redemption
requests, to service shareholder accounts and to provide other related services.
SHAREHOLDER INFORMATION
HOW TO BUY AND SELL SHARES
BUYING SHARES
For your convenience, we offer several ways to start and add to Fund
investments.
OPENING YOUR ACCOUNT THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, he or she is prepared to handle your
planning and transaction needs. Your financial professional will be able to
assist you in establishing your fund account, executing transactions, and
monitoring your investment. If you do not hold your Fund investment in the name
of your financial professional and you prefer to place a transaction order
yourself, please use the instructions below for investing directly.
You may also purchase shares through certain authorized brokers that have
entered into selling group agreements with the Distributor. Brokers may charge
a fee for their services at the time of purchase or redemption. Additional
information about these brokers and their fees is included under "Customers of
Selected Brokers" below.
OPENING YOUR ACCOUNT DIRECTLY
You may establish accounts without the help of an intermediary as follows:
15
<PAGE>
- - CHOOSE THE FUND IN WHICH YOU WISH TO INVEST.
Determine the amount you are investing. The minimum amount for initial
investments is $[ ] for the Class N shares ($[ ] for additional investments)
and $[ ] for the Class I shares ($[ ] for additional investments). Each Fund
reserves the right at any time to waive, increase or decrease the minimum
requirements applicable to initial or subsequent investments. Minimum
subsequent investment requirements do not apply to investors purchasing shares
through the Fund's automatic dividend reinvestment plan. In addition, minimum
initial investments may vary for investors purchasing shares through a
broker-dealer or other intermediary having a service agreement with the
Investment Adviser and maintaining an omnibus account with the Fund. See
"Customers of Selected Brokers" below for more information.
- - COMPLETE THE ACCOUNT APPLICATION ACCOMPANYING THIS PROSPECTUS.
Please apply at this time for any account privileges you may want to use in the
future, to avoid the delays associated with adding them later on.
- - MAIL YOUR COMPLETED APPLICATION TO:
Leland Funds, Inc.
c/o ASB Capital Management, Inc.
1101 Pennsylvania Avenue, N.W.,
Suite 300
Washington, D.C. 20004
For answers to any questions, please speak with a Leland Representative at
[phone number].
We reserve the right to reject any purchase of shares at our sole discretion.
We also reserve the right to cancel any purchase order for which payment has not
been received by the third business day following the order.
Confirmation statements showing transactions in your account and a summary of
the status of the account serve as evidence of ownership of shares of the Fund.
We will forward a confirmation statement to you on receipt of a proper order.
BUYING SHARES BY MAIL
You may buy shares of a Fund by mailing a check with your completed account
application to Leland at Leland Funds, Inc., c/o ASB Capital Management, Inc.,
1101 Pennsylvania Avenue, N.W., Suite 300, Washington, D.C. 20004. Checks
should be made payable to [insert name of the Fund].
If you have established an account and would like to purchase additional Fund
shares, make out a check for the investment amount payable to [insert name of
the Fund]. Mail the check with a competed investment slip to Leland at Leland
Funds, Inc., c/o ASB Capital Management, Inc., 1101 Pennsylvania Avenue, N.W.,
Suite 300, Washington, D.C. 20004. If you do not have an investment slip,
write your account number on the check.
BUYING SHARES BY TELEPHONE
You may purchase shares of a Fund by calling your Leland Representative at
[phone number]. Please make sure you have established an account with Leland
by mailing an application as explained above.
CUSTOMERS OF SELECTED BROKERS
Shares may be purchased and redeemed through certain authorized broker-dealers
that have entered into a selling agreement with the Funds' Distributor
("Selected Brokers"). Selected Brokers may receive payments as a processing
agent from the Transfer Agent. In addition, Selected Brokers may charge their
customers a fee for their services, no part of which is received by any Fund or
Leland.
Investors who purchase shares through a Selected Broker will be subject to the
procedures of their Selected Broker, which may include charges, limitations,
investment minimums, cutoff times and restrictions in addition to, or different
from, those generally applicable to Leland customers. Any such charges would
reduce the return on an investment in a Fund. Investors should acquaint
themselves with their Selected Broker's procedures and should read this
Prospectus in conjunction with any material and information provided by their
Selected Broker. Investors who purchase a Fund's shares though a Selected
Broker may or may not be the shareholder of record. Selected Brokers are
responsible for promptly transmitting purchase, redemption and other requests to
a Fund.
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<PAGE>
Certain shareholder services, such as periodic investment programs, may not be
available to customers of Selected Brokers or may differ in scope from programs
available to Leland customers. Shareholders should contact their Selected
Broker for further information. Each Fund may confirm purchases and redemptions
of a Selected Broker's customers directly to the Selected Broker, which in turn
will provide its customers with confirmation and periodic statements. The Funds
are not responsible for the failure of any Selected Broker to carry out its
obligations to its customer.
SELLING SHARES
REDEMPTION
To sell (redeem) shares of a Fund, you may use any of the methods outlined above
under "Buying Shares." Shareholders who have invested through a Selected Broker
should redeem their shares through their Selected Broker. Shares of the Fund
are redeemed at the next net asset value per share calculated after receipt by
the Fund of a redemption request in proper form. See "Pricing Your Shares --
NAV Calculations" below.
Redemption payments will be made wholly in cash unless Leland's Board of
Directors believes that unusual conditions exist which would make such payment
detrimental to the best interests of Leland. Under such circumstances, payment
of the redemption price could be made in whole or in part in portfolio
securities. You would incur brokerage costs to sell such securities.
REDEEMING SHARES BY MAIL
You may redeem shares by writing a letter of instruction, signed by each
registered owner or their duly-authorized agent, that includes the following
information:
- The name of the registered owner(s) of the account
- The name of the Fund
- The account number
- The number of shares or the dollar amount you want to sell
- The recipient's name and address or wire information (if different
from those of the account registration)
Please indicate whether you want cash proceeds sent by check or by wire. Make
sure the letter is signed by all registered owners or by their authorized
parties. Mail the letter to the Fund.
SIGNATURE GUARANTEES
Certain requests must include a signature guarantee, which is designed to
protect you and the Fund from fraudulent activities. Your request must be made
in writing and include a signature guarantee if any of the following situations
applies:
- You wish to redeem more than $50,000 worth of shares.
- The check is being mailed to an address different from the one on your
account (address of record).
- The check is being made payable to someone other than the account
owner.
- You are instructing us to change your bank account information.
REDEEMING SHARES BY TELEPHONE
You may redeem shares by calling your Leland Representative at [telephone
number]. Customers of Leland automatically have the privilege of purchasing or
redeeming shares of a Fund by telephone unless a signature guarantee is required
as explained above.
Leland will employ reasonable procedures to verify the genuineness of telephone
redemption requests. These procedures may include requiring certain personal
identification information and recording telephone orders. If such procedures
are not followed, Leland may be liable for any losses due to unauthorized or
fraudulent instructions. Neither Leland nor any Fund will be liable for
17
<PAGE>
following instructions communicated by telephone that are reasonably believed to
be genuine. You should verify the accuracy of your account statements
immediately after you receive them and contact your Leland Representative if you
question any activity in the account.
Each Fund reserves the right to refuse to honor requests made by telephone if
that Fund believes them not to be genuine. Each Fund also may limit the amount
involved or the number of such requests. During periods of drastic economic or
market change, telephone redemption privileges may be difficult to implement.
Each Fund reserves the right to terminate or modify this privilege at any time.
OTHER SHAREHOLDER SERVICES AND ACCOUNT POLICIES
BUSINESS DAYS
All of the Funds' regular business days are the same as those of the New York
Stock Exchange (the "NYSE"). NYSE holidays include New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. When any holiday falls on a
weekend, the NYSE typically is closed on the weekday immediately before or after
such holiday.
PRICING YOUR SHARES -- NAV CALCULATIONS
The price at which shares of each Fund are purchased and redeemed is equal to
the net asset value per share ("NAV") of a Fund as determined on the date a Fund
executes an order for the purchase or redemption of shares. The date on which a
Fund executes a purchase or redemption order is explained below in "Timing of
Orders." The NAV per share is computed by dividing the total current value of
the assets of a Fund, less its liabilities, by the total number of shares
outstanding at the time of such computation.
THE EQUITY AND BOND FUNDS. The Equity and Bond Funds calculate their NAVs
every business day as of the close of trading on the NYSE (normally 4:00 p.m.
Eastern time). If the markets close early, the Funds may close early and may
value their shares at an earlier time under these circumstances. Shares of the
Funds will not be priced on days on which the NYSE is closed for trading. A
Fund's securities are typically priced using market quotes or pricing services.
When these methods are not available or do not represent a security's value at
the time of pricing, the security is valued in accordance with the Fund's fair
valuation procedures.
THE MONEY MARKET FUND. NAV for the shares of the Money Market Fund is
determined as of 5:00 p.m. (Eastern time) on each day this Fund is open for
business. If the market for the instruments and securities the Money Market
Fund invests in close early, this Fund may close early and may value its shares
at earlier times under these circumstances. The Money Market Fund uses the
amortized cost method to value portfolio securities pursuant to Rule 2a-7 under
the 1940 Act. Expenses and fees, including advisory fees, are accrued daily and
are taken into account for the purpose of determining the NAV of the Money
Market Fund's shares. See the Statement of Additional Information for further
disclosure.
TIMING OF ORDERS
THE EQUITY AND BOND FUNDS. The Equity and Bond Fund accept orders until
the close of trading on the NYSE every business day (normally 4:00 p.m. Eastern
time). Orders received by the Equity or a Bond Fund in the proper form before
the close of trading on the NYSE are executed the same day at the Fund's NAV for
that day. Orders received by the Equity or a Bond Fund after the close of
trading on the NYSE are executed the following day at that day's NAV.
THE MONEY MARKET FUND. The Money Market Fund accepts orders until 5:00
p.m. (Eastern time). Orders received by the Money Market Fund in the proper form
before 5:00 p.m. (Eastern time) are executed the same day at the Fund's NAV for
that day. Orders received by the Money Market Fund after 5:00 p.m. (Eastern
time) are executed the following day at that day's NAV.
SUSPENSION OF SHARE REDEMPTIONS AND POSTPONEMENT OF PAYMENTS
We have the right to suspend redemption of shares of the Funds and to postpone
payment of proceeds for up to seven days or as permitted by law. We may suspend
the right of redemption or postpone the date of payment for more than seven days
after shares are tendered for redemption for any period during which:
- The NYSE is closed (other than a customary weekend or holiday closing)
or the SEC determines that trading thereon is restricted;
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<PAGE>
- An emergency (as determined by the SEC) exists as a result of which
disposal by the Fund of securities it owns is not reasonably
practicable, or as a result of which it is not reasonably practical
for the Fund fairly to determine the value of its net assets; or
- The SEC, by order, permits such suspension for the protection of
stockholders.
TIMING OF SETTLEMENTS
When you buy shares of a Fund, you will become the owner of record when the Fund
receives your payment, generally the day following execution. When you sell
shares, cash proceeds are generally available the day following execution and
will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the Fund's next NAV but the proceeds will not be available until
your check clears. This may take up to 15 days from the purchase date. Upon
execution of the redemption order, a confirmation statement will be forwarded to
you indicating the number of shares sold and the proceeds thereof.
ACCOUNTS WITH BELOW-MINIMUM BALANCES
If your account balance falls below the minimum ($[ ] for Class N shares and $[
] for Class I shares) as a result of selling shares (and not because of Fund
performance), each Fund reserves the right to request that you buy more shares
or close your account. If your account balance is still below the minimum 90
days after notification, we reserve the right to close out your account and send
the proceeds to the address of record.
AUTOMATIC REINVESTMENT
We will reinvest each income dividend and capital gain distribution declared by
a Fund in full and fractional shares of the Fund of the same class, unless you
or your duly authorized agent elect to receive all such payments, or only the
dividend or distribution portions, in cash. We will base such reinvestment on
the Fund's NAV as determined on the ex-dividend date. You or your authorized
agent may request changes in the manner in which dividend and distribution
payments are made through written notice to the Fund. This request will be
effective as to any payment if it is received prior to the record date used for
determining your payment. Any dividend and distribution election will remain in
effect until you notify the Fund in writing to the contrary.
EXCHANGE PRIVILEGE
You may exchange shares of either class of a Fund into shares of the same class
of any other Fund offered by Leland, without a sales charge or other fee (except
redemption fee, if any), by contacting the Fund. You may also exchange Class N
shares of a Fund into Class I shares of the Fund or any other Fund offered by
Leland. Exchange purchases are subject to the minimum investment requirements of
the class purchased. In order to keep Fund expenses low for all shareholders,
the Funds will not allow frequent exchanges, purchases or sales of Fund shares.
If a shareholder exhibits a pattern of frequent trading, the Fund reserves the
right to refuse to accept further purchase or exchange orders from that
shareholder. An exchange will be treated as a redemption and purchase for tax
purposes.
Shares will be exchanged at next net asset value per share determined after
receipt by the Fund of:
- A written request for exchange, signed by each registered owner or his
or her duly-authorized agent exactly as the shares are registered,
which clearly identifies the exact names in which the account is
registered, the account number and the number of shares or the dollar
amount to be exchanged.
Exchanges will not become effective until all documents in the form required
have been received by the Fund. If you have any questions, please contact the
Fund.
Please be sure to read carefully the prospectus of any other Fund into which you
wish to exchange shares.
ACCOUNT STATEMENTS
Shareholder accounts are opened in accordance with your registration
instructions. Transactions in the account, such as additional investments and
dividend reinvestments, will be reflected on regular confirmation statements.
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<PAGE>
REPORTS TO SHAREHOLDERS
Each Fund's fiscal year ends on December 31. Each Fund will issue to its
stockholders semi-annual and annual reports. In addition, stockholders will
receive quarterly statements of the status of their accounts reflecting all
transactions having taken place within that quarter. In order to reduce
duplicate mailings and printing costs, Leland will provide one annual and
semi-annual report and annual prospectus per household. Information regarding
the tax status of income dividends and capital gains distributions will be
mailed to shareholders on or before January 31st of each year. Account tax
information will also be sent to the IRS.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Funds pay dividends periodically and make capital gains distributions
annually. The Leland Equity Fund pays any dividends [period]. The Bond Funds
and the Money Market Fund pay any dividends [period].
Distributions paid by a Fund are automatically reinvested to purchase new shares
of the Funds. The new shares are purchased at NAV, generally on the day
distributions are paid.
TAXES
The following discussion regarding taxes is based on laws that were in effect as
of the date of this Prospectus. The discussion summarizes only some of the
important tax considerations that affect the Funds and you as a shareholder. It
is not intended as a substitute for careful tax planning. You should consult
your tax advisor about your specific tax situation. Federal income tax
considerations are discussed further in the Statement of Additional Information.
Distributions of tax-exempt interest income earned by any Fund are expected to
be exempt from federal income taxation, except for the possible application of
the alternative minimum tax. Dividends paid out of a Fund's net investment
income (including dividends and taxable interest) and net short-term capital
gains will be taxable to you as ordinary income. If a portion of a Fund's
income consists of dividends paid by U.S. corporations, a portion of the
dividends paid by that Fund may be eligible for the dividends-received deduction
for corporate shareholders. Distributions of net long-term capital gains earned
by a Fund are taxable to you as long-term capital gains, regardless of how long
you have held your Fund shares. Fund distributions are taxable to you in the
same manner whether received in cash or reinvested in additional Fund shares.
If you buy shares of a Fund shortly before any distribution, your distribution
from the Fund will, in effect, be a taxable return of part of your investment.
Similarly, if you buy shares of a Fund that holds appreciated securities in its
portfolio, you will receive a taxable return of part of your investment is and
when the Fund sells the appreciated securities and realizes the gain. Some of
the Funds have built up, or have the potential to build up, high levels of
unrealized appreciation.
A distribution will be treated as paid to you on December 31 of the current
calendar year if it is declared by a Fund in October, November or December with
a record date in such a month and paid by a Fund during January of the following
calendar year.
Each year, each Fund in which you have invested will notify you of the tax
status of dividends and other distributions.
Upon the sale or other disposition of your Fund shares, you may realize a
capital gain or loss which will be long-term or short-term, generally depending
upon how long you held your shares.
The Funds may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to you if you fail to provide the Funds in
which you invest with your correct taxpayer identification number or to make
required certifications, or if you have been notified by the IRS that you are
subject to backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against your U.S. federal income tax liability.
Except in the case of the Money Market Fund, your redemptions (including
redemptions in-kind) and exchanges of Fund shares will ordinarily result in a
taxable capital gain or loss, depending on the amount you receive for your
shares (or are deemed to receive in the case of exchanges) and the amount you
paid (or are deemed to have paid) for them. As long as the Money Market Fund
continually maintains a $1.00 NAV, you ordinarily will not recognize taxable
gain or loss on the redemption or exchange of such Fund shares.
Fund distributions also may be subject to state, local and foreign taxes. In
many states, Fund distributions which are derived from interest on certain U.S.
Government obligations are exempt from taxation. You should consult your own tax
adviser regarding the particular tax consequences of an investment in the Funds.
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[Back Cover]
LELAND FUNDS, INC.
WHERE TO GO FOR ADDITIONAL INFORMATION ABOUT THE FUNDS.
If you would like additional information about any Fund, the following
information documents are available to you:
STATEMENT OF ADDITIONAL INFORMATION
Additional information about each Fund's structure and operations can be found
in the Statement of Additional Information. The information presented in the
Statement of Additional Information is incorporated by reference into this
Prospectus and is legally considered to be part of this Prospectus.
You may request free copies of these materials, along with other information
about the Funds and make shareholder inquiries by contacting:
ASB Capital Management, Inc.
1101 Pennsylvania Avenue, N.W.
Suite 300
Washington, D.C. 20004
Telephone: (800) 544-8850
OBTAINING INFORMATION FROM THE SECURITIES AND EXCHANGE COMMISSION.
Reports and other information about each Fund (including the Funds' Statement of
Additional Information) may also be obtained from the Securities and Exchange
Commission:
1. By going to the Commission's Public Reference Room in Washington,
D.C., where you can review and copy the information. Information on
the operation of the Public Reference Room may be obtained by calling
the Commission at (800) SEC-03300.
2. By accessing the Commission's Internet site at http://www.sec.gov
where you can view, download and print the information.
3. By writing to the Public Reference Section of the Securities and
Exchange Commission, Washington, D.C. 20549-6009, where, upon payment
of a duplicating fee, copies of the information will be sent to you.
SEC File Number 811-09573
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LELAND FUNDS, INC.
LELAND EQUITY FUND
LELAND BOND FUND
LELAND INTERMEDIATE BOND FUND
LELAND TWO-YEAR GOVERNMENT BOND FUND
LELAND SHORT-TERM INVESTMENT FUND
CLASS I AND CLASS N
STATEMENT OF ADDITIONAL INFORMATION
[DATE]
This Statement of Additional Information (the "SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated [ ] (the "Prospectus")
for Leland Equity Fund, Leland Bond Fund, Leland Intermediate Bond Fund, Leland
Two-Year Government Bond Fund and Leland Short-Term Investment Fund (each a
"Fund" and, collectively, the "Funds"), each of which is a separate portfolio of
Leland Funds, Inc. ("Leland").
To obtain a free copy of the Prospectus, please write to Leland Funds, Inc., c/o
ASB Capital Management, Inc., 1101 Pennsylvania Avenue, N.W., Suite 300,
Washington, D.C. 20004, or call 1-800-544-8850.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ORGANIZATION OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS. . . . . . . . . . . . . . 1
The Equity Fund . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Bond Funds. . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Money Market Fund . . . . . . . . . . . . . . . . . . . . . . 15
MANAGEMENT OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . 20
INVESTMENT ADVISORY AND OTHER SERVICES. . . . . . . . . . . . . . . . . . . 21
Investment Adviser. . . . . . . . . . . . . . . . . . . . . . . . 21
Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Shareholder Servicing . . . . . . . . . . . . . . . . . . . . . . 21
Transfer Agent and Custodian. . . . . . . . . . . . . . . . . . . 21
Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 23
BROKERAGE ALLOCATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
DESCRIPTION OF CAPITAL SHARES . . . . . . . . . . . . . . . . . . . . . . . 24
COMPUTATION OF NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . 25
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS . . . . . . . . . . . 26
Dividends and Capital Gains Distributions . . . . . . . . . . . . 26
Tax Status of the Funds . . . . . . . . . . . . . . . . . . . . . 26
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. . . . . . . . . . . . . . 28
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION. . . . . . . . . . . . . . . 28
Shares of the Funds Sold on a Continuous Basis by the Distributor 29
PERFORMANCE CALCULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 29
Average Annual Total Return . . . . . . . . . . . . . . . . . . . 29
Cumulative Total Return . . . . . . . . . . . . . . . . . . . . . 29
Yield Calculations. . . . . . . . . . . . . . . . . . . . . . . . 29
Effective Yield . . . . . . . . . . . . . . . . . . . . . . . . . 29
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
RATINGS OF FIXED INCOME SECURITIES. . . . . . . . . . . . . . . . A-1
</TABLE>
<PAGE>
ORGANIZATION OF THE FUNDS
Leland is registered under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end diversified management investment company. Leland
was formed under Maryland law on August 24, 1999 as a Maryland corporation.
Because Leland offers multiple portfolios, it is known as a "series company."
Each Fund is a separate portfolio of assets and has its own investment objective
which it pursues through separate investment policies, as described below and in
the Prospectus. Leland's investment adviser is ASB Capital Management, Inc.
("ASBCM" or the "Investment Adviser"), an investment adviser registered under
the Investment Advisers Act of 1940, as amended.
Each Fund issues shares of beneficial interest in Leland. The Board of Directors
of Leland may increase the number of authorized shares or create additional
series or classes of Leland or portfolio shares without shareholder approval.
Shares are fully paid and nonassessable when issued, are transferable without
restriction, and have no preemptive or conversion rights. Shares of Leland have
equal rights with respect to voting, except that the holders of shares of each
Fund will have the exclusive right to vote on matters affecting only the rights
of the holders of that Fund. For example, holders of a Fund will have the
exclusive right to vote on any investment management agreement or investment
restriction that relates only to that Fund. Shareholders of the Funds do not
have cumulative voting rights, and therefore the holders of more than 50% of the
outstanding shares of Leland voting together for the election of directors may
elect all of the members of Leland's Board of Directors. In such event, the
remaining holders cannot elect any members of the Board of Directors.
Leland's Board of Directors may authorize the issuance of additional shares, and
may, from time to time, classify or reclassify issued or any unissued shares to
create one or more new classes or series in addition to those already authorized
by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such shares; provided, however, that any such classification or
reclassification shall not substantially adversely affect the rights of holders
of issued shares. Any such classification or reclassification will comply with
the provisions of the 1940 Act. The Directors also have the authority to
terminate a series or class thereof by written notice to shareholders without
shareholder approval.
Leland's Articles of Incorporation (the "Articles of Incorporation") permit the
Directors to issue an unlimited number of full and fractional shares, par value
$.001, of the Funds. Each Fund share is entitled to participate pro rata in the
dividends and distributions of that Fund.
Leland will not normally hold annual shareholders' meetings. Under Maryland law
and Leland's Bylaws, an annual meeting is not required to be held in any year in
which the election of directors is not required to be acted upon under the 1940
Act. Leland's Bylaws provide that special meetings of shareholders, unless
otherwise provided by law or by the Articles of Incorporation, may be called for
any purpose or purposes by a majority of the Board of Directors, the Chairman of
the Board, the President, or the written request of the holders of at least 10%
of the outstanding shares of beneficial interests of Leland entitled to be voted
at such meeting to the extent permitted by Maryland law.
Each Director serves until the next election of directors and until the election
and qualification of his or her successor or until such Director sooner dies,
resigns, retires or is removed by the affirmative vote of a majority of the
outstanding voting securities of Leland. In accordance with the 1940 Act, (i)
Leland will hold a shareholder meeting for the election of directors at such
time as less than a majority of the Directors have been elected by shareholders,
and (ii) if, as a result of a vacancy in the Board of Directors, less than
two-thirds of the Directors have been elected by the shareholders, that vacancy
will be filled only by a vote of the shareholders.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The following supplements the discussion in the Prospectus of the Funds'
investment objectives, strategies, policies and risks. These investment
strategies and policies may be changed without shareholder approval unless
otherwise noted. Capitalized terms not otherwise defined in this SAI have the
same meanings as in the Prospectus.
Whenever an investment policy or restriction of any Fund described in the
Prospectus or in this SAI states a maximum percentage of assets that may be
invested in a security or other asset, or describes a policy regarding quality
standards, that percentage limitation or standard will, unless otherwise
indicated, apply to that Fund only at the time a transaction takes place. Thus,
if a percentage limitation is adhered to at the time of investment, a later
increase or decrease in the percentage that results from circumstances not
involving any affirmative action by a Fund will not be considered a violation.
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Descriptions in this SAI of a particular investment practice or technique in
which any Fund may engage or a financial instrument which any Fund may purchase
are meant to describe the spectrum of investments that the Investment Adviser,
in its discretion, might, but is not required to, use in managing each Fund's
portfolio assets. The Investment Adviser may, in its discretion, at any time
employ such practice, technique or instrument for one or more Funds but not for
all Funds advised by it. Furthermore, it is possible that certain types of
financial instruments or investment techniques described herein may not be
available, permissible, economically feasible or effective for their intended
purposes in some or all markets, in which case a Fund would not use them.
Certain practices, techniques or instruments may not be principal activities of
a Fund but, to the extent employed, could from time to time have a material
impact on that Fund's performance.
In the discussion that follows, the "Equity Fund" refers to the Leland Equity
Fund. The "Bond Funds" refer to the Leland Bond, the Leland Intermediate Bond
and the Leland Two-Year Government Bond Funds. The "Money Market Fund" refers
to the Leland Short-Term Investment Fund.
THE EQUITY FUND
INVESTMENT POLICIES
FUNDAMENTAL INVESTMENT POLICIES
The Equity Fund has adopted the following investment restrictions, all of which
are fundamental policies; that is, they may not be changed, without approval by
the holders of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the Equity Fund.
The Equity Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and
as a result thereof, the value of the Equity Fund's investments in
that industry would equal 25% of the current value of the Fund's total
assets, provided that there is no limitation with respect to
investment in securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities.
(2) purchase securities of any issuer if, as a result, with respect to 75%
of the Equity Fund's total assets, more than 5% of the value of its
total assets would be invested in the securities of any one issuer or,
with respect to 100% of its assets, the Equity Fund's ownership would
be more than 10% of the outstanding voting securities of such issuer.
This policy does not restrict the Equity Fund's ability to invest in
securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities; or to invest substantially all of its assets in
the portfolio of one or more open-end management investment companies
pursuant to Section 12 of the 1940 Act and the rules thereunder.
(3) borrow money except to the extent permitted by the 1940 Act, and the
rules, regulations and exemptions thereunder;
(4) issue senior securities except to the extent permitted by the 1940
Act, and the rules, regulations and exemptions thereunder;
(5) make loans to other parties if, as a result, the aggregate value of
such loans would exceed one-third of the Equity Fund's total assets.
For the purposes of this limitation, entering into repurchase
agreements, lending securities and acquiring any debt securities are
not deemed to be the making of loans;
(6) underwrite securities of other issuers, except to the extent that the
purchase of permitted investments directly from the issuer thereof or
from an underwriter for an issuer and the later disposition of such
securities in accordance with the Equity Fund's investment program may
be deemed to be an underwriting;
(7) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Equity Fund from investing in securities or other instruments backed
by real estate or securities of companies engaged in the real estate
business); nor
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(8) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent the Equity Fund from purchasing or selling options and futures
contracts, or from investing in securities or other instruments backed
by physical commodities).
NON-FUNDAMENTAL INVESTMENT POLICIES
The Equity Fund has adopted the following non-fundamental policies which may be
changed by a vote of a majority of the Directors of Leland at any time without
approval of the Equity Fund's shareholders.
(1) The Equity Fund may invest in shares of other open-end management
investment companies, subject to the limitations of the 1940 Act, the
rules thereunder, and any orders obtained thereunder now or in the
future. Other investment companies in which the Equity Fund invests
can be expected to charge fees for operating expenses, such as
investment advisory and administration fees, that would be in addition
to those charged by the Equity Fund.
(2) The Equity Fund may not invest or hold more than 15% of the Equity
Fund's net assets in illiquid securities. For this purpose, illiquid
securities include, among others, (a) securities that are illiquid by
virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) fixed time deposits that are
subject to withdrawal penalties and that have maturities of more than
seven days, and (c) repurchase agreements not terminable within seven
days.
(3) The Equity Fund may lend securities from its portfolio to brokers,
dealers and financial institutions, in amounts not to exceed (in the
aggregate) up to the limits established by and under the 1940 Act,
including any exemptive relief obtained thereunder, which limits are
currently generally one-third of the Equity Fund's total assets. Any
such loans of portfolio securities will be fully collateralized based
on values that are marked to market daily. The Equity Fund will not
enter into any portfolio security lending arrangement having a
duration of longer than one year.
(4) The Equity Fund may not make investments for the purpose of exercising
control or management.
(5) The Equity Fund may not purchase securities on margin (except for
short-term credits necessary for the clearance of transactions).
(6) The Equity Fund may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the
securities sold short (short sales "against the box"), and provided
that transactions in futures contracts and options are not deemed to
constitute selling securities short.
(7) The Equity Fund may not purchase interests, leases, or limited
partnership interests in oil, gas, or other mineral exploration or
development programs.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES AND ASSOCIATED RISKS
Set forth below are descriptions of certain investments and additional
investment policies for the Equity Fund.
BANK OBLIGATIONS
The Equity Fund may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, the Equity Fund may be subject to additional investment risks that are
different in some respects from those incurred by an equity fund which invests
only in debt obligations of U.S. domestic issuers. Such risks include possible
future political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits. In addition, foreign branches of U.S. banks and foreign banks may be
subject to less stringent reserve requirements and to different accounting,
auditing, reporting and recordkeeping standards than those applicable to
domestic branches of U.S. banks.
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Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by the Equity Fund will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation ("FDIC"). Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
COMMERCIAL PAPER
The Equity Fund may invest in commercial paper (including variable amount master
demand notes) which refers to short-term, unsecured promissory notes issued by
corporations to finance short-term credit needs. Commercial paper is usually
sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. Variable amount master demand notes are demand
obligations which permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes.
Investments by the Equity Fund in commercial paper (including variable rate
demand notes and variable rate master demand notes issued by domestic and
foreign bank holding companies, corporations and financial institutions, as well
as similar instruments issued by government agencies and instrumentalities) will
consist of issues that are rated in one of the two highest rating categories by
a Nationally Recognized Ratings Organization ("NRRO"). Commercial paper may
include variable- and floating-rate instruments.
CONVERTIBLE SECURITIES
The Equity Fund may invest in convertible securities that provide current income
and are issued by companies with the characteristics described above for the
Equity Fund and that have a strong earnings and credit record. The Equity Fund
may purchase convertible securities that are fixed-income debt securities or
preferred stocks, and which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
issuer. Convertible securities, while usually subordinate to similar
nonconvertible securities, are senior to common stocks in an issuer's capital
structure. Convertible securities offer flexibility by providing the investor
with a steady income stream (which generally yield a lower amount than similar
nonconvertible securities and a higher amount than common stocks) as well as the
opportunity to take advantage of increases in the price of the issuer's common
stock through the conversion feature. Fluctuations in the convertible security's
price can reflect changes in the market value of the common stock or changes in
market interest rates. At most, 5% of the Equity Fund's net assets will be
invested, at the time of purchase, in convertible securities that are not rated
in the four highest rating categories by one or more NRROs, such as Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P"),
or unrated but determined by the Investment Adviser to be of comparable quality.
FORWARD COMMITMENTS, WHEN-ISSUED PURCHASES AND DELAYED-DELIVERY TRANSACTIONS
The Equity Fund may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
The Equity Fund will segregate cash, U.S. Government obligations or other
high-quality debt instruments in an amount at least equal in value to the Equity
Fund's commitments to purchase when-issued securities. If the value of these
assets declines, the Equity Fund will segregate additional liquid assets on a
daily basis so that the value of the segregated assets is equal to the amount of
such commitments.
ILLIQUID SECURITIES
The Equity Fund may invest in securities not registered under the 1933 Act and
other securities subject to legal or other restrictions on resale. Illiquid
securities may be difficult to sell promptly at an acceptable price. Delay or
difficulty in selling securities may result in a loss or be costly to the Equity
Fund.
LOANS OF PORTFOLIO SECURITIES
The Equity Fund may lend its portfolio securities to brokers, dealers and
financial institutions, provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities or cash or letters of credit
maintained on a daily marked-to-market basis in an amount at least equal to the
current market value of the securities loaned; (2) the Equity Fund may at any
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time call the loan and obtain the return of the securities loaned within five
business days; (3) the Equity Fund will receive any interest or dividends paid
on the loaned securities; and (4) the aggregate market value of securities
loaned will not at any time exceed the limits established by the 1940 Act.
The Equity Fund will earn income for lending its securities because cash
collateral pursuant to these loans will be invested in short-term money market
instruments. In connection with lending securities, the Equity Fund may pay
reasonable finders, administrative and custodial fees. The Equity Fund will not
enter into any security lending arrangement having a duration longer than one
year. Loans of securities involve a risk that the borrower may fail to return
the securities or may fail to provide additional collateral. In either case,
the Equity Fund could experience delays in recovering securities or collateral
or could lose all or part of the value of the loaned securities. Although voting
rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by the Equity Fund if a material event affecting the
investment is to occur. The Equity Fund may pay a portion of the interest or
fees earned from securities lending to a borrower or placing broker. Borrowers
and placing brokers may not be affiliated, directly or indirectly, with ASBCM or
any of its affiliates.
MONEY MARKET INSTRUMENTS AND TEMPORARY INVESTMENTS
The Equity Fund may invest in the following types of high quality money market
instruments that have remaining maturities not exceeding one year: (i) U.S.
Government obligations; (ii) negotiable certificates of deposit, bankers'
acceptances and fixed time deposits and other obligations of domestic banks
(including foreign branches) that have more than $1 billion in total assets at
the time of investment and are members of the Federal Reserve System or are
examined by the Comptroller of the Currency or whose deposits are insured by the
FDIC; (iii) commercial paper rated at the date of purchase "Prime-1" by Moody's
or "A-1" or "A-1--" by S&P, or, if unrated, of comparable quality as determined
by the Investment Adviser; and (iv) repurchase agreements. The Equity Fund also
may invest in short-term U.S. dollar-denominated obligations of foreign banks
(including U.S. branches) that at the time of investment: (i) have more than $10
billion, or the equivalent in other currencies, in total assets; (ii) are among
the 75 largest foreign banks in the world as determined on the basis of assets;
(iii) have branches or agencies in the United States; and (iv) in the opinion of
the Investment Adviser, are of comparable quality to obligations of U.S. banks
which may be purchased by the Equity Fund.
LETTERS OF CREDIT. Certain of the debt obligations (including certificates of
participation, commercial paper and other short-term obligations) which the
Equity Fund may purchase may be backed by an unconditional and irrevocable
letter of credit of a bank, savings and loan association or insurance company
which assumes the obligation for payment of principal and interest in the event
of default by the issuer. Only banks, savings and loan associations and
insurance companies which, in the opinion of the Investment Adviser, are of
comparable quality to issuers of other permitted investments of the Equity Fund
may be used for letter of credit-backed investments.
REPURCHASE AGREEMENTS. The Equity Fund may enter into repurchase agreements,
wherein the seller of a security to the Equity Fund agrees to repurchase that
security from the Equity Fund at a mutually agreed upon time and price. The
Equity Fund may enter into repurchase agreements only with respect to securities
that could otherwise be purchased by the Equity Fund. All repurchase agreements
will be fully collateralized at 102% based on values that are marked to market
daily. The maturities of the underlying securities in a repurchase agreement
transaction may be greater than twelve months, although the maximum term of a
repurchase agreement will always be less than twelve months. If the seller
defaults and the value of the underlying securities has declined, the Equity
Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with
respect to the seller of the security, the Equity Fund's disposition of the
security may be delayed or limited.
The Equity Fund may not enter into a repurchase agreement with a maturity of
more than seven days, if, as a result, more than 15% of the Equity Fund's total
net assets would be invested in repurchase agreements with maturities of more
than seven days, restricted securities and illiquid securities. The Equity Fund
may not enter into a repurchase agreement with a maturity of more than seven
days, if, as a result, more than 15% of the market value of the Equity Fund's
total net assets would be invested in repurchase agreements with maturities of
more than seven days, restricted securities and illiquid securities. The Equity
Fund will only enter into repurchase agreements with primary broker/dealers and
commercial banks that meet guidelines established by the Board of Directors and
that are not affiliated with the Investment Adviser. The Equity Fund may
participate in pooled repurchase agreement transactions with other funds advised
by the Investment Adviser.
OTHER INVESTMENT COMPANIES
The Equity Fund may invest in shares of other open-end management investment
companies, up to the limits prescribed in Section 12(d) of the 1940 Act. Under
the 1940 Act, the Equity Fund's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of the Equity Fund's net assets with respect
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to any one investment company and (iii) 10% of the Equity Fund's net assets in
aggregate. Other investment companies in which the Equity Fund invests can be
expected to charge fees for operating expenses such as investment advisory and
administration fees, that would be in addition to those charged by the Equity
Fund.
PRIVATELY ISSUED SECURITIES
The Equity Fund may invest in privately issued securities, including those which
may be resold only in accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"). Rule 144A Securities are restricted securities that
are not publicly traded. Accordingly, the liquidity of the market for specific
Rule 144A Securities may vary. Delay or difficulty in selling such securities
may result in a loss to the Equity Fund. Privately issued or Rule 144A
securities that are determined by the Investment Adviser to be "illiquid" are
subject to the Equity Fund's policy of not investing more than 15% of its net
assets in illiquid securities. The Investment Adviser, under guidelines approved
by Board of Directors of Leland, will evaluate the liquidity characteristics of
each Rule 144A Security proposed for purchase by the Equity Fund on a
case-by-case basis and will consider the following factors, among others, in
their evaluation: (1) the frequency of trades and quotes for the Rule 144A
Security; (2) the number of dealers willing to purchase or sell the Rule 144A
Security and the number of other potential purchasers; (3) dealer undertakings
to make a market in the Rule 144A Security; and (4) the nature of the Rule 144A
Security and the nature of the marketplace trades (e.g., the time needed to
dispose of the Rule 144A Security, the method of soliciting offers and the
mechanics of transfer).
UNRATED INVESTMENTS
The Equity Fund may purchase instruments that are not rated if, in the opinion
of the Investment Adviser, such obligations are of investment quality comparable
to other rated investments that are permitted to be purchased by the Equity
Fund. After purchase by the Equity Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Equity
Fund. Neither event will require a sale of such security by the Equity Fund. To
the extent the ratings given by Moody's or S&P may change as a result of changes
in such organizations or their rating systems, the Equity Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in its Prospectus and in this SAI. The ratings of
Moody's and S&P are more fully described in the SAI Appendix.
U.S. GOVERNMENT OBLIGATIONS
The Equity Fund may invest in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government obligations").
Payment of principal and interest on U.S. Government obligations (i) may be
backed by the full faith and credit of the United States (as with U.S. Treasury
bills and GNMA certificates) or (ii) may be backed solely by the issuing or
guaranteeing agency or instrumentality itself (as with FNMA notes). In the
latter case investors must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
Government will provide financial support to its agencies or instrumentalities
where it is not obligated to do so. In addition, U.S. Government obligations are
subject to fluctuations in market value due to fluctuations in market interest
rates. As a general matter, the value of debt instruments, including U.S.
Government obligations, declines when market interest rates increase and rises
when market interest rates decrease. Certain types of U.S. Government
obligations are subject to fluctuations in yield or value due to their structure
or contract terms.
WARRANTS
The Equity Fund may each invest up to 5% of its net assets at the time of
purchase in warrants (other than those that have been acquired in units or
attached to other securities), and not more than 2% of its net assets in
warrants which are not listed on the New York or American Stock Exchange.
Warrants represent rights to purchase securities at a specific price valid for a
specific period of time. The prices of warrants do not necessarily correlate
with the prices of the underlying securities. The Equity Fund may only purchase
warrants on securities in which the Equity Fund may invest directly.
NATIONALLY RECOGNIZED STATISTICAL RATINGS ORGANIZATIONS
The ratings of Moody's Investors Service, Inc., Standard & Poor's Ratings Group,
Division of McGraw Hill, Duff & Phelps Credit Rating Co., Fitch Investors
Service, Inc. Thomson Bank Watch and IBCA Inc. represent their opinions as to
the quality of debt securities. It should be emphasized, however, that ratings
are general and not absolute standards of quality, and debt securities with the
same maturity, interest rate and rating may have different yields while debt
securities of the same maturity and interest rate with different ratings may
have the same yield. Subsequent to purchase by the Equity Fund, an issue of debt
securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Equity Fund. The Investment Adviser will
consider such an event in determining whether the Equity Fund should continue to
hold the obligation.
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THE BOND FUNDS
INVESTMENT POLICIES
FUNDAMENTAL INVESTMENT POLICIES
Each Bond Fund has adopted the following investment restrictions, all of which
are fundamental policies; that is, they may not be changed without approval by
the vote of the holders of a majority (as defined in the 1940 Act) of the
outstanding voting securities of such Bond Fund.
The Bond Funds may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and
as a result thereof, the value of a Bond Fund's investments in that
industry would equal 25% of the current value of such Bond Fund's
total assets, provided that there is no limitation with respect to
investment in securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities.
(2) purchase securities of any issuer if, as a result, with respect to 75%
of a Bond Fund's total assets, more than 5% of the value of its total
assets would be invested in the securities of any one issuer or, with
respect to 100% of its assets, such Bond Fund's ownership would be
more than 10% of the outstanding voting securities of such issuer.
This policy does not restrict a Bond Fund's ability to invest in
securities issued or guaranteed by the U.S. Government, its agencies
and instrumentalities;
(3) borrow money except to the extent permitted by the 1940 Act, and the
rules, regulations and exemptions thereunder;
(4) issue senior securities except to the extent permitted by the 1940
Act, and the rules, regulations and exemptions thereunder;
(5) make loans to other parties if, as a result, the aggregate value of
such loanswould exceed one-third of a Bond Fund's total assets. For
the purposes of this limitation, entering into repurchase agreements,
lending securities and acquiring any debt securities are not deemed to
be the making of loans;
(6) underwrite securities of other issuers, except to the extent that the
purchase of permitted investments directly from the issuer thereof or
from an underwriter for an issuer and the later disposition of such
securities in accordance with a Bond Fund's investment program may be
deemed to be an underwriting;
(7) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Bond Funds from investing in securities or other instruments backed by
real estate or securities of companies engaged in the real estate
business); nor
(8) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent the Bond Funds from purchasing or selling options and futures
contracts or from investing in securities or other instruments backed
by physical commodities).
NON-FUNDAMENTAL INVESTMENT POLICIES
Each Bond Fund has adopted the following non-fundamental policies which may be
changed by a majority vote of Leland's Board of Directors at any time and
without approval of such Bond Fund's shareholders.
(1) Each Bond Fund may invest in shares of other open-end management
investment companies, subject to the limitations of the 1940 Act, the
rules thereunder, and any orders obtained thereunder now or in the
future. Other investment companies in which the Bond Funds invest can
be expected to charge fees for operating expenses, such as investment
advisory and administration fees, that would be in addition to those
charged by a Bond Fund.
(2) Each Bond Fund may not invest or hold more than 15% of the Bond Fund's
net assets in illiquid securities. For this purpose, illiquid
securities include, among others, (a) securities that are illiquid by
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virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) fixed time deposits that are
subject to withdrawal penalties and that have maturities of more than
seven days, and (c) repurchase agreements not terminable within seven
days.
(3) Each Bond Fund may lend securities from its portfolio to brokers,
dealers and financial institutions, in amounts not to exceed (in the
aggregate) one-third of the Bond Fund's total assets. Any such loans
of portfolio securities will be fully collateralized based on values
that are marked to market daily. The Bond Funds will not enter into
any portfolio security lending arrangement having a duration of longer
than one year.
(4) Each Bond Fund may not make investments for the purpose of exercising
control or management.
(5) Each Bond Fund may not purchase securities on margin (except for
short-term credits necessary for the clearance of transactions).
(6) Each Bond Fund may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the
securities sold short (short sales "against the box"), and provided
that transactions in futures contracts and options are not deemed to
constitute selling securities short.
(7) Each Bond Fund may not purchase interests, leases, or limited
partnership interests in oil, gas, or other mineral exploration or
development programs.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES AND ASSOCIATED RISKS
Set forth below are descriptions of certain investments and additional
investment policies for the Bond Funds.
BANK OBLIGATIONS
The Bond Funds may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic banks, foreign subsidiaries of domestic banks, foreign branches of
domestic banks, and domestic and foreign branches of foreign banks, domestic
savings and loan associations and other banking institutions. With respect to
such securities issued by foreign branches of domestic banks, foreign
subsidiaries of domestic banks, and domestic and foreign branches of foreign
banks, a Bond Fund may be subject to additional investment risks that are
different in some respects from those incurred by a bond fund which invests only
in debt obligations of U.S. domestic issuers. Such risks include possible future
political and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on the securities, the possible
establishment of exchange controls or the adoption of other foreign governmental
restrictions which might adversely affect the payment of principal and interest
on these securities and the possible seizure or nationalization of foreign
deposits. In addition, foreign branches of U.S. banks and foreign banks may be
subject to less stringent reserve requirements and to different accounting,
auditing, reporting and recordkeeping standards than those applicable to
domestic branches of U.S. banks.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by a Bond Fund will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation ("FDIC"). Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
BONDS
Certain of the debt instruments purchased by the Bond Funds may be bonds. The
Bond Funds invest no more than 15% in bonds that are below investment grade. A
bond is an interest-bearing security issued by a company or governmental unit.
The issuer of a bond has a contractual obligation to pay interest at a stated
rate on specific dates and to repay principal (the bond's face value)
periodically or on a specified maturity date.
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An issuer may have the right to redeem or "call" a bond before maturity, in
which case the investor may have to reinvest the proceeds at lower market rates.
The value of fixed-rate bonds will tend to fall when interest rates rise and
rise when interest rates fall. The value of "floating-rate" or "variable-rate"
bonds, on the other hand, fluctuate much less in response to market interest
rate movements than the value of fixed rate bonds.
Bonds may be senior or subordinated obligations. Senior obligations generally
have the first claim on a corporation's earnings and assets and, in the event of
liquidation, are paid before subordinated debt. Bonds may be unsecured (backed
only by the issuer's general creditworthiness) or secured (also backed by
specified collateral).
COMMERCIAL PAPER
The Bond Funds may invest in commercial paper (including variable amount master
demand notes) which refers to short-term, unsecured promissory notes issued by
corporations to finance short-term credit needs. Commercial paper is usually
sold on a discount basis and has a maturity at the time of issuance not
exceeding nine months. Variable amount master demand notes are demand
obligations which permit the investment of fluctuating amounts at varying market
rates of interest pursuant to arrangements between the issuer and a commercial
bank acting as agent for the payee of such notes whereby both parties have the
right to vary the amount of the outstanding indebtedness on the notes.
Investments by the Bond Funds in commercial paper (including variable rate
demand notes and variable rate master demand notes issued by domestic and
foreign bank holding companies, corporations and financial institutions, as well
as similar instruments issued by government agencies and instrumentalities) will
consist of issues that are rated in one of the two highest rating categories by
a Nationally Recognized Ratings Organization ("NRRO"). Commercial paper may
include variable- and floating-rate instruments.
CONVERTIBLE SECURITIES
The Bond Funds may invest in convertible securities. A convertible security is
generally a debt obligation or preferred stock that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different user. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Like a common stock, the value of a convertible security
also tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines. Because
its value can be influenced by both interest rate and market movements, a
convertible security is not as sensitive to interest rats as a similar fixed-
income security, nor is it as sensitive to changes in share price as its
underlying stock.
The creditworthiness of the issuer of a convertible security may be important in
determining the security's true value. This is because the holder of a
convertible security will have recourse only to the issuer. In addition, a
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued.
While the Bond Funds use the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible preferred
stock is treated like a preferred stock for a Bond Fund's financial reporting,
credit rating, and investment limitation purposes. A preferred stock is
subordinated to all debt obligations in the event of insolvency, and an issuer's
failure to make a dividend payment is generally not an event of default
entitling the preferred shareholder to take action. A preferred stock generally
has no maturity date, so that its market value is dependent on the issuer's
business prospects for an indefinite period of time. In addition, distributions
from preferred stock are dividends, rather than interest payments, and are
usually treated as such for corporate tax purposes.
FLOATING- AND VARIABLE-RATE OBLIGATIONS
The Bond Funds may purchase floating- and variable-rate obligations such as
demand notes and bonds. Variable-rate demand notes include master demand notes
that are obligations that permit a Bond Fund to invest fluctuating amounts,
which may change daily without penalty, pursuant to direct arrangements between
the Bond Fund, as lender, and the borrower. The interest rate on a floating-rate
demand obligation is based on a known lending rate, such as a bank's prime rate,
and is adjusted automatically each time such rate is adjusted. The interest rate
on a variable-rate demand obligation is adjusted automatically at specified
intervals. The issuer of such obligations ordinarily has a right, after a given
period, to prepay in its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified number of days' notice to the
holders of such obligations. Frequently, such obligations are secured by letters
of credit or other credit support arrangements provided by banks.
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There generally is no established secondary market for these obligations because
they are direct lending arrangements between the lender and borrower.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, a Bond Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies and each Bond
Fund may invest in obligations which are not so rated only if the Investment
Adviser determines that at the time of investment the obligations are of
comparable quality to the other obligations in which such Bond Fund may invest.
The Investment Adviser, on behalf of each Bond Fund, considers on an ongoing
basis the creditworthiness of the issuers of the floating- and variable-rate
demand obligations in such Bond Fund's portfolio. No Bond Fund will invest more
than 15% of the value of its total net assets in floating-or variable-rate
demand obligations whose demand feature is not exercisable within seven days.
Such obligations may be treated as liquid, if an active secondary market exists.
Floating- and variable-rate instruments are subject to interest- rate risk and
credit risk.
The floating- and variable-rate instruments that the Bond Funds may purchase
include certificates of participation in such instruments.
FOREIGN OBLIGATIONS AND SECURITIES
Each Bond Fund may invest up to 25% of its assets in high-quality, short-term
debt obligations of foreign branches of U.S. banks, U.S. branches of foreign
banks and short-term debt obligations of foreign governmental agencies that are
denominated in and pay interest in U.S. dollars. Investments in foreign
obligations involve certain considerations that are not typically associated
with investing in domestic obligations. There may be less publicly available
information about a foreign issuer than about a domestic issuer and the
available information may be less reliable. In addition, with respect to certain
foreign countries, taxes may be withheld at the source under foreign tax laws,
and there is a possibility of expropriation or confiscatory taxation, political
or social instability or diplomatic developments that could adversely affect
investments in, the liquidity of, and the ability to enforce contractual
obligations with respect to, securities of issuers located in those countries.
The Bond Funds may invest in securities denominated in currencies other than the
U.S. dollar and may temporarily hold funds in bank deposits or other money
market investments denominated in foreign currencies. Therefore, the Bond Funds
may be affected favorably or unfavorably by exchange control regulations or
changes in the exchange rate between such currencies and the dollar. Changes in
foreign currency exchange rates influence values within a Bond Fund from the
perspective of U.S. investors. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors.
FORWARD COMMITMENT, WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS
The Bond Funds may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Delivery and
payment on such transaction normally take place within 120 days after the date
of the commitment to purchase. Securities purchased or sold on a when-issued,
delayed-delivery or forward commitment basis involve a risk of loss if the value
of the security to be purchased declines, or the value of the security to be
sold increases, before the settlement date. The Bond Funds will establish a
segregated account in which they will maintain cash, U.S. Government obligations
or other high-quality debt instruments in an amount at least equal in value to
each such Bond Fund's commitments to purchase when-issued securities. If the
value of these assets declines, a Bond Fund will place additional liquid assets
in the account on a daily basis so that the value of the assets in the account
is equal to the amount of such commitments.
ILLIQUID SECURITIES
The Bond Funds may invest in securities not registered under the Securities Act
of 1933, as amended (the "1933 Act") and other securities subject to legal or
other restrictions on resale. Because such securities may be less liquid than
other investments, they may be difficult to sell promptly at an acceptable
price. Delay or difficulty in selling securities may result in a loss or be
costly to a Bond Fund. Each Bond Fund may invest up to 15% of its net assets in
illiquid securities.
LOANS OF PORTFOLIO SECURITIES
Each Bond Fund may lend its portfolio securities to brokers, dealers and
financial institutions, provided: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities or cash or letters of credit
maintained on a daily marked-to-market basis in an amount at least equal to the
current market value of the securities loaned; (2) such Bond Fund may at any
time call the loan and obtain the return of the securities loaned within five
business days; (3) such Bond Fund will receive any interest or dividends paid on
the loaned securities; and (4) the aggregate market value of securities loaned
will not at any time exceed the limits established by the 1940 Act.
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A Bond Fund will earn income for lending its securities because cash collateral
pursuant to these loans will be invested in short-term money market instruments.
In connection with lending securities, a Bond Fund may pay reasonable finders,
administrative and custodial fees. A Bond Fund will not enter into any security
lending arrangement having a duration longer than one year. Loans of securities
involve a risk that the borrower may fail to return the securities or may fail
to provide additional collateral. In either case, a Bond Fund could experience
delays in recovering securities or collateral or could lose all or part of the
value of the loaned securities. Although voting rights, or rights to consent,
attendant to securities on loan pass to the borrower, such loans may be called
at any time and will be called so that the securities may be voted by a Bond
Fund if a material event affecting the investment is to occur. A Bond Fund may
pay a portion of the interest or fee earned from securities lending to a
borrower or a placing broker. Borrowers and placing brokers may not be
affiliated, directly or indirectly with ASBCM or any of its affiliates.
MORTGAGE-RELATED SECURITIES
The Bond Funds may invest in mortgage-related securities. Mortgage pass-through
securities are securities representing interests in "pools" of mortgages in
which payments of both interest and principal on the securities are made
monthly, in effect "passing through" monthly payments made by the individual
borrowers on the residential mortgage loans which underlie the securities (net
of fees paid to the issuer or guarantor of the securities). Payment of principal
and interest on some mortgage pass-through securities (but not the market value
of the securities themselves) may be guaranteed by the full faith and credit of
the U.S. Government or its agencies or instrumentalities. Mortgage pass-through
securities created by non- government issuers (such as commercial banks, savings
and loan institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers) may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit, which may be issued by governmental entities,
private insurers or the mortgage poolers.
PREPAYMENT RISK. The stated maturities of mortgage-related securities may be
shortened by unscheduled prepayments of principal on the underlying mortgages.
Therefore, it is not possible to predict accurately the average maturity of a
particular mortgage-related security. Variations in the maturities of
mortgage-related securities will affect the yield of a Bond Fund. Early
repayment of principal on mortgage-related securities may expose a Bond Fund to
a lower rate of return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, in the event of
prepayment the value of the premium would be lost. Like other fixed-income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline; however, when interest rates decline, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed-income securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND ADJUSTABLE RATE MORTGAGES
("ARMS"). The Bond Funds may also invest in investment grade CMOs. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). CMOs
are structured into multiple classes, with each class bearing a different stated
maturity. Payments of principal, including prepayments, are first returned to
investors holding the shortest maturity class; investors holding the longer
maturity classes receive principal only after the first class has been retired.
As new types of mortgage-related securities are developed and offered to
investors, the Investment Adviser will, consistent with the Bond Funds'
investment objectives, policies and quality standards, consider making
investments in such new types of mortgage-related securities.
The Bond Funds each may invest in ARMs issued or guaranteed by the GNMA, FNMA or
the FHLMC. The full and timely payment of principal and interest on GNMA ARMs is
guaranteed by GNMA and backed by the full faith and credit of the U.S.
Government. FNMA also guarantees full and timely payment of both interest and
principal, while FHLMC guarantees full and timely payment of interest and
ultimate payment of principal. FNMA and FHLMC ARMs are not backed by the full
faith and credit of the United States. However, because FNMA and FHLMC are
government-sponsored enterprises, these securities are generally considered to
be high quality investments that present minimal credit risks. The yields
provided by these ARMs have historically exceeded the yields on other types of
U.S. Government securities with comparable maturities, although there can be no
assurance that this historical performance will continue.
The mortgages underlying ARMs guaranteed by GNMA are typically insured or
guaranteed by the Federal Housing Administration, the Veterans Administration or
the Farmers Home Administration, while those underlying ARMs issued by FNMA or
FHLMC are typically conventional residential mortgages which are not so insured
or guaranteed, but which conform to specific underwriting, size and maturity
standards. The interest rates on the mortgages underlying the ARMs and some of
the CMOs in which the Bond Funds may invest generally are readjusted at periodic
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intervals ranging from one year or less to several years in response to changes
in a predetermined commonly-recognized interest rate index. The adjustable rate
feature should reduce, but will not eliminate, price fluctuations in such
securities, particularly when market interest rates fluctuate. The net asset
value of a Bond Fund's shares may fluctuate to the extent interest rates on
underlying mortgages differ from prevailing market interest rates during interim
periods between interest rate reset dates. Accordingly, investors could
experience some loss if they redeem their shares of a Bond Fund or if the Bond
Funds sells these portfolio securities before the interest rates on the
underlying mortgages are adjusted to reflect prevailing market interest rates.
The holder of ARMs and CMOs are also subject to prepayment risk.
The Bond Funds will not invest in CMOs that, at the time of purchase, are
"high-risk mortgage securities" as defined in the then current Federal Financial
Institutions Examination Council Supervisory Policy Statement on Securities
Activities. High-risk mortgage securities are generally those with long
durations or those which are likely to be more sensitive to interest-rate
fluctuations.
MORTGAGE PASS-THROUGHS OR PARTICIPATION CERTIFICATES ("PCS"). The Bond Funds
also may invest in mortgage pass-through securities, also known as mortgage PCs.
PCs represent a direct ownership interest in a pool of mortgage loans. The
issuer or servicer of PCs collects the monthly payments from the homeowners
whose loans are in a given pool and "passes through" the cash flow to investors
in monthly payments which represent both interest and repayment of principal.
PCs are subject to prepayment risk.
Most PCs are issued and/or guaranteed by GNMA, FNMA or FHLMC and carry an
implied AAA credit rating. The remainder are privately issued and generally
rated AAA or AA. The payments of principal and interest on PCs are considered
secure; however, the cash flow on these investments may vary from month to
month, depending on the actual prepayment rate of the underlying mortgage loans.
At issuance, the stated maturity PCs is generally 30 years, although an
increasing number may have 15-, seven- or five-year stated maturities.
Most PCs are backed by fixed-rate mortgage loans; however, ARMs are also pooled
to create the securities. Most ARMs have caps and floors limiting the extent of
interest-rate changes, and these option-like characteristics require that
pass-throughs backed by ARMs have higher yields than pure floating-rate debt
securities. The market for ARMS is largely an institutional market.
ASSET-BACKED SECURITIES
The Bond Funds may invest in various types of asset-backed securities.
Asset-backed securities are securities that represent an interest in an
underlying security. The asset-backed securities in which the Bond Funds invest
may consist of undivided fractional interests in pools of consumer loans or
receivables held in trust. Examples include certificates for automobile
receivables (CARS) and credit card receivables (CARDS). Payments of principal
and interest on these asset-backed securities are "passed through" on a monthly
or other periodic basis to certificate holders and are typically supported by
some form of credit enhancement, such as a surety bond, limited guaranty, or
subordination. The extent of credit enhancement varies, but usually amounts to
only a fraction of the asset-backed security's par value until exhausted.
Ultimately, asset-backed securities are dependent upon payment of the consumer
loans or receivables by individuals, and the certificate holder frequently has
no recourse to the entity that originated the loans or receivables. The actual
maturity and realized yield will vary based upon the prepayment experience of
the underlying asset pool and prevailing interest rates at the time of
prepayment. Asset-backed securities are relatively new instruments and may be
subject to greater risk of default during periods of economic downturn than
other instruments. Also, the secondary market for certain asset-backed
securities may not be as liquid as the market for other types of securities,
which could result in a Bond Fund experiencing difficulty in valuing or
liquidating such securities. The Bond Funds may also invest in securities backed
by pools of mortgages. The investments are described under the heading
"Mortgage-Related Securities."
OTHER INVESTMENT COMPANIES
The Bond Funds may invest in shares of other open-end management investment
companies, up to the limits prescribed in Section 12(d) of the 1940 Act. Under
the 1940 Act, a Bond Fund's investment in such securities currently is limited
to, subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of such Bond Fund's net assets with respect to any
one investment company and (iii) 10% of such Bond Fund's net assets in
aggregate. Other investment companies in which the Bond Funds invest can be
expected to charge fees for operating expenses, such as investment advisory and
administration fees, that would be in addition to those charged by the Bond
Funds.
REPURCHASE AGREEMENTS
Each Bond Fund may enter into repurchase agreements, wherein the seller of a
security to a Bond Fund agrees to repurchase that security from a Bond Fund at a
mutually agreed upon time and price. A Bond Fund may enter into repurchase
agreements only with respect to securities that could otherwise be purchased by
such Bond Fund. All repurchase agreements will be fully collateralized at 102%
based on values that are marked to market daily. The maturities of the
12
<PAGE>
underlying securities in a repurchase agreement transaction may be greater than
twelve months, although the maximum term of a repurchase agreement will always
be less than twelve months. If the seller defaults and the value of the
underlying securities has declined, a Bond Fund may incur a loss. In addition,
if bankruptcy proceedings are commenced with respect to the seller of the
security, such Bond Fund's disposition of the security may be delayed or
limited.
A Bond Fund may not enter into a repurchase agreement with a maturity of more
than seven days, if, as a result, more than 15% of the market value of such Bond
Fund's total net assets would be invested in repurchase agreements with
maturities of more than seven days, restricted securities and illiquid
securities. A Bond Fund will only enter into repurchase agreements with primary
broker/dealers and commercial banks that meet guidelines established by the
Board of Directors and that are not affiliated with the Investment Adviser. The
Bond Funds may participate in pooled repurchase agreement transactions with
other funds advised by ASBCM.
REVERSE REPURCHASE AGREEMENTS
The Bond Funds intend to limit their borrowings (including reverse repurchase
agreements) during the current fiscal year to not more than 10% of net assets.
At the time a Bond Fund enters into a reverse repurchase agreement (an agreement
under which a Bond Fund sells their portfolio securities and agrees to
repurchase them at an agreed-upon date and price), it will place in a segregated
custodial account liquid assets such as U.S. Government securities or other
liquid high-grade debt securities having a value equal to or greater than the
repurchase price (including accrued interest) and will subsequently monitor the
account to ensure that such value is maintained. Reverse repurchase agreements
involve the risk that the market value of the securities sold by the Bond Funds
may decline below the price at which the Bond Funds are obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act.
MUNICIPAL BONDS
The Bond Funds may invest in municipal bonds. The two principal classifications
of municipal bonds are "general obligation" and "revenue" bonds. Municipal bonds
are debt obligations issued to obtain funds for various public purposes.
Industrial development bonds are a specific type of revenue bond backed by the
credit and security of a private user. Certain types of industrial development
bonds are issued by or on behalf of public authorities to obtain funds to
provide privately-operated facilities. The Bond Funds may not invest 20% or more
of their respective assets in industrial development bonds.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. For example, under federal tax legislation
enacted in 1986, interest on certain private activity bonds must be included in
an investor's alternative minimum taxable income, and corporate investors must
treat all tax-exempt interest as an item of tax preference. Moreover the Bond
Funds cannot predict what legislation, if any, may be proposed in the state
legislature regarding the state income tax status of interest on such
obligations, or which proposals, if any, might be enacted. Such proposals, while
pending or if enacted, might materially and adversely affect the availability of
municipal obligations generally for investment by the Bond Funds and the
liquidity and value of the Bond Funds' portfolios. In such an event, the Bond
Funds would re-evaluate their investment objectives and policies and consider
possible changes in their structure or possible dissolution.
Certain of the municipal obligations held by the Bond Funds may be insured as to
the timely payment of principal and interest. The insurance policies usually are
obtained by the issuer of the municipal obligation at the time of its original
issuance. In the event that the issuer defaults on interest or principal
payment, the insurer will be notified and will be required to make payment to
the bondholders. There is, however, no guarantee that the insurer will meet its
obligations. In addition, such insurance does not protect against market
fluctuations caused by changes in interest rates and other factors.
MUNICIPAL NOTES
The Bond Funds may invest in municipal notes. Municipal notes include, but are
not limited to, tax anticipation notes ("TANs"), bond anticipation notes
("BANs"), revenue anticipation notes ("RANs") and construction loan notes.
Notes sold as interim financing in anticipation of collection of taxes, a bond
sale or receipt of other revenues are usually general obligations of the issuer.
TANS. An uncertainty in a municipal issuer's capacity to raise taxes as a
result of such events as a decline in its tax base or a rise in delinquencies
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs. Furthermore, some municipal issuers mix various tax proceeds
13
<PAGE>
into a general fund that is used to meet obligations other than those of the
outstanding TANs. Use of such a general fund to meet various obligations could
affect the likelihood of making payments on TANs.
BANS. The ability of a municipal issuer to meet its obligations on its BANs is
primarily dependent on the issuer's adequate access to the longer term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal of, and interest on, BANs.
RANS. A decline in the receipt of certain revenues, such as anticipated
revenues from another level of government, could adversely affect an issuer's
ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.
The values of outstanding municipal securities will vary as a result of changing
market evaluations of the ability of their issuers to meet the interest and
principal payments (i.e., credit risk). Such values also will change in response
to changes in the interest rates payable on new issues of municipal securities
(i.e., market risk). Changes in the value of municipal securities held in the
Bond Funds' portfolios arising from these or other factors will cause changes in
the net asset value per share of the Bond Funds.
U.S. GOVERNMENT OBLIGATIONS
The Bond Funds may invest in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government Obligations").
Payment of principal and interest on U.S. Government Obligations (i) may be
backed by the full faith and credit of the United States (as with U.S. Treasury
bills and GNMA certificates) or (ii) may be backed solely by the issuing or
guaranteeing agency or instrumentality itself (as with FNMA notes). In the
latter case investors must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
Government will provide financial support to its agencies or instrumentalities
where it is not obligated to do so. In addition, U.S. Government Obligations are
subject to fluctuations in market value due to fluctuations in market interest
rates. As a general matter, the value of debt instruments, including U.S.
Government Obligations, declines when market interest rates increase and rises
when market interest rates decrease. Certain types of U.S. Government
Obligations are subject to fluctuations in yield or value due to their structure
or contract terms.
ZERO COUPON BONDS
The Bond Funds may invest in zero coupon bonds. Zero coupon bonds are securities
that make no periodic interest payments, but are instead sold at discounts from
face value. The buyer of such a bond receives the rate of return by the gradual
appreciation of the security, which is redeemed at face value on a specified
maturity date. Because zero coupon bonds bear no interest, they are more
sensitive to interest-rate changes and are therefore more volatile. When
interest rates rise, the discount to face value of the security deepens and the
securities decrease more rapidly in value, when interest rates fall, zero coupon
securities rise more rapidly in value because the bonds carry fixed interest
rates that become more attractive in a falling interest rate environment.
NATIONALLY RECOGNIZED RATINGS ORGANIZATIONS
The ratings of Moody's, S&P, Division of McGraw Hill, Duff & Phelps Credit
Rating Co., Fitch Investors Service, Inc. Thomson Bank Watch and IBCA Inc.
represent their opinions as to the quality of debt securities. It should be
emphasized, however, that ratings are general and not absolute standards of
quality, and debt securities with the same maturity, interest rate and rating
may have different yields while debt securities of the same maturity and
interest rate with different ratings may have the same yield. Subsequent to
purchase by the Bond Funds, an issue of debt securities may cease to be rated or
its rating may be reduced below the minimum rating required for purchase by the
Bond Funds. The Investment Adviser will consider such an event in determining
whether the Bond Fund involved should continue to hold the obligation.
14
<PAGE>
THE MONEY MARKET FUND
INVESTMENT POLICIES
FUNDAMENTAL INVESTMENT POLICIES
The Money Market Fund has adopted the following investment restrictions, all of
which are fundamental policies; that is, they may not be changed without
approval by the vote of the holders of a majority (as defined in the 1940 Act)
of the outstanding voting securities of the Money Market Fund.
The Money Market Fund may not:
(1) purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and
as a result thereof, the value of the Money Market Fund's investments
in that industry would equal 25% of the current value of the Money
Market Fund's total assets, provided that there is no limitation with
respect to investment in (i) securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, (ii) tax-exempt
municipal securities, and (iii) foreign government securities. For
purposes of this policy, (i) "Mortgage Related Securities," as they
are defined in the Securities Exchange Act of 1934, as amended (the
"1934 Act") are treated as securities of an issuer in the industry of
the primary type of asset backing the security; (ii) financial
services companies are classified according to the end users of their
services (for example, automobile finance, bank finance, and
diversified finance); and (iii) utility companies are classified
according to their services (for example, gas, gas transmission,
electric and gas, electric and telephone). In certain circumstances,
the guarantor of a guaranteed security may also be considered to be an
issuer in connection with such guarantee, except that a guarantee of a
security shall not be 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 Money Market Fund, does not exceed 10% of
the value of the Money Market Fund's total assets;
(2) purchase securities of any issuer if, as a result, with respect to 75%
of the Money Market Fund's total assets, more than 5% of the value of
its total assets would be invested in the securities of any one issuer
or, with respect to 100% of its assets, the Money Market Fund's
ownership would be more than 10% of the outstanding voting securities
of such issuer. This policy does not restrict the Money Market Fund's
ability to invest in securities issued or guaranteed by the U.S.
Government, its agencies and instrumentalities;
(3) borrow money except to the extent permitted by the 1940 Act, and the
rules, regulations and exemptions thereunder;
(4) issue senior securities except to the extent permitted by the 1940
Act, and the rules, regulations and exemptions thereunder;
(5) make loans to other parties if, as a result, the aggregate value of
such loans would exceed one-third of the Money Market Fund's total
assets. For the purposes of this limitation, entering into repurchase
agreements, lending securities and acquiring any debt securities are
not deemed to be the making of loans;
(6) underwrite securities of other issuers, except to the extent that the
purchase of permitted investments directly from the issuer thereof or
from an underwriter for an issuer and the later disposition of such
securities in accordance with the Money Market Fund's investment
program may be deemed to be an underwriting;
(7) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Money Market Fund from investing in securities or other instruments
backed by real estate or securities of companies engaged in the real
estate business); nor
(8) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not
prevent the Money Market Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments
backed by physical commodities).
NON-FUNDAMENTAL INVESTMENT POLICIES
The Money Market Fund has adopted the following non-fundamental policies which
may be changed by a majority vote of the Board of Directors at any time and
without approval of such Fund's shareholders.
(1) The Money Market Fund may invest in shares of other open-end
management investment companies, subject to the limitations of the
1940 Act, the rules thereunder, and any orders obtained thereunder now
or in the future. Other investment companies in which the Money Market
15
<PAGE>
Fund invests can be expected to charge fees for operating expenses,
such as investment advisory and administration fees, that would be in
addition to those charged by the Money Market Fund.
(2) The Money Market Fund may not invest or hold more than 10% of the
Money Market Fund's net assets in illiquid securities. For this
purpose, illiquid securities include, among others, (a) securities
that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale, (b) fixed time
deposits that are subject to withdrawal penalties and that have
maturities of more than seven days, and (c) repurchase agreements not
terminable within seven days.
(3) The Money Market Fund may lend securities from its portfolio to
brokers, dealers and financial institutions, in amounts not to exceed
(in the aggregate) one-third of the Money Market Fund's total assets.
Any such loans of portfolio securities will be fully collateralized
based on values that are marked to market daily. The Money Market Fund
will not enter into any portfolio security lending arrangement having
a duration of longer than one year.
(4) The Money Market Fund may not make investments for the purpose of
exercising control or management.
(5) The Money Market Fund may not purchase securities on margin (except
for short-term credits necessary for the clearance of transactions).
(6) The Money Market Fund may not sell securities short, unless it owns or
has the right to obtain securities equivalent in kind and amount to
the securities sold short (short sales "against the box"), and
provided that transactions in futures contracts and options are not
deemed to constitute selling securities short.
(7) The Money Market Fund may not purchase interests, leases, or limited
partnership interests in oil, gas, or other mineral exploration or
development programs.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES AND ASSOCIATED RISKS
Set forth below are descriptions of certain investments and additional
investment policies for the Money Market Fund.
BANK OBLIGATIONS
The Money Market Fund may invest in bank obligations, including certificates of
deposit, time deposits, bankers' acceptances and other short-term obligations of
domestic and foreign banks, foreign subsidiaries of domestic banks, foreign
branches of domestic and foreign banks, and domestic and foreign branches of
foreign banks, domestic savings banks and associations and other banking
institutions. With respect to such securities issued by foreign branches of
domestic banks, foreign subsidiaries of domestic banks, and domestic and foreign
branches of foreign banks, the Money Market Fund may be subject to additional
investment risks that are different in some respects from those incurred by a
fund which invests only in debt obligations of U.S. domestic issuers. Such risks
include possible future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on the
securities, the possible establishment of exchange controls or the adoption of
other foreign governmental restrictions which might adversely affect the payment
of principal and interest on these securities and the possible seizure or
nationalization of foreign deposits. In addition, foreign branches of U.S. banks
and foreign banks may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping standards than those
applicable to domestic branches of U.S. banks.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by the Money Market Fund will not benefit from insurance from the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the Federal Deposit Insurance Corporation ("FDIC"). Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. These instruments reflect the obligation both of the bank and
of the drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
16
<PAGE>
COMMERCIAL PAPER
The Money Market Fund may invest in commercial paper. Commercial paper includes
short-term unsecured promissory notes, variable rate demand notes and variable
rate master demand notes issued by domestic and foreign bank holding companies,
corporations and financial institutions as well as similar taxable instruments
issued by government agencies and instrumentalities.
DERIVATIVE SECURITIES
The internal investment policies of the Investment Adviser prohibit the Money
Market Fund's purchase of many types of floating-rate derivative securities that
are considered potentially volatile. The following types of derivative
securities ARE NOT permitted investments for the Money Market Fund:
- capped floaters (on which interest is not paid when market rates move
above a certain level);
- leveraged floaters (whose interest rate reset provisions are based on
a formula that magnifies changes in interest rates);
- range floaters (which do not pay any interest if market interest rates
move outside of a specified range);
- dual index floaters (whose interest rate reset provisions are tied to
more than one index so that a change in the relationship between these
indices may result in the value of the instrument falling below face
value); and
- inverse floaters (which reset in the opposite direction of their
index).
FLOATING- AND VARIABLE-RATE OBLIGATIONS
The Money Market Fund may purchase floating- and variable-rate obligations such
as demand notes and bonds. These obligations may have stated maturities in
excess of thirteen months, but they permit the holder to demand payment of
principal at any time, or at specified intervals not exceeding thirteen months.
Variable- rate demand notes include master demand notes that are obligations
that permit the Money Market Fund to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the Money
Market Fund, as lender, and the borrower. The interest rates on these notes
fluctuates from time to time, but the Money Market Fund may only invest in
floating- or variable-rate securities that bear interest at a rate that resets
quarterly or more frequently and that resets based on standard money market rate
indices. The issuer of such obligations ordinarily has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders of such obligations.
Because these obligations are direct lending arrangements between the lender and
borrower, it is not contemplated that such instruments generally will be traded,
and there generally is no established secondary market for these obligations,
although they are redeemable at face value. Accordingly, where these
obligations are not secured by letters of credit or other credit support
arrangements, the Money Market Fund's right to redeem is dependent on the
ability of the borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies and the Money
Market Fund may invest in obligations which are not so rated only if the
Investment Adviser determines that at the time of investment the obligations are
of comparable quality to the other obligations in which the Money Market Fund
may invest. The Investment Adviser, on behalf of the Money Market, considers on
an ongoing basis the creditworthiness of the issuers of the floating- and
variable-rate demand obligations in such Fund's portfolio. The Money Market
Fund will not invest more than 10% of the value of its total net assets in
floating- or variable-rate demand obligations whose demand feature is not
exercisable within seven days. Such obligations may be treated as liquid,
provided that an active secondary market exists.
FOREIGN OBLIGATIONS
The Money Market Fund may invest up to 25% of its assets in high-quality,
short-term (thirteen months or less) debt obligations of foreign branches of
U.S. banks or U.S. branches of foreign banks that are denominated in and pay
interest in U.S. dollars. Investments in foreign obligations involve certain
considerations that are not typically associated with investing in domestic
obligations. There may be less publicly available information about a foreign
issuer than about a domestic issuer. Foreign issuers also are not subject to the
same uniform accounting, auditing and financial reporting standards or
17
<PAGE>
governmental supervision as domestic issuers. In addition, with respect to
certain foreign countries, taxes may be withheld at the source under foreign
income tax laws and there is a possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments that could
affect adversely investments in, the liquidity of, and the ability to enforce
contractual obligations with respect to, securities of issuers located in those
countries.
FORWARD COMMITMENTS, WHEN-ISSUED PURCHASES AND DELAYED-DELIVERY TRANSACTIONS
The Money Market Fund may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
The Money Market Fund will segregate cash, U.S. Government obligations or other
high-quality debt instruments in an amount at least equal in value to the Money
Market Fund's commitments to purchase when-issued securities. If the value of
these assets declines, the Money Market Fund will segregate additional liquid
assets on a daily basis so that the value of the segregated assets is equal to
the amount of such commitments.
LETTERS OF CREDIT
Certain of the debt obligations (including certificates of participation,
commercial paper and other short-term obligations) which the Money Market Fund
may purchase may be backed by an unconditional and irrevocable letter of credit
of a bank, savings and loan association or insurance company which assumes the
obligation for payment of principal and interest in the event of default by the
issuer. Only banks, savings and loan associations and insurance companies which,
in the opinion of ASBCM, are of comparable quality to issuers of other permitted
investments of the Money Market Fund may be used for letter of credit-backed
investments.
OTHER INVESTMENT COMPANIES
The Money Market Fund may invest in shares of other open-end management
investment companies, up to the limits prescribed in Section 12(d) of the 1940
Act. Under the 1940 Act, the Money Market Fund's investment in such securities
currently is limited to, subject to certain exceptions, (i) 3% of the total
voting stock of any one investment company, (ii) 5% of such Fund's net assets
with respect to any one investment company and (iii) 10% of such Fund's net
assets in aggregate. Other investment companies in which the Money Market Fund
invests can be expected to charge fees for operating expenses such as investment
advisory and administration fees, that would be in addition to those charged by
the Money Market Fund.
RATINGS OF SECURITIES
Any security that the Money Market Fund purchases must present minimal credit
risks and be of "high quality" or "highest quality." "High quality" means to be
rated in the top two rating categories and "highest quality" means to be rated
only in the top rating category, by the requisite Nationally Recognized Ratings
Organization ("NRRO") or, if unrated, determined to be of comparable quality to
such rated securities by the Investment Adviser, under guidelines adopted by the
Board of Directors.
The ratings of Moody's, S&P, Duff & Phelps Credit Rating Co., Fitch Investors
Service, Inc., Thomson Bank Watch and IBCA Inc. represent their opinions as to
the quality of debt securities. It should be emphasized, however, that ratings
are general and not absolute standards of quality, and debt securities with the
same maturity, interest rate and rating may have different yields while debt
securities of the same maturity and interest rate with different ratings may
have the same yield. Subsequent to purchase by the Money Market Fund, an issue
of debt securities may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Money Market Fund. The Investment
Adviser will consider such an event in determining whether the Money Market Fund
should continue to hold the obligation.
REPURCHASE AGREEMENTS
The Money Market Fund may enter into repurchase agreements wherein the seller of
a security to the Money Market Fund agrees to repurchase that security from the
Fund at a mutually agreed upon time and price. The Money Market Fund may enter
into repurchase agreements only with respect to securities that could otherwise
be purchased by the Fund. All repurchase agreements will be fully collateralized
at at least 102% based on values that are marked to market daily. The maturities
of the underlying securities in a repurchase agreement transaction may be
greater than twelve months, although the maximum term of a repurchase agreement
will always be less than twelve months. If the seller defaults and the value of
the underlying securities has declined, the Money Market Fund may incur a loss.
In addition, if bankruptcy proceedings are commenced with respect to the seller
of the security, the Money Market Fund's disposition of the security may be
delayed or limited.
18
<PAGE>
The Money Market Fund may not enter into a repurchase agreement with a maturity
of more than seven days, if, as a result, more than 10% of the market value of
such Fund's total net assets would be invested in repurchase agreements with
maturities of more than seven days, restricted securities and illiquid
securities. The Money Market Fund will only enter into repurchase agreements
with primary broker/dealers and commercial banks that meet guidelines
established by the Board of Directors and that are not affiliated with the
Investment Adviser. The Money Market Fund may participate in pooled repurchase
agreement transactions with other funds advised by ASBCM.
UNRATED AND DOWNGRADED INVESTMENTS
The Money Market Fund may purchase instruments that are not rated if, in the
opinion of the Investment Adviser, such obligations are of comparable quality to
other rated investments that are permitted to be purchased by the Money Market
Fund. The Money Market Fund may purchase unrated instruments only if they are
purchased in accordance with the Money Market Fund's procedures adopted by
Leland's Board of Directors in accordance with Rule 2a-7 under the 1940 Act.
After purchase by the Money Market Fund, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund. In
the event that a portfolio security ceases to be an "Eligible Security" or no
longer "presents minimal credit risks," immediate sale of such security is not
required, provided that the Board of Directors has determined that disposal of
the portfolio security would not be in the best interests of the Money Market
Fund.
U.S. GOVERNMENT AND U.S. TREASURY OBLIGATIONS
The Money Market Fund may invest in obligations of agencies and
instrumentalities of the U.S. Government ("U.S. Government obligations").
Payment of principal and interest on U.S. Government obligations (i) may be
backed by the full faith and credit of the United States (as with U.S. Treasury
bills and GNMA certificates) or (ii) may be backed solely by the issuing or
guaranteeing agency or instrumentality itself (as with FNMA notes). In the
latter case investors must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
Government will provide financial support to its agencies or instrumentalities
where it is not obligated to do so. In addition, U.S. Government obligations are
subject to fluctuations in market value due to fluctuations in market interest
rates. As a general matter, the value of debt instruments, including U.S.
Government obligations, declines when market interest rates increase and rises
when market interest rates decrease. Certain types of U.S. Government
obligations are subject to fluctuations in yield or value due to their structure
or contract terms.
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<PAGE>
MANAGEMENT OF THE FUNDS
The business of the Funds is managed by Leland's Board of Directors which elects
officers responsible for the day to day operations of the Funds and for the
execution of the policies formulated by the Board of Directors.
The following table sets forth the principal occupation or employment of the
members of the Board of Directors and principal officers of Leland.
<TABLE>
<CAPTION>
Principal Occupation(s) During
-------------------------------
Name (Age) and Address Position(s) Held with Leland Past 5 Years
- -------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Walter R. Fatzinger, Jr., (57)* Director 1999 - Present:
-------------------------------
President, ASB Capital
Leland Funds, Inc. Management, Inc.
c/o ASB Capital Management, Inc.
1101 Pennsylvania Avenue, N.W. 1994 - 1999:
-------------------------------
Suite 300 President - Greater Washington
Washington, D.C. 20004 Region, First National Bank of
Maryland; Executive Vice
President - Institutional Bank,
First National Bank of Maryland
Leslie A. Nicholson, (59)* Director 1996 - Present:
-------------------------------
Executive Vice President and
Leland Funds, Inc. General Counsel, Chevy Chase
c/o ASB Capital Management, Inc. Bank
1101 Pennsylvania Avenue, N.W.
Suite 300 1994 - 1996:
-------------------------------
Washington, D.C. 20004 Partner, Shaw Pittman law firm
<FN>
* An "interested person" of Leland as defined in the 1940 Act.
</TABLE>
Leland makes no payments to any of its officers for services. However, each of
Leland's Directors who are not "interested persons" (the "Disinterested
Directors") are paid by Leland an annual fee of $[ ] and fees of $[ ] for each
meeting they attend (other than those held by telephone conference call). Each
Director is reimbursed by Leland for any expenses incurred by reason of
attending such meetings or in connection with services performed for the Funds.
The following table sets forth information regarding compensation of Directors
by Leland and by the fund complex of which the Funds are a part. In the column
headed "Total Compensation from Leland and Fund Complex Paid to Directors," the
number in parentheses indicates the total number of boards in the fund complex
on which the Director served as of [date].
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Compensation
Aggregate Pension or Retirement from Leland and
Name of Person Compensation Benefits Accrued as Part of Estimated Annual Benefits Fund Complex
(Position) from Leland* Fund Expenses* Upon Retirement* Paid to Directors*
- --------------------- ------------ --------------------------- ------------------------- ------------------
<S> <C> <C> <C> <C>
Walter R. Fatzinger, N/A N/A N/A N/A
Jr.
(Director)
Leslie A. Nicholson N/A N/A N/A N/A
(Director)
<FN>
* Based on estimated amounts for the current fiscal year.
</TABLE>
20
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
ASB Capital Management, Inc., a Maryland corporation, is the investment adviser
to the Funds (as previously defined, the "Investment Adviser"). Pursuant to the
Investment Management Agreement with Leland on behalf of the Funds, the
Investment Adviser manages each Fund's investments in accordance with its stated
policies and restrictions, subject to oversight by Leland's Board of Directors.
The Investment Adviser is a wholly owned subsidiary of Chevy Chase Bank, F.S.B.
("Chevy Chase Bank"). Personnel of the Investment Adviser may invest in
securities for their own account pursuant to a code of ethics that sets forth
all employees' fiduciary responsibilities regarding the Funds, establishes
procedures for personal investing and restricts certain transactions. The
Investment Adviser was established in 1983 and is one of the largest
SEC-registered investment advisors headquartered in the greater Washington area.
The Investment Adviser has a solid reputation as a skilled investment manager
for institutional portfolios. It specializes in the management of corporate,
public, endowment, foundation, and non-profit funds, with a primary focus on
Taft-Hartley Funds. It offers equity and fixed-income products, as well as a
proprietary real estate investment product and currently manages approximately
$3 billion in institutional assets. The Investment Adviser's knowledgeable
professionals handle each institution's needs with the personal care often
afforded only to individual clients.
The Investment Management Agreement, which is dated [ ], 2000, will continue in
effect for an initial two-year term, and thereafter from year to year so long as
continuation is specifically approved at least annually by a vote of Leland's
Board of Directors by vote of the shareholders of the Funds, and in either case
by a majority of Disinterested Directors who have no direct or indirect
financial interest in the Agreement. The agreement may be terminated as to a
Fund at any time upon 60 days' prior written notice, without penalty, by either
party, or by a majority vote of the outstanding shares of that Fund, and will
terminate automatically upon assignment.
The Investment Management Agreement provides that the Investment Adviser will
not be liable for any error of judgment or of law, or for any loss suffered by a
Fund in connection with the matters to which such agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
Investment Adviser's part in the performance of its obligations and duties, or
by reason of its reckless disregard of its obligations and duties under such
agreement. The services of the Investment Adviser to the Funds under the
Investment Management Agreement are not exclusive and it is free to render
similar services to others.
For the investment management services furnished to the Funds, each Fund pays
the Investment Adviser an annual investment management fee, accrued daily and
payable monthly, of [ ]% of that Fund's average daily net assets.
The Investment Adviser and its affiliates may, from time to time, voluntarily
waive or reimburse all or a part of a Fund's operating expenses. Expense
reimbursements by the Investment Adviser or its affiliates will increase a
Fund's total return. [Description of any such waiver/reimbursement to be added
by amendment.]
ADMINISTRATOR
Pursuant to an Administration Agreement with Leland and the Investment Adviser,
[ ] (the "Administrator") provides administrative services to the Funds.
Administrative services furnished by the Administrator include, among others,
maintaining and preserving the records of the Funds, including financial and
corporate records, computing net asset value, dividends, performance data and
financial information regarding the Funds, preparing reports, overseeing the
preparation and filing with the SEC and state securities regulators of
registration statements, notices, reports and other material required to be
filed under applicable laws, developing and implementing procedures for
monitoring compliance with regulatory requirements, providing routine accounting
services, providing office facilities and clerical support as well as providing
general oversight of other service providers. [Description of compensation of
Administrator to be added by amendment.]
The Administration Agreement, which is dated [ ], 2000, will continue in effect
for an initial two-year term, and thereafter from year to year so long as such
continuation is specifically approved at least annually by a vote of Leland's
Board of Directors, including a majority of Disinterested Directors who have no
direct or indirect financial interest in the Agreement. Leland or the
Administrator may terminate the Administration Agreement on 60 days' prior
written notice without penalty. Termination by Leland may be by vote of
Leland's Board of Directors, or a majority of the Disinterested Directors who
have no direct or indirect financial interest in the Agreement, or by a majority
of the outstanding voting securities of the Funds.
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The Administration Agreement provides that the Administrator will not be liable
for any error of judgment or of law, or for any loss suffered by a Fund in
connection with the matters to which such agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the
Administrator's part in the performance of its obligations and duties, or by
reason of its reckless disregard of its obligations and duties under such
agreement.
DISTRIBUTOR
The distributor of the Funds is [ ], [address] (the "Distributor"). Pursuant to
a Distribution Agreement between Leland and the Distributor, the Distributor has
the exclusive right to distribute shares of the Funds. The Distributor may enter
into dealer or agency agreements with affiliates of the Investment Adviser and
other firms for the sale of Funds shares. [Description of fees, if any, paid to
the Distributor to be added by amendment.] From time to time and out of its own
resources, the Investment Adviser or its affiliates may pay fees to
broker-dealers or other persons for distribution or other services related to
the Funds.
The Distribution Agreement with the Distributor will continue in effect only if
such continuance is specifically approved at least annually by a vote of
Leland's Board of Directors, including a majority of the Disinterested Directors
who have no direct or indirect financial interest in the Agreement. The
Agreement was approved by Leland's Board of Directors, including a majority of
the Disinterested Directors who have no direct or indirect financial interest in
the Agreement. The Funds may terminate the Distribution Agreement on 60 days'
prior written notice without penalty. Termination by a Fund may be by vote of
Leland's Board of Directors, or a majority of the Disinterested Directors who
have no direct or indirect financial interest in the Agreement. The Agreement
terminates automatically in the event of its "assignment" as defined in the 1940
Act.
SHAREHOLDER SERVICING
Leland's Board of Directors has approved a Shareholder Servicing Plan
("Servicing Plan") pursuant to which each Fund may pay banks, broker-dealers or
other financial institutions that have entered into a shareholder services
agreement with Leland ("Servicing Agents") in connection with shareholder
support services that they provide. Payments under the Servicing Plan will be
calculated daily and paid monthly at an annual rate that may not exceed [ ]% of
the average daily net assets of the applicable Fund. The shareholder services
provided by the Servicing Agents pursuant to the Servicing Plan may include,
among other services, providing general shareholder liaison services (including
responding to shareholder inquiries), providing information on shareholder
investments, establishing and maintaining shareholder accounts and records, and
providing such other similar services as may be reasonably requested.
The Servicing Plan was approved by Leland's Board of Directors, including a
majority of the Disinterested Directors who have no direct or indirect financial
interest in the Plan or the Shareholder Services Agreement (described below).
The Servicing Plan continues in effect as long as such continuance is
specifically so approved at least annually. The Servicing Plan may be terminated
by Leland with respect to a Fund by a vote of a majority of the Disinterested
Directors who have no direct or indirect financial interest in the Plan or any
agreements relating thereto.
Leland may enter into agreements with other service organizations, including
broker-dealers and banks whose clients are shareholders of the Funds, to act as
Servicing Agents and to perform shareholder support services with respect to
such clients pursuant to the Servicing Plan.
Such Shareholder Services Agreements will continue in effect only if such
continuance is specifically approved at least annually by a vote of Leland's
Board of Directors, including a majority of the Disinterested Directors who have
no direct or indirect financial interest in the Agreement. A Fund may terminate
the Shareholder Services Agreement on 60 days' prior written notice without
penalty. Termination by a Fund may be by vote of Leland's Board of Directors, or
a majority of the Disinterested Directors who have no direct or indirect
financial interest in the Agreement. The Agreement terminates automatically in
the event of its "assignment" as defined in the 1940 Act.
Conflict of interest restrictions may apply to the receipt by Servicing Agents
of compensation from Leland in connection with the investment of fiduciary
assets in Fund shares. Servicing Agents, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the FDIC, and
investment advisers and other money managers are urged to consult their legal
advisers before investing such assets in Fund shares.
TRANSFER AGENT AND CUSTODIAN
[ ] (the "Transfer Agent"), [address], serves as transfer and dividend
disbursing agent for the Funds. For the services provided under the Transfer
Agency and Dividend Disbursing Agency Agreement, which include furnishing
periodic and year-end shareholder statements and confirmations of purchases and
sales, reporting share ownership, aggregating, processing and recording
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purchases and redemptions of shares, processing dividend and distribution
payments, forwarding shareholder communications such as proxies, shareholder
reports, dividend notices and prospectuses to beneficial owners, receiving,
tabulating and transmitting proxies executed by beneficial owners and sending
year-end tax reporting to shareholders and the Internal Revenue Service, the
Transfer Agent receives an annual fee, payable monthly, of [ ]% of each Fund's
average daily net assets. The Transfer Agent is permitted to subcontract any or
all of its functions with respect to all or any portion of the Funds'
shareholders to one or more qualified sub-transfer agents or processing agents,
which may be affiliates of the Transfer Agent, the Distributor, or
broker-dealers authorized to sell shares of the Funds pursuant to a selling
agreement with the Distributor. The Transfer Agent is permitted to compensate
those agents for their services; however, that compensation may not increase the
aggregate amount of payments by the Funds to the Transfer Agent.
Pursuant to a Custodian Agreement, [ ] (the "Custodian"), [address], acts as the
custodian of the Funds' assets. The Custodian, among other things, maintains a
custody account or accounts in the name of each Fund, receives and delivers all
assets for each Fund upon purchase and upon sale or maturity, collects all
income and other payments and distributions with respect to the assets of each
Fund, and pays expenses of each Fund.
OTHER EXPENSES
Each Fund pays the expenses of its operations, including the costs of
shareholder and board meetings; the fees and expenses of blue sky and pricing
services, independent auditors, counsel, the Custodian and the Transfer Agent;
reports and notices to shareholders; the costs of calculating net asset value;
brokerage commissions or transaction costs; taxes; interest; insurance premiums;
Investment Company Institute dues; and the fees and expenses of qualifying that
Fund and its shares for distribution under federal and state securities laws. In
addition, each Fund pays for typesetting, printing and mailing proxy material,
prospectuses, statements of additional information, notices and reports to
existing shareholders, and the fees of the Disinterested Directors. Each Fund is
also liable for such nonrecurring expenses as may arise, including costs of any
litigation to which Leland may be a party, and any obligation it may have to
indemnify Leland's officers and Directors with respect to any litigation.
Leland's expenses generally are allocated among the Funds on the basis of
relative net assets at the time of allocation, except that expenses directly
attributable to a particular Fund are charged to that Fund.
BROKERAGE ALLOCATION
The Investment Adviser places orders for the purchase and sale of assets with
brokers and dealers selected by and in the discretion of the Investment Adviser.
In placing orders for the Funds' portfolio transactions, the Investment Adviser
seeks "best execution" (i.e., prompt and efficient execution at the most
favorable prices).
Consistent with the policy of "best execution," orders for portfolio
transactions are placed with broker-dealer firms giving consideration to the
quality, quantity and nature of the firms' professional services which include
execution, clearance procedures, reliability and other factors. In selecting
among the firms believed to meet the criteria for handling a particular
transaction, the Investment Adviser may give consideration to those firms that
provide market, statistical and other research information to Leland and the
Investment Adviser. In addition, the Funds may pay higher than the lowest
available commission rates when the Investment Adviser believes it is reasonable
to do so in light of the value of the brokerage and research services provided
by the broker effecting the transaction, viewed in terms of either the
particular transaction or the Investment Adviser's overall responsibilities
with respect to accounts as to which it exercises investment discretion. Any
research benefits derived are available for all clients. Because statistical and
other research information is only supplementary to the Investment Adviser's
research efforts and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to significantly reduce its
expenses. In no event will a broker-dealer that is affiliated with the
Investment Adviser receive brokerage commissions in recognition of research
services provided to the Investment Adviser.
The Investment Adviser intends to employ broker-dealer affiliates of the
Investment Adviser (collectively "Affiliated Brokers") to effect portfolio
transactions for the Funds, provided certain conditions are satisfied. Payment
of brokerage commissions to Affiliated Brokers is subject to Section 17(e) of
the 1940 Act and Rule 17e-1 thereunder, which require, among other things, that
commissions for transactions on securities exchanges paid by a registered
investment company to a broker which is an affiliated person of such investment
company, or an affiliated person of another person so affiliated, not exceed the
usual and customary brokers' commissions for such transactions. Leland's Board
of Directors, including a majority of Disinterested Directors, has adopted
procedures to ensure that commissions paid to affiliates of the Investment
Adviser by the Funds satisfy the standards of Section 17(e) and Rule 17e-1.
Certain transactions may be effected for a Funds by a broker-dealer affiliate of
the Investment Adviser at no net cost to that Fund; however, the broker-dealer
may be compensated by another broker-dealer in connection with such transaction
for the order flow to the second broker-dealer. Receipt of such compensation
will be subject to the Funds' procedures pursuant to Section 17(e) and Rule
17e-1.
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The investment decisions for each Fund will be reached independently from those
for other accounts, if any, managed by the Investment Adviser. On occasions when
the Investment Adviser deems the purchase or sale of securities to be in the
best interest of one or more clients of the Investment Adviser, the Investment
Adviser, to the extent permitted by applicable laws and regulations, may, but
shall be under no obligation to, aggregate the securities to be so sold or
purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. 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 Investment Adviser, in accordance with its policy for aggregation
of orders, as in effect from time to time. In some cases this procedure may
affect the size or price of the position obtainable for a Fund.
Purchases and sales of equity securities on exchanges are generally effected
through brokers who charge commissions. In transactions on stock exchanges in
the United States, these commissions generally are negotiated. In all cases, a
Fund will attempt to negotiate best execution.
Purchases and sales of fixed income portfolio securities are generally effected
as principal transactions. These securities are normally purchased directly from
the issuer or from an underwriter or market maker for the securities. There
usually are no brokerage commissions paid for such purchases. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter, and purchases from dealers serving as market
makers include the spread between the bid and ask prices. In the case of
securities traded in the over-the-counter markets, there is generally no stated
commission, but the price usually includes an undisclosed commission or markup.
DESCRIPTION OF CAPITAL SHARES
All shares of the Funds have equal voting rights and will be voted in the
aggregate, and not by series, except where voting by series is required by law
or where the matter involved affects only one series. There are no conversion or
preemptive rights in connection with any shares. All shares of the Funds when
duly issued will be fully paid and non-assessable. The rights of the holders of
shares of each Fund may not be modified except by vote of the majority of the
outstanding shares of such Fund. Certificates are not issued unless requested
and are never issued for fractional shares. Fractional shares are liquidated
when an account is closed.
Shares of each Fund have non-cumulative voting rights, which means that the
holders of more than 50% of all series of Leland's shares voting for the
election of the Directors can elect 100% of Leland's Directors if they wish to
do so. In such event, the holders of the remaining less than 50% of Leland
shares voting for the election of Directors will not be able to elect any person
to the Board of Directors.
Leland is not required to hold a meeting of stockholders in any year in which
the 1940 Act does not require a shareholder vote on a particular matter, such as
election of Directors. Leland will hold a meeting of its shareholders for the
purpose of voting on the question of removal of one or more Directors if
requested in writing by the holders of at least 10% of Leland's outstanding
voting securities, and will assist in communicating with its shareholders as
required by Section 16(c) of the 1940 Act.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held. Unless otherwise provided by law or its
Articles of Incorporation or Bylaws, Leland generally may take or authorize any
extraordinary action upon the favorable vote of the holders of more than 50% of
its outstanding shares or may take or authorize any routine action upon approval
of a majority of the votes cast.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as Leland shall not be deemed to have been effectively acted upon unless
approved by a majority of the outstanding voting securities, as defined in the
1940 Act, of the series or class of the Funds affected by the matter. Under Rule
18f-2, a series or class is presumed to be affected by a matter, unless the
interests of each series or class in the matter are identical or the matter does
not affect any interest of such series or class. Under Rule 18f-2 the approval
of an investment advisory agreement or any change in a fundamental investment
policy would be effectively acted upon with respect to a Fund only if approved
by a majority of its outstanding voting securities, as defined in the 1940 Act.
However, the rule also provides that the ratification of independent public
accountants, the approval of principal underwriting contracts and the election
of directors may be effectively acted upon by the shareholders of Leland voting
without regard to a Fund.
Each share of each Class of a Fund represents an equal proportional interest in
the Fund with each other share of the same Class and is entitled to such
dividends and distributions out of the income earned on the assets allocable to
the Class as are declared in the discretion of the Board of Directors. In the
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event of the liquidation or dissolution of the Funds, shareholders of a Fund are
entitled to receive the assets attributable to the Fund that are available for
distribution, and a distribution of any general assets not attributable to a
particular Fund that are available for distribution, in such manner and on such
general basis as the Board of Directors may determine.
COMPUTATION OF NET ASSET VALUE
THE EQUITY AND BOND FUNDS
The price of a Fund's shares on any given day is its net asset value ("NAV") per
share. NAV is calculated by Leland for each Fund on each day that the New York
Stock Exchange (the "NYSE") is open for trading. Each Fund calculates its NAV
every business day as of the close of trading on the NYSE (normally 4:00 p.m.
Eastern Time). If the markets close early, the Funds may close early and may
value their shares at an earlier time under these circumstances. Shares of the
Funds will not be priced on days on which the NYSE is closed for trading.
Currently, the NYSE is closed on weekends and 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. When any holiday falls on a
weekend, the NYSE typically is closed on the weekday immediately before or after
such holiday.
Securities owned by a Fund for which market quotations are readily available are
valued at current market value. Each Fund values its securities as follows. A
security listed or traded on an exchange is valued at its last sale price (prior
to the time as of which assets are valued) on the exchange where it is
principally traded. Lacking any such sales on the day of valuation, the security
is valued at the mean of the last bid and asked prices. All other securities for
which over-the-counter market quotations are readily available generally are
valued at the mean of the current bid and asked prices. When market quotations
are not readily available, securities are valued at fair value as determined in
good faith by the Board. Debt securities may be valued on the basis of
valuations furnished by pricing services that utilize electronic data processing
techniques to determine valuations for normal institutional-size trading units
of debt securities, without regard to sale or bid prices, when such valuations
are believed to more accurately reflect the fair market value of such
securities. Debt obligations with remaining maturities of 60 days or less
generally are valued at amortized cost. The amortized cost method involves
valuing a security at its cost and amortizing any discount or premium over the
period until maturity, regardless of the impact of fluctuating interest rates on
the market value of the security.
THE MONEY MARKET FUND
Net asset value per share for the shares of the Money Market Fund is determined
as of 5:00 p.m. on each day such Fund is open for business. The Money Market
Fund is open for business on each day the NYSE is open for trading. If the
markets for the instruments and securities the Money Market Fund invests in
close early, the Money Market Fund may close early and may value its shares at
earlier times under these circumstances. Expenses and fees, including advisory
fees, are accrued daily and are taken into account for the purpose of
determining the net asset value of the Money Market Fund's shares.
The Money Market Fund uses the amortized cost method to determine the value of
its portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The
amortized cost method involves valuing a security at its cost and amortizing any
discount or premium over the period until maturity, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
the value, as determined by amortized cost, is higher or lower than the price
that the Money Market Fund would receive if the security were sold. During these
periods the yield to a shareholder may differ somewhat from that which could be
obtained from a similar fund that uses a method of valuation based upon market
prices. Thus, during periods of declining interest rates, if the use of the
amortized cost method resulted in a lower value of the Money Market Fund's
portfolio on a particular day, a prospective investor in the Money Market Fund
would be able to obtain a somewhat higher yield than would result from
investment in a fund using solely market values, and existing Money Market Fund
shareholders would receive correspondingly less income. The converse would apply
during periods of rising interest rates.
Rule 2a-7 provides that in order to value its portfolio using the amortized cost
method, a Fund must maintain a dollar-weighted average portfolio maturity of 90
days or less, purchase securities having remaining maturities (as defined in
Rule 2a-7) of thirteen months or less and invest only in those high-quality
securities that are determined by the Board of Directors to present minimal
credit risks. The maturity of an instrument is generally deemed to be the period
remaining until the date when the principal amount thereof is due or the date on
which the instrument is to be redeemed. However, Rule 2a-7 provides that the
maturity of an instrument may be deemed shorter in the case of certain
instruments, including certain variable and floating rate instruments subject to
demand features. Pursuant to Rule 2a-7, the Board is required to establish
procedures designed to stabilize, to the extent reasonably possible, a Fund's
price per share as computed for the purpose of sales and redemptions at $1.00.
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Such procedures include review of the Fund's portfolio holdings by the Board of
Directors, at such intervals as it may deem appropriate, to determine whether
the Fund's net asset value calculated by using available market quotations
deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Board of Directors. If such deviation exceeds
1/2 of 1%, the Board will promptly consider what action, if any, will be
initiated. In the event the Board determines that a deviation exists that may
result in material dilution or other unfair results to investors or existing
shareholders, the Board will take such corrective action as it regards as
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends or establishing a net asset value per share by
using available market quotations. It is the intention of the Money Market Fund
to maintain a per share net asset value of $1.00, but there can be no assurance
that the Money Market Fund will do so.
Instruments having variable or floating interest rates or demand features may be
deemed to have remaining maturities as follows: (a) a government security with a
variable rate of interest readjusted no less frequently than every thirteen
months may be deemed to have a maturity equal to the period remaining until the
next readjustment of the interest rate; (b) an instrument with a variable rate
of interest, the principal amount of which is scheduled on the face of the
instrument to be paid in thirteen months or less, may be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate; (c) an instrument with a variable rate of interest that is
subject to a demand feature may be deemed to have a maturity equal to the longer
of the period remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through demand; (d)
an instrument with a floating rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (e) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur or,
where no date is specified but the agreement is subject to demand, the notice
period applicable to a demand for the repurchase of the securities.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX STATUS
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Funds pay dividends periodically and make capital gains distributions
annually. The Leland Equity Fund pays any dividends [period]. The Bond Funds
and the Money Market Fund pay any dividends [period].
Distributions paid by a Fund are automatically reinvested to purchase new shares
of the Funds. The new shares are purchased at NAV, generally on the day
distributions are paid.
TAX STATUS OF THE FUNDS
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). To qualify as a regulated investment company, each Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and the excess of
net short-term capital gains over net long-term capital losses) and its net
tax-exempt interest income each taxable year, if any.
As a regulated investment company, each Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to shareholders. Each Fund intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the
excise tax, each Fund must distribute during each calendar year an amount equal
to the sum of (1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year, (2) at least 98% of its
capital gains in excess of its capital losses (adjusted for certain ordinary
losses, as prescribed by the Code) for the one-year period ending on October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that was not distributed during those years. A distribution will be
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treated as paid on December 31 of the current calendar year if it is declared by
a Fund in October, November or December with a record date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, each Fund
intends to make its distributions in accordance with the calendar year
distribution requirement.
Dividends paid out of a Fund's investment company taxable income will be taxable
to a U.S. shareholder as ordinary income. If a portion of a Fund's income
consists of dividends paid by U.S. corporations, a portion of the dividends paid
by the Fund may be eligible for the corporate dividends-received deduction.
Distributions of net capital gains, if any, designated as capital gain dividends
are taxable as long-term capital gains, regardless of how long the shareholder
has held the Fund's shares, and are not eligible for the dividends-received
deduction. Shareholders receiving distributions in the form of additional
shares, rather than cash, generally will have a cost basis in each such share
equal to the net asset value of a share of the Fund on the reinvestment date.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of
additional shares will receive a report as to the net asset value of those
shares.
Investments by a Fund in zero coupon securities will result in income to the
Fund equal to a portion of the excess of the face value of the securities over
their issue price (the "original issue discount") each year that the securities
are held, even though the Fund receives no cash interest payments. This income
is included in determining the amount of income which the Fund must distribute
to maintain its status as a regulated investment company and to avoid the
payment of federal income tax and the 4% excise tax.
Gain derived by a Fund from the disposition of any market discount bonds (i.e.,
bonds purchased other than at original issue, where the face value of the bonds
exceeds their purchase price) held by the Fund will be taxed as ordinary income
to the extent of the accrued market discount on the bonds, unless the Fund
elects to include the market discount in income as it accrues.
The taxation of equity options and over-the-counter options on debt securities
is governed by Code section 1234. Pursuant to Code section 1234, the premium
received by a Fund for selling a put or call option is not included in income at
the time of receipt. If the option expires, the premium is short-term capital
gain to the Fund. If the Fund enters into a closing transaction, the difference
between the amount paid to close out its position and the premium received is
short-term capital gain or loss. If a call option written by a Fund is
exercised, thereby requiring the Fund to sell the underlying security, the
premium will increase the amount realized upon the sale of such security and any
resulting gain or loss will be a capital gain or loss, and will be long-term or
short-term depending upon the holding period of the security. With respect to a
put or call option that is purchased by a Fund, if the option is sold, any
resulting gain or loss will be a capital gain or loss, and will be long-term or
short-term, depending upon the holding period of the option. If the option
expires, the resulting loss is a capital loss and is long-term or short-term,
depending upon the holding period of the option. If the option is exercised, the
cost of the option, in the case of a call option, is added to the basis of the
purchased security and, in the case of a put option, reduces the amount realized
on the underlying security in determining gain or loss.
Certain options and futures contracts in which a Fund may invest are "section
1256 contracts." Gains or losses on section 1256 contracts generally are
considered 60% long-term and 40% short-term capital gains or losses; however,
foreign currency gains or losses (as discussed below) arising from certain
section 1256 contracts may be treated as ordinary income or loss. Also, section
1256 contracts held by a Portfolio at the end of each taxable year (and,
generally, for purposes of the 4% excise tax, on October 31 of each year) are
"marked-to-market" (that is, treated as sold at fair market value), resulting in
unrealized gains or losses being treated as though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a 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.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Funds of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by the Funds which is taxed as
ordinary income when distributed to shareholders.
Each Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because the straddle rules may affect the character of gains or losses, defer
losses and/or accelerate the recognition of gains or losses from the affected
straddle positions, the amount which may be distributed to shareholders, and
27
<PAGE>
which will be taxed to them as ordinary income or long-term capital gain, may be
increased or decreased as compared to a fund that did not engage in such hedging
transactions.
Notwithstanding any of the foregoing, a Fund may recognize gain (but not loss)
from a constructive sale of certain "appreciated financial positions" if the
Fund enters into a short sale, offsetting notional principal contract or forward
contract transaction with respect to the appreciated position or substantially
identical property. Appreciated financial positions subject to this constructive
sale treatment are interests (including options and forward contracts and short
sales) in stock, partnership interests, certain actively traded trust
instruments and certain debt instruments. Constructive sale treatment does not
apply to certain transactions closed in the 90-day period ending with the 30th
day after the close of the taxable year, if certain conditions are met.
Unless certain constructive sale rules (discussed more fully above) apply, a
Fund will not realize gain or loss on a short sale of a security until it closes
the transaction by delivering the borrowed security to the lender. Pursuant to
Code Section 1233, all or a portion of any gain arising from a short sale may be
treated as short-term capital gain, regardless of the period for which the Fund
held the security used to close the short sale. In addition, the Fund's holding
period of any security which is substantially identical to that which is sold
short may be reduced or eliminated as a result of the short sale. Recent
legislation, however, alters this treatment by treating certain short sales
against the box and other transactions as a constructive sale of the underlying
security held by the Fund, thereby requiring current recognition of gain, as
described more fully above. Similarly, if a Fund enters into a short sale of
property that becomes substantially worthless, the Fund will recognize gain at
that time as though it had closed the short sale. Future Treasury regulations
may apply similar treatment to other transactions with respect to property that
becomes substantially worthless.
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition 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 a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
Each Fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Corporate shareholders and certain other shareholders
specified in the Code generally are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal income tax liability.
Fund shareholders may be subject to state, local and foreign taxes on their Fund
distributions. In many states, Fund distributions which are derived from
interest on certain U.S. Government obligations are exempt from taxation. The
tax consequences to a foreign shareholder of an investment in a Fund may be
different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Fund. Shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS
Leland's independent auditors, [ ], [address], audit and report on the Funds'
annual financial statements, review certain regulatory reports and the Funds'
federal income tax returns, and perform other professional accounting, auditing,
tax and advisory services when engaged to do so by Leland. Shareholders will
receive annual audited financial statements and semi-annual unaudited financial
statements.
28
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
SHARES OF THE FUNDS ARE SOLD ON A CONTINUOUS BASIS BY THE DISTRIBUTOR
If Leland's Board of Directors determines that existing conditions make cash
payments undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the relevant Fund's NAV per share. Shareholders receiving securities
or other property on redemption may realize a gain or loss for tax purposes, and
will incur any costs of sale, as well as the associated inconveniences. An
in-kind distribution of portfolio securities will be less liquid than cash. The
shareholder may have difficulty in finding a buyer for portfolio securities
received in payment for redeemed shares. Portfolio securities may decline in
value between the time of receipt by the shareholder and conversion to cash. A
redemption in-kind of a Fund's portfolio securities could result in a less
diversified portfolio of investments for that Fund and could affect adversely
the liquidity of that Fund's portfolio.
Leland may suspend redemption rights and postpone payments at times when
trading on the NYSE is restricted, the NYSE is closed for any reason other than
its customary weekend or holiday closings, emergency circumstances as determined
by the SEC exist, or for such other circumstances as the SEC may permit.
PERFORMANCE CALCULATIONS
The Funds may advertise certain yield and total return information. Quotations
of yield and total return reflect only the performance of a hypothetical
investment in a Fund or class of shares during the particular time period shown.
Yield and total return vary based on changes in the market conditions and the
level of a Fund's expenses, and no reported performance figure should be
considered an indication of performance which may be expected in the future.
In connection with communicating its performance to current or prospective
shareholders, these figures may also be compared to the performance of other
mutual funds tracked by mutual fund rating services or to unmanaged indices
which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs.
Performance information for a Fund or Class of shares in a Fund may be useful in
reviewing the performance of such Fund or Class of shares and for providing a
basis for comparison with investment alternatives. The performance of a Fund
and the performance of a Class of shares in a Fund, however, may not be
comparable to the performance from investment alternatives because of
differences in the foregoing variables and differences in the methods used to
value portfolio securities, compute expenses and calculate performance.
Performance information may be advertised for non-standardized periods,
including year-to-date and other periods less than a year.
AVERAGE ANNUAL TOTAL RETURN
The Funds may advertise certain total return information. As and to the extent
required by the SEC, an average annual compound rate of return ("T") is computed
by using the redeemable value at the end of a specified period ("ERV") of a
hypothetical initial investment ("P") over a period of years ("n") according to
the following formula: P(1+T)/n/=ERV.
CUMULATIVE TOTAL RETURN
In addition to the above performance information, each Fund may also advertise
the cumulative total return of the Fund. Cumulative total return is based on the
overall percentage change in value of a hypothetical investment in the Fund,
assuming all Fund dividends and capital gain distributions are reinvested,
without reflecting the effect of any sales charge that would be paid by an
investor, and is not annualized.
YIELD CALCULATIONS
The Funds may, from time to time, include their yields, tax-equivalent yields
(if applicable) and effective yields in advertisements or reports to
shareholders or prospective investors. Quotations of yield for the Funds are
based on the investment income per share earned during a particular seven-day or
thirty-day period, less expenses accrued during a period ("net investment
income") and are computed by dividing net investment income by the offering
price per share on the last date of the period, according to the following
formula:
29
<PAGE>
YIELD = 2[(a - b + 1)/6/ -1]
---------------------
Cd
where a = dividends and interest earned during the period, b =expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and d = the maximum offering price per share on the last day of the period.
EFFECTIVE YIELD
Effective yields for the Funds are based on the change in the value of a
hypothetical investment (exclusive of capital changes) over a particular
seven-day (or thirty-day) period, less a pro-rata share of each Fund's expenses
accrued over that period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The base
period return is then annualized multiplying by 365/7 (or 365/30 for thirty-day
yield), with the resulting yield figure carried to at least the nearest
hundredth of one percent. "Effective yield" for the Funds assumes that all
dividends received during the period have been reinvested. Calculation of
"effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
Effective Seven-Day Yield = [(Base Period Return +1)365/7]-1
From time to time and only to the extent the comparison is appropriate for a
Fund or a Class of shares, Leland may quote the performance or price- earning
ratio of a Fund or Class in advertising and other types of literature as
compared to the performance of the S&P Index, the Dow Jones Industrial Average,
the Lehman Brothers 20+ Treasury Index, the Lehman Brothers 5-7 Year Treasury
Index, Real Estate Investment Averages (as reported by the National Association
of Real Estate Investment Trusts), Gold Investment Averages (provided by World
Gold Council), Bank Averages (which are calculated from figures supplied by the
U.S. League of Savings Institutions based on effective annual rates of interest
on both passbook and certificate accounts), average annualized certificate of
deposit rates (from the Federal Reserve G-13 Statistical Releases or the Bank
Rate Monitor), the Salomon One Year Treasury Benchmark Index, the Consumer Price
Index (as published by the U.S. Bureau of Labor Statistics), other managed or
unmanaged indices or performance data of bonds, municipal securities, stocks or
government securities (including data provided by Ibbotson Associates), or by
other services, companies, publications or persons who monitor mutual funds on
overall performance or other criteria. The S&P Index and the Dow Jones
Industrial Average are unmanaged indices of selected common stock prices. The
performance of the Funds or a Class also may be compared to that of other mutual
funds having similar objectives. This comparative performance could be expressed
as a ranking prepared by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc., Bloomberg Financial Markets or Morningstar, Inc.,
independent services which monitor the performance of mutual funds. The Funds'
performance will be calculated by relating net asset value per share at the
beginning of a stated period to the net asset value of the investment, assuming
reinvestment of all gains distributions and dividends paid, at the end of the
period. The Funds' comparative performance will be based on a comparison of
yields, as described above, or total return, as reported by Lipper, Survey
Publications or Morningstar, Inc.
Any such comparisons may be useful to investors who wish to compare past
performance of the Funds or a Class with that of competitors. Of course, past
performance cannot be a guarantee of future results. Leland also may include,
from time to time, a reference to certain marketing approaches of the
Distributor, including, for example, a reference to a potential shareholder
being contacted by a selected broker or dealer. General mutual fund statistics
provided by the Investment Company Institute may also be used.
Leland also may use the following information in advertisements and other types
of literature, only to the extent the information is appropriate for the Fund:
(i) the Consumer Price Index may be used to assess the real rate of return from
an investment in a Fund; (ii) other government statistics, including, but not
limited to, The Survey of Current Business, may be used to illustrate investment
attributes of a Fund or the general economic, business, investment, or financial
environment in which a Fund operates; (iii) the effect of tax-deferred
compounding on the investment returns of a Fund, or on returns in general, may
be illustrated by graphs, charts, etc., where such graphs or charts would
compare, at various points in time, the return from an investment in a Fund (or
returns in general) on a tax-deferred basis (assuming reinvestment of capital
gains and dividends and assuming one or more tax rates) with the return on a
taxable basis; and (iv) the sectors or industries in which a Fund invests may be
compared to relevant indices of stocks or surveys (e.g., S&P Industry Surveys)
to evaluate a Fund's historical performance or current or potential value with
respect to the particular industry or sector.
In addition, Leland also may use, in advertisements and other types of
literature, information and statements showing that bank savings accounts offer
a guaranteed return of principal and a fixed rate of interest, but no
opportunity for capital growth. Leland also may include in advertising and
other types of literature information and other data from reports and studies
prepared by the Tax Foundation, including information regarding federal and
state tax levels and the related "Tax Freedom Day."
30
<PAGE>
Leland also may discuss in advertising and other types of literature that a Fund
has been assigned a rating by an NRSRO, such as Standard & Poor's Corporation.
Such rating would assess the creditworthiness of the investments held by the
Fund. The assigned rating would not be a recommendation to purchase, sell or
hold the Fund's shares since the rating would not comment on the market price of
the Fund's shares or the suitability of the Fund for a particular investor. In
addition, the assigned rating would be subject to change, suspension or
withdrawal as a result of changes in, or unavailability of, information relating
to the Fund or its investments. Leland may compare the Fund's performance with
other investments which are assigned ratings by NRSROs. Any such comparisons may
be useful to investors who wish to compare the Fund's past performance with
other rated investments.
Leland also may discuss in advertising and other types of literature the
features, terms and conditions of Chevy Chase Bank accounts through which
investments in the Funds may be made via a "sweep" arrangement (the "Sweep
Accounts"). Such advertisements and other literature may include, without
limitation, discussions of such terms and conditions as the minimum deposit
required to open a Sweep Account, a description of the yield earned on shares of
the Funds through a Sweep Account, a description of any monthly or other service
charge on a Sweep Account and any minimum required balance to waive such service
charges, any overdraft protection plan offered in connection with a Sweep
Account, a description of any ATM or check privileges offered in connection with
a Sweep Account and any other terms, conditions, features or plans offered in
connection with a Sweep Account. Such advertising or other literature may also
include a discussion of the advantages of establishing and maintaining a Sweep
Account, and may include statements from customers as to the reasons why such
customers have established and maintained a Sweep Account.
Leland may disclose in advertising and other types of literature that investors
can open and maintain Sweep Accounts over the Internet or through other
electronic channels (collectively, "Electronic Channels"). Such advertising and
other literature may discuss the investment options available to investors,
including the types of accounts and any applicable fees. Advertising and other
literature may disclose that Chevy Chase Bank may maintain Web sites, pages or
other information sites accessible through Electronic Channels (an "Information
Site") and may describe the contents and features of the Information Site and
instruct investors on how to access the Information Site and open a Sweep
Account. Advertising and other literature may also disclose the procedures
employed by Chevy Chase Bank to secure information provided by investors,
including disclosure and discussion of the tools and services for accessing
Electronic Channels. Such advertising or other literature may include
discussions of the advantages of establishing and maintaining a Sweep Account
through Electronic Channels and testimonials from Chevy Chase Bank customers or
employees and may also include descriptions of locations where product
demonstrations may occur.
Leland also may disclose in sales literature the distribution rate on the shares
of a Fund. Distribution rate, which may be annualized, is the amount determined
by dividing the dollar amount per share of the most recent dividend by the most
recent NAV or maximum offering price per share as of a date specified in the
sales literature. Distribution rate will be accompanied by the standard 30-day
yield as required by the SEC.
31
<PAGE>
<TABLE>
<CAPTION>
APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
<S> <C>
Aaa Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and are to be considered as upper medium
grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds that are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be very moderate, and therefore not well safeguarded
during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of desirable investments. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca Bonds that are rated Ca represent obligations which are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C
Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
</TABLE>
NOTE: Moody's may apply numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier I indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representations as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act of 1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
A-1
<PAGE>
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries
- High rates of return on funds employed
- Conservative capitalization structures with moderate reliance on debt
and ample asset protection
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
- Well established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or entities, then the
name or names of such supporting entity or entities are listed within
parentheses beneath the name of the issuer, or there is a footnote referring the
reader to another page for the name or names of the supporting entity or
entities. In assigning ratings to such issuers, Moody's evaluates the financial
strength of the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment. Moody's makes no representation and gives no opinion on
the legal validity or enforceability of any support arrangement. You are
cautioned to review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols and their definitions are as follows:
<TABLE>
<CAPTION>
<S> <C>
aaa An issue that is rated "aaa" is considered to be a top-quality preferred stock. This rating indicates good asset
protection and the least risk of dividend impairment within the universe of preferred stocks.
aa An issue that is rated "aa" is considered a high-grade preferred stock. This rating indicates that there is reasonable
assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future.
a An issue that is rated "a" is considered to be an upper-medium grade preferred stock. While risks are judged to be
somewhat greater than in the "aaa" and "aa" classifications, earnings and asset protection are, nevertheless, expected
to be maintained at adequate levels.
baa An issue that is rated "baa" is considered to be medium grade, neither highly protected nor poorly secured. Earnings
and asset protection appear adequate at present but may be questionable over any great length of time.
A-2
<PAGE>
ba An issue that is rated "ba" is considered to have speculative elements and its future cannot be considered well
assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b An issue that is rated "b" generally lacks the characteristics of a desirable investment. Assurance of dividend
payments and maintenance of other terms of the issue over any long period of time may be small.
caa An issue that is rated "caa" is likely to be in arrears on dividend payments. This rating designation does not purport
to indicate the future status of payments.
ca An issue that is rated "ca" is speculative in a high degree and is likely to be in arrears on dividends with little
likelihood of eventual payment.
c
This is the lowest rated class of preferred or preference stock. Issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
</TABLE>
NOTE: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
A-3
<PAGE>
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
(a) ARTICLES OF INCORPORATION: To be filed by amendment.
(b) BY-LAWS: To be filed by amendment.
(c) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS: To be filed by
amendment.
(d) INVESTMENT ADVISORY CONTRACTS: To be filed by amendment.
(e) UNDERWRITING CONTRACTS: To be filed by amendment.
(f) BONUS OR PROFIT SHARING CONTRACTS: Not applicable.
(g) CUSTODIAN AGREEMENTS: To be filed by amendment.
(h) OTHER MATERIAL CONTRACTS: To be filed by amendment.
(i) LEGAL OPINION: To be filed by amendment.
(j) OTHER OPINIONS: Not applicable.
(k) OMITTED FINANCIAL STATEMENTS: Not applicable.
(l) INITIAL CAPITAL AGREEMENTS: Not applicable.
(m) RULE 12b-1 PLAN: Not applicable.
(n) FINANCIAL DATA SCHEDULE: Not applicable.
(o) RULE 18f-3 PLAN: To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
Not applicable.
ITEM 25. INDEMNIFICATION
Section 2-418 of the General Corporation Law of Maryland empowers a corporation
to indemnify directors and officers of the corporation under various
circumstances as provided in such statute. A director or officer who has been
successful on the merits or otherwise, in the defense of any proceeding, must be
indemnified against reasonable expenses incurred by such person in connection
with the proceeding. Reasonable expenses may be paid or reimbursed by the
corporation in advance of the final disposition of the proceeding, after a
determination that the facts then known to those making the determination would
not preclude indemnification under the statute, and following receipt by the
corporation of a written affirmation by the person that his or her standard of
conduct necessary for indemnification has been met and upon delivery of a
written undertaking by or on behalf of the person to repay the amount advanced
if it is ultimately determined that the standard of conduct has not been met.
Article VI of the Bylaws of Registrant contains indemnification provisions
conforming to the above statute and to the provisions of Section 17 of the 1940
Act, as amended.
The Registrant and the directors and officers of Registrant obtained coverage
under an Errors and Omissions insurance policy. The terms and conditions of the
policy coverage conforms generally to the standard coverage available throughout
the investment company industry. The coverage also applies to Registrant's
investment manager and its members and employees.
C-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the provisions of Maryland law and Registrant's Articles
of Incorporation and Bylaws, or otherwise, Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in said Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or paid
by a director, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered,
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 Act and will be governed by the final adjudication of such
issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information required by this item relative to ASB Capital Management, Inc.,
Investment Adviser to each of Registrant's separate series to be added by
amendment.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) To be identified by amendment.
(b) To be added by amendment.
(c) To be added by amendment.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained pursuant
to Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of the Registrant and the offices of the Registrant's Investment
Adviser, 1101 Pennsylvania Avenue, N.W., Suite 300, Washington, D.C. 20004.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
C-2
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
the Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, duly authorized, in the City of Washington, the District of
Columbia, on the 24th day of March, 2000.
LELAND FUNDS, INC.
By: /s/ Walter R. Fatzinger, Jr.
--------------------------------
Director
By: /s/ Leslie A. Nicholson
--------------------------------
Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement on Form N-1A has been signed below by the
following person in the capacities and on the dates indicated.
SIGNATURE: TITLE: DATE:
/s/ Walter R. Fatzinger, Jr. Director March 24, 2000
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Walter R. Fatzinger, Jr.
/s/ Leslie A. Nicholson Director March 24, 2000
- -----------------------------
Leslie A. Nicholson
<PAGE>
EXHIBIT INDEX
