As filed via EDGAR with the Securities and Exchange Commission on
April 30, 1999.
File No. 33-12738
ICA No. 811-5063
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 21 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 23 [X]
Cornerstone Fixed Income Funds
(Exact name of registrant as specified in charter)
67 Wall Street
New York, New York 10005
(Address of principal executive office)
(212) 809-1855
(Area code and telephone number)
Copies to:
Stephen C. Leslie Carl Frischling, Esq.
Cornerstone Equity Advisors, Inc. Kramer Levin Naftalis & Frankel LLP
67 Wall Street 919 Third Avenue
New York, New York 10005 New York, New York 10022
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
[x] Immediately upon filing pursuant to [ ] on ______________ pursuant to
paragraph (b) paragraph (b)
[ ] 60 days after filing pursuant to [ ] on ( ) pursuant to
paragraph (a)(1) paragraph (a)(1)
[ ] 75 days after filing pursuant to [ ] on ( ) pursuant to
paragraph (a)(2) of paragraph (a)(2) rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Cornerstone Fixed Income Funds
Cornerstone High-Yield Municipal Bond Series
This Prospectus pertains to the Cornerstone High-Yield Municipal Bond
Series (the "Fund") of the Cornerstone Fixed Income Funds.
Prospectus
April 30, 1999
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
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Risk/Return Summary............................................................
Financial Highlights...........................................................
Investment Objective Principal Investment Strategies.........................
Principal Risks................................................................
Year 2000......................................................................
Management.....................................................................
Pricing of Fund Shares.........................................................
Purchase of Shares.............................................................
Redemption of Shares...........................................................
Distribution Expenses..........................................................
Dividends and Tax Matters......................................................
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<PAGE>
RISK/RETURN SUMMARY
Investment Objective and Principal Strategy Overview
The Fund seeks to provide a high level of income that is excluded from federal
income tax. The Fund will attempt to achieve its objective by investing at least
80% of its total assets in lower quality municipal securities by (i.e., high
yield, high risk debt securities) the interest from which is excluded from
federal income tax. In addition, the Fund will invest in variable and floating
rate instruments, zero coupon bonds, and "when-issued" securities, enter into
futures contracts and purchase options, and borrow for investment purposes. The
Fund normally purchases long-term municipal bonds with maturities of 20 years or
greater because such municipal bonds generally produce higher yields than
short-term municipal bonds. The Fund may, however, decide to invest in
securities with shorter maturities.
Principal Risks of Investing in the Fund
There is no guarantee that the Fund will achieve its stated objective. In fact,
you could lose money by investing in the Fund. In making your investment
decision, you should understand that the Fund's net asset value (NAV), yield,
and total return may be adversely affected by any or all of the following
factors:
o High yield, high risk debt securities carry a high degree of credit risk
because its issuers may fail to make timely payments of interest and
principal on the Fund's investments. High yield, high risk debt
securities are regarded as speculative investments.
o Rising interest rates cause the prices of debt securities to decrease
and falling rates cause the prices of debt securities to increase.
Securities with longer maturities can be more sensitive to interest rate
changes. In effect, the longer the maturity of a security, the greater
the impact a change in interest rates could have on the security's
price. Variable and inverse floating rate instruments and zero coupon
bonds, in particular, are extremely sensitive to interest rate changes.
o The Fund is non-diversified, which means that a relatively high
percentage of the Fund's assets may be invested in a limited number of
issuers. Consequently, its performance may be more vulnerable to changes
in the market value of a single issuer or group of issuers.
o The market for futures and options contracts may be illiquid, which
could prevent the Fund from liquidating futures positions and subjecting
the Fund to substantial losses. In addition, the prices of the
securities being hedged may not move in step with the prices in a
futures contract, which could create losses for the Fund.
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<PAGE>
o Borrowing for investment purposes, otherwise known as leveraging, is a
speculative practice that could result in losses for the Fund that would
be greater in degree than if leverage was not employed.
o It is expected that a substantial portion of the assets of the Fund will
be derived from professional money managers and investors who intend to
invest in the Fund as part of an asset-allocation or market-timing
investment strategy. These investors are likely to redeem or exchange
their Fund shares frequently to take advantage of anticipated changes in
market conditions. The strategies employed by investors in the Fund may
result in considerable assets moving in and out of the Fund.
Consequently, the Fund expects that it will generally experience
significant portfolio turnover, which will likely cause higher expenses
and additional costs and may adversely affect the ability of the Fund to
meet its investment objective.
Summary of Past Performance
The bar chart and table shown below indicate the risks of investing in the Fund.
The bar chart shows the performance of the Fund for each of the last 10 calendar
years. The table shows how the Fund's average annual return for 1, 5, and 10
years compare with those of a broad measure of market performance.
Bar Chart
The bar chart illustrates how the Fund's returns vary from year to year. As
always, past performance is no way to predict future performance.
<TABLE>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.74% 15.71% 4.05% 25.70% (12.92)% 5.12% 6.26% 10.14% (5.85)% 5.91%
</TABLE>
The Fund's best performance for one quarter was 9.16% for the quarter ended
12/31/95. The Fund's worst performance for one quarter was (5.84)% for the
quarter ended 3/31/94.
Average Annual Total Returns Table
The table below shows the Fund's average annual total returns for the 1, 5, and
10 year periods of the Fund's existence in comparison to the Lehman Brothers
Municipal Bond Index for the same periods. The table provides some indication of
the risks of investing in the Fund by showing how the Fund's average annual
total returns for the periods noted compare with that of a broad measure of
market performance. As always, past performance is no way to predict future
performance.
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<PAGE>
<TABLE>
<CAPTION>
Average Annual Returns as One Year 5 years 10 Years
of 12/31/98
<S> <C> <C> <C>
Cornerstone High-Yield Municipal
Bond Series 0.74% 5.83% 5.00%
Lehman Brothers Municipal
Bond Index 6.48% 6.22% 8.22%
</TABLE>
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
(as percentage of offering price)......................................... None
Maximum Deferred Sales Charge (Load)...................................... None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
and other Distributions.................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)........ $12*
Exchange Fee.............................................................. None
Maximum Account Fee....................................................... None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees.......................................................... 0.80%
Distribution [and/or Service] (12b-1) Fees............................... 0.50%
Other Expenses........................................................... 2.90%
Total Annual Fund Operating Expenses..................................... 4.20%
* The Transfer Agent charges a $12 service fee for each payment of
redemption proceeds made by wire.
Example: This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating
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<PAGE>
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$422 $1,275 $2,142 $4,372
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<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by McGladrey & Pullen, LLP, whose report, along
with the Fund's financial statements, are included in the Annual Report which is
available upon request:
<TABLE>
<CAPTION>
Year Ended December 31,
1998+ 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of year.............. $ 7.53 $ 6.86 $ 7.07 $ 5.92 $ 7.27
------ ------ ------ ------ ------
Income from investment operations:
Net investment income........................... 0.29 0.37 0.47 0.34 0.43
Net realized and unrealized gains/(losses) on (0.23) 0 .67 (0.21) 1.15 (1.35)
investments.....................................
Total from investment operations............ 0.06 1.04 0.26 1.49 (0.92)
Less distributions
Dividends from net investment income............ (0.29) (0.37) (0.47) (0.34) (0.43)
------ ------ ------ ------ ------
Net asset value, end of year.................... $ 7.30 $ 7.53 $ 6.86 $ 7.07 $ 5.92
------ ------ ------ ------ ------
Total Return.................................... 0.74% 15.71% 4.05% 25.70% (12.92%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted)......... $1,572 $2,255 $1,858 $1,457 $ 979
Ratios to average net assets:
Interest expense............................ .84% -- -- -- --
Operating expenses.......................... 3.36% 2.58% 2.49% 2.50% 2.50%
------ ------ ------ ------ ------
Total expenses.......................... 4.20% 2.58%* 2.49%* 2.50%* 2.50%*
Net investment income....................... 3.63% 5.12%* 6.85%* 5 .15%* 6.70%*
Portfolio turnover rate......................... 57.02% 133.79% 139.26% 43.51% 75.31%
</TABLE>
* These ratios are after expense reimbursement of 3.52%, 4.59%, 6.22% and
6.20%, for each of the years ended December 31, 1997, 1996, 1995 and 1994,
respectively.
+ See "Management" for changes in investment adviser during 1998.
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<PAGE>
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The investment objective of the Fund is to provide a high level of
current income excluded from federal income taxes through the investment in a
portfolio of lower quality municipal bonds.
The policy of the Fund is to invest under normal circumstances at least
80% of its assets in debt securities issued by, or on behalf of, states,
territories, and possessions of the United States and the District of Columbia
and their political subdivisions, agencies, or instrumentalities, the interest
on which is excluded from federal income tax (municipal bonds). As a temporary
defensive measure under certain market conditions, the Fund may invest up to 50%
of its assets in short-term taxable investments.
The Fund invests at least 65% of its assets in the lower quality,
high-yield municipal bonds that are rated BB or lower by Standard & Poor's
Corporation (S&P) or Ba or lower by Moody's Investors Service, Inc. (Moody's) or
are unrated but judged by the Fund's investment adviser to be of at least
comparable quality. The Fund may not invest any of its assets in municipal bonds
that are not currently paying income or in municipal bonds that are rated lower
than C by S&P or Moody's. There is no limit on the percentage of its assets that
the Fund may invest in unrated securities that would otherwise qualify for
purchase by the Fund. Although the Fund invests its assets predominantly in the
lower quality municipal bonds described above due to the higher yield they
provide, the Fund may under certain conditions invest in higher quality
securities. For example, certain securities with higher risk characteristics
that the Fund invests in, such as inverse floaters and previously non-rated zero
coupon bonds that have been escrowed with government securities, may have
relatively high credit ratings, but still may have higher risk characteristics
that make them appropriate for high yield investors.
The Fund normally purchases long-term municipal bonds with maturities of
20 years or greater because such municipal bonds generally produce higher yields
than short-term municipal bonds. Although the market value of all fixed-income
securities generally varies inversely with changes in interest rates, long-term
securities are more exposed to this variation than short-term securities and
thus more likely to cause some instability in the Fund's share price. The Fund
reserves the right to vary the average maturity of securities it holds. A large
portion of the Fund's assets may be invested in municipal bonds whose interest
payments are derived from revenues from similar projects or whose issuers share
the same geographic location. Consequently, the asset value and performance of
the Fund may be more susceptible to certain economic, political, or regulatory
developments than if the Fund had a more diversified portfolio of investments.
In making investments, the Fund considers the advice of its investment adviser
and uses the Fund's research facilities to perform its own credit analysis,
consisting of an examination of the economic feasibility of revenue bond project
financings and
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<PAGE>
general purpose borrowings; the financial condition of the issuer or guarantor
with respect to liquidity; cash flow and ability to meet anticipated debt
service requirements; and various economic, political, industrial, and
geographic trends. Through credit analysis and portfolio diversification,
investment risk can be reduced; however, there can be no assurances that losses
will not occur.
The Fund also invests, from time to time, a portion of its assets in
higher quality municipal bonds (those rated BBB or above by S&P or Baa or above
by Moody's), such as when there is an influx of assets and sufficient suitable
lower quality municipal bonds are not available, or during a period when yield
spreads among municipal bonds are narrow and the marginally higher yields of
lower quality municipal bonds do not justify, in the judgment of the investment
adviser of the Fund, the increased risk involved. Securities rated BBB by S&P or
Baa by Moody's are considered medium grade, neither highly protected nor poorly
secured, with some elements of uncertainty over any great length of time and
certain speculative characteristics as well.
Participation Interests, Variable and Inverse Floating Rate Instruments
The Fund may purchase participation interests from financial
institutions. These participation interests give the purchaser an undivided
interest in one or more underlying municipal obligations. The Fund may also
invest in municipal obligations which have variable interest rates that are
readjusted periodically. Such readjustment may be based either upon a
predetermined standard, such as a bank prime rate or the U.S. Treasury bill
rate, or upon prevailing market conditions. Many variable instruments are
subject to redemption or repurchase at par on demand by the Fund (usually upon
no more than seven days' notice). All variable rate instruments must meet the
quality standards of the Fund. The Manager will monitor the pricing, quality and
liquidity of the variable rate municipal obligations held by the Fund. The Fund
may purchase inverse floaters which are instruments whose interest rates bear an
inverse relationship to the interest rate on another security or the value of an
index.
The Fund may purchase various types of structured municipal bonds whose
interest rates fluctuate according to changes in other interest rates for some
period and then revert to a fixed rate. The relationship between the interest
rate on these bonds and the other interest rate or index may be direct or
inverse, or it may be based on the relationship between two other interest rates
such as the relationship between taxable and tax-exempt interest rates.
Zero Coupon Bonds
Zero coupon bonds are purchased at a discount from the face amount
because the buyer receives only the right to a fixed payment on a certain date
in the future and does not receive any periodic interest payments. The effect of
owning instruments which do not make
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<PAGE>
current interest payments is that a fixed yield is earned not only on the
original investment but also, in effect, on accretion during the life of the
obligations. This implicit reinvestment of earnings at the same rate eliminates
the risk of being unable to reinvest distributions at a rate as high as the
implicit yields on the zero coupon bond, but at the same time eliminates the
holder's ability to reinvest at higher rates. For this reason, zero coupon bonds
are subject to substantially greater price fluctuations during periods of
changing market interest rates than are comparable securities which pay interest
currently, which fluctuation increases in accordance with the length of the
period to maturity.
When-lssued Purchases
Municipal securities are frequently offered on a "when-issued" basis.
When so offered, the price and coupon rate are fixed at the time the commitment
to purchase is made, but delivery and payment for the when-issued securities
take place at a later date. Normally, the settlement date occurs between 15-45
days from the date of purchase. During the period between purchase and
settlement, no interest accrues to the purchase. The price that the Fund would
be required to pay may be in excess of the market value of the security on the
settlement date. While securities may be sold prior to the settlement date, the
Fund intends to purchase such securities for the purpose of actually acquiring
them unless a sale becomes desirable for investment reasons. At the time the
Fund makes a commitment to purchase a municipal security on a when-issued basis
, it will record the transaction and reflect the value of the security in
determining its net asset value. That value may fluctuate from day to day in the
same manner as values of other municipal securities held by the Fund.
Futures Contracts
A futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. They have been designed by boards of
trade that have been designated contracts markets by the Commodity Futures
Trading Commission (the "CFTC") . Futures contracts trade on these markets in a
manner similar to the way a stock trades on a stock exchange. Presently, there
are futures contracts based on such debt securities as long-term U.S. Treasury
bonds, Treasury notes, Government National Mortgage Association modified
pass-through mortgage-backed securities, three-month U.S. Treasury bills,
municipal bonds and bank certificates of deposit. While futures contracts based
on debt securities do provide for the delivery and acceptance of securities,
such deliveries and acceptances are very seldom made. Generally, the futures
contract is terminated by the execution of an offsetting transaction. An
offsetting transaction for a futures contract sale is effected by that party
entering into a futures contract purchase for the same aggregate amount of the
specified type of financial instrument and same delivery date. If the price in
the sale exceeds the price in the offsetting purchase, that party is immediately
paid the difference and thus realizes a gain. If the offsetting purchase price
exceeds the sale price, that party pays the difference and realizes a loss.
Similarly, closing out a futures contract purchase is effected by that party
entering into a futures contract sale. If the
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<PAGE>
offsetting sale price exceeds the purchase price, that party realizes a gain; if
the purchase price exceeds the offsetting sale price, that party realizes a
loss.
The Fund enters into futures contracts involving debt securities backed
by the full faith and credit of the U.S. Government. The Fund's purpose in
entering into futures contracts is to protect the Fund from the adverse effects
of fluctuations in interest rates without actually
buying or selling long-term debt securities. For example, because the Fund owns
long-term bonds, if interest rates were expected to increase, the Fund might
enter into futures contracts for the sale of debt securities. This would have
much the same effect as selling an equivalent value of the Fund's long-term
bonds. If interest rates did increase, the value of the debt securities in the
Fund's portfolio would decline, but the value of such futures contracts would
increase at approximately the same rate, thereby preventing the net asset value
of the Fund from declining as much as it otherwise would have.
Similarly, when interest rates are expected to decline, the Fund may
enter into futures contracts as a hedge against the anticipated increase in the
price of long-term bonds. Because the value of such futures contracts should
vary directly with the price of long-term bonds, the Fund could take advantage
of the anticipated rise in the value of long-term bonds without actually buying
them until the market had stabilized. At that time, futures contracts could be
liquidated and Fund cash reserves could be used to buy long-term bonds on the
cash market. The Fund could accomplish similar results by selling bonds with
long maturities and investing in bonds with short maturities when interest rates
are expected to increase. However, because the futures market is more liquid
than the cash market, using futures contracts as an investment technique allows
the Fund to maintain a defensive position without having to sell its portfolio
securities. This technique would be particularly appropriate when the cash flow
from the sale of new shares of the Fund could have the effect of diluting
dividend earnings.
Futures contracts may also be used to protect the Fund portfolio from
shifts in value due to overvaluation or undervaluation of the municipal bond
market as compared to the taxable bond market. For instance, if the municipal
bond market appeared to be overvalued relative to the U.S. Government bond
market, a hedge could be created by executing futures contracts for the sale of
municipal bonds and for the purchase of government bonds in like amounts.
Investment by the Fund in futures contracts is subject to a restriction
because of CFTC regulations; the Fund may enter into future contracts only as a
temporary defensive measure for hedging purposes.
Options
Options are the right to buy or sell securities, or futures contracts,
in the future. A put option gives the holder the right to sell a designated
security for a set price within a specified time period, and a call option gives
the holder the right to buy a designated security for a set price within a
specified time period. Currently, the market for options on tax-exempt
securities
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<PAGE>
is very small. There are also options on futures contracts, which entitle a
holder to enter into a futures contract, on specified terms, within a specified
time period. Unlike a futures contract, which requires parties to the contract
to buy and sell a security for a set price on a set date, an option merely
entitles its holder to decide on or before a future date whether to purchase or
sell a security at a set price or to enter into a specified futures contract. If
the holder decides not to exercise an option, all that is lost is the price,
called the premium, paid for the option. Further, because the value of the
option is fixed at the point of sale, there are no daily payments of cash to
reflect the change in the value of the underlying transaction. However, since an
option gives the buyer the right to enter into a transaction or contract at a
set price for a fixed period of time, its value does change daily, and that
change is reflected in the net asset value of the Fund.
The Fund will buy only options listed on national securities exchanges,
except for agreements (sometimes called cash puts) that may accompany the
purchase of a new issue of bonds from a dealer.
Borrowings
The Fund may borrow money in an amount up to 33.33% of its total assets.
Borrowings are also subject to the restriction that the value of the Fund's
assets, less its liabilities other than borrowings, must always be equal to or
greater than 300% of all of its borrowings (including the proposed borrowing).
If this 300% coverage requirement is not met, the Fund must, within three days,
reduce its debt to the extent necessary to meet such coverage requirement, and
to do so, it may have to sell a portion of its investments at a time when such a
sale would otherwise be unadvisable.
Interest on money borrowed is an expense of the Fund and decreases its
net earnings. While money borrowed may be used by the Fund for investment in
securities, the interest paid on borrowed money reduces the amount of money
available for investment by the Fund. The interest paid by the Fund on
borrowings may be more or less than the yield on the securities purchased with
borrowed funds.
The Fund may borrow in order to meet redemption requests and for
investment. Borrowing for investment increases both investment opportunity and
investment risk. Since the Fund's assets fluctuate in value, and the obligation
resulting from the borrowing is fixed, the net asset value per share of the Fund
will tend to increase more when the Fund's investments increase in value and
decrease more when the Fund's investments decrease in value than would otherwise
be the case. This is a speculative factor known as leverage.
Portfolio Transactions and Turnover
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<PAGE>
The Fund is fully managed by purchasing and selling securities as well
as by holding selected securities to maturity. In purchasing and selling
portfolio securities, the Fund seeks to take advantage of variations in the
creditworthiness of issuers. For a description of the strategies that may be
used by the Fund in purchasing and selling portfolio securities.
While it is not possible to predict accurately the rate of turnover of
the Fund's portfolio on an annual basis, it is anticipated that the rate will
not materially exceed 100%. A portfolio turnover of 100% would occur if all of
the securities in the portfolio were changed once in a 12-month period.
Computation of portfolio turnover excludes transactions in securities having a
maturity of one year or less at the time of acquisition. A high turnover rate
(over 100%) increases transaction costs and the possibility of taxable
short-term gains (see "Dividends and Tax Matters") which, in turn, will reduce
the Fund's return. Therefore, the Manager weighs the added costs of short-term
investment against anticipated gains.
Temporary Defensive Investments
The Fund anticipates that it may, from time to time, and in response to
adverse market conditions, invest a portion of its total assets on a temporary
basis in short-term fixed-income obligations , the interest on which is subject
to federal income taxes. These defensive measures may have the effect of
reducing the income to the Fund from the portfolio. Moreover, notwithstanding
the imposition of such measures, Fund management may not be able to foresee
developments in the economy sufficiently in advance to avoid significant
declines in market value. To the extent that the Fund is in a temporary
defensive posture, the Fund's investment objective may not be achieved.
PRINCIPAL RISKS
Credit Risk
High yield, high risk debt securities carry a high degree of credit
risk because its issuers may fail to make timely payments of interest and
principal on the Fund's investments. Such failure may arise from changes in the
financial condition of an issuer, changes in specific economic or political
conditions affecting an issuer, and changes in general economic or political
conditions. High yield, high risk debt securities are regarded as speculative
investments.
Interest Rate Risk
Rising interest rates cause the prices of debt securities to decrease
and falling rates cause the prices of debt securities to increase. Securities
with longer maturities can be more sensitive to interest rate changes. In
effect, the longer the maturity of a security, the greater the impact a change
in interest rates could have on the security's price. Short-term (less than one
year) and
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<PAGE>
long-term (greater than one year) interest rates do not necessarily move in the
same direction or the same amount. Short term securities tend to react to
changes in short-term interest rates, and long-term securities tend to react to
changes in long-term interest rates.
Diversification Risk
Because the Fund may invest a greater percentage of its assets in a few
issuers, there is an increased likelihood that a few issuers of securities may
cause losses to the Fund. In the event of decline of creditworthiness or default
on the obligations of one or more such issuers exceeding 5% of the Fund's
assets, an investment in the Fund will involve greater risk than in a fund that
has a policy of diversification. Many of the Fund's portfolio securities will be
obligations which are related in such a way that an economic, business or
political development or change affecting one such security also would affect
the other portfolio securities (e.g., securities the interest on which is paid
from revenues of similar types of projects). As a result, the Fund's portfolio
may be subject to greater risk as compared to a portfolio composed of more
varied obligations or issuers. Furthermore, the relatively high degree of
similarities among the issuers of obligations in the Fund's portfolio may result
in a greater degree of fluctuation in the market value of the portfolio.
Market-Timing
It is expected that a substantial portion of the assets of the Fund will
be derived from professional money managers and investors who intend to invest
in the Fund as part of an asset-allocation or market-timing investment strategy.
These investors are likely to redeem or exchange their Fund shares frequently to
take advantage of anticipated changes in market conditions. The strategies
employed by investors in the Fund may result in considerable assets moving in
and out of the Fund. Consequently, the Manager expects that the Fund will
generally experience significant portfolio turnover, which will likely cause
higher expenses and additional costs and affect the Fund's performance.
Risk Factors Relating to Futures and Options
There are certain risks in investing in options and interest rate
futures contracts. With respect to the use of futures contracts, although the
Fund intends to purchase or sell futures contracts only if there is an active
market for such contracts, no assurance can be given that a liquid market will
exist for any particular contract at any particular time. Many futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. Futures contract prices could move to the daily limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Fund to
substantial losses. If it is not possible, or the Fund determines not to close a
futures position in anticipation of adverse price movements, the Fund will be
required to make daily cash payments of variation
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<PAGE>
margin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may offset partially or completely losses on the
futures contract.
In addition, no assurance can be given that the price of the securities
being hedged will correlate with the price movements in a futures contract and
thus provide an offset to losses on the futures contract. However, the risk of
imperfect correlation generally tends to diminish as the maturity date of the
futures contract approaches.
The Manager could also be incorrect in its expectations about the
direction or degree of various interest rate movements in the time span within
which the movements take place. Predicting interest rate direction involves
skills and techniques different from those used in most investment strategies,
and there is no guarantee that such predictions will be accurate.
The risk the Fund assumes when it buys an option is the loss of the
premium paid for the option. In order to benefit from buying an option, the
price of the underlying security must change sufficiently to cover the premium
paid, the commissions paid, both in the acquisition of the option and in a
closing transaction, or the exercise of the option and subsequent sale of the
underlying security. (The Fund could enter into a closing transaction by
purchasing an option if it had previously sold one, or by selling an option if
it had previously bought one, with the same terms as the option previously
acquired.) Nevertheless, the price change in the underlying security does not
assume a profit, because prices in the options market may not reflect such a
change.
The risk involved in writing options on futures contracts the Fund owns,
or on securities held in its portfolio, is that there could be an increase in
the market value of such contracts or securities. In such case, the option would
be exercised and the asset would be sold at a lower price than the cash market
price. To some extent, the risk of not realizing a gain could be reduced by
entering into a closing transaction. However, the cost of closing the option and
terminating the Fund's obligation might be more or less than the premium
received when it originally wrote the option. Further, the Fund might not be
able to close the option because of insufficient activity in the options market.
The risk involved in writing options (or selling futures) is not limited to the
value of the options, since the maximum potential loss to the Fund is the cost
of closing out the short options (or futures) positions which theoretically has
no limit.
Finally, in deciding whether to use futures contracts or options,
consideration must be given to brokerage commission costs, which are normally
higher than those associated with general securities transactions.
Risk Factors Relating to Lower Rated Municipal Bonds
You should carefully consider the relative risks of investing in the
higher yielding (and, therefore, higher risk) securities in which the Fund may
invest. These are bonds such as those rated Ba to Caa by Moody's or BB to CC by
S&P, Fitch or Duff or, if unrated, are judged by
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Fund management to be of comparable quality. They generally are not meant for
short-term investing and may be subject to certain risks with respect to the
issuing entity and to greater market fluctuations than certain lower yielding,
higher rated fixed-income securities. Bonds rated Ba by Moody's are judged to
have speculative elements; their future cannot be considered as well assured and
often the protection of interest and principal payments may be very moderate.
Bonds rated BB by S&P, Fitch or Duff are regarded as having predominantly
speculative characteristics and, while such obligations have less near-term
vulnerability to default than other speculative grade debt, they face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Bonds rated CC by S&P, Fitch or Duff are regarded as having
the highest degree of speculation; while such bonds may have some small degree
of quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Bonds rated as low
as Caa by Moody's may be in default or may present elements of danger with
respect to principal or interest. The Fund will not purchase bonds in default.
Investments in bonds rated Ba or lower by Moody's and BB or lower by
S&P, Fitch or Duff, while generally providing greater income and opportunity for
gain than investments in higher rated bonds, usually entail greater risk of
principal and income (including the possibility of default or bankruptcy of the
issuers of such bonds), and may involve greater volatility of price (especially
during periods of economic uncertainty or change) than investments in higher
rated bonds. However, since yields may vary over time, no specific level of
income can be assured. These lower rated, high yielding securities generally
tend to reflect economic changes and short-term corporate and industry
developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates. Lower rated
securities will also be affected by the market's perception of their credit
quality (especially during times of adverse publicity) and the outlook for
economic growth. In the past, economic downturns or an increase in interest
rates have, under certain circumstances, caused a higher incidence of default by
the issuers of these securities and may do so in the future, especially in the
case of highly leveraged issuers. The prices for these securities may be
affected by legislative and regulatory developments. For example, new Federal
rules require that savings and loan associations gradually reduce their holdings
of high-yield securities. An effect of such legislation may be to significantly
depress the prices of outstanding lower rated high yielding fixed-income
securities. Factors adversely affecting the market price and yield of these
securities will adversely affect the Fund's net asset value. In addition, the
retail secondary market for these securities may be less liquid than that of
higher rated bonds; adverse conditions could make it difficult at times for the
Fund to sell certain securities or could result in lower prices than those used
in calculating the Fund's net asset value. Therefore, judgment may at times play
a greater role in valuing these securities than in the case of investment grade
fixed-income securities, and it also may be more difficult during certain
adverse market conditions to sell these lower rated securities at their fair
value to meet redemption requests or to respond to changes in the market.
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<PAGE>
Risk Factors Relating to When Issued Securities
When a commitment to purchase a security on a when-issued basis is made,
procedures are established consistent with the General Statement of Policy of
the Securities and Exchange Commission concerning such purchases. Because that
policy currently recommends that an amount of the Fund's assets equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, cash or high-quality debt securities sufficient to cover any
commitments are always expected to be available. Although it is not intended
that such purchases would be made for speculative purposes and although the Fund
intends to adhere to provisions of the Securities and Exchange Commission
policy, purchases of securities on a when-issued basis may involve more risk
than other types of purchases. For example, when the time comes to pay for a
when-issued security, portfolio securities of the Fund may have to he sold in
order for the Fund to meet its payment obligations, and a sale of securities to
meet such obligations carries with it a greater potential for the realization of
capital gain, which is not tax-exempt. Also, if it is necessary to sell the
when-issued security before delivery, the Fund may incur a loss because of
market fluctuations since the time the commitment to purchase the when-issued
security was made. Moreover, any gain resulting from any such sale would not be
tax-exempt. Additionally, because of market fluctuations between the time of
commitment to purchase and the date of purchase, the when-issued security may
have a lesser (or greater) value at the time of purchase than the Fund's payment
obligations with respect to the security.
Risk Factors Relating to Zero Coupon Bonds
The Fund may invest in zero coupon bonds and pay-in-kind bonds (bonds
which pay interest through the issuance of additional bonds), which involve
special considerations. These securities may be subject to greater fluctuations
in value due to changes in interest rates than interest-bearing securities and
thus may be considered more speculative than comparably rated interest-bearing
securities. In addition, current Federal income tax law requires the holder of a
zero coupon security or of certain pay-in-kind bonds to accrue income with
respect to these securities prior to the receipt of cash payments. To maintain
its qualification as a regulated investment company and avoid liability for
Federal income taxes, the Fund may be required to distribute income accrued with
respect to these securities and may have to dispose of portfolio securities
under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements. Fund management anticipates that investments in zero
coupon securities and pay-in-kind bonds will not ordinarily exceed 25% of the
value of the Fund's total assets.
Risk Factors Relating to Inverse Floating Rate Instruments
Changes in interest rates inversely affect the rate paid on inverse
floating rate instruments ("inverse floaters"). The inverse floaters' price will
be more volatile than that of a fixed rate bond. Additionally, some inverse
floaters contain a "leverage factor" whereby the interest rate moves inversely
by a "factor" to the benchmark. For example, the rates on the inverse floating
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<PAGE>
rate note may move inversely at three times the benchmark rate. Certain interest
rate movements and other market factors can substantially affect the liquidity
of inverse floaters. These instruments are designed to be highly sensitive to
interest rate changes and may subject the holders thereof to extreme reductions
of yield and possibly loss of principal.
YEAR 2000
The Fund's securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian or transfer agent were unable to recognize dates after
1999. The adviser and other service providers have told the Fund that they are
taking action to prevent, and do not expect the funds to suffer from,
significant year 2000 problems.
In addition, problems processing year 2000 data could also have adverse
effects on the computer systems of the issuers or entities that comprise the
Fund's portfolio securities. If such issuers or entities are unable to properly
address the year 2000 problem, then it could have an adverse effect on the
operations of such issuer, which, in turn, would result in a drop in market
value for the securities and a loss for the Fund. This problem may exist to a
greater degree with respect to investments by the Fund in the securities of
non-U.S. issuers. Generally, non-U.S. issuers have not devoted the resources
necessary to properly address the year 2000 problem. Therefore, the problems
noted above for domestic issuers of securities held by the Fund is likely to be
exacerbated for the securities of non-U.S. issuers.
MANAGEMENT
The Fund is managed by Cornerstone Equity Advisors, Inc. ("Cornerstone"
or the "Manager"). Cornerstone's principal business address is 67 Wall Street,
New York, New York 10005. Cornerstone is an investment adviser registered with
the Securities and Exchange Commission. Prior to its association with the Fund,
Cornerstone managed approximately $20 million of assets for private and
institutional accounts. As investment manager, Cornerstone manages and
supervises the Fund's investment portfolio and directs the purchase and sales of
its investment securities.
Cornerstone received advisory fees and reimbursements for its costs
totaling $3,710, which amounted to 0.80% of the Fund's average net assets for
the period from September 29, 1998 to December 31, 1998. During the year 1998,
Fundamental Portfolio Advisors, Inc. served as investment adviser to the Fund
(from January 1, to May 31, 1998), and Tocqueville Asset Management L.P. served
as interim investment adviser to the Fund (from June 1, to September 28, 1998)
each at the same fee rate applicable to Cornerstone's current and interim
advisory contracts.
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<PAGE>
The Fund's portfolio manager is Mr. Stephen C. Leslie, Chairman and
Chief Executive Officer of Cornerstone. Mr. Leslie has been associated with
Cornerstone since its inception in 1997. Dating back to 1994, Mr. Leslie has
held the following positions: he was a partner of Wall Street Capital Group, a
merchant bank; he was a partner of Wall Street Investment Corp., a
broker/dealer; he was a partner of Tucker Anthony Securities, a broker/dealer;
and he was a senior vice-president of Pryor McClendon Counts & Co., a
broker/dealer.
PRICING OF FUND SHARES
The price of Fund shares is based on the Fund's net asset value. Each
share of the Fund is sold at its net asset value next determined after a
purchase order becomes effective. The net asset value per share of the Fund is
determined at the close of trading on the New York Stock Exchange (currently
4:00 P.M. New York time) on each day that both the New York Stock Exchange and
the Fund's custodian bank are open for business. The net asset value per share
of the Fund is also determined on any other day in which the level of trading in
its portfolio securities is sufficiently high that the current net asset value
per share might be materially affected by changes in the value of its portfolio
securities. On any day on which no purchase orders for the shares of the Fund
become effective and no shares are tendered for redemption, the net asset value
per share will not be determined. The Fund shares will not be priced on the
following days when the New York Stock Exchange is closed: New Year's Day, Dr.
Martin Luther King Jr.'s Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The net asset
value per share of the Fund is computed by taking the amount of the value of all
of its assets, less its liabilities, and dividing it by the number of
outstanding shares. For purposes of determining net asset value, expenses of the
Fund are accrued daily and taken into account.
The Fund's portfolio securities are valued on the basis of prices
provided by an independent pricing service when, in the opinion of persons
designated by the Fund's trustees, such prices are believed to reflect the fair
market value of such securities. Prices of non-exchange traded portfolio
securities provided by independent pricing services are generally determined
without regard to bid or last sale prices but take into account institutional
size trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading
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<PAGE>
characteristics and other market data. Securities traded or dealt in upon a
securities exchange and not subject to restrictions against resale as well as
options and futures contracts listed for trading on a securities exchange or
board of trade are valued at the last quoted sales price, or, in the absence of
a sale, at the mean of the last bid and asked prices. Options not listed for
trading on a securities exchange or board of trade for which over-the-counter
market quotations are readily available are valued at the mean of the current
bid and asked prices. Money market and short-term debt instruments with a
remaining maturity of 60 days or less will be valued on an amortized cost basis.
Municipal daily or weekly variable rate demand instruments will be priced at par
value plus accrued interest. Securities not priced in a manner described above
and other assets are valued by persons designated by the Fund's Trustees using
methods which the Trustees believe accurately reflects fair value. The prices
realized from the sale of these securities could be less than those originally
paid by the Fund or less than what may be considered the fair value of such
securities.
PURCHASE OF SHARES
Shares of the Fund may be purchased either directly from the Fund or
through securities dealers, banks or other financial institutions. The Fund has
a minimum initial purchase requirement of $1,000 and a minimum subsequent
purchase requirement of $100. Subsequent purchases are made in the same manner
as initial purchases.
Shares of the Fund may be purchased only in states where the shares are
qualified for sale. Investors can purchase shares without a load if they
purchase shares directly from the Fund. However, investors may be charged a fee
if they purchase shares through securities dealers, banks, or other financial
institutions. Investors opening a new account for the Fund must complete and
submit a purchase application along with payment of the purchase price for their
initial investment. Investors purchasing additional shares of the Fund should
include their account number with payment of the purchase price for additional
shares being purchased. Investors may reopen an account with a minimum
investment of $100 and without filing a purchase application during the year in
which the account was closed or during the following calendar year if
information on the original purchase application is still applicable. The Fund
may require filing a statement that all information on the original purchase
application remains applicable.
A purchase order becomes effective immediately on receipt by Firstar
Mutual Fund Services, LLC, as agent for the Fund, if it is received before 4:00
P.M. Eastern Time on any business day. After a purchase order becomes effective,
confirmation of the purchase is sent to the investor, and the purchase is
credited to the investor's account. The Fund, or any series thereof, reserves
the right to reject any purchase order.
The Cornerstone Automatic Investment Program offers a simple way to
maintain a regular investment program. The Fund has waived the initial
investment minimum for you when
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<PAGE>
you open a new account and invest $100 or more per month through the Cornerstone
Automatic Investment Program. The Program permits an existing shareholder to
purchase additional shares of any Fund (minimum $50 per transaction) at regular
intervals. Under the Automatic Investment Program, shares are purchased by
transferring funds from a shareholder's checking or bank money market account in
an amount of $50 or more designated by the shareholder. At the shareholder's
option, the account designated will be debited and shares will be purchased on
the date selected by the shareholder. There must be a minimum of seven days
between automatic purchases. If the date selected by the shareholder is not a
business day, funds will be transferred the next business day thereafter. Only
an account maintained at a domestic financial institution which is an Automated
Clearing House member may be so designated. To establish an Automatic Investment
Account, complete and sign the appropriate of the Purchase Application and send
it to the Transfer Agent. Shareholders may cancel this privilege or change the
amount of purchase at any time by calling 1-800-322-6864 or by mailing written
notification to: Cornerstone Family of Funds, c/o Firstar Mutual Fund Services,
LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The change will be effective five
business days following receipt of notification by the Transfer Agent. A Fund
may modify or terminate this privilege at any time or charge a service fee,
although no such fee currently is contemplated. However, a $20 fee will be
imposed by Firstar Mutual Fund Services, LLC, if sufficient funds are not
available in the shareholder's account at the time of the automatic transaction.
Methods of Payment
Payment of the purchase price for shares of the Fund may be made in any
of the following manners:
Payment by wire: An expeditious method of purchasing shares is the
transmittal of federal funds by bank wire to Firstar Mutual Fund Services, LLC.
To purchase shares by wire transfer, instruct a commercial bank to wire money
to:
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ABA # 075000022
Credit: Firstar Mutual Fund Services, LLC
Account # 112952137
Further credit: The Cornerstone Family of Funds
Name of shareholder and account number (if known)
(Wired funds must be received prior to 4:00 p.m. Eastern time to be eligible for
same day pricing.)
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<PAGE>
The establishment of a new account or any additional purchases for an
existing account by wire transfer should be preceded by a phone call to Firstar
Mutual Fund Services, LLC, 1-800-322-6864 to provide information for the
account. A properly signed share purchase application marked "Follow Up" must be
sent for all new accounts opened by wire transfer. Applications are subject to
acceptance by the Fund, and are not binding until so accepted. The wire transfer
should be accompanied by the name, address, and social security number (in the
case of new investors) or account number (in the case of persons already owning
shares of that series).
Payment by check: Shares may also be purchased by check. Checks should
be made payable to Cornerstone Family of Funds and mailed to Cornerstone Family
of Funds, c/o Firstar Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee,
WI 53201-0701. The U.S. Postal Service and other independent delivery services
are not agents of the Fund. Therefore, deposit of purchase requests in the mail
or with such services does not constitute receipt by Firstar Mutual Fund
Services, LLC or the Fund. Please do not mail letters by overnight courier to
the post office box address. Purchase requests sent by overnight or express mail
should be directed to: Cornerstone Family of Funds, c/o Firstar Mutual Fund
Services, LLC, Mutual Fund Services, Third Floor, 615 East Michigan Street,
Milwaukee, Wisconsin 53202. If your check does not clear, Firstar Mutual Fund
Services, LLC will cancel your purchase and charge you a $20 fee. Moreover, you
could be liable for any losses incurred. The Fund reserves the right to limit
the number of checks processed at any one time and will notify investors prior
to exercising this right.
Exchange Privilege: For your convenience, the Exchange Privilege permits
you to purchase shares in any of the other funds for which the manager acts as
the investment manager in exchange for shares of the Fund at respective net
asset values per share. Exchange instructions may be given in writing to Firstar
Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee, WI 53201-0701, the
Fund's transfer agent, and must specify the number of shares of the Fund to be
exchanged and the fund into which the exchange is being made. The telephone
exchange privilege will be made available to shareholders automatically. You may
telephone exchange instructions by calling Firstar Mutual Fund Services, LLC at
1-800-322-6864. Before any exchange, you must obtain, and should review, a copy
of the current y prospectus of the fund into which your exchange is being made.
Prospectuses may be obtained y by calling or writing the Fund. See also
"Telephone Redemption Privilege" for a discussion of y the Fund's policy with
respect to losses resulting from unauthorized telephone transactions.
The Exchange Privilege is only available in those states where such
exchanges can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may recognize a capital
gain or loss for federal income tax purposes in connection with an exchange. The
Exchange Privilege may be modified or terminated by the Fund after giving 60
days' prior
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<PAGE>
notice. The Fund reserves the right to reject any specific order, including
purchases by exchange.
A Completed Purchase Application must be received by the Transfer Agent
before the Exchange, Check Redemption, Telephone Redemption or Expedited
Redemption Privileges may be used.
REDEMPTIONS OF SHARES
Each investor in the Fund has the right to cause the Fund to redeem his
or her shares by making a request to Firstar Mutual Fund Services, LLC in
accordance with either the regular redemption procedure, the telephone
redemption privilege, the expedited redemption privilege, or the check
redemption privilege, as described below. If Firstar Mutual Fund Services, LLC
receives a redemption request before the close of trading on any day the New
York Stock Exchange is open for trading, the redemption will become effective on
that day and be made at the net asset value per share of the Fund, as determined
at the close of trading on that day, and payment will be made on the following
business day. If Firstar Mutual Fund Services, LLC receives a redemption request
following the close of trading on the New York Stock Exchange, or on any day the
New York Stock Exchange is not open for business, the redemption will become
effective on the next day the New York Stock Exchange is open for trading and be
made at the net asset value per share of the Fund, as determined at the close of
trading on that day, and payment will be made on the following business day.
Investors are entitled to receive all dividends on shares being redeemed
that are declared on or before the effective date of the redemption of such
shares. The net asset value per share of the Fund received by an investor on
redeeming shares may be more or less than the purchase price per share paid by
such investor, depending on the market value of the portfolio of the Fund at the
time of redemption.
Regular Redemption Procedure
Investors may redeem their shares by sending a written redemption
request to Firstar Mutual Fund Services, LLC, which request must specify the
number of shares to be redeemed and be signed by the investor of record. For
redemptions exceeding $50,000 (and for all written redemptions, regardless of
amount, made within 30 days following any changes in account registration), the
signature of the investor on the redemption request must be guaranteed by an
eligible guarantor institution appointed by Firstar Mutual Fund Services, LLC.
Signature guarantees in proper form generally will be accepted from domestic
banks, a member of a national securities exchange, credit unions and savings
associations, as well as from participants in the Securities Transfer Agents
Medallion Program ("Stamp"). If you have any questions with respect to signature
guarantees, please call the transfer agent at 1-800-322-6864. Firstar Mutual
Fund Services, LLC may, at its option, request further documentation from
corporations, executors, administrators, trustees, or guardians. If a redemption
request is sent to the Fund,
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<PAGE>
the Fund will forward it to Firstar Mutual Fund Services, LLC. The U.S. Postal
Service and other independent delivery services are not agents of the Fund.
Therefore, deposit of redemption requests in the mail or with such services does
not constitute receipt by Firstar Mutual Fund Services, LLC or the Fund. Please
do not mail letters by overnight courier to the post office box address.
Redemption requests sent by overnight or express mail should be directed to:
Cornerstone Family of Funds, c/o Firstar Mutual Fund Services, LLC, Mutual Fund
Services, Third Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202.
Redemption requests will not become effective until all proper documents have
been received by Firstar Mutual Fund Services, LLC. Requests for redemption that
are subject to any special condition or specify an effective date other than as
provided herein cannot be accepted and will be returned to the investor.
Telephone Redemption Privilege
An investor may, either by completing the appropriate section of the
purchase application, or by making a later written request to Firstar Mutual
Fund Services, LLC containing his or her signature guaranteed by an eligible
guarantor (see above), obtain the telephone redemption privilege for any of his
or her accounts. Provided that your account registration has not changed within
the last 30 days, an investor may redeem up to $150,000 worth of shares per day
from an account for which he or she has the telephone redemption privilege by
making a telephone redemption request to Firstar Mutual Fund Services, LLC, at
1-800-322-6864. Telephone calls may be recorded. A check for the proceeds of
such a redemption will be issued in the name of the investor of record and
mailed to the investor's address as it appears on the records of the Fund. Both
the Fund and Firstar Mutual Fund Services, LLC reserve the right to refuse or
limit a telephone redemption request and to modify the telephone redemption
privilege at any time.
Neither the Fund nor its transfer agent will be liable for following
instructions communicated by telephone that they reasonably believe to be
genuine. It is the Fund's policy to provide that a written confirmation
statement of all telephone call transactions will be mailed to shareholders at
their address of record within three business days after the telephone call
transaction. Since you will bear the risk of loss, you should verify the
accuracy of telephone transactions immediately upon receipt of your confirmation
statement.
Expedited Redemption Privilege
An investor in any series of the Fund may, either by completing the
appropriate section of the purchase application, or by later making a written
request to Firstar Mutual Fund Services, LLC containing his or her signature
guaranteed by an eligible guarantor (see above), obtain the expedited redemption
privilege for any of his or her accounts. The expedited redemption privilege
allows the investor to have the proceeds from any redemption of shares in the
amount of $5,000 or more transferred by wiring federal funds to the commercial
bank or savings and loan institution specified in his or her purchase
application or written request for
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<PAGE>
the expedited redemption privilege. The commercial bank or savings and loan
institution specified must be a member of the Federal Reserve System. Expedited
redemption requests may be made either by mail to the address specified under
regular redemption procedure or by telephone to the number specified under
telephone redemption privilege. The proceeds from such a redemption may be
subject to a deduction of the usual and customary charge Firstar Mutual Fund
Services, LLC charges a $12 service fee for each payment of redemption proceeds
made by federal wire. This fee will be deducted from your account. An investor
may change the account or commercial bank designation to receive the redemption
proceeds by sending a written request to Firstar Mutual Fund Services, LLC
containing his or her signature guaranteed in the manner described above. Both
the Fund and Firstar Mutual Fund Services, LLC reserve the right to refuse or
limit an expedited redemption request and to modify the expedited redemption
privilege at any time.
Check Redemption Privilege
An investor in any series of the Fund may, by either completing the
appropriate section of the purchase application, or by later making a written
request to the Fund, obtain redemption checks for any of his or her accounts.
These checks may be used by the investor in any lawful manner and may be payable
to the order of any person or company in an amount of $100 or more. When a check
is presented to Firstar Mutual Fund Services, LLC for payment, Firstar Mutual
Fund Services, LLC, as agent for the investor, will cause the Fund to redeem a
sufficient number of shares in the investor's account to cover the amount of the
check. Investors using the check redemption privilege will be subject to the
same rules and regulations that are applicable to other checking accounts at
Firstar Mutual Fund Services, LLC. There is currently no charge to the investor
for using the check redemption privilege, except that Firstar Mutual Fund
Services, LLC imposes a $20 fee if an investor requests that it stop payment of
a Redemption Check or if it cannot honor a Redemption Check due to insufficient
funds or other valid reasons. The check redemption privilege may not be used to
close an account. The check redemption privilege may be modified or terminated
at any time by either the Fund or Firstar Mutual Fund Services, LLC.
At times, the Fund may be requested to redeem shares for which it has
not yet received good payment. The Fund may delay, or cause to be delayed
payment of redemption proceeds until such time as it has assured itself that
good payment has been received for the purchase of such shares, which may take
up to 15 days. In the case of payment by check, determination of whether the
check has been paid by the paying institution can generally be made within 7
days, but may take longer. Investors may avoid the possibility of any such delay
by purchasing shares by wire. In the event of delays in paying redemption
proceeds, the Fund will take all available steps to expedite collection of the
investment check.
If shares were purchased by check, you may write checks against such
shares only after 15 days from the date the purchase was executed. Shareholders
who draw against shares
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<PAGE>
purchased fewer than 15 days from the date of original purchase, will be charged
usual and customary bank fees.
The Fund reserves the right to suspend the right of redemption or
postpone the day of payment with respect to its shares (1) during any period
when the New York Stock Exchange is closed (other than customary weekend and
holiday closings), (2) during any period when trading markets that the Fund
normally uses are restricted or an emergency exists as determined by the
Securities and Exchange Commission, so that disposing of the Fund's investments
or determining its net asset value is not reasonably practicable, or (3) for
such other periods as the Securities and Exchange Commission by order may permit
to protect investors.
If an investor's account has an aggregate net asset value of less than
$1,000, the Fund may redeem the shares held in such account if the net asset
value of such account has not been increased to at least $100 within 60 days of
notice by the Fund to such investor of its intention to redeem the shares in
such account. The Fund will not redeem the shares of an account with a net asset
value of less than $100 if the account was reduced from the initial minimum
investment of $1,000 to below $100 as a result of market activity.
Exchangeability of Shares
Investors may exchange shares of the Fund having an aggregate net asset
value of $1,000 or more for shares of any other series of the Fund or any other
mutual fund for which the Manager acts as the investment adviser, by either (1)
delivering a written request to Firstar Mutual Fund Services, LLC, specifying
the number of shares of the Fund to be exchanged and the series of the Fund or
the mutual fund in which they wish to invest in connection with such an exchange
or (2) by making such a request by telephone. (See "Redemption-Telephone
Redemption Privilege" for a discussion of the Fund's policy with respect to
losses resulting from unauthorized telephone transactions). The exchange is
effected by redeeming the investor's shares of the Fund and issuing to the
investor shares of the series or mutual fund in which he or she is investing.
The shares of both the Fund and the series or mutual fund being invested in are
valued for purposes of this exchange at the net asset value per share of the
Fund and such other series or fund, respectively, as next determined after
receipt by Firstar Mutual Fund Services, LLC of the exchange request.
The exchange privilege is available in only those states where such
exchange can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers and is subject to the
suitability requirements, if any, for the series or fund for which an exchange
is proposed to be made. Prior to effecting an exchange, an investor should
consider the investment policies of the series or mutual fund he or she is
investing in. Any exchange is, in effect, a redemption of shares in one fund and
a purchase of the other fund. An exchange by an investor is a taxable event for
federal income tax purposes that may result in a capital gain or loss.
- 26 -
<PAGE>
Dividend FLEXIVEST Option
Shareholders of the Fund may elect to have all dividends and
distributions paid by such Series automatically reinvested in shares of the
Fund's Tax-Free Money Market Series at its net asset value on the payment date
of such dividend or distribution, provided the shareholder has: (i) a minimum
opening account balance in the Tax-Free Money Market Series of at least $1,000;
and (ii) made appropriate selection of the FLEXIVEST option in the
"Distributions" section of the Account Application Form.
Transfers
An investor may transfer shares of the Fund by submitting to Firstar
Mutual Fund Services, LLC a written request for transfer, signed by the
registered holder of the shares and indicating the name, social security number
or taxpayer identification number of, and distribution and redemption options
elected by, the new registered holder. Firstar Mutual Fund Services, LLC may, at
its option, request further documentation from transferors that are
corporations, executors, administrators, trustees, or guardians.
DISTRIBUTION EXPENSES
The Fund has adopted a plan of distribution pursuant to Rule 12b-1 of
the 1940 Act (the plan), under which the Fund pays to Cresvale International
(US) LLC (the "Distributor") a fee, which is accrued daily and paid monthly, at
an annual rate of .50% of the Fund's average daily net assets. Amounts paid
under the plan are paid to the Distributor to compensate it for services it
provides and expenses it bears in distributing the Fund's shares to investors,
including payment of compensation by the Distributor to securities dealers and
other financial institutions and organizations, such as banks, trust companies,
savings and loan associations, and investment advisers to obtain various
distribution related and/or administrative services for the Fund. Expenses of
the Distributor also include expenses of its employees, who engage in or support
distribution of shares or service shareholder accounts, including overhead and
telephone expenses; printing and distributing prospectuses and reports used in
connection with the offering of the Fund's shares; and preparing, printing, and
distributing sales literature and advertising materials. Because these payments
are paid out of the Fund's assets on a continual basis over time, these fees
will increase the cost of your investment and may cost you more than other types
of sales charges.
DIVIDENDS AND TAX MATTERS
Dividends and Distributions
The Fund declares, on each business day just prior to calculating its
net asset value, all of its net investment income (consisting of earned interest
income less expenses) as a dividend on shares of record as of the close of
business on the preceding business day. Dividends are distributed on the last
business day of each calendar month. The Fund normally distributes
- 27 -
<PAGE>
capital gains, if any, before the end of its fiscal year. All dividends and
capital gains distributions by the Fund will be in the form of additional shares
unless the investor has made an election, either on his or her purchase
application or in a subsequent written request to Firstar Mutual Fund Services,
LLC, to receive such distributions in cash. An investor may change his or her
distribution election by filing a written request with Firstar Mutual Fund
Services, LLC,
at least four days prior to the date of a distribution.
Tax Matters
The Fund intends to qualify as a regulated investment company,
which means that it pays no federal income tax on the earnings or capital gains
it distributes to its shareholders.
o Exempt-interest dividends from the Fund will be exempt from
federal regular income tax.
o Ordinary dividends from the Fund are taxable as ordinary income
and dividends from the Fund's long-term capital gains are
taxable as capital gain.
o Dividends are treated in the same manner for federal income tax
purposes whether you receive them in the form of cash or
additional shares. They may also be subject to state and local
taxes.
o Certain dividends paid to you in January will be taxable as if
they had been paid the previous December.
o We will mail you tax statements annually showing the amounts and
tax status of the distributions you received.
o When you sell (redeem) or exchange shares of the Fund , you must
recognize any gain or loss.
o Because your tax treatment depends on your purchase price and
tax position, you should keep your regular account statements
for use in determining your tax.
***We provide this tax information for your general information. You should
consult your own tax adviser about the tax consequences of investing in the
Fund.***
- 28 -
<PAGE>
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUND, THE FOLLOWING DOCUMENTS ARE
AVAILABLE FREE UPON REQUEST:
Annual/Semi-Annual Reports: contain performance data and information on
portfolio holdings for the Fund's most recently completed fiscal year or half
year and, on an annual basis, a statement from portfolio management and the
auditor's report.
Statement of Additional Information (SAI): contains more detailed information
about the Fund's policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Fund may be
obtained without charge by contacting:
Cornerstone Fixed Income Funds
Cornerstone High-Yield Municipal Series
67 Wall Street
New York NY 10005
1-800- 322-6864
Information about the Fund (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C. 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800- SEC-0330. Reports and other information
about the Fund may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
===============================================================================
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING
CHANGES TO EXISTING ACCOUNTS, PURCHASING, EXCHANGING OR
REDEEMING SHARES, OR OTHER INVESTOR SERVICES, PLEASE CALL:
1-800-(322- 6864)
Monday through Friday
9:00 a.m. to 8:00 p.m. (EST)
===============================================================================
The Fund's Investment Company Act File number is 811-5063
A-1
<PAGE>
Cornerstone Fixed Income Funds
Cornerstone U.S. Government Strategic Income Fund
The Cornerstone U.S. Government Strategic Income Fund (the "Fund"), is a
series of the Cornerstone Fixed Income Funds.
Prospectus dated April 30, 1999
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Risk/Return Summary............................................................
Financial Highlights...........................................................
Investment Objective Principal Investment Strategies.........................
Principal Risks...............................................................
Year 2000......................................................................
Management.....................................................................
Pricing of Fund Shares.........................................................
Purchase of Shares.............................................................
Redemption of Shares...........................................................
Distribution Expenses.........................................................
Dividends and Tax Matters......................................................
- -------------------------------------------------------------------------------
-2-
<PAGE>
RISK/RETURN SUMMARY
Investment Objective and Principal Strategy Overview
The Fund seeks to provide a high level of current income with minimum risk of
principal and relatively stable share price. The Fund will attempt to achieve
its objective by investing, under normal conditions, at least 65% of its assets
in securities issued by the U.S. Government, its agencies or instrumentalities;
securities that it believes represent minimal risk of defaulting on principal
and interest payments. In addition, the Fund may invest in zero coupon bonds,
enter into repurchase agreements, and engage in borrowing for investment
purposes. The Fund is not limited as to the maturities of the securities in
which it may invest.
Principal Risks of Investing in the Fund
There is no guarantee that the Fund will achieve its stated objective. In fact,
you could lose money by investing in the Fund. In making your investment
decision, you should understand that the Fund's net asset value (NAV), yield,
and total return may be adversely affected by any or all of the following
factors:
o Rising interest rates cause the prices of debt securities to decrease
and falling rates cause the prices of debt securities to increase.
Securities with longer maturities can be more sensitive to interest rate
changes. In effect, the longer the maturity of a security, the greater
the impact a change in interest rates could have on the security's
price. Zero coupon bonds, in particular, are sensitive to changes in
interest rates.
o Borrowing for investment purposes, otherwise known as leveraging, is a
speculative practice that could result in losses for the Fund that would
be greater in degree than if leverage was not employed.
o It is expected that a substantial portion of the assets of the Fund
will be derived from professional money managers and investors who
intend to invest in the Fund as part of an asset-allocation or
market-timing investment strategy. These investors are likely to redeem
or exchange their Fund shares frequently to take advantage of
anticipated changes in market conditions. The strategies employed by
investors in the Fund may result in considerable assets moving in and
out of the Fund. Consequently, the Fund expects that it will generally
experience significant portfolio turnover, which will likely cause
higher expenses and additional costs and may adversely affect the
ability of the Fund to meet its investment objective.
Summary of Past Performance
The bar chart and table shown below indicate the risks of investing in the Fund.
The bar chart shows the performance of the Fund for each of the last 6 calendar
years (since the Fund's
-3-
<PAGE>
inception). The table shows how the Fund's average annual return for the 1 and 5
year periods and for the period since inception compare with those of a broad
measure of market performance.
Bar Chart
The bar chart illustrates how the Fund's returns vary from year to year. As
always, past performance is no way to predict future performance.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(4.61)% 5.51% 5.02% 15.43% (25.57)% 8.14%
</TABLE>
The Fund's best performance for one quarter was 7.50% for the quarter ended
12/31/95. The Fund's worst performance for one quarter was (13.82)% for the
quarter ended 6/1/94.
Average Annual Total Returns Table
The table below shows the Fund's average annual total returns for the 1 and 5
year periods and for the period of the Fund's existence in comparison to the
Lehman Brothers 1-3 Year Government Bond Index for the same periods. The table
provides some indication of the risks of investing in the Fund by showing how
the Fund's average annual total returns for the periods noted compare with that
of a broad measure of market performance. As always, past performance is no way
to predict future performance.
<TABLE>
<CAPTION>
Average Annual Returns as One Year 5 Years Since inception
of 12/31/98 on 03/02/92
<S> <C> <C> <C>
Cornerstone U.S. Government
Strategic Income Fund (4.61)% (1.91)% 0.88%
Lehman Brothers 1-3 Year
Government Bond Index 7.01% 5.97% 6.13%
</TABLE>
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
-4-
<PAGE>
<TABLE>
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as percentage of offering price)........................................................ None
Maximum Deferred Sales Charge (Load) (as a percentage of offering price)................. None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
and other Distributions................................................................. None
Redemption Fee........................................................................... $12*
Exchange Fee............................................................................. None
Maximum Account Fee...................................................................... None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees......................................................................... 0.75%
Distribution [and/or Service] (12b-1) Fees.............................................. 0.50%
Other Expenses...........................................................................3.80%
Total Annual Fund Operating Expenses.................................................... 5.05%
</TABLE>
* The Transfer Agent charges a $12 service fee for each payment of
redemption proceeds made by wire.
Example: This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$505 $1,514 $2,522 $5,037
-5-
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by McGladrey & Pullen, LLP, whose report, along
with the Fund's financial statements, are included in the Annual Report which is
available upon request:
<TABLE>
<CAPTION>
Year Ended December 31,
1998* 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net asset value, beginning of period............ $ 1.41 $ 1.43 $ 1.49 $ 1.37 $ 2.01
Income from investment operations
Net investment income........................... 0.06 0.10 0.13 0.08 0.14
Net realized and unrealized gain/(loss) on investments(0.12) (0.02) (0 .06) 0.12 (0.64)
Total from investment operation............. (0.06) 0.08 0.07 0.20 (0.50)
Less distributions
Dividends from net investment income............ (0.06) (0.10) (0.13) (0.08) (0.14)
Dividends from net realized gains............... -- -- -- -- --
Net asset value, end of year................... $ 1.29 $ 1.41 $ 1.43 $ 1.49 $ 1.37
-===== --===== -===== --===== --=====
Total return.................................... (4.61%) 5 .51% 5.02% 15.43% (25.57%)
Ratios/supplemental data:
Net assets, end of year (000 omitted)........... $4,804 $10,030 $13,224 $15,194 $19,020
Ratios to average net assets................
Interest expense (a)........................ 1.45% 2.75% 2 .61% 3.00% 2.01%
Operating expenses.......................... 3.60% 5.75% 3.41% 3.05% 2.16%
-===== --===== -===== --===== --=====
Total expenses+ (a)..................... 5.05%++ 8.50% 6.02% 6.05% 4.17%
-===== --===== -===== --===== --=====
Net investment income+...................... 4.79% 6.83% 9.01% 5.91% 8 .94%
Portfolio turnover rate......................... 68.44% 12.55% 12.65% 114.36% 60.66%
</TABLE>
+ These ratios are after expense reimbursement of 1.37%, 2.02% and 1.00% for
each of the years ended December 31, 1997, 1996, and 1995, respectively.
** Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
-6-
<PAGE>
(a) The ratios for each of the years in the three year period ending December
31, 1996 have been reclassified to conform with the 1997 presentations.
++ This ratio would have been 5.11%, net of expenses paid indirectly of 0.06%.
* See "Management" for changes in investment adviser in 1998.
-7-
<PAGE>
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The Fund's objective is to provide high current income with minimum risk
of principal and relative stability of net asset value. In seeking its
objective, the Fund, under normal conditions, will invest at least 65% of its
assets in obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities (collectively "Government Securities"). Government
Securities in which the Fund may invest include: Direct obligations of the U.S.
Treasury, such as U.S. Treasury bills, certificates of indebtedness, notes and
bonds ("Direct Obligations"); and obligations of U.S. Government agencies or
instrumentalities, such as Federal Home Loan Banks, Farmers Home Administration,
Federal Farm Credit Banks, Federal National Mortgage Association ("FNMA"),
Government National Mortgage Association ("GNMA"), Resolution Funding Corp.
("RFCO"), Financing Corp. ("FICO") and Federal Home Loan Mortgage Association
("FHLMC") (hereinafter collectively referred to as "Agencies").
The obligations of Government Securities which the Fund may buy are
backed in a variety of ways by the U.S. Government or its agencies or
instrumentalities. While the U.S. Government provides financial support to such
agencies and instrumentalities, no assurance can be given that it will always do
so, since it is not obligated by law. The Fund will invest in such securities
only when it is satisfied that the credit risk with respect to the issuer is
minimal. Some of these obligations, such as GNMA mortgage-backed securities and
obligations of the Farmers Home Administration which represent part ownership in
a pool of mortgage loans, are backed by the full faith and credit of the U.S.
Treasury. Obligations of the Farmers Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury. Obligations of Federal Home
Loan Banks and the Farmers Home Administration are backed by the discretionary
authority of the U.S. Government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, Farmers Home
Administration, Federal Farm Credit Banks, FNMA, RFCO, FICO and FHLMC are backed
by the credit of the agency or instrumentality issuing the obligations.
Securities issued by the U.S. Government differ with respect to maturity
and modality of payment. The two types of payment modes are coupon paying and
capital appreciation. Coupon paying bonds and notes pay a periodic interest
payment, usually semi-annually, and a final principal payment at maturity.
Capital appreciation bonds and Treasury bills accrue a daily amount of interest
income, and pay a stated face amount at maturity. Most U.S. Government capital
appreciation bonds were created as a result of the separation of coupon paying
bonds into distinct securities representing the periodic coupon payments and the
final principal payment. This is referred to as "stripping". The separate
securities representing a specific payment to be made by the U.S. Government on
a specific date are also called "zero coupon" bonds. Current federal tax law
requires the Fund daily to accrue as income a portion of the original issue
discount at which each zero coupon bond was purchased. Amortization of this
discount has the effect of increasing the Fund's income, although it receives no
actual cash payments. The Fund distributes this income to its shareholders as
income dividends and such income is reflected in
-8-
<PAGE>
the Fund's quoted yield. See below for additional discussion concerning the
effects of the amortization of the discount.
The U.S. Government facilitates the "stripping" of coupon bonds by
providing for the periodic coupon payments and the principal payment to be kept
separate in the Federal Reserve and Treasury bookkeeping systems, and allows
stripped bonds to be reconstituted into coupon bonds by delivering all of the
securities representing the coupons and principal payment to the system.
Since the value of debt securities owned by the Fund will fluctuate
depending upon market factors and generally inversely with prevailing interest
rate levels, the net asset value of the Fund will fluctuate. The Fund is not
limited as to the maturities of the securities in which it may invest. Debt
securities with longer maturities generally tend to produce higher yields and
are subject to greater market fluctuation as a result of changes in interest
rates than debt securities with shorter maturities.
At any given time, there is a relationship between the yield of a U.S.
Government obligation and its maturity. This is called the "yield curve." Since
U.S. Government debt securities are assumed to have negligible credit risk, the
main determinant of yield differential between individual securities is
maturity. When the yield curve is such that longer maturities correspond to
higher yields, the yield curve has a positive slope and is referred to as a
"normal" yield curve. At certain times shorter maturities have higher yields and
the yield curve is said to be "inverted." Even when the yield curve is "normal"
(i.e. has a positive slope), the relationship between yield and maturity for
some U.S. Government strip securities is such that yields increase with maturity
up to some point and then, after peaking, decline so that the longest maturities
are not the highest yielding. This is called a "humped" curve.
Zero Coupon Securities
The Fund may invest in zero coupon securities. Zero coupon Treasury
securities do not entitle the holder to any periodic payments of interest prior
to maturity. Accordingly, such securities usually trade at a deep discount from
their face or par value and will be subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities which make periodic distributions of interest. On the other hand,
because there are no periodic interest payments to be reinvested prior to
maturity, zero coupon securities eliminate the reinvestment risk and lock in a
rate of return to maturity. Current federal tax law requires that a holder (such
as the Fund) of a zero coupon security accrue a portion of the discount at which
the security was purchased as income each year even though the Fund received no
interest payment in cash on the security during the year. As an investment
company, the Fund must pay out substantially all of its net investment income
each year. Accordingly, the Fund may be required to pay out as an income
distribution each year an amount which is greater than the total amount of cash
interest the Fund actually received. Such distributions will be made from the
cash assets of the Fund or by liquidation of portfolio securities, if necessary.
If a distribution of cash necessitates the liquidation of portfolio
-9-
<PAGE>
securities, the Manager will select which securities to sell. The Fund may
realize a gain or loss from such sales. In the event the Fund realizes net
capital gains from such transactions, its shareholders may receive a larger
capital gain distribution, if any, than they would in the absence of such
transactions.
Repurchase Agreements
The Fund may enter into repurchase agreements involving Government
Securities. Under a repurchase agreement, the Fund acquires a debt instrument
for a relatively short period (usually not more that one week) subject to the
obligation of the seller to repurchase and the Fund to resell such debt
instrument at a fixed price. The resale price is in excess of the purchase price
in that it reflects an agreed-upon market interest rate effective for the period
of time during which the Fund's money is invested. The Fund's repurchase
agreements will at all times be fully collateralized in an amount at least equal
to the purchase price including accrued interest earned on the underlying
Government Securities. The instruments held as collateral are valued daily, and
as the value of instruments declines, the Fund will require additional
collateral. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the Fund may incur a loss.
Borrowing for Investment and For Other Purposes
The Fund may borrow from banks and enter into reverse repurchase
agreements up to 33-1/3% of the value of its total assets (computed at the time
the loan is made) to take advantage of investment opportunities and for
temporary, extraordinary or emergency purposes. The Fund may pledge up to
33-1/3% of its total assets to secure these borrowings. If the Fund's asset
coverage for borrowings falls below 300%, the Fund will take prompt action to
reduce its borrowings. If the Fund borrows to invest in securities, any
investment gains made on the securities in excess of interest paid on the
borrowing will cause the net asset value of the Fund's shares to rise faster
than would otherwise be the case. On the other hand, if the investment
performance of the additional securities purchased fails to cover their cost
(including any interest paid on the money borrowed) to the Fund, the net asset
value of the Fund's shares will decrease faster than would otherwise be the
case. This is the speculative characteristic known as "leverage." As long as the
interest rate paid by the Fund for borrowing via the use of reverse repurchase
agreements is less than the interest rate the Fund can earn on its securities
investments, these transactions will represent an essential element of the
Fund's objective of achieving relatively high current income. As discussed
above, this speculative characteristic known as leverage increases the amount of
fluctuation in the Fund's price given any particular change in the value of its
securities holdings. Thus, all of the sources of risk inherent in the Fund's
strategy of reducing interest rate risk by the use of hedging with futures
contracts to bring the weighted duration of the Fund's portfolio to three years
or less, will be magnified to the extent that the borrowing done by the Fund
results in leverage.
-10-
<PAGE>
INVESTMENT RISKS
Interest Rate Risk
Rising interest rates cause the prices of debt securities to decrease
and falling rates cause the prices of debt securities to increase. Securities
with longer maturities can be more sensitive to interest rate changes. In
effect, the longer the maturity of a security, the greater the impact a change
in interest rates could have on the security's price. Short-term (less than one
year) and long-term (greater than one year) interest rates do not necessarily
move in the same direction or the same amount. Short term securities tend to
react to changes in short-term interest rates, and long-term securities tend to
react to changes in long-term interest rates.
Market-Timing
It is expected that a substantial portion of the assets of the Fund will
be derived from professional money managers and investors who intend to invest
in the Fund as part of an asset-allocation or market-timing investment strategy.
These investors are likely to redeem or exchange their Fund shares frequently to
take advantage of anticipated changes in market conditions. The strategies
employed by investors in the Fund may result in considerable assets moving in
and out of the Fund. Consequently, the Manager expects that the Fund will
generally experience significant portfolio turnover, which will likely cause
higher expenses and additional costs and affect the Fund's performance.
Risk Factors Relating to Zero Coupon Bonds
The Fund may invest in zero coupon bonds and pay-in-kind bonds (bonds
which pay interest through the issuance of additional bonds), which involve
special considerations. These securities may be subject to greater fluctuations
in value due to changes in interest rates than interest-bearing securities and
thus may be considered more speculative than comparably rated interest-bearing
securities. In addition, current federal income tax law requires the holder of a
zero coupon security or of certain pay-in-kind bonds to accrue income with
respect to these securities prior to the receipt of cash payments. To maintain
its qualification as a regulated investment company and avoid liability for
federal income taxes, the Fund may be required to distribute income accrued with
respect to these securities and may have to dispose of portfolio securities
under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements. Fund management anticipates that investments in zero
coupon securities and pay-in-kind bonds will not ordinarily exceed 25% of the
value of the Fund's total assets.
Portfolio Turnover
The Fund has no fixed policy with respect to portfolio turnover. The
Fund may engage in short-term trading to benefit from yield disparities among
different issues of Government Securities, to seek short-term profits during
periods of fluctuating interest rates, or for other
-11-
<PAGE>
reasons the Manager believes would be beneficial to the Fund. The Manager
expects that, under normal circumstances, the Fund's annual portfolio turnover
rate will not exceed 200%. The portfolio turnover rate is calculated by dividing
the lesser of sales or purchases of portfolio securities by the average monthly
value of the Fund's portfolio securities, excluding securities having a maturity
at the date of purchase of one year or less. While the Fund will pay commissions
in connection with its options and futures transactions, the other securities in
which the Fund invests are generally traded on a "net" basis with dealers acting
as principals for their own account without a stated commission. Nevertheless,
high portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs which will be borne directly by the
Fund.
YEAR 2000
The Fund's securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian or transfer agent were unable to recognize dates after
1999. The adviser and other service providers have told the Fund that they are
taking action to prevent, and do not expect the funds to suffer from,
significant year 2000 problems.
In addition, problems processing year 2000 data could also have adverse
effects on the computer systems of the issuers or entities that comprise the
Fund's portfolio securities. If such issuers or entities are unable to properly
address the year 2000 problem, then it could have an adverse effect on the
operations of such issuer, which, in turn, would result in a drop in market
value for the securities and a loss for the Fund. This problem may exist to a
greater degree with respect to investments by the Fund in the securities of
non-U.S. issuers. Generally, non-U.S. issuers have not devoted the resources
necessary to properly address the year 2000 problem. Therefore, the problems
noted above for domestic issuers of securities held by the Fund is likely to be
exacerbated for the securities of non-U.S. issuers.
MANAGEMENT
The Fund is managed by Cornerstone Equity Advisors, Inc. ("Cornerstone"
or the "Manager"). Cornerstone's principal business address is 67 Wall Street,
New York, New York 10005. Cornerstone is an investment adviser registered with
the Securities and Exchange Commission. Prior to its association with the Fund,
Cornerstone managed approximately $20 million of assets for private and
institutional accounts. As investment manager, Cornerstone manages and
supervises the Fund's investment portfolio and directs the purchase and sales of
its investment securities.
Cornerstone received advisory fees and reimbursements for its costs
totaling $10,498, which amounted to 0.75% of the Fund's average net assets for
the period from September 29, 1998 to December 31, 1998. During the year 1998,
Fundamental Portfolio Advisors, Inc. served as investment adviser to the Fund
(from January 1, to May 31, 1998), and Tocqueville Asset Management L.P. served
as interim investment adviser to the Fund (from June 1, to September 28, 1998)
each at the same fee rate applicable to Cornerstone's current and interim
advisory contracts.
-12-
<PAGE>
The Fund's portfolio manager is Mr. Stephen C. Leslie, Chairman and
Chief Executive Officer of Cornerstone. Mr. Leslie has been associated with
Cornerstone since its inception in 1997. Dating back to 1994, Mr. Leslie has
held the following positions: he was a partner of Wall Street Capital Group, a
merchant bank; he was a partner of Wall Street Investment Corp., a
broker/dealer; he was a partner of Tucker Anthony Securities, a broker/dealer;
and he was a senior vice-president of Pryor McClendon Counts & Co., a
broker/dealer.
PRICING OF FUND SHARES
The price of Fund shares is based on the Fund's net asset value. The net
asset value per share is determined as of the close of trading on the New York
Stock Exchange (currently 4:00 P.M., New York time) on each day that both the
New York Stock Exchange and the Fund's custodian bank are open for business and
on any other day during which there is a sufficient degree of trading in the
Fund's portfolio securities that the Fund's net asset value might be materially
affected by changes in the value of its portfolio securities, unless there have
been no shares tendered for redemption or orders to purchase shares received.
The Fund's shares will not be priced on the following days when the New York
Stock Exchange is closed: New Year's Day, Dr. Martin Luther King Jr.'s Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. The net asset value per share is computed
by taking the value of all assets of the Fund, subtracting the liabilities of
the Fund, and dividing by the number of outstanding shares. For purposes of
determining net asset value, expenses of the Fund are accrued daily and taken
into account.
The value used by the Fund in computing the current price per share for
the purpose of purchase and redemption of Fund shares (the net asset value per
share) means an amount which reflects calculations to the nearest 1/10th of one
cent.
The Fund's portfolio securities are valued on the basis of prices
provided by an independent pricing service when, in the opinion of persons
designated by the Fund's Board of Trustees, such prices are believed to reflect
the fair market value of such securities. Prices of non-exchange traded
portfolio securities provided by independent pricing services are
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generally determined without regard to bid or last sale prices but take into
account institutional size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and other
market data. Securities traded or dealt in upon a securities exchange and not
subject to restrictions against resale as well as options and futures contracts
listed for trading on a securities exchange or board of trade are valued at the
last quoted sales price, or, in the absence of a sale, at the mean of the last
bid and asked prices. Options not listed for trading on a securities exchange or
board of trade for which over-the-counter market quotations are readily
available are valued at the mean of the current bid and asked prices. Money
market and short-term debt instruments with a remaining maturity of 60 days or
less will be valued on an amortized cost basis. Municipal daily or weekly
variable rate demand instruments will be priced at par value plus accrued
interest. Securities not priced in a manner described above and other assets are
valued by persons designated by the Fund's Trustees using methods which the
Trustees believe accurately reflects fair value. The prices realized from the
sale of these securities could be less than those originally paid by the Fund or
less than what may be considered the fair value of such securities.
The Fund's most recent asset value can be obtained by calling
1-800-322-6864 7 days a week, 24 hours a day. To obtain more detailed
information on the Fund's net asset value, yield and performance you can call
1-800-322-6864 weekdays 9:00 AM-8:00 PM Eastern time.
PURCHASE OF SHARES
You may purchase shares directly from the Fund without a load on any day
the New York Stock Exchange is open for business. The public offering price for
shares purchased is the net asset value per share of the Fund next determined
after a purchase order becomes effective. Orders for the purchase of Fund shares
become effective (i) immediately, if received prior to 4:00 P.M. New York time
on any business day. Shares being purchased will begin accruing dividends on the
day following the date of purchase and continue to earn dividends until the date
of redemption. Information regarding transmittal of funds by bank wire and
procurement of a Federal Reserve Draft may be obtained from your bank. All
payments (including checks from individual investors) must be in U.S. dollars.
If your check does not clear your purchase will be canceled and you could be
liable for any losses or fees incurred. Firstar Mutual Fund Services, LLC will
charge a $20 fee against a shareholders account for any payment check returned
to the Custodian.
The minimum initial purchase is $2,500 and the minimum subsequent
purchase is $100 . The minimum initial investment for qualified pension plans
(IRAs, Keoghs, etc.) is $2,000. The minimum subsequent investment is $100. (The
foregoing minimum investments may be
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modified or waived at any time at our discretion). Subsequent investments are
made in the same manner as an initial purchase is made.
All shares purchased are confirmed to you and credited to your account
at the net asset value determined as described herein under the heading "Pricing
of Fund Shares." Share certificates are issued only on written request by you to
Cornerstone Family of Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box
701, Milwaukee, WI 53201-0701. There is no charge for share certificates.
Certificates are not issued for fractional shares. Certificates will only be
issued in amounts of 1,000 or more shares. The issuance of certificates may be
discontinued at any time without prior notice. The Fund reserves the right to
reject any purchase order. The Fund reserves the right to limit the number of
purchase order checks processed at any one time and will notify investors prior
to exercising this right. If this right is exercised, the Fund will return
checks immediately.
Although shares of the Fund may be purchased without a sales charge if
you purchase them directly from the Fund, you may be charged a fee for effecting
transactions in the Fund's shares through securities dealers, banks, or other
financial institutions.
The Cornerstone Automatic Investment Program offers a simple way to
maintain a regular investment program. The Fund has waived the initial
investment minimum for you when you open a new account and invest $100 or more
per month through the Cornerstone Automatic Investment Program. The Program
permits an existing shareholder to purchase additional shares of any Fund
(minimum $50 per transaction) at regular intervals. Under the Automatic
Investment Program, shares are purchased by transferring funds from a
shareholder's checking or bank money market account in an amount of $50 or more
designated by the shareholder. At the shareholder's option, the account
designated will be debited and shares will be purchased on the date selected by
the shareholder. There must be a minimum of seven days between automatic
purchases. If the date selected by the shareholder is not a business day, funds
will be transferred the next business day thereafter. Only an account maintained
at a domestic financial institution which is an Automated Clearing House member
may be so designated. To establish an Automatic Investment Account, complete and
sign the appropriate section of the Purchase Application and send it to the
Transfer Agent. Shareholders may cancel this privilege or change the amount of
purchase at any time by calling 1-800-322-6864 or by mailing written
notification to: Cornerstone Family of Funds, c/o Firstar Mutual Fund Services,
LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The change will be effective five
business days following receipt of notification by the Transfer Agent. A Fund
may modify or terminate this privilege at any time or charge a service fee,
although no such fee currently is contemplated. However, a $20 fee will be
imposed by Firstar Mutual Fund Services, LLC, if sufficient funds are not
available in the shareholder's account at the time of the automatic transaction.
While investors may use this option to purchase shares in their IRA or
other retirement plan accounts, the Transfer Agent will not monitor the amount
of contributions to ensure that they do not exceed the amount allowable for
federal tax purposes. Firstar Mutual Fund Services,
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LLC, will assume that all retirement plan contributions are being made for the
tax year in which they are received.
Methods of Payment
Payment by Wire : An expeditious method of investing in the Fund is
through the transmittal of Federal funds by bank wire to Firstar Bank Milwaukee,
N.A. (the "Bank"). Federal funds transmitted by bank wire to the Bank and
received by it prior to 4:00 P.M. New York time are priced at the net asset
value determined on such day. Federal funds received after 4:00 P.M. New York
time will be available on the next business day. Funds other than Federal funds
transmitted by bank wire may or may not be converted into Federal funds on the
day received by the Bank depending upon the time the funds are received and the
bank wiring the funds. We encourage you to make payment by wire in Federal
funds. The Fund will not be responsible for delays in the wiring system.
To purchase shares by wiring funds, instruct a commercial bank to wire
your money to:
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ABA # 075000022
Credit: Firstar Mutual Fund Services, LLC
Account # 112952137
Further credit: The Cornerstone Family of Funds
Name of shareholder and account number (if known)
Instructions for new accounts should specify the name, address, and social
security number of each person in whose name the shares are to be registered and
the name of the Fund. If you are an existing shareholder, you need only furnish
your account number and the name of the Fund. Failure to submit required
information may delay investment.
Payment by Mail: Purchase orders for which remittance is to be made by
check may be submitted directly by mail to Cornerstone Family of Funds, c/o
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The
U.S. Postal Service and other independent delivery services are not agents of
the Fund. Therefore, deposit of purchase requests in the mail or with such
services does not constitute receipt by Firstar Mutual Fund Services, LLC or the
Fund. Please do not mail letters by overnight courier to the post office box
address. Purchase requests sent by overnight or express mail should be directed
to: Cornerstone Family of Funds, c/o Firstar Mutual Fund Services, LLC, Third
Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202. Checks should be
made payable to Cornerstone Family of Funds.
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When opening a new account, you must enclose a completed purchase
application. If you are an existing shareholder, you should enclose the
detachable stub from an account statement you have received or otherwise
indicate your account number and the name of the Fund.
Personal Delivery: For personal delivery instructions, please call the
Fund at 1-800-322-6864.
Exchange for Municipal Securities: If you own municipal obligations
meeting the criteria for investment by the Fund, you may exchange such
securities for shares of the Fund. All such exchanges are discretionary with the
Fund. If you desire to make such an exchange, you should contact the Fund prior
to delivering any securities in order to establish that the securities are
acceptable for exchange, to determine what transaction charges, if any, may be
imposed and to obtain delivery instructions for such securities. The value of
the securities being exchanged will be determined in the same manner that the
value of the Fund's portfolio securities is determined; the specific method of
determining the value will be provided to you on request. The Fund reserves the
right to refuse any such exchange, even if the securities offered by an investor
meet the general investment criteria of the Fund. A capital gain or loss for
federal income tax purposes may be realized by the investor following the
exchange. Maturing bonds or detached coupons submitted within five (5) business
days of the payment date are credited on the payment date.
Exchange Privilege. For your convenience, the Exchange Privilege permits
you to purchase shares in any of the other funds for which Fund management acts
as the investment manager in exchange for shares of the Fund at respective net
asset values per share. Exchange instructions may be given in writing to Firstar
Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee, WI 53201-0701, the
Fund's transfer agent, and must specify the number of shares of the Fund to be
exchanged and the fund into which the exchange is being made. The telephone
exchange privilege will be made available to shareholders automatically. You may
telephone exchange instructions by calling Firstar Mutual Fund Services, LLC, at
1-800-322-6864. Before any exchange, you must obtain, and should review, a copy
of the current prospectus of the fund into which your exchange is being made.
Prospectuses may be obtained by calling or writing the Fund. See also "Telephone
Redemption Privilege" for a discussion of the Fund's policy with respect to
losses resulting from unauthorized telephone transactions.
The Exchange Privilege is only available in those states where such
exchanges can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may recognize a capital
gain or loss for federal income tax purposes in connection with an exchange. The
Exchange Privilege may be modified or terminated by the Fund after giving 60
days' prior notice. The Fund reserves the right to reject any specific order,
including purchases by exchange.
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A Completed Purchase Application must be received by the Transfer Agent
before the Exchange, Check Redemption, Telephone Redemption or Expedited
Redemption Privileges may be used.
REDEMPTION OF SHARES
Shares of the Fund are redeemable at your option without charge at the
next determined net asset value following receipt by Firstar Mutual Fund
Services, LLC, of a redemption request in proper order. To effect a redemption,
you may utilize the Check Redemption Privilege, the Telephone Redemption
Privilege, the Expedited Redemption Privilege, or the regular redemption
procedure. Due to the cost of maintaining an account, the Fund reserves the
right to redeem an account involuntarily, on not less than 60 days' written
notice, at any time an investor has reduced his or her account to less than
$100. During the 60-day period, a shareholder may increase his or her holdings
to $100 or more, and thereby avoid an involuntary redemption.
When redemption requests are received by Firstar Mutual Fund Services,
LLC, by 4:00 P.M. New York time on any day during which the net asset value is
determined (see "Pricing of Fund Shares"), the redemption will be effective on
such day, and payment will be made on the next business day based on the net
asset value next determined after receipt of the redemption instruction. If a
redemption notice is received after 4:00 P.M. New York time, the redemption will
be effective on the next business day, and payment will be made thereafter on
the second business day. In the event you wish to liquidate your holdings, you
will be entitled to all dividends declared through the date of redemption. At
times, the Fund may be requested to redeem shares for which it has not yet
received good payment. The Fund may delay, or cause to be delayed, the mailing
of a redemption check until such time as it has assured itself that good payment
has been received from the purchase of such shares, which may take up to 15 days
from the purchase date. In the case of payment by check, the determination of
whether the check has been paid by the paying institution generally takes up to
seven days, but may take longer. You may avoid this delay by purchasing shares
by wire or by using a certified or official bank check drawn on a U.S. bank. In
the event of delays in payment of redemption proceeds, the Fund will take all
available steps to expedite collection of the investment check. If shares were
purchased by check, you may write checks against such shares only after 15 days
from the date the purchase was executed. Shareholders who draw against shares
purchased fewer than 15 days from the date of original purchase, will be charged
usual and customary bank fees. The Fund reserves the right to suspend the right
of redemption or postpone the day of payment (1) during any period when the New
York Stock Exchange is closed (other than customary weekend and holiday
closings), (2) when the trading markets normally used by the Fund are restricted
or an emergency exists as determined by the Securities and Exchange Commission
(the "Commission") as to make the disposal of the Fund's investments or
determination of its net asset value unreasonably impracticable, or (3) for such
other periods as the Commission by order may permit to protect the Fund's
shareholders.
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<PAGE>
You may realize a taxable capital gain or loss when shares are redeemed,
depending on their net asset value. On all redemption requests (including
redemption checks) for joint accounts, the signatures of all joint owners are
required unless shareholders have designated otherwise.
Check Redemption Privilege
You may request that the Fund provide you with redemption checks
("Checks") drawn on the Fund's account by either (i) completing the appropriate
section of the application order form or (ii) subsequent written request to the
Fund. These Checks will be sent only to the individuals in whose name the
account is registered and only to the address of record with the Fund. You may
use the Checks in any lawful manner and make them payable to the order of any
person or company in an amount of $100 or more. Dividends continue to be earned
until the Check clears the Fund account and is paid by Firstar Mutual Fund
Services, LLC. The Fund may delay, or cause to be delayed, payment of redemption
proceeds until such time as it or Firstar Mutual Fund Services, LLC has assured
itself that good payment has been collected for the purchase of such shares. In
addition, the Fund reserves the right not to honor Check redemption requests
received by Firstar Mutual Fund Services, LLC within 15 days from the purchase
date if the shares to be redeemed have been purchased by check. You will be
subject to the same rules and regulations that the Bank applies to checking
accounts in general. There is currently no charge to you for the use of the
Checks, except that Firstar Mutual Fund Services, LLC, imposes a $20 charge if
an investor requests that it stop payment of a Check or if it cannot honor a
Check due to insufficient funds or other valid reasons.
When a Check is presented for payment, Firstar Mutual Fund Services,
LLC, as your agent, will cause the Fund to redeem a sufficient number of shares
in your account to cover the amount of the Check. Shares for which stock
certificates have been issued may not be redeemed by Check. Since the net asset
value of the Fund's shares changes daily, you should make certain that the total
value of your account is sufficient to cover the amount of your Check.
Otherwise, the Check will be returned marked insufficient funds. Checks may not
be used to close an account. The Check Redemption Privilege may be modified or
terminated by either the Fund or Firstar Mutual Fund Services, LLC, upon 60
days' written notice to shareholders.
Telephone Redemption Privilege
You may direct redemptions of up to $150,000 worth of shares per day by
telephone either (i) by completing the appropriate section of the application
form or (ii) by later signature guaranteed* written request. Telephone calls
will be recorded. Firstar Mutual Fund Services, LLC, will act on instructions
that it reasonably believes to be genuine. The proceeds of the redemption will
only be mailed to the address of record with the Fund, or a preauthorized bank
address. (Available only if established on the account application and if there
has been no change of address by telephone within the preceding 30 days.) The
Fund reserves the right to refuse a telephone redemption and may limit the
amount and frequency. The Telephone Redemption Privilege may be modified or
terminated at any time by either the Fund or Firstar Mutual Fund Services, LLC.
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Neither the Fund nor its transfer agent will be liable for following
instructions that they reasonably believe to be genuine. It is the Fund's policy
to provide that a written confirmation statement of all telephone call
transactions be mailed to shareholders at their address of record within 3
business days after the telephone call transaction. You should verify the
accuracy of telephone call transactions immediately upon receipt of your
confirmation statement. As a result of this policy, you will bear the risk of
loss in the event of a fraudulent telephone exchange or redemption transaction.
Expedited Redemption Privilege
Requests for expedited redemption may be made by letter or telephone for
amounts equal to or exceeding $5,000, if you have previously filed with Firstar
Mutual Fund Services, LLC, a signed telephone authorization form available from
the Fund, or completed the appropriate Section of the Application Form. If the
request is for more than $5,000, proceeds of the expedited redemption will be
transferred by Federal Reserve wire to the commercial bank specified in the
authorization form or to a correspondent bank if your bank is not a member of
the Federal Reserve System. Firstar Mutual Fund Services, LLC, charges a $12
service fee for each payment of redemption proceeds made by Federal wire. This
fee will be deducted from your account. If the correspondent bank fails to
notify your bank immediately, there could be a delay in crediting the funds to
your bank account. Proceeds of less than $5,000 will be mailed to your address.
The Fund reserves the right to refuse an expedited redemption and may limit the
amount and frequency.
This privilege may be modified or terminated at any time without prior
notice by either the Fund or Firstar Mutual Fund Services, LLC. Any time funds
are wired by the Bank, the proceeds of redemption may be subject to the
deduction of the Bank's usual and customary charges for wiring funds.
Requests by letter should be addressed to Cornerstone Family of Funds,
c/o Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701.
In order to qualify to use the Expedited Redemption Privilege, you must
complete the appropriate portion of the new account application and your initial
payment for purchase of the Fund's shares must be drawn on, and redemption
proceeds paid to, the same bank and account as designated on the application.
In order to change the commercial bank or account designated to receive
the redemption proceeds, you must send a written request to Cornerstone Family
of Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI
53201-0701. Such request must be signed by each shareholder with each signature
guaranteed by an eligible guarantor (see above).
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*A signature guarantee must be from an eligible guarantor institution approved
by Cornerstone. Signature guarantees in proper form generally will be accepted
from domestic banks, a member of a national securities exchange, credit unions
and savings associations, as well as from participants in the Securities
Transfer Agents Medallion Program ("STAMP"). If you have any questions with
respect to signature guarantees, please call the transfer agent at 1-800-
322-6864.
Regular Redemption Procedure
You may redeem your shares by sending a written request, together with
duly endorsed stock certificates, if any, to Cornerstone Family of Funds, c/o
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. All
certificates and all written requests for redemption must be endorsed by you.
For redemptions exceeding $50,000 (and for all written redemption requests,
regardless of amount, made within 30 days following any change in account
registration), your endorsement must be signature guaranteed, as described
above. Firstar Mutual Fund Services, LLC, may, at its option, request further
documentation from corporations, executors, administrators, trustees or
guardians. If requested, redemption proceeds of more than $5,000 will be wired
into any member bank of the Federal Reserve System. However, such transaction
may be subject to a deduction of the Bank's usual and customary charges for
wiring funds. The Fund will accept other suitable verification arrangements for
foreign investors. The U.S. Postal Service and other independent delivery
services are not agents of the Fund. Therefore, deposit of redemption requests
in the mail or with such services does not constitute receipt by Firstar Mutual
Fund Services, LLC, or the Fund. Please do not mail letters by overnight courier
to the post office box address. Redemption requests sent by overnight or express
mail should be directed to: Cornerstone Family of Funds, c/o Firstar Mutual Fund
Services, Third Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202.
Redemptions by mail will not become effective until all documents in the form
required have been received by Firstar Mutual Fund Services, LLC.
Requests for redemption subject to any special condition, or which
specify an effective date other than as provided herein, cannot be accepted and
will be returned to you.
Tax Sheltered Retirement Plans
We offer a Prototype Pension and Profit Sharing Plan, including Keogh
plans, IRAs, SEP-IRA Plans, IRA Rollover Accounts and 403(b) plans. Check
redemption and telephone redemption privileges are not available to Retirement
account holders. Plan support services are available by calling us at 1-800-
322-6864.
How to Transfer Shares
Shares may be transferred from one person to another by sending to
Firstar Mutual Fund Services, LLC, a written request for such transfer, signed
by the registered owner(s) exactly as the account is registered with each
signature guaranteed as described above, with (i) the name(s) of the new
registered owner(s), (ii) the social security number or taxpayer identification
number
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for the new registration, and (iii) the redemption option elected. If the shares
being transferred are represented by certificates in the possession of the
investor, such certificates, properly signed with signature guarantees, must
also be forwarded to Firstar Mutual Fund Services, LLC. In addition, Firstar
Mutual Fund Services, LLC, reserves the right to request any additional
documents that may be required for transfer by corporations, executors,
administrators, trustees, and guardians.
Reopening an Account
You may reopen an account with a minimum investment of $100 or more
without filing a new application form during the year in which your account was
closed or during the following calendar year, provided that the information on
your original form is still applicable. The Fund may require you to file a
statement that all information on the original account application form remains
applicable.
DISTRIBUTION AGREEMENT AND MARKETING PLAN
Distribution Agreement. Cresvale International (US) LLC, acts as
principal distributor of Fund shares. The Distributor has the exclusive right to
distribute Fund shares directly or through other broker-dealers. The Distributor
is reimbursed for distribution expenses pursuant to a Distribution and Marketing
Plan (the "Marketing Plan"), adopted pursuant to Rule 12b-1 under the 1940 Act,
which allows it to finance activities that are primarily intended to result in
the sale of the Fund's shares, including but not limited to advertising,
commissions, and salaries paid to registered representatives and marketing
personnel of the Distributor, printing of prospectuses and reports for other
than existing shareholders, preparation and distribution of advertising material
and sales literature, and payments to dealers, banks and shareholder servicing
agents who enter into agreements with the Manager or the Distributor for
providing administrative and account maintenance services. Such services may
include, without limitation, some or all of the following: answering Fund
inquiries; assistance in changing dividend options, account registration and
addresses; performance of sub-accounting; maintenance of shareholder accounts
and records; assistance in processing purchase and redemption transactions;
providing periodic statements showing a shareholder's account balance and the
integration of such statements with those of other transactions and balances in
the shareholder's other accounts serviced by the Manager or the Distributor, if
any; and such other information and services as the Fund reasonably may request,
to the extent the Manager or Distributor is permitted by applicable statute,
rule or regulation to provide such information or services.
Marketing Plan. Pursuant to the Marketing Plan, the Fund may incur
distribution expenses not to exceed .25% per annum of its average daily net
assets. The Marketing Plan will only permit payments for expenses actually
incurred by the Distributor or the Manager. The Marketing Plan allows for the
carry-over of expenses from year to year and, if the Marketing Plan is
terminated or not continued in accordance with its terms, the Fund's obligation
to make payments to the Distributor (or Manager) pursuant to the Plan will cease
and the Fund will not
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be required to make any payments past the date the Marketing Plan terminates.
The Fund records all accruals made under the Marketing Plan as expenses in the
calculation of its net investment income. The Fund may not accrue the amount of
distribution expenses incurred by the Distributor that may be paid pursuant to
the Marketing Plan in future periods as a liability, because it is believed that
the standards for the accrual of a liability under generally accepted accounting
principles will not have been satisfied. Such distribution expenses are recorded
as an expense in future periods as they are accrued. Certain overhead expenses
of the Distributor are also provided for under the Marketing Plan.
DIVIDENDS AND TAX MATTERS
The Fund intends to qualify as a regulated investment company, which
means that it pays no federal income tax on the earnings or capital gains it
distributes to its shareholders.
o Dividends from the Fund that are attributable to interest on certain
U.S. Government obligations may be exempt from certain state and local
income taxes. The extent to which ordinary dividends are attributable
to U.S. Government obligations will be provided on the tax statements
you receive from the Fund.
o Ordinary dividends from the Fund are taxable as ordinary income and
dividends from the Fund's long-term capital gains are taxable as
capital gain.
o Dividends are treated in the same manner for federal income tax
purposes whether you receive them in the form of cash or additional
shares. They may also be subject to state and local taxes.
o Certain dividends paid to you in January will be taxable as if they
had been paid the previous December.
o We will mail you tax statements annually showing the amounts and tax
status of the distributions you received.
o When you sell (redeem) or exchange shares of a Fund, you must
recognize any gain or loss.
o Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
***We provide this tax information for your general information. You should
consult your own tax adviser about the tax consequences of investing in a
Fund.***
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FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUND, THE FOLLOWING DOCUMENTS ARE
AVAILABLE FREE UPON REQUEST:
Annual/Semi-Annual Reports: contain performance data and information on
portfolio holdings for the Fund's most recently completed fiscal year or half
year and, on an annual basis, a statement from portfolio management and the
auditor's report.
Statement of Additional Information (SAI): contains more detailed information
about the Fund's policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Fund may be
obtained without charge by contacting:
Cornerstone Fixed Income Funds
Cornerstone U.S. Government Strategic Income Funds
67 Wall Street
New York NY 10005
1-800- 322-6864
Information about the Fund (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C. 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800-SEC- 0330. Reports and other information
about the Fund may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
===============================================================================
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING
CHANGES TO EXISTING ACCOUNTS, PURCHASING, EXCHANGING OR
REDEEMING SHARES, OR OTHER INVESTOR SERVICES, PLEASE CALL:
1-800-(322- 6864)
Monday through Friday
9:00 a.m. to 8:00 p.m. (EST)
===============================================================================
The Fund's Investment Company Act File number is 811-5063.
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Cornerstone Fixed Income Funds
Cornerstone Tax-Free Money Market Series
This Prospectus pertains to the Cornerstone Tax-Free Money Market
Series ("Money Market Series") of the Cornerstone Fixed Income Funds.
Prospectus
April 30, 1999
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
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Risk/Return Summary............................................................
Financial Highlights...........................................................
Investment Objective Principal Investment Strategies.........................
Principal Risks...............................................................
Year 2000......................................................................
Management.....................................................................
Pricing of Fund Shares.........................................................
Purchase of Shares.............................................................
Redemption of Shares...........................................................
Distribution Expenses.........................................................
Dividends and Tax Matters......................................................
- -------------------------------------------------------------------------------
- 2 -
<PAGE>
RISK/RETURN SUMMARY
Investment Objective and Principal Strategy Overview
The Money Market Series is a money market fund that seeks to provide current
income that is excluded from federal income tax while preserving capital and
liquidity. The Money Market Series will attempt to achieve its objective
investing at least 80% of its total assets in high quality municipal securities
the interest from which is excluded from federal income tax. The Money Market
Series will also invest in variable rate securities and enter into repurchase
agreements.
Principal Risks of Investing in the Money Market Series
There is no guarantee that the Money Market Series will achieve its stated
objective. In fact, you could lose money by investing in the Money Market
Series. In making your investment decision, you should understand that the Money
Market Series' net asset value (NAV), yield, and total return may be adversely
affected by any or all of the following factors:
o Rising interest rates cause the prices of debt securities to decrease and
falling rates cause the prices of debt securities to increase. Securities
with longer maturities can be more sensitive to interest rate changes. In
effect, the longer the maturity of a security, the greater the impact a
change in interest rates could have on the security's price.
o Certain issuers of securities may fail to make timely payments of interest
and principal on the Fund's investments.
o It is expected that a substantial portion of the assets of the Fund will
be derived from professional money managers and investors who intend to
invest in the Fund as part of an asset-allocation or market-timing
investment strategy. These investors are likely to redeem or exchange their
Fund shares frequently to take advantage of anticipated changes in market
conditions. The strategies employed by investors in the Fund may result in
considerable assets moving in and out of the Fund. Consequently, the Fund
expects that it will generally experience significant portfolio turnover,
which will likely cause higher expenses and additional costs and may
adversely affect the ability of the Fund to meet its investment objective.
o AN INVESTMENT IN THE MONEY MARKET SERIES IS NOT INSURED OR GUARANTEED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH THE MONEY MARKET SERIES SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE MONEY MARKET SERIES.
- 3 -
<PAGE>
Summary of Past Performance
The bar chart and table shown below indicate the risks of investing in the Money
Market Series. The bar chart shows the performance of the Money Market Series
for each of the last 10 calendar years. The table shows how the Money Market
Series' average annual return for 1, 5, and 10 years compare with those of a
broad measure of market performance.
Bar Chart
The bar chart illustrates how the Money Market Series' returns vary from year to
year. As always, past performance is no way to predict future performance.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
==== ===== ===== ===== ===== ===== ===== ===== ===== =====
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.77% 2.19% 2.28% 2.60% 1.69% 1.40% 2.79% 4.86% 5.14%
5.45%
</TABLE>
The Money Market Series' best performance for one quarter was 1.42% for the
quarter ended 6/30/89. The Money Market Series' worst performance for one
quarter was 0.30% for the quarter ended 3/31/94.
Average Annual Total Returns Table
The table below shows the Money Market Series' average annual total returns for
the 1, 5, and 10 year periods of the Money Market Series' existence in
comparison to the Lipper Tax-Exempt Money Market Average for the same periods.
The table provides some indication of the risks of investing in the Money Market
Series by showing how the Money Market Series' average annual total returns for
the periods noted compare with that of a broad measure of market performance. As
always, past performance is no way to predict future performance.
<TABLE>
<CAPTION>
Average Annual Returns as One Year 5 Years 10 Years
of 12/31/98
<S> <C> <C> <C>
Cornerstone Tax-Free Money
Market Series 1.77% 2.07% 2.99%
Lipper Tax-Exempt
Money Market Average 2.92% 2.92% 3.46%
</TABLE>
- 4 -
<PAGE>
The current seven-day yield may be obtained by calling 1-800-322-6864.
Fees and Expenses of the Money Market Series
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Money Market Series.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases
<TABLE>
<S> <C>
(as percentage of offering price)........................................................ None
Maximum Deferred Sales Charge (Load)..................................................... None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends
and other Distributions................................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable)....................... $12*
Exchange Fee............................................................................. None
Maximum Account Fee...................................................................... None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees......................................................................... 0.50%
Distribution [and/or Service] (12b-1) Fees.............................................. 0.50%
Other Expenses...........................................................................0.87%
Total Annual Fund Operating Expenses.................................................... 1.87%
</TABLE>
* The Transfer Agent charges a $12 service fee each payment or redemption
proceeds made by wire.
Example: This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$190 $588 $1,011 $2,190
- 5 -
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by McGladrey & Pullen, LLP, whose report, along
with the Fund's financial statements, are included in the Annual Report which is
available upon request:
<TABLE>
<CAPTION>
Year Ended December 31,
1998* 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the period)
Net Asset Value, Beginning of Year.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------ ------- ------
Income from investment operations:
Net investment income........................... 0.02 0.02 0.02 0.03 0.02
------- ------- ------ ------- ------
Less distributions:
Dividends from net investment income............ (0.02) (0.02) (0.02) (0.03) (0.02)
------- ------- ------ ------- ------
Net Asset Value, End of Year.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------ ------- ------
Total Return.................................... 1.77% 2.19% 2.28% 2.60% 1.69%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (000 omitted)........... $59,296 $13,263 $4,621 $11,251 $9,004
Ratios to Average Net Assets
Expenses.................................... 1.87%++ 1.52%+ ++ 1.54%++ 1.53%++ 0.91%+
Net investment income....................... 1.46% 2.10% 2.04% 2.43% 1.55%
</TABLE>
+ These ratios are after expense reimbursement of .02% and .44% for each of
the years ended December 31, 1997 and 1994, respectively.
++ These ratios would have been 1.77%, 1.44%, 1.40% and 1.35% net of expenses
paid indirectly of .10%, .08%, .14% and .18% for the years ended December
31, 1998, 1997, 1996 and 1995, respectively.
* See "Management" for changes in investment adviser in 1998.
- 6 -
<PAGE>
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The investment objective of the Money Market Series of the Cornerstone
Fixed Income Funds is to provide as high a level of current income excluded from
federal income tax as is consistent with the preservation of capital and
liquidity. The Money Market Series will seek to achieve its objective by
investing, under normal circumstances, at least 80% of its assets in a managed
portfolio of high-quality debt securities, including bonds other than private
activity bonds issued after August 7, 1986, issued by or on behalf of states,
territories, and possessions of the United States, the District of Columbia, and
their political subdivisions, agencies, and instrumentalities, the interest from
which is exempt from federal income tax (municipal bonds). The Money Market
Series may invest in obligations issued or guaranteed by the U.S. Government
without any limitation.
The Money Market Series invests only in U.S. dollar-denominated
securities which are rated in one of the two highest rating categories for debt
obligations by Standard & Poor's Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's"), two nationally recognized statistical rating
organizations ("NRSROs") (or one NRSRO if the instrument was rated by only one
such organization) or, if unrated, are of comparable quality as determined in
accordance with procedures established by the Board of Trustees of the Fund.
Under normal market circumstances the Money Market Series will invest at
least 80% of its assets in high-quality municipal bonds rated AA, SP-1, or
higher by S&P or MIG-1 or Prime-1 by Moody's or are unrated but judged by the
Fund's investment adviser to be of at least comparable quality in accordance
with procedures established by the Board of Trustees of the Fund. At least 80%
of the Money Market Series' assets will be invested in obligations with
remaining maturities of 13 months or less. Accordingly, the securities in which
the Money Market Series will invest may not yield as high a level of current
income as longer term or lower grade securities that generally have less
liquidity and greater fluctuation in value.
Municipal bonds include debt obligations issued to obtain funds for
various public purposes, including construction of public facilities, repayment
of outstanding obligations, and payment of general operating expenses. The Money
Market Series will hold two categories of municipal bonds: general obligation
bonds, which are backed by the faith, credit, and taxing power of the issuing
municipality and considered to be the safest type of municipal bond; and revenue
bonds, which are backed by the revenues of a specific project or facility or in
some cases, by the proceeds of special excise taxes, user fees, or other
specific revenue sources. Certain revenue bonds may be issued to obtain funding
for privately operated facilities. These bonds, known as private activity bonds,
are backed by the credit and security of a private user and therefore have more
potential risk.
- 7 -
<PAGE>
Repurchase Agreements
The Money Market Series may enter into repurchase agreements with
commercial banks, brokers, or dealers pursuant to which the Money Market Series
acquires a money market instrument (generally a U.S. Government obligation
qualifying for purchase by the Money Market Series) that is subject to resale by
the Money Market Series on a specified date (generally within one week) at a
specified price (which price reflects an agreed-on interest rate effective for
the period of time the Money Market Series holds the investment and is unrelated
to the interest rate on the instrument). As a matter of fundamental policy, the
Money Market Series will not enter into repurchase agreements of more than one
week in length if as a result, more than 10% of the total assets of the Money
Market Series would be invested in such agreements or other restricted or
illiquid securities. The Money Market Series enters into repurchase agreements
for the purpose of making short-term cash investments. Risks involved in
entering into repurchase agreements include the possibility of default or
bankruptcy by the other party to the agreement. The Money Market Series'
investment adviser will monitor the creditworthiness of parties with which it
enters into repurchase agreements.
Variable Rate Securities
The Money Market Series may invest in variable rate municipal bonds with
or without demand features. Interest rates on such securities fluctuate based on
changes in specified market rates, such as the prime rate, or are adjusted at
predetermined intervals, at least every six months. A demand feature allows the
Money Market Series to demand prepayment of the principal amount of the
municipal bond prior to its maturity. Some demand obligations are guaranteed by
banks or other financial institutions, which may enhance the quality of the
underlying security.
Temporary Defensive Investments
The Money Market Series anticipates that it may, from time to time, and
in response to adverse market conditions, invest up to 50% of its assets, on a
temporary basis, in short-term fixed-income obligations whose interest is
subject to federal income tax. Such investments are made only under conditions
that in the opinion of the investment adviser of the Money Market Series make
such investments advisable. The Money Market Series invests in only those
taxable obligations that are (1) rated AA or higher by S&P or Aa or higher by
Moody's or unrated but judged by its investment adviser to be of at least
comparable quality, (2) obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities, or (3) obligations of banks (including
certificates of deposit, bankers' acceptances, and repurchase agreements) with
at least $1,000,000,000 of assets .
- 8 -
<PAGE>
Portfolio Turnover
Because the Money Market Series will invest in municipal bonds maturing
in not more than one year, portfolio turnover will be high. In addition, the
Money Market Series will attempt to increase yields by trading securities to
take advantage of short-term interest rate disparities. A high turnover rate
increases transaction costs and the possibility of taxable short-term gains, and
affects performance. Therefore the Money Market Series will carefully weigh the
added cost of short-term investments against anticipated gains. If the Money
Market Series disposes of a municipal bond prior to maturity, it may realize a
loss or a gain. The value of the Money Market Series will generally vary
inversely with the movement of interest rates.
PRINCIPAL RISKS
Interest Rate Risk
Rising interest rates cause the prices of debt securities to decrease
and falling rates cause the prices of debt securities to increase. Securities
with longer maturities can be more sensitive to interest rate changes. In
effect, the longer the maturity of a security, the greater the impact a change
in interest rates could have on the security's price. Short-term (less than one
year) and long-term (greater than one year) interest rates do not necessarily
move in the same direction or the same amount. Short term securities tend to
react to changes in short-term interest rates, and long-term securities tend to
react to changes in long-term interest rates.
Credit Risk
Certain issuers of securities may fail to make timely payments of
interest and principal on the Money Market Series' investments. Such failure may
arise from changes in the financial condition of an issuer, changes in specific
economic or political conditions affecting an issuer, and changes in general
economic or political conditions. Investment grade debt securities tend to be
less sensitive to these changes than debt securities rated below investment
grade. There is, however, no guarantee that a high credit rating will insure
timely payments from the issuer.
Market-Timing
It is expected that a substantial portion of the assets of the Money
Market Series will be derived from professional money managers and investors who
intend to invest in the Money Market Series as part of an asset-allocation or
market-timing investment strategy. These investors are likely to redeem or
exchange their Money Market Series shares frequently to take advantage of
anticipated changes in market conditions. The strategies employed by investors
in the Money Market Series may result in considerable assets moving in and out
of the Fund. Consequently, the Manager expects that the Money Market Series will
generally experience significant portfolio turnover, which will likely cause
higher expenses and additional costs and affect the Money Market Series'
performance.
- 9 -
<PAGE>
YEAR 2000
The Fund's securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian or transfer agent were unable to recognize dates after
1999. The adviser and other service providers have told the Fund that they are
taking action to prevent, and do not expect the funds to suffer from,
significant year 2000 problems.
In addition, problems processing year 2000 data could also have adverse
effects on the computer systems of the issuers or entities that comprise the
Fund's portfolio securities. If such issuers or entities are unable to properly
address the year 2000 problem, then it could have an adverse effect on the
operations of such issuer, which, in turn, would result in a drop in market
value for the securities and a loss for the Fund. This problem may exist to a
greater degree with respect to investments by the Fund in the securities of
non-U.S. issuers. Generally, non-U.S. issuers have not devoted the resources
necessary to properly address the year 2000 problem. Therefore, the problems
noted above for domestic issuers of securities held by the Fund is likely to be
exacerbated for the securities of non-U.S. issuers.
MANAGEMENT
The Fund is managed by Cornerstone Equity Advisors, Inc. ("Cornerstone"
or the "Manager"). Cornerstone's principal business address is 67 Wall Street,
New York, New York 10005. Cornerstone is an investment adviser registered with
the Securities and Exchange Commission. Prior to its association with the Fund,
Cornerstone managed approximately $20 million of assets for private and
institutional accounts. As investment manager, Cornerstone manages and
supervises the Money Market Series' investment portfolio and directs the
purchase and sales of its investment securities.
Cornerstone received advisory fees and reimbursements for its costs
totaling $46,064, which amounted to 0.50% of the Money Market Series' average
net assets for the period from September 29, 1998 to December 31, 1998. During
the year 1998, Fundamental Portfolio Advisors, Inc. served as investment adviser
to the Money Market Series (from January 1, to May 31, 1998), and Tocqueville
Asset Management L.P. served as interim investment adviser to the Money Market
Series (from June 1, to September 28, 1998) each at the same fee rate applicable
to Cornerstone's current and interim advisory contracts.
- 10 -
<PAGE>
The Fund's portfolio manager is Mr. Stephen C. Leslie, Chairman and
Chief Executive Officer of Cornerstone. Mr. Leslie has been associated with
Cornerstone since its inception in 1997. Dating back to 1994, Mr. Leslie has
held the following positions: he was a partner of Wall Street Capital Group, a
merchant bank; he was a partner of Wall Street Investment Corp., a
broker/dealer; he was a partner of Tucker Anthony Securities, a broker/dealer;
and he was a senior vice-president of Pryor McClendon Counts & Co., a
broker/dealer.
PRICING OF FUND SHARES
The price of Money Market Series shares is based on the Fund's net asset
value. Each share of the Money Market Series is sold at its net asset value next
determined after a purchase order becomes effective. It is the intention of the
Money Market Series to maintain a per share net asset value of $1, although no
such net asset value can be guaranteed. The net asset value per share of the
Money Market Series is determined as of the close of trading on the New York
Stock Exchange (currently 4:00 P.M. New York time) on each day that both the New
York Stock Exchange and the Fund's custodian bank are open for business. The net
asset value per share of the Money Market Series is also determined on any other
day that the level of trading in its portfolio securities is sufficiently high
that the current net asset value per share might be materially affected by
changes in the value of its portfolio securities. On any day on which no
purchase orders for the shares of the Money Market Series become effective and
no shares are tendered for redemption, the net asset value per share will not be
determined. The Money Market Series shares will not be priced on the following
days when the New York Stock Exchange is closed: New Year's Day, Dr. Martin
Luther King Jr.'s Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. The net asset value per
share of the Money Market Series is computed by taking the amount of the value
of all of its assets, less its liabilities, and dividing it by the number of
outstanding shares. For purposes of determining net asset value, expenses of the
Money Market Series are accrued daily and taken into account.
The portfolio securities of the Money Market Series are valued on an
amortized cost basis. Under this valuation method, a portfolio instrument is
valued at cost and any premium or discount is amortized on a constant basis
until maturity. Other assets are valued at fair value as determined in good
faith by persons designated by the Fund's Trustees using methods determined by
the Trustees.
PURCHASES OF SHARES
Shares of the Money Market Series may be purchased either directly from
the Money Market Series or through securities dealers, banks, or other financial
institutions. The Money Market Series has a minimum initial purchase requirement
of $1,000 and a minimum subsequent
- 11 -
<PAGE>
purchase requirement of $100. Subsequent purchases are made in the same manner
as initial purchases.
Investors can purchase shares without a load if they purchase the shares
directly from the Money Market Series. However, investors may be charged a fee
if they purchase shares through securities dealers, banks, or other financial
institutions. Investors opening a new account for the Money Market Series must
complete and submit a purchase application along with payment of the purchase
price for their initial investment. Investors purchasing additional shares of
the Money Market Series should include their account number along with payment
of the purchase price for additional shares being purchased. Investors may
re-open an account with a minimum investment of $100 and without filing a
purchase application during the year in which the account was closed or during
the following calendar year if the information on the original purchase
application is still applicable. The Money Market Series may require the filing
of a statement that all information on the original purchase application remains
applicable.
For customers of certain financial institutions who offer the service,
investors may have their "free-credit" cash balances automatically invested in
shares of the Money Market Series. These investments are not subject to the
minimum purchase requirements described above.
A purchase order becomes effective immediately on receipt by Firstar
Mutual Fund Services, LLC, as agent for the Money Market Series, if it is
received before 4:00 P.M. (Eastern time) on any business day. After a purchase
order becomes effective, confirmation of the purchase is sent to the investor,
and the purchase is credited to the investor's account. The Fund, or any series
thereof, reserves the right to reject any purchase order.
The Cornerstone Automatic Investment Program offers a simple way to
maintain a regular investment program. The Fund has waived the initial
investment minimum for you when you open a new account and invest $100 or more
per month through the Cornerstone Automatic Investment Program. The Program
permits an existing shareholder to purchase additional shares of any Fund
(minimum $50 per transaction) at regular intervals. Under the Automatic
Investment Program, shares are purchased by transferring funds from a
shareholder's checking or bank money market account in an amount of $50 or more
designated by the shareholder. At the shareholder's option, the account
designated will be debited and shares will be purchased on the date selected by
the shareholder. There must be a minimum of seven days between automatic
purchases. If the date selected by the shareholder is not a business day, funds
will be transferred the next business day thereafter. Only an account maintained
at a domestic financial institution which is an Automated Clearing House member
may be so designated. To establish an Automatic Investment Account, complete and
sign the appropriate section of the Purchase Application and send it to the
Transfer Agent. Shareholders may cancel this privilege or change the amount of
purchase at any time by calling 1-800-322-6864 or by mailing written
notification to: Cornerstone Family of Funds, c/o Firstar Mutual Fund Services,
LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The change will be effective five
business days following receipt of notification by the Transfer Agent. A Fund
may modify or terminate this privilege at
- 12 -
<PAGE>
any time or charge a service fee, although no such fee currently is
contemplated. However, a $20 fee will be imposed by Firstar Mutual Fund
Services, LLC, if sufficient funds are not available in the shareholder's
account at the time of the automatic transaction.
Methods of Payment
Payment by Wire: An expeditious method of investing in the Fund is
through the transmittal of Federal funds by bank wire to Firstar Bank Milwaukee,
N.A. (the "Bank"). Federal funds transmitted by bank wire to the Bank and
received by it prior to 4:00 P.M. New York time are priced at the net asset
value determined on such day. Federal funds received after 4:00 P.M. New York
time will be available on the next business day. Funds other than Federal funds
transmitted by bank wire may or may not be converted into Federal funds on the
day received by the Bank depending upon the time the funds are received and the
bank wiring the funds. We encourage you to make payment by wire in Federal
funds. The Fund will not be responsible for delays in the wiring system.
To purchase shares by wiring funds, instruct a commercial bank to wire
your money to:
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ABA # 075000022
Credit: Firstar Mutual Fund Services, LLC
Account # 112952137
Further credit: The Cornerstone Family of Funds
Name of shareholder and account number (if known)
Instructions for new accounts should specify the name, address, and social
security number of each person in whose name the shares are to be registered and
the name of the Fund. If you are an existing shareholder, you need only furnish
your account number and the name of the Fund.
Failure to submit required information may delay investment.
Payment by Mail: Purchase orders for which remittance is to be made by
check may be submitted directly by mail to Cornerstone Family of Funds, c/o
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701. The
U.S. Postal Service and other independent delivery services are not agents of
the Fund. Therefore, deposit of purchase requests in the mail or with such
services does not constitute receipt by Firstar Mutual Fund Services, LLC or the
Fund. Please do not mail letters by overnight courier to the post office box
address. Purchase requests sent by overnight or express mail should be directed
to: Cornerstone Family of Funds, c/o Firstar Mutual Fund Services, LLC, Third
Floor, 615 East Michigan Street,
- 13 -
<PAGE>
Milwaukee, Wisconsin 53202. Checks should be made payable to Cornerstone Family
of Funds.
When opening a new account, you must enclose a completed purchase
application. If you are an existing shareholder, you should enclose the
detachable stub from an account statement you have received or otherwise
indicate your account number and the name of the Fund.
Personal Delivery: For personal delivery instructions, please call the
Fund at 1-800-322-6864.
Exchange for Municipal Securities: If you own municipal obligations
meeting the criteria for investment by the Fund, you may exchange such
securities for shares of the Fund. All such exchanges are discretionary with the
Fund. If you desire to make such an exchange, you should contact the Fund prior
to delivering any securities in order to establish that the securities are
acceptable for exchange, to determine what transaction charges, if any, may be
imposed and to obtain delivery instructions for such securities. The value of
the securities being exchanged will be determined in the same manner that the
value of the Fund's portfolio securities is determined; the specific method of
determining the value will be provided to you on request. The Fund reserves the
right to refuse any such exchange, even if the securities offered by an investor
meet the general investment criteria of the Fund. A capital gain or loss for
Federal income tax purposes may be realized by the investor following the
exchange. Maturing bonds or detached coupons submitted within five (5) business
days of the payment date are credited on the payment date.
Exchange Privilege. For your convenience, the Exchange Privilege permits
you to purchase shares in any of the other funds for which Fund management acts
as the investment manager in exchange for shares of the Fund at respective net
asset values per share. Exchange instructions may be given in writing to Firstar
Mutual Fund Services, LLC, Agent, P.O. Box 701, Milwaukee, WI 53201-0701, the
Fund's transfer agent, and must specify the number of shares of the Fund to be
exchanged and the fund into which the exchange is being made. The telephone
exchange privilege will be made available to shareholders automatically. You may
telephone exchange instructions by calling Firstar Mutual Fund Services, LLC at
1-800-322-6864. Before any exchange, you must obtain, and should review, a copy
of the current prospectus of the fund into which your exchange is being made.
Prospectuses may be obtained by calling or writing the Fund. See also "Telephone
Redemption Privilege" for a discussion of the Fund's policy with respect to
losses resulting from unauthorized telephone transactions.
The Exchange Privilege is only available in those states where such
exchanges can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers. Prior to effecting an
exchange, you should consider the investment policies of the fund in which you
are seeking to invest. Any exchange of shares is, in effect, a redemption of
shares in one fund and a purchase of the other fund. You may recognize a capital
gain or loss for federal income tax purposes in connection with an exchange. The
Exchange
- 14 -
<PAGE>
Privilege may be modified or terminated by the Fund after giving 60 days' prior
notice. The Fund reserves the right to reject any specific order, including
purchases by exchange.
A Completed Purchase Application must be received by the Transfer Agent
before the Exchange, Check Redemption, Telephone Redemption or Expedited
Redemption Privileges may be used.
REDEMPTIONS
Each investor in the Money Market Series has the right to cause the
Money Market Series to redeem his or her shares, by making a request to Firstar
Mutual Fund Services, LLC, in accordance with the procedures of either the
regular redemption procedure, the telephone redemption privilege, the expedited
redemption privilege, or the check redemption privilege, as described in the
following paragraphs. If Firstar Mutual Fund Services, LLC, receives a
redemption request before the close of trading on any day the New York Stock
Exchange is open for trading, the redemption will become effective on that day
and be made at the net asset value per share of the Money Market Series, as
determined at the close of trading on that day, and payment will be made on the
following business day. If Firstar Mutual Fund Services, LLC, receives a
redemption request following the close of trading on the New York Stock
Exchange,
or on any day the New York Stock Exchange is not open for business, the
redemption will become effective on the next day the New York Stock Exchange is
open for trading and be made at the net asset value per share of the Money
Market Series, as determined at the close of trading on that day, and payment
will be made on the following business day. Investors are entitled to receive
all dividends on shares being redeemed that are declared on or before the
effective date of the redemption of such shares. The net asset value per share
of the Money Market Series received by an investor on redeeming shares may be
more or less than the purchase price per share paid by such investor, depending
on the market value of the portfolio of the Money Market Series at the time of
redemption.
Regular Redemption Procedure
Investors may redeem their shares by sending a written redemption
request to Firstar Mutual Fund Services, LLC, which request must specify the
number of shares to be redeemed and be signed by the investor of record. For
redemptions exceeding $50,000 (and for all written redemptions, regardless of
amount, made within 30 days following any change in account registration), the
signature of the investor on the redemption request must be guaranteed by an
eligible guarantor institution approved by Firstar Mutual Fund Services, LLC.
Signature guarantees in proper form generally will be accepted from domestic
banks, a member of a national securities exchange, credit unions and savings
associations, as well as from participants in the Securities Transfer Agents
Medallion Program ("STAMP"). If you have any questions with respect to signature
guarantees, please call the transfer agent at 1-800-322-6864. Firstar Mutual
Fund Services, LLC, may, at its option, request further documentation from
corporations, executors, administrators, trustees, or guardians. If a redemption
request is sent to the Money Market
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<PAGE>
Series, the Money Market Series will forward it to Firstar Mutual Fund Services,
LLC. Redemption requests will not become effective until all proper documents
have been received by Firstar Mutual Fund Services, LLC. The U.S. Postal Service
and other independent delivery services are not agents of the Fund. Therefore,
deposit of redemption requests in the mail or with such services does not
constitute receipt by Firstar Services, LLC, or the Fund. Please do not mail
letters by overnight courier to the post office box address. Redemption requests
sent by overnight or express mail should be directed to: Cornerstone Family of
Funds, c/o Firstar Mutual Fund Services, LLC, Third Floor, 615 East Michigan
Street, Milwaukee, Wisconsin 53202. Requests for redemption that are subject to
any special condition, or specify an effective date other than as provided
herein, cannot be accepted and will be returned to the investor.
Telephone Redemption Privilege
An investor may, by either completing the appropriate section of the
purchase application, or by later making a written request to Firstar Mutual
Fund Services, LLC, containing his or her signature guaranteed by an eligible
guarantor (see above), obtain the telephone redemption privilege for any of his
or her accounts. Provided that your account registration has not changed within
the last 30 days, an investor may redeem up to $150,000 worth of shares from an
account for which he or she has the telephone redemption privilege by making a
telephone redemption request to Firstar Mutual Fund Services, LLC, at 1-800-
322-6864. Telephone calls will be recorded. A check for the proceeds of such a
redemption will be issued in the name of the investor of record and mailed to
the investor's address as it appears on the records of the Money Market Series.
Both the Money Market Series and Firstar
Mutual Fund Services, LLC, reserve the right to refuse or limit a telephone
redemption request and to modify the telephone redemption privilege at any time.
Neither the Fund nor its transfer agent will be liable for following
instructions communicated by telephone that they reasonably believe to be
genuine. It is the Fund's policy to provide that a written confirmation
statement of all telephone call transactions will be mailed to shareholders at
their address of record within 3 business days after the telephone call
transaction. Since you will bear the risk of loss, you should verify the
accuracy of telephone transactions immediately upon receipt of your confirmation
statement.
Expedited Redemption Privilege
An investor in any series of the Fund may, either by completing the
appropriate section of the purchase application, or by later making a written
request to Firstar Mutual Fund Services, LLC, containing his or her signature
guaranteed by an eligible guarantor (see above), obtain the expedited redemption
privilege for any of his or her accounts. The expedited redemption privilege
allows the investor to have the proceeds of any redemption of shares in any
amount of $5,000 or more transferred by wiring federal funds to the commercial
bank or savings and loan institution specified in his or her purchase
application or written request for the
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<PAGE>
expedited redemption privilege. Expedited redemption requests may be made by
either mail (to the address specified under regular redemption procedure) or by
telephone (to the number specified under telephone redemption privilege). The
proceeds of such a redemption may be subject to a deduction of the usual and
customary charge. Firstar Mutual Fund Services, LLC charges a $12 service fee
for each payment of redemption proceeds made by federal wire. This fee will be
deducted from your account. An investor may change the account or commercial
bank designated to receive the redemption proceeds by sending a written request
to Firstar Mutual Fund Services, LLC, containing his or her signature guaranteed
in the manner just described. Both the Money Market Series and Firstar Mutual
Fund Services, LLC, reserve the right to refuse or limit an expedited redemption
request and to modify the expedited redemption privilege at any time.
Check Redemption Privilege
An investor in any series of the Fund may, by either completing the
appropriate section of the purchase application, or by later making a written
request to the Money Market Series, obtain redemption checks for any of his or
her accounts. These checks may be used by the investor in any lawful manner and
may be payable to the order of any person or company in an amount of $100 or
more. When a check is presented to Firstar Mutual Fund Services, LLC for
payment, Firstar Mutual Fund Services, LLC, as agent for the investor, will
cause the Money Market Series to redeem a sufficient number of shares in the
investor's account to cover the amount of the check. Investors using the check
redemption privilege will be subject to the same rules and regulations
applicable to other checking accounts at Firstar Mutual Fund Services, LLC.
There is no charge to the investor for using the check redemption privilege,
except that Firstar Mutual Fund Services, LLC, imposes a $20 charge if an
investor requests that it stop t payment of a Redemption Check or if it cannot
honor a Redemption Check due to insufficient funds or other valid reasons. The
check redemption privilege may not be used to close an account. The check
redemption privilege may be modified or terminated at any time by either the
Money Market Series or Firstar Mutual Fund Services, LLC.
At times, the Money Market Series may be requested to redeem shares for
which it has not yet received good payment. The Money Market Series may delay,
or cause to be delayed, payment of redemption proceeds until such time as it has
assured itself that good payment has been received for the purchase of such
shares, which may take up to 15 days. In the case of payment by check, the
determination of whether the check has been paid by the paying institution can
generally be made within 7 days, but may take longer. Investors may avoid the
possibility of any such delay by purchasing shares by wire. In the event of
delays in paying redemption proceeds, the Money Market Series will take all
available steps to expedite collection of the investment check.
If shares are purchased by check, you may write checks against such
shares only after 15 days from the date the purchase was executed. Shareholders
who draw against shares
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<PAGE>
purchased fewer than 15 days from the date of original purchase, will be charged
usual and customary bank fees.
The Money Market Series reserves the right to suspend the right of
redemption or postpone the day of payment with respect to its shares (1) during
any period when the New York Stock Exchange is closed (other than customary
weekend and holiday closings); (2) during any period when trading markets that
the Money Market Series normally uses are restricted or an emergency exists as
determined by the Securities and Exchange Commission, so that disposal of the
Money Market Series' investments or determination of its net asset value is not
reasonably practicable; or (3) for such other periods as the Securities and
Exchange Commission by order may permit to protect investors.
If an investor's account has an aggregate net asset value of less than
$100, the Money Market Series may redeem the shares held in such account if the
net asset value of such account has not been increased to at least $100 within
60 days' of notice by the Money Market Series to such investor of its intention
to redeem the shares in such account. The Money Market Series will not redeem
the shares of an account with a net asset value of less than $100 if the account
was reduced from the initial minimum investment of $1,000 or more to below $100
as a result of market activity.
Exchange of Shares
Investors may exchange shares of the Money Market Series having an
aggregate net asset value of $1,000 or more for shares of any other series of
the Fund or any other mutual fund for which the Manager acts as the investment
adviser by either (1) delivering to Firstar Mutual Fund Services, LLC, a written
request specifying the number of shares of the Money Market Series to be
exchanged and the series of the Fund or the mutual fund in which they wish to
invest after such an exchange, or (2) in the case of those investors who have
the telephone redemption privilege, making such a request by telephone. (See
"Redemption-Telephone Redemption Privilege" for a discussion of the Fund's
policy with respect to losses resulting from unauthorized telephone
transactions). The exchange is effected by redeeming the investor's shares of
the Money Market Series and issuing to the investor shares of the series or
mutual fund in which he or she is investing. The shares of both the Money Market
Series and the series or mutual fund being invested in are valued for purposes
of this exchange at the net asset value per share of the Money Market Series and
such other series or fund, respectively, as next determined after receipt by
Firstar Mutual Fund Services, LLC, of the exchange request.
The exchange privilege is available only in those states where such
exchange can legally be made and exchanges may only be made between accounts
with identical account registration and account numbers and is subject to the
suitability requirements, if any, of the series or fund for which an exchange is
proposed to be made. Prior to effecting an exchange, an investor should consider
the investment policies of the series or mutual fund he or she is investing in.
Any exchange is, in effect, a redemption of shares in one fund and a purchase of
the other fund.
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<PAGE>
Therefore, an investor may recognize a capital gain or loss for federal income
tax purposes on the exchange.
Transfers
An investor may transfer shares of the Money Market Series by submitting
to Firstar Mutual Fund Services, LLC, a written request for transfer, signed by
the registered holder of the shares and indicating the name of, the social
security number or taxpayer identification number of, and the distribution and
redemption options elected by, the new registered holder. Firstar Mutual Fund
Services, LLC may, at its option, request further documentation from transferors
who are corporations, executors, administrators, trustees, or guardians.
DISTRIBUTION EXPENSES
The Fund has adopted a plan of distribution pursuant to Rule 12b-1 of
the 1940 Act (the plan), under which the Money Market Series pays to Cresvale
International (US) LLC (the "Distributor") a fee, which is accrued daily and
paid monthly, at an annual rate of .50% of the Money Market Series' average
daily net assets. Amounts paid under the plan are paid to the Distributor to
compensate it for services it provides and expenses it bears in distributing the
Money Market Series' shares to investors, including payment of compensation by
the Distributor to securities dealers and other financial institutions and
organizations, such as banks, trust companies, savings and loan associations,
and investment advisers to obtain various distribution related and/or
administrative services for the Money Market Series. Expenses of
the Distributor also include expenses of its employees, who engage in or
support distribution of shares or service shareholder accounts, including
overhead and telephone expenses; printing and distributing prospectuses and
reports used in connection with the offering of the Money Market Series' shares;
and preparing, printing, and distributing sales literature and advertising
materials. Because these payments are paid out of the Fund's assets on a
continual basis over time, these fees will increase the cost of your investment
and may cost you more than other types of sales charges.
DIVIDENDS AND TAX MATTERS
Dividends and Distributions
The Money Market Series will declare on each business day just prior to
the calculation of its net asset value all of its net investment income
(consisting of earned interest income less expenses) as a dividend on shares of
record at the close of business on the preceding business day. Dividends are
distributed on the last business day of each calendar month. The Money Market
Series normally distributes capital gains, if any, before the end of its fiscal
year. All dividends and capital gains distributions by the Money Market Series
will be in the form of additional shares unless the investor has made an
election, either on his or her purchase application or in a subsequent written
request to Firstar Mutual Fund Services, LLC, to receive
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<PAGE>
such distributions in cash. An investor may change his or her distribution
election by filing a written request with Firstar Mutual Fund Services, LLC, at
least four days prior to the date of a distribution.
Taxes
The Money Market Series intends to qualify as a regulated investment
company, which means that it pays no federal income tax on the earnings or
capital gains it distributes to its shareholders.
o Exempt-interest dividends from the Money Market Series will be exempt
from federal regular income tax.
o Ordinary dividends from the Money Market Series are taxable as
ordinary income and dividends from the Money Market Series' long-term
capital gains are taxable as capital gain.
o Dividends are treated in the same manner for federal income tax
purposes whether you receive them in the form of cash or additional
shares. They may also be subject to state and local taxes.
o Certain dividends paid to you in January will be taxable as if they
had been paid the previous December.
o We will mail you tax statements annually showing the amounts and tax
status of the distributions you received.
o When you sell (redeem) or exchange shares of the Money Market Series,
you must recognize any gain or loss. However, as long as the Money
Market Series NAV per share does not deviate from $1.00, there will be
no gain or loss.
o Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
***We provide this tax information for your general information. You should
consult your own tax adviser about the tax consequences of investing in the
Money Market Series.***
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<PAGE>
FOR MORE INFORMATION
FOR INVESTORS WHO WANT MORE INFORMATION ON THE FUND, THE FOLLOWING DOCUMENTS ARE
AVAILABLE FREE UPON REQUEST:
Annual/Semi-Annual Reports: contain performance data and information on
portfolio holdings for the Fund's most recently completed fiscal year or half
year and, on an annual basis, a statement from portfolio management and the
auditor's report.
Statement of Additional Information (SAI): contains more detailed information
about the Fund's policies, investment restrictions, risks and business
structure. This prospectus incorporates the SAI by reference.
Copies of these documents and answers to questions about the Fund may be
obtained without charge by contacting:
Cornerstone Fixed Income Funds
Cornerstone Tax-Free Money Market Series
67 Wall Street
New York NY 10005
1-800- 322-6864
Information about the Fund (including the SAI) can be viewed and copied at the
Public Reference Room of the Securities and Exchange Commission (the "SEC") in
Washington, D.C. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing the Public Reference Room of the SEC, Washington,
D.C. 20549-6009. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-800- SEC-0330. Reports and other information
about the Fund may be viewed on-screen or downloaded from the SEC's Internet
site at http://www.sec.gov.
================================================================================
FOR MORE INFORMATION ON OPENING A NEW ACCOUNT, MAKING
CHANGES TO EXISTING ACCOUNTS, PURCHASING, EXCHANGING OR
REDEEMING SHARES, OR OTHER INVESTOR SERVICES, PLEASE CALL:
1-800-(322- 6864)
Monday through Friday
9:00 a.m. to 8:00 p.m. (EST)
================================================================================
The Fund's Investment Company Act File number is 811-5063.
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CORNERSTONE FIXED INCOME FUNDS
CORNERSTONE HIGH-YIELD MUNICIPAL BOND SERIES
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1999
AND
SUPPLEMENTS THE FUND'S PROSPECTUS OF THE SAME DATE.
This Statement of Additional Information provides certain detailed information
concerning the Cornerstone High-Yield Municipal Bond Series (the "High-Yield
Series") of Cornerstone Fixed Income Funds (the "Fund"). It is not a prospectus.
The Fund's Prospectus may be obtained, without charge, by writing to the Fund at
Cornerstone Family of Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box
701, Milwaukee, WI 53201-0701, or by calling (800) 322-6864. This Statement of
Additional Information should be read in conjuction with the Fund's Prospectus
dated April 30, 1999, and the Fund's Annual Report dated December 31, 1998,
which are hereby incorporated by reference.
<PAGE>
TABLE OF CONTENTS
Page
----
FUND HISTORY .............................................................
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS...........................
INVESTMENT LIMITATIONS ...........................................
MANAGEMENT OF THE FUND ...........................................
OWNERSHIP OF SECURITIES ..................................................
INVESTMENT MANAGEMENT AND OTHER SERVICES .................................
DISTRIBUTION PLAN ................................................
PORTFOLIO TRANSACTIONS............................................
TAXES.............................................................
DESCRIPTION OF SHARES.............................................
CERTAIN LIABILITIES...............................................
PURCHASE OF SHARES .......................................................
PRICING OF SHARES ........................................................
CALCULATION OF YIELD......................................................
FINANCIAL STATEMENTS..............................................
APPENDIX.......................................................... A-1
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<PAGE>
FUND HISTORY
Cornerstone Fixed Income Funds (the "Fund") was organized as a
Massachusetts business trust on March 19, 1987. On April 30, 1999, the Fund
changed its name from Fundamental Fixed Income Fund to Cornerstone Fixed Income
Funds. The Company has three series: Cornerstone Tax-Free Money Market Series,
Cornerstone U.S. Government Strategic Income Fund, and Cornerstone High-Yield
Municipal Bond Series (the "High-Yield Series"). This Statement of Additional
Information pertains to the High-Yield Series, which is an open-end,
non-diversified management investment company.
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS
The Prospectus of the High-Yield Series dated April 30, 1999 (the
"Prospectus") identifies the investment objective and the principal investment
policies of the High-Yield Series. Other investment policies and a further
description of certain of the policies described in the Prospectus are set forth
below.
Lending Portfolio Securities. The High-Yield Series may lend
securities in its portfolio to brokers, dealers, banks, or other institutional
borrowers of securities for the purpose of obtaining additional income, provided
that the borrower maintains with the High-Yield Series collateral in the form of
cash or cash equivalents, such as Treasury bills, equal to at least l00% of the
fair market value of the securities lent. Borrowers of portfolio securities of
the High-Yield Series pay to the High-Yield Series any income accruing on
borrowed securities during the time such securities are on loan and may also pay
to the High-Yield Series a specified amount of interest on the borrowed
securities. In addition, the High-Yield Series is entitled to earn additional
income by investing the collateral it holds. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in the collateral
should the borrower of any loaned securities fail financially. For this reason,
the investment adviser of the High-Yield Series will evaluate and monitor the
creditworthiness of firms that borrow securities from the High-Yield Series. The
High-Yield Series will not lend its portfolio securities if as a result more
than 30% of its total assets will be subject to such loans. In addition, because
income derived from lending its portfolio securities is not tax-exempt, the
High-Yield Series limits lending its securities in accordance with its
investment objective. Accordingly, it is not anticipated that the High-Yield
Series will normally engage in any material amount of portfolio lending.
"When-Issued" Securities. As described in the Prospectus under
"INVESTMENT OBJECTIVE AND POLICIES," the High-Yield Series may purchase new
issues of tax-exempt securities on a "when-issued" basis. In order to invest the
High-Yield Series' assets immediately, while awaiting delivery of securities
purchased on a "when-issued" basis, short-term obligations that offer same day
settlement and earnings will
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<PAGE>
normally be purchased. Although short-term investments will normally be in
tax-exempt securities, short-term taxable securities may be purchased if
suitable short-term tax-exempt securities are not available. When a commitment
to purchase a security on a "when-issued" basis is made, procedures are
established consistent with the General Statement of Policy of the Securities
and Exchange Commission concerning such purchases. Because that policy currently
recommends that an amount of the assets of the High-Yield Series equal to the
amount of the purchase be held aside or segregated to be used to pay for the
commitment, cash or high-quality debt securities sufficient to cover any
commitments are always expected to be available. Nonetheless, such purchases may
involve more risk than other types of purchases, as described in the Prospectus.
Futures Contracts. The High-Yield Series may enter into contracts
for the future acquisition or delivery of fixed-income securities ("Futures
Contracts"). This investment technique is designed only to hedge against
anticipated future changes in interest rates which otherwise might either
adversely affect the value of the High-Yield Series' securities or adversely
affect the prices of long-term bonds which the High-Yield Series intends to
purchase at a later date (although the High-Yield Series may engage in
transactions in futures contracts for income purposes if Commodity Futures
Trading Commission regulations on this issue change). If interest rates move in
an unexpected manner, the High-Yield Series will not achieve the anticipated
benefits of Futures Contracts or may realize a loss.
Options. The High-Yield Series intends to both purchase and write
options on securities and Futures Contracts, within the limits described in the
Prospectus. The market for options on tax-exempt securities is a new and
developing one, and consequently the High-Yield Series faces the risk that such
options acquired by it may not be readily marketable. As the market for options
on tax-exempt securities expands, the High-Yield Series expects that its
activities with respect to options will expand also (subject to any applicable
investment restrictions).
Portfolio Management. The High-Yield Series intends to fully
manage its portfolio by buying and selling securities, as well as holding
securities to maturity. In managing its portfolio, the High-Yield Series seeks
to take advantage of market developments and yield disparities, which may
include use of the following strategies:
(1) shortening the average maturity of its portfolio in
anticipation of a rise in interest rates so as to minimize depreciation of
principal;
(2) lengthening the average maturity of its portfolio in
anticipation of a decline in interest rates so as to maximize tax-exempt yield;
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<PAGE>
(3) selling one type of debt security (e.g., revenue bonds)
and ---- buying another (e.g., general obligation bonds) when disparities arise
in the relative values of each; and
(4) changing from one debt security to an essentially
similar debt security when their respective yields appear distorted due to
market factors.
The High-Yield Series engages in portfolio trading if it believes
a transaction, net of costs (including custodian charges), will help in
achieving its investment objective.
Portfolio Turnover. Pursuit by the High-Yield Series of its
investment objective may lead to frequent changes in the securities held in its
portfolio, which is known as "portfolio turnover." Portfolio turnover may
involve payments by the High-Yield Series of broker commissions, dealer spreads
and other transaction costs relating to the purchase and the sale of securities.
Portfolio turnover rate for a given fiscal year is calculated by dividing the
lesser of the amount of the purchases or the amount of the sales of portfolio
securities during the year by the monthly average of the value of the portfolio
securities during the year. Securities with maturities or expiration dates of
one year or less at the time of acquisition by the High-Yield Series are
excluded from this calculation. A high portfolio turnover rate increases
transactions costs of the High-Yield Series and increases the likelihood of the
distribution of taxable capital gains to investors. For the fiscal years ended
December 31, 1997 and 1996, the High-Yield Series' portfolio turnover rates were
approximately 134% and 139%, respectively.
Temporary Defensive Investments. The High-Yield Series may, from
time to time, take temporary defensive positions that are inconsistent with its
prinicpal investment strategies. Such investments are made only under conditions
that, in the opinion of the investment adviser of the High-Yield Series, make
such investments advisable. For example, the High-Yield Series may invest in
taxable obligations pending investment in municipal bonds of the proceeds from
the sale of its shares or investments, or to ensure the liquidity needed to
satisfy redemptions of shares and the day-to-day operating expenses of the
High-Yield Series. The High-Yield Series invests in only those taxable
obligations that are (1) rated A or higher by S&P or Moody's or unrated but
judged by its investment adviser to be of at least comparable quality; (2)
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities; or (3) obligations of banks (including certificates of
deposit, bankers' acceptances, and repurchase agreements) with at least
$1,000,000,000 of assets. No more than 50% of the assets of the High-Yield
Series may be invested in taxable obligations at any one time, and the
High-Yield Series anticipates that on a 12-month average, taxable obligations
will constitute less than 10% of the value of its total investments.
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<PAGE>
INVESTMENT LIMITATIONS
In addition to its investment objectives, the High-Yield Series
has adopted the following policies as "fundamental policies", which cannot be
changed without the approval of the holders of a majority of the shares of the
High-Yield Series (which, as used in this Statement of Additional Information,
means the lesser of (i) more than 50% of the outstanding shares, or (ii) 67% or
more of the shares present at a meeting at which holders of more than 50% of the
outstanding shares are represented in person or by proxy). The High-Yield Series
may not:
(1) issue senior securities;
(2) borrow money in an amount not exceeding 33 1/3% of the
value of its total assets and subject to a 300% asset coverage requirement, or
pledge mortgage or hypothecate any of its assets, except to secure such
permitted borrowings;
(3) underwrite securities issued by other persons, except
insofar as the High-Yield Series may technically be deemed an underwriter under
the Securities Act of 1933 in selling a portfolio security;
(4) purchase or sell real estate (including limited
partnership interests but excluding Municipal Bonds secured by real estate or
interests therein) or interests in oil, gas or mineral leases;
(5) make loans to others except (i) through the use of
repurchase agreements, provided that not more than 10% of its total assets are
invested at any one time in repurchase agreements of more than one week in
length or in other restricted or illiquid securities, (ii) through the lending
of its portfolio securities in accordance with the limitations set forth in the
Prospectus under "INVESTMENT OBJECTIVE AND POLICIES - Lending of Portfolio
Securities" and (iii) that the purchase of debt securities in accordance with
its investment policies shall not constitute loans for purposes of this
restriction;
(6) purchase or retain the securities of any issuer, if, to
the High-Yield Series' knowledge, those individual officers, directors or
trustees of the Fund, or of the investment advisor of the High-Yield Series, who
own beneficially own more than 1/2 of 1% of the outstanding securities of such
issuer, together own beneficially more than 5% of the outstanding securities of
such issuer;
(7) purchase securities, if, as a result of such purchase,
25% or more of its total assets would be invested in non-governmental industrial
revenue bonds, the payment of the principal and interest on which are the
responsibility of issuers in the same industry, provided that it may invest more
than 25% of its total assets in industrial revenue bonds;
-6-
<PAGE>
(8) make short sales of securities or purchase any
securities or evidences of interests therein on margin, except that the
High-Yield Series may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of securities and except that the High-Yield
Series may make deposits on margin in connection with interest rate futures
contracts;
(9) purchase or sell commodities or commodities contracts
except financial futures and related options as described in the High-Yield
Series' Prospectus; or
(10) invest in securities which are restricted as to
disposition under federal securities laws or for which there is no readily
available market (i.e., market makers do not exist or will not entertain bids or
offers).
The above restrictions, along with the fundamental policies
identified in the Prospectus under "INVESTMENT OBJECTIVE AND POLICIES -
Miscellaneous," constitute all of the fundamental policies of the High-Yield
Series.
For the purposes of the High-Yield Series' investment
restrictions, the issuer of a tax-exempt security is deemed to be the entity
(public or private) ultimately responsible for the payment of the principal and
interest on the security.
Operating Policies. The High-Yield Series has adopted the
following operating policies which are not fundamental and which may be changed
without shareholder approval. The High-Yield Series may enter into repurchase
agreements (a purchase of and a simultaneous commitment to resell a security at
an agreed upon price on an agreed upon date) only with member banks of the
Federal Reserve System and only if collateralized by U.S. Government securities.
If the vendor of a repurchase agreement fails to pay the sum agreed to on the
agreed upon delivery date, the High-Yield Series would have the right to sell
the U.S. Government securities, but might incur a loss in so doing and in
certain cases may not be permitted to sell the U.S. Government securities. As
noted in paragraph (5) on page 5, the High-Yield Series may not invest more than
10% of its assets in repurchase agreements maturing in more than seven days. In
addition, in order to comply with certain state statutes, the High-Yield Series
will not pledge, mortgage or hypothecate its portfolio securities if at the time
the value of the securities so pledged, mortgaged or hypothecated would exceed
10% of the value of the High-Yield Series. For purposes of this restriction,
collateral arrangements with respect to the writing of stock options, financial
futures, options on financial futures and collateral arrangements with respect
to margin requirements are not deemed to be a pledge of assets, and for purposes
of the restriction in paragraph (1) above, neither such arrangements nor the
purchase or sale of futures or purchase of related options are deemed to be the
issuance of a senior security.
Percentage Restrictions. If a percentage restriction on
investment or utilization of assets set forth above is adhered to at the time an
investment is made or assets are so
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<PAGE>
utilized, a later change in percentage resulting from changes in the value of
the portfolio securities of the High-Yield Series will not be considered a
violation of such policy.
Temporary Defensive Investments
The High-Yield Series retains the flexibility to respond to
changes in the market or in the economy. Consequently, the High-Yield Series may
use a temporary defensive investment strategy. When employing a temporary
defensive investment strategy, the High-Yield Series may hold cash (U.S.
dollars), or invest without limitation in taxable, high quality short term money
market instruments. Any net interest income derived from taxable securities and
distributed by the High-Yield Series will be taxable as ordinary income when
distributed.
Portfolio Turnover
The High-Yield Series' portfolio turnover rate was approximately
134% for the year ended December 31, 1997, and was approximately 57% for the
year ended December 31, 1998. The lower portfolio turnover rate for the year
ended December 31, 1998 was attributable to the discontinuance of the advisory
contract with one adviser and the decision to abandon a plan of reorganization
with another.
MANAGEMENT OF THE FUND
Trustees and Officers
The business of the Company is managed under the direction of the
Board of Trustees. Specifically, the Board of Trustees is responsible for
oversight of the High-Yield Series by reviewing and approving necessary
agreements with the High-Yield Series' service providers, and mandating policies
for the High-Yield Series' operations.
Trustees and officers of the High-Yield Series, together with
information as to their principal business occupations during the last five
years, are shown below. Each trustee who is considered to be an "interested
person" of the Fund, as defined in the 1940 Act, is indicated by as asterisk
(*). The Board Members listed below were elected by the High-Yield Series'
shareholders at a Special Meeting held on March 12, 1999.
-8-
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
Position(s) Held Principal Occupation(s) During
Name, Address, and Age with Fund Past Five Years
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
William J. Armstrong Trustee Vice President and Treasurer,
Ingersoll Rand Company Ingersoll-Rand Company (5/86 -
200 Chestnut Ridge Road Present); Trustee, Chase Vista
Woodcliff Lake, NJ 07675 Funds.
Age: 56
- -----------------------------------------------------------------------------------------------------
L. Greg Ferrone Trustee Consultant (3/99-Present);
83 Ronald Court Senior Manager, ARC Partners
Ramsey, New Jersey 07446 (10/97 - 3/99); Consultant,
IntraNet, Inc. (4/90 - 10/97);
Age: 47 Sales & Marketing Director,
RAV Communications (4/85 -
4/90); Vice President/Regional
Manager, National Westminster
Bank USA (3/78 - 4/85).
- -----------------------------------------------------------------------------------------------------
Stephen C. Leslie* President and Chairman and CEO,
Cornerstone Equity Advisors Trustee Cornerstone Equity Advisors
Inc. Inc. (6/97 - Present); Partner,
67 Wall Street Wall Street Capital Group (3/97
New York, New York 10005 - 6/97); Partner, Wall Street
Investment Corp. (11/95 -3/97);
Age: 45 Partner, Tucker Anthony
Securities (8/95 - 10/95); Senior
Vice President, Pryor
McClendon Counts & Co. (5/94
- 8/95); Senior Vice President,
Siebert Capital Markets (6/93 -
5/94).
- -----------------------------------------------------------------------------------------------------
G. John Fulvio* Treasurer/Chief Treasurer, Cornerstone Equity
Speer & Fulvio Financial Officer Advisors, Inc. (4/97 - Present);
60 East 42nd Street and Trustee Partner, Speer & Fulvio (3/87 -
New York, New York 10165 Present).
Age: 41
- -----------------------------------------------------------------------------------------------------
- 9 -
<PAGE>
- -----------------------------------------------------------------------------------------------------
Leroy E. Rodman Trustee Counsel, Morrison, Cohen,
Morrison, Cohen, Singer & Singer & Weinstein, LLP
Weinstein, LLP (1996 - Present); Senior Partner,
750 Lexington Avenue Teitelbaum, Hiller, Rodman,
New York, NY 10022 Paden & Hibsher, P.C. (1990 -
1996).
Age: 85
- -----------------------------------------------------------------------------------------------------
Dr. Yvonne Scruggs-Leftwich Trustee Executive Director and Chief
11510 Bucknell Drive Operating Officer, Black
Condo #204 Leadership Forum, Inc.;
Wheaton, MD 20902 Director, Joint Center For
Political and Economic Studies
Age: 65 (1991 - Present).
=====================================================================================================
</TABLE>
Mr. Leslie is the chief portfolio manager and Mr. Fulvio the
Treasurer of the Fund's adviser, Cornerstone Equity Advisors, Inc. All of the
Trustees of the Fund are also Trustees of The California Muni Fund and Directors
of Cornerstone Fixed-Income Funds.
For services and attendance at board meetings and meetings of
committees which are common to the Fund, Cornerstone Fixed-Income Funds and The
California Muni Fund (other affiliated mutual funds for which the Fund's
investment manager acts as the investment adviser), each Trustee of the Fund who
is not affiliated with the Fund's investment manager is compensated at the rate
of $5,000 per quarter prorated among the three funds based on their respective
net assets at the end of each quarter. Each such Trustee is also reimbursed by
the three funds, on the same basis, for actual out-of-pocket expenses relating
to his attendance at meetings. Some Trustees received additional compensation at
a rate of $125 per hour for services related to servicing on the Portfolio
Review Committee. As of the date of this Statement of Additional Information,
Trustees and officers of the Fund as a group owned beneficially less than 1% of
the Fund's outstanding shares.
- 10 -
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
(for each current Board Member for the
most recently completed fiscal year)
==========================================================================================================
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual From Fund and
Name of Person*, Compensation as Part of Fund Benefits Upon Fund Complex
Position From Fund Expenses Retirement Paid to Trustees
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
L. Greg Ferrone, $12,401 N/A N/A $19,500
Director
==========================================================================================================
</TABLE>
* Mr. Ferrone is the only current Board Member who served in that capacity
during the fiscal year ended 1998.
- 11 -
<PAGE>
OWNERSHIP OF SECURITIES
As of March 31, 1999, except as set forth below, no person owned
beneficially or of record more than 5% of the outstanding shares of the
High-Yield Series. As of that date, the officers and Board Members of the Fund
beneficially owned less than 1% of the shares of the Fund.
Number of Percentage of
Name & Address Shares Owned Outstanding Shares
Vivian Kaufman Revocable Trust 36,889.616 18.54%
U/A DTD October 6, 1993
1900 S. Ocean Blvd., Apt.5S
Pompano Beach, FL 33062-8000
Donald M. Sullivan 18,383.091 9.24%
29-07 148th St., Apt. 320
Flushing, NY 11354-2455
Evelyn M. Brady
222 E. 56th Street, Apt. 3E 16,515.192 8.30%
New York, NY 10022-3718
Anthony Arcidiacono 12,675.696
220-36 67th Avenue 6.37%
Bayside, NY 11364
- 12 -
<PAGE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
Advisory Services
The Fund is currently managed by Cornerstone Equity Advisors,
Inc. ("Cornerstone" or the "Manager"). Cornerstone's Chairman and Chief
Executive Officer is Mr. Stephen C. Leslie, who is also President of the
High-Yield Series. Mr. Leslie is one of two individuals who may be considered a
"control person" of Cornerstone. Cornerstone's Treasurer, Mr. G. John Fulvio, is
the Treasurer and Chief Financial Officer of the Fund. Mr. Fulvio is not
considered a "control person" of Cornerstone.
Cornerstone receives an advisory fee equal to the following
percentages of the Fund's average daily net asset value:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
----------------------------- ------------------
<S> <C>
Net asset value to $100,000,000 .50%
Net asset value of $100,000,000 or more but less than $200,000,000 .48%
Net asset value of $200,000,000 or more but less than $300,000,000 .46%
Net asset value of $300,000,000 or more but less than $400,000,000 .44%
Net asset value of $400,000,000 or more but less than $500,000,000 .42%
Net asset value of $500,000,000 or more .40%
</TABLE>
The fee levels noted above are identical to those received by the
Fund's previous advisers, Tocqueville Asset Management, L.P. ("Tocqueville"),
and Fundamental Portfolio Advisors, Inc. ("FPA").
From September 29, 1998 to December 31, 1998 Cornerstone received
an aggregate advisory fee of $3,710. From June 1, 1998 to September 28, 1998
Tocqueville, as an interim adviser, received an aggregate advisory fee of $5,717
. From January 1, 1998 to May 30, 1998 FPA waived an aggregate advisory fee of
$7,205. For the fiscal year ended December 31, 1997 FPA received an aggregate
advisory fee of $14,600. For the fiscal year ended December 31, 1996 FPA
received an aggregate advisory fee of $787,962.
Administrator, Transfer Agent, and Accounting Agent
Firstar Mutual Fund Services, LLC, 615 East Michigan Street,
Milwaukee, WI 53201-0701 currently acts as Administrator, Transfer Agent, and
Accounting Agent of the
- 13 -
<PAGE>
Fund. Firstar Mutual Fund Services, LLC provides various administrative and
accounting services necessary for the operations of the Fund. Services provided
by the Administrator include: facilitating general Fund management; monitoring
Fund compliance with federal and state regulations; supervising the maintenance
of the Fund's general ledger, the preparation of the Fund's financial
statements, the determination of the net asset value of the Fund's assets and
the declaration and payment of dividends and other distributions to
shareholders; and preparing specified financial, tax and other reports. The Fund
pays the Administrator an annual fee for administrative services of 0.06% on the
first $200 million on the Fund's average net assets; 0.05% of the next $300
million of the Fund's average net assets; 0.03% of the remaining value of the
Fund's average net assets, subject to a minimum annual fee of $30,000 for the
High-Yield Series. The Fund reimburses the Administrator for certain
out-of-pocket expenses. In addition, the Fund pays Firstar Mutual Funds
Services, LLC a fee for accounting services of $25,000 on the first $40 million
of assets, and 0.02% annually on the next $200 million of such assets; 0.01% of
any remaining assets, determined as of the end of the month; plus certain
expenses.
Custodian and Independent Public Accountant
Firstar Bank Milwaukee, N.A. (the "Bank"), 615 East Michigan
Street, Milwaukee, WI 53201-0701, acts as Custodian of the Fund's cash and
securities.
McGladrey & Pullen, LLP acts as independent certified public
accountants for the Fund, performing an annual audit of the Fund's financial
statements and preparing its tax returns.
DISTRIBUTION PLAN
The High-Yield Series has entered into a Distribution Agreement
with Cresvale International (US) LLC ("Cresvale"). The Trustees who are not, and
were not at the time they voted, interested persons of the Fund, as defined in
the 1940 Act (the "Independent Trustees"), have approved the Distribution
Agreement. The Distribution Agreement provides that Cresvale will bear the
distribution expenses of the High-Yield Series not borne by the High-Yield
Series. The Distribution Agreement was approved by action of the Trustees of the
Fund on February 10, 1999. The Distribution Agreement will continue in effect
from year-to-year if it is specifically approved, at least annually, in the
manner required by the 1940 Act.
Cresvale bears all expenses it incurs in providing services under
the Distribution Agreement. Such expenses include compensation to it and to
securities dealers and other financial institutions and organizations such as
banks, trust companies, savings and
- 14 -
<PAGE>
loan associations and investment advisors for distribution related and/or
administrative services performed for the High-Yield Series. Cresvale also pays
certain expenses in connection with the distribution of the High-Yield Series'
shares, including the cost of preparing, printing and distributing advertising
or promotional materials. The High-Yield Series bears the cost of registering
its shares under federal and state securities law.
The Fund and Cresvale have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended. Under the Distribution Agreement, Cresvale will use its best efforts in
rendering services to the Fund.
The Fund has adopted a plan of distribution pursuant to Rule
12b-1 under the 1940 Act (the "Plan") pursuant to which the High-Yield Series
pays Cresvale compensation accrued daily and paid monthly at the annual rate of
1/2 of 1.0% of the High-Yield Series' average daily net assets. The Plan was
adopted by a majority vote of the Board of Trustees, including all of the
Independent Trustees (none of whom had or have any direct or indirect financial
interest in the operation of the Plan), cast in person at a meeting called for
the purpose of voting on the Plan on September 29, 1987 by the then sole
shareholders of the High-Yield Series.
Pursuant to the Plan, Cresvale provides the Fund, for review by
the Trustees, and the Trustees review, at least quarterly, a written report of
the amounts expended under the Plan and the purpose for which such expenditures
were made.
No interested person of the Fund nor any Trustee of the Fund who
is not an interested person of the Fund, as defined in the 1940 Act, has any
direct financial interest in the operation of the Plan except to the extent that
Cresvale and certain of its employees may be deemed to have such an interest as
a result of receiving a portion of the amounts expended thereunder by the Fund.
The Plan has been approved and will continue in effect from
year-to-year thereafter, provided such continuance is approved annually by vote
of the Trustees in the manner described above. It may not be amended to increase
materially the amount to be spent for the services described therein without
approval of the shareholders of the Fund, and material amendments of the Plan
must also be approved by the Trustees in the manner described above. The Plan
may be terminated at any time, without payment of any penalty, by vote of the
majority of the Trustees who are not interested persons of the Fund, and with no
direct or indirect financial interest in the operations of the Plan, or by a
vote of a majority of the outstanding voting securities of the Fund (as defined
in the 1940 Act). The Plan will automatically terminate in the event of its
assignment (as defined in the 1940 Act). So long as the Plan is in effect, the
election and nomination of the Independent Trustees shall be committed to the
discretion of the Independent Trustees. In the Trustees' quarterly review of the
Plan, they will consider its continued appropriateness and the level of
compensation provided therein.
- 15 -
<PAGE>
During the year ended December 31, 1998, the Fund paid $3,539 for
expenses incurred pursuant to the Plan, which amount was spent in the
distribution of the Fund's shares, including expenses for: advertising -- ($33);
printing and mailing of Prospectuses to other than current shareholders --
($3,351); and sales, and shareholder servicing support services and other
distribution services, -- ($155). Of the amount paid by the Fund during last
year, ($0) was paid to Fundamental Services Corporation for expenses incurred
and services rendered by it pursuant to the Plan.
PORTFOLIO TRANSACTIONS
The High-Yield Series' management provides the High-Yield Series
with investment advice and recommendations for the purchase and sale of
portfolio securities. Newly issued securities are usually purchased from the
issuer or an underwriter, at prices including underwriting fees; other purchases
and sales are usually placed with those dealers from whom it appears that the
best price or execution will be obtained. All orders for the purchase and sale
of portfolio securities are placed by the High-Yield Series' management, subject
to the general control of the High-Yield Series' Trustees. The High-Yield
Series' management may sell portfolio securities prior to their maturity if
market conditions and other considerations indicate, in the opinion of the High
- -Yield Series' management, that such sale would be advisable. In addition, the
High-Yield Series' management may engage in short-term trading when it believes
it is consistent with the High-Yield Series' investment objective. Also, a
security may be sold and another of comparable quality may be simultaneously
purchased to take advantage of what the High-Yield Series' management believes
to be a temporary disparity in the normal yield relationships of two securities.
The High-Yield Series' management is generally responsible for the
implementation, or supervision of the implementation, of investment decisions,
including the allocation of principal business and portfolio brokerage, and the
negotiation of commissions.
It is the High-Yield Series' policy to seek execution of its
purchases and sales at the most favorable prices through responsible
broker-dealers and in agency transactions, at competitive commission rates. When
considering broker-dealers, the Manager will take into account such factors as
the price of the security, the size and difficulty of the order, the rate of
commission, if any, the reliability, financial condition, integrity and general
execution and operational capabilities of competing broker-dealers, and the
brokerage and research services which they provide to the High-Yield Series'
management.
During the last three fiscal years from 1996-98, the High-Yield
Series paid $ -0-, $ -0-, and $ -0-, respectively, in brokerage commissions.
The Board of Trustees of the High-Yield Series is authorized to
adopt a brokerage allocation policy pursuant to the Securities Exchange Act of
1934 which would permit the High-Yield Series to pay a broker-dealer which
furnishes research services a
- 16 -
<PAGE>
higher commission than that which might be charged by another broker-dealer
which does not furnish research services, or which furnishes research services
deemed to be of a lesser value, provided that such commission is deemed
reasonable in relation to the value of the brokerage and research services
provided by the broker-dealer.
Section 28(e)(3) of the Securities Exchange Act of 1934 defines
"Brokerage and Research Services" as including, among other things, advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities , the availability of securities or purchasers or sellers of
securities, furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts, and offering securities transactions and performing functions
incidental thereto (such as clearance and settlement).
It is not the High-Yield Series' practice to allocate principal
business or brokerage on the basis of sales of High-Yield Series shares which
may be made through brokers or dealers, although broker-dealers effecting
purchases of High-Yield Series shares for their customers may participate in
principal transactions of brokerage allocation as described above.
TAXES
The following is only a summary of certain additional federal
income tax considerations generally affecting the High-Yield Series and its
shareholders that are not described in the Prospectus. No attempt is made to
present a detailed explanation of the tax treatment of the High-Yield Series or
its shareholders, and the discussions here and in the Prospectus are not
intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The High-Yield Series has elected to be taxed as a regulated
investment company for federal income tax purposes under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company, the High-Yield Series is not subject to federal income tax
on the portion of its net investment income (i.e., taxable interest, dividends
and other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the High-Yield Series made
during the taxable year or, under specified circumstances, within twelve months
after
- 17 -
<PAGE>
the close of the taxable year, will be considered distributions of income and
gains of the taxable year and will therefore count toward satisfaction of the
Distribution Requirement.
If the High-Yield Series has a net capital loss (i.e., the excess
of capital losses over capital gains) for any year, the amount thereof may be
carried forward up to eight years and treated as a short-term capital loss which
can be used to offset capital gains in such years. As of December 31, 1997, the
High-Yield Series has capital loss carryforwards of approximately $160,500,
which expire in varying amounts between December 31, 1998 and December 31, 2003.
Under Code Section 382, if the High-Yield Series has an "ownership change," the
High-Yield Series' use of its capital loss carryforwards in any year following
the ownership change will be limited to an amount equal to the net asset value
of the High-Yield Series immediately prior to the ownership change multiplied by
the highest adjusted long-term tax-exempt rate (which is published monthly by
the Internal Revenue Service (the "IRS")) in effect for any month in the
3-calendar-month period ending with the calendar month of change occurs (the
rate for April 1998 is 5.04%). The High-Yield will use its best efforts to avoid
having an ownership change. However, because of circumstances which may be
beyond the control or knowledge of the High-Yield Series, there can be no
assurance that the High-Yield Series will not have, or has not already had, an
ownership change. If the High-Yield Series has or has had an ownership change,
any capital gain net income for any year following the ownership change in
excess of the annual limitation on the capital loss carryforwards will have to
be distributed by the High-Yield Series and will be taxable to shareholders as
described under "High-Yield Series Distributions" below.
In addition to satisfying the Distribution Requirement, a
regulated investment company must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement").
In general, gain or loss recognized by the High-Yield Series on
the disposition of an asset will be a capital gain or loss. However, gain
recognized on the disposition of a debt obligation (including municipal
obligations) purchased by the High-Yield Series at a market discount (generally,
at a price less than its principal amount) will be treated as ordinary income to
the extent of the portion of the market discount which accrued during the period
of time the High-Yield Series held the debt obligation.
In general, for purposes of determining whether capital gain or
loss recognized by the High-Yield Series on the disposition of an asset is
long-term or short-term, the holding period of the asset may be affected if (1)
the asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to
- 18 -
<PAGE>
another asset so used, or (2) the asset is otherwise held by the High-Yield
Series as part of a "straddle" (which term generally excludes a situation where
the asset is stock and the High-Yield Series grants a qualified covered call
option (which, among other things, must not be deep-in-the-money) with respect
thereto). In addition, the High-Yield Series may be required to defer the
recognition of a loss on the disposition of an asset held as part of a straddle
to the extent of any unrecognized gain on the offsetting position. Any gain
recognized by the High-Yield Series on the lapse of, or any gain or loss
recognized by the High-Yield Series from a closing transaction with respect to,
an option written by the High-Yield Series will be treated as a short-term
capital gain or loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of the High-Yield Series' net
investment in the transaction and: (1) the transaction consists of the
acquisition of property by the High-Yield Series and a contemporaneous contract
to sell substantially identical property in the future; (2) the transaction is a
straddle within the meaning of section 1092 of the Code; (3) the transaction is
one that was marketed or sold to the High-Yield Series on the basis that it
would have the economic characteristics of a loan but the interest-like return
would be taxed as capital gain; or (4) the transaction is described as a
conversion transaction in the Treasury Regulations. The amount of the gain
recharacterized generally will not exceed the amount of the interest that would
have accrued on the net investment for the relevant period at a yield equal to
120% of the federal long-term, mid-term, or short-term rate, depending upon the
type of instrument at issue, reduced by an amount equal to: (1) prior inclusions
of ordinary income items from the conversion transaction and (2) the capital
interest on acquisition indebtedness under Code section 263(g). Built-in losses
will be preserved where the High-Yield Series has a built-in loss with respect
to property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed
through to the High-Yield Series' shareholders.
Certain transactions that may be engaged in by the High-Yield
Series (such as regulated futures contracts, certain foreign currency contracts,
and options on stock indexes and futures contracts) will be subject to special
tax treatment as "Section 1256 contracts." Section 1256 contracts are treated as
if they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contracts have not terminated (by delivery, exercise, entering into a closing
transaction or otherwise) as of such date. Any gain or loss recognized as a
consequence of the year-end deemed disposition of Section 1256 contracts is
taken into account for the taxable year together with any other gain or loss
that was previously recognized upon the termination of Section 1256 contracts
during that taxable year. Any capital gain or loss for the taxable year with
respect to Section 1256 contracts (including any capital gain or loss arising as
a consequence of the year-end deemed sale of such contracts) is generally
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. The High-Yield Series, however, may elect not to have this special tax
treatment apply to Section 1256 contracts that
- 19 -
<PAGE>
are part of a "mixed straddle" with other investments of the High-Yield Series
that are not Section 1256 contracts.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the
High-Yield Series must satisfy an asset diversification test in order to qualify
as a regulated investment company. Under this test, at the close of each quarter
of the High-Yield Series' taxable year, at least 50% of the value of the
High-Yield Series' assets must consist of cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and securities
of other issuers (as to which the High-Yield Series has not invested more than
5% of the value of the High-Yield Series' total assets in securities of such
issuer and as to which the High-Yield Series does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one issuer (other
than U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the High-Yield Series controls and
which are engaged in the same or similar trades or businesses. Generally, an
option (call or put) with respect to a security is treated as issued by the
issuer of the security, not the issuer of the option.
If for any taxable year the High-Yield Series does not qualify as
a regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the
High-Yield Series' current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated
investment company that fails to distribute in each calendar year an amount
equal to 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year (a "taxable year
election")). (Tax-exempt interest on municipal obligations is not subject to the
excise tax.) The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed
- 20 -
<PAGE>
any amount on which it is subject to income tax for any taxable year ending in
such calendar year.
For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year; and (2)
exclude foreign currency gains and losses incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The High-Yield Series intends to make sufficient distributions or
deemed distributions of its ordinary taxable income and capital gain net income
prior to the end of each calendar year to avoid liability for the excise tax.
However, investors should note that the High-Yield Series may in certain
circumstances be required to liquidate portfolio investments to make sufficient
distributions to avoid excise tax liability.
High-Yield Series Distributions
The High-Yield Series anticipates distributing substantially all
of its investment company taxable income for each taxable year. Such
distributions will be taxable to shareholders as ordinary income and treated as
dividends for federal income tax purposes, but they will not qualify for the 70%
dividends-received deduction for corporate shareholders.
The High-Yield Series may either retain or distribute to
shareholders its net capital gain for each taxable year. The High-Yield Series
currently intends to distribute any such amounts. Net capital gain that is
distributed and designated as a capital gain dividend will be taxable to
shareholders as long-term capital gain, regardless of the length of time the
shareholder has held his shares or whether such gain was recognized by the
High-Yield Series prior to the date on which the shareholder acquired his
shares.
The High-Yield Series intends to qualify to pay exempt- interest
dividends by satisfying the requirement that at the close of each quarter of the
High-Yield Series' taxable year at least 50% of the High-Yield Series' total
assets consists of tax-exempt municipal obligations. Distributions from the
High-Yield Series will constitute exempt-interest dividends to the extent of the
High-Yield Series' tax-exempt interest income (net of expenses and amortized
bond premium). Exempt-interest dividends distributed to shareholders of the
High-Yield Series are excluded from gross income for federal income tax
purposes. However, shareholders required to file federal income tax returns will
be required to report the receipt of exempt-interest dividends on their returns.
Moreover, while exempt-interest dividends are excluded from gross income for
federal income tax purposes, they may be subject to alternative minimum tax
("AMT") in certain circumstances and may have other
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collateral tax consequences as discussed below. Distributions by the High-Yield
Series of any investment company taxable income or of any net capital gain will
be taxable to shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds,
the regular tax and is computed at a maximum marginal rate of 28% for
noncorporate taxpayers and 20% for corporate taxpayers on the excess of the
taxpayer's alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986, generally will constitute an item of
tax preference includable in AMTI for both corporate and noncorporate taxpayers.
In addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in computing
the portion, if any, of social security or railroad retirement benefits that
must be included in an individual shareholder's gross income and subject to
federal income tax. Further, a shareholder of the High-Yield Series is denied a
deduction for interest on indebtedness incurred or continued to purchase or
carry shares of the High-Yield Series. Moreover, a shareholder who is (or is
related to) a "substantial user" of a facility financed by industrial
development bonds held by the High-Yield Series will likely be subject to tax on
dividends paid by the High-Yield Series which are derived from interest on such
bonds. Receipt of exempt-interest dividends may result in other collateral
federal income tax consequences to certain taxpayers, including financial
institutions, property and casualty insurance companies and foreign corporations
engaged in a trade or business in the United States. Prospective investors
should consult their own tax advisers as to such consequences.
Distributions by the High-Yield Series that do not constitute
ordinary income dividends, exempt-interest dividends or capital gain dividends
will be treated as a return of capital to the extent of (and in reduction of)
the shareholder's tax basis in his shares; any excess will be treated as gain
realized from the sale of the shares, as discussed below.
Distributions by the High-Yield Series will be treated in the
manner described above regardless of whether such distributions are paid in cash
or reinvested in additional shares of the High-Yield Series (or of another
fund). Shareholders receiving a distribution in the form of additional shares
will be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment date. In
addition, if the net asset value at the time a shareholder purchases shares of
the High-Yield Series reflects realized but undistributed income or gain, or
unrealized appreciation in the value of assets held by the High-Yield Series,
distributions of such amounts will be taxable
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<PAGE>
to the shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by
the High-Yield Series into account in the year in which they are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the High-Yield Series) on
December 31 of such calendar year provided such dividends are actually paid in
January of the following year. Shareholders will be advised annually as to the
U.S. federal income tax consequences of distributions made (or deemed made)
during the year.
The High-Yield Series will be required in certain cases to
withhold and remit to the U.S. Treasury 31% of ordinary income and capital gain
dividends, and the proceeds of redemption of shares, paid to any shareholder (1)
who has failed to provide a correct taxpayer identification number, (2) who is
subject to backup withholding by the IRS for failure properly to report the
receipt of interest or dividend income, or (3) who has failed to certify to the
High-Yield Series that it is not subject to backup withholding or that it is an
"exempt recipient" (such as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or
redemption of shares of the High-Yield Series in an amount equal to the
difference between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so recognized may
be disallowed if the shareholder purchases other shares of the High-Yield Series
within 30 days before or after the sale or redemption. In general, any gain or
loss arising from (or treated as arising from) the sale or redemption of shares
of the High-Yield Series will be considered capital gain or loss and will be
long-term capital gain or loss if the shares were held for longer than one year.
However, any capital loss arising from the sale or redemption of shares held for
six months or less will be disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) will be treated as a long-term capital loss to the extent of the
amount of capital gain dividends received on such shares. For this purpose, the
special holding period rules of Code section 246(c)(3) and (4) generally will
apply in determining the holding period of shares. Capital losses in any year
are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign
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shareholder"), depends on whether the income from the High-Yield Series is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the High-Yield Series is not effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
ordinary income dividends paid to a the shareholder will be subject to U.S.
withholding tax at the rate of 30% (or lower applicable treaty rate) on the
gross amount of the dividend. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale or redemption
of shares of the High-Yield Series, capital gain dividends and exempt-interest
dividends and amounts retained by the High-Yield Series that are designated as
undistributed capital gains.
If the income from the High-Yield Series is effectively connected
with a U.S. trade or business carried on by a foreign shareholder, then ordinary
income and capital gain dividends received in respect of, and any gains realized
upon the sale of, shares of the High-Yield Series will be subject to U.S.
federal income tax at the rates applicable to U.S.
taxpayers.
In the case of a foreign noncorporate shareholder, the High-Yield
Series may be required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding (or subject to
withholding at a reduced treaty rate), unless the shareholder furnishes the
High-Yield Series with proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim
the benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
High-Yield Series, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and Treasury Regulations issued thereunder as
in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, perhaps with retroactive effect.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated investment
companies may differ from the rules for U.S. federal income taxation described
above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting investment
in the High-Yield Series.
DESCRIPTION OF SHARES
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The Fund's Declaration of Trust permits its Board of Trustees to
authorize the issuance of an unlimited number of full and fractional shares of
beneficial interest (without par value), which may be divided into such separate
series as the Trustees may establish. The Fund currently has three series of
shares: the High-Yield Series, the Cornerstone Tax-Free Money Market Series and
the Cornerstone U.S. Government Strategic Income Fund Series. The Trustees may
establish additional series of shares, and may divide or combine the shares into
a greater or lesser number of shares without thereby changing the proportionate
beneficial interests in the Fund. Each share represents an equal proportionate
interest in the Fund with each other share. The shares of any additional series
would participate equally in the earnings, dividends and assets of the
particular series, and would be entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shareholders of all series would vote together in the election and selection of
Trustees and accountants. Upon liquidation of the High-Yield Series, each
series' shareholder is entitled to share pro rata in the net assets available
for distribution to shareholders from such series.
Shareholders are entitled to one vote for each share held and may
vote in the election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees. No material amendment may be made to the Fund's Declaration of Trust
without the affirmative vote of a majority of its shares. Shares have no
preemptive or conversion rights. Shares are fully paid and non-assessable,
except as set forth below. See "Certain Liabilities."
CERTAIN LIABILITIES
As a Massachusetts business trust, the Fund's operations are
governed by its Declaration of Trust dated March 19, 1987, a copy of which is on
file with the office of The Secretary of the Commonwealth of Massachusetts.
Theoretically, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for the obligations of the trust.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Fund or any series of the Fund and
requires that notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Fund or its Trustees. Moreover,
the Declaration of Trust provides for the indemnification out of Fund property
of any shareholders held personally liable for any obligations of the Fund or
any series of the Fund. The Declaration of Trust also provides that the Fund
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss beyond his or
her investment because of shareholder liability would be limited to
circumstances in which the Fund itself will be unable to meet its obligations.
In light of the nature of the Fund's business, the possibility
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<PAGE>
of the Fund's liabilities exceeding its assets, and therefore a shareholder's
risk of personal liability, is extremely remote.
The Declaration of Trust further provides that the Fund shall
indemnify each of its Trustees and officers against liabilities and expenses
reasonably incurred by them, in connection with, or arising out of, any action,
suit or proceeding, threatened against or otherwise involving such Trustee or
officer, directly or indirectly, by reason of being or having been a Trustee or
officer of the Fund. The Declaration of Trust does not authorize the Fund to
indemnify any Trustee or officer against any liability to which he or she would
otherwise be subject by reason of or for willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties.
PURCHASE OF SHARES
For information regarding the manner in which shares of the Fund
are offered to the public, see "Purchase of Shares" in the Prospectus.
PRICING OF SHARES
The net asset value of shares of the High-Yield Series is
determined as of the close of trading on the New York Stock Exchange (currently
4:00 P.M., New York time) on each day that both the New York Stock Exchange and
the Fund's custodian bank are open for business. This determination is made once
during each such day as of the close of the New York Stock Exchange by deducting
the amount of the High-Yield Series' liabilities from the value of its assets
and dividing the difference by the number of its shares outstanding. Debt
securities (other than short-term obligations), including listed issues, are
valued on the basis of valuations furnished by a pricing service which utilizes
both dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institution-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data, without exclusive reliance
upon exchange or over-the-counter prices, because such valuations are believed
to reflect more accurately the fair value of such securities. Use of the pricing
service has been approved by the Board of Trustees. Short-term obligations are
valued at amortized cost, which constitutes fair value as determined by the
Board of Trustees. Portfolio securities for which there are no such valuations
are valued at fair value as determined in good faith by or at the direction of
the Board of Trustees.
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<PAGE>
CALCULATION OF YIELD
The High-Yield Series' yield quotations and average annual total
return quotations as they may appear in the Prospectus, this Statement of
Additional Information or in advertising and sales material are calculated by
standard methods prescribed by the Securities and Exchange Commission.
The High-Yield Series' yield is computed by dividing the
High-Yield Series' net investment income per share during a base period of 30
days, or one month, by the net asset value per share of the High-Yield Series on
the last day of such base period in accordance with the following formula:
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 reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
For purposes of calculating interest earned on debt obligations as provided in
item "a" above:
(i) The yield to maturity of each obligation held by the
High-Yield Series is computed based on the market value of the obligation
(including actual accrued interest, if any) at the close of business on the last
day of each month, or, with respect to obligations purchased during the month,
the purchase price (plus actual accrued interest, if any).
(ii) The yield to maturity of each obligation is then divided by
360 and the resulting quotient is multiplied by the market value of the
obligation (including actual accrued interest, if any) to determine the interest
income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For these purposes it is assumed that each month
has 30 days.
(iii) Interest earned on all debt obligations during the 30-day
or one month period is then totaled.
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<PAGE>
(iv) The maturity of an obligation with a call provision(s) is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date.
(v) In the case of a tax-exempt obligation issued without
original issue discount and having a current market discount, the coupon rate of
interest of the obligation is used in lieu of yield to maturity to determine
interest income earned on the obligation. In the case of a tax-exempt obligation
with original issue discount where the discount based on the current market
value of the obligation exceeds the then remaining portion of original issue
discount (i.e. market discount), the yield to maturity used to determine
interest income earned on the obligation is the imputed rate based on the
original issue discount calculation. In the case of a tax-exempt obligation with
original issue discount where the discount based on the current market value of
the obligation is less than the then remaining portion of the original issue
discount (market premium), the yield to maturity used to determine interest
income earned on the obligation is based on the market value of the obligation.
With respect to the treatment of discount and premium on mortgage
or other receivables-backed obligations which are expected to be subject to
monthly payments of principal and interest ("pay downs"), the High-Yield Series
accounts for gain or loss attributable to actual monthly pay downs as an
increase or decrease to interest income during the period. In addition, the
High-Yield Series may elect (i) to amortize the discount or premium on a
remaining security, based on the cost of the security, to the weighted average
maturity date, if such information is available, or to the remaining term of the
security, if the weighted average maturity date is not available, or (ii) not to
amortize the discount or premium on a remaining security.
For purposes of computing yield, dividend income is recognized by
accruing 1/360 of the stated dividend rate of each obligation in the High-Yield
Series' portfolio each day that the obligation is in the portfolio. The
High-Yield Series does not use equalization accounting in the calculation of
yield. Expenses accrued during any base period, if any, pursuant to the
Distribution Plan are included among the expenses accrued during the base
period. Any reimbursement accrued pursuant to the Distribution Plan during a
base period, if any, will reduce expenses accrued pursuant to such Plan, but
only to the extent the reimbursement does not exceed the accrued expenses for
the base period.
The High-Yield Series' yield for the one-month period ended
December 31, 1998 determined in accordance with the above formula is 3.28%.
Average annual total return quotations are computed by finding
the average annual compounded rates of return that would cause a hypothetical
investment made on the first day of a designated period (assuming all dividends
and distributions are reinvested) to equal the ending redeemable value of such
hypothetical investment on the last day of the designated period in accordance
with the following formula:
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<PAGE>
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1000 payment made
at the end of a designated period (or fractional portion thereof)
For purposes of the above computation, it is assumed that all
dividends and distributions made by the High-Yield Series are reinvested at net
asset value during the designated period. The average annual total return
quotation is determined to the nearest 1/100 of 1%. The average annual total
return for the High-Yield Series for the year ended December 31, 1998 was .74%.
The average annual total return for the High Yield Series for the 5 year period
ended December 31, 1998 was 5.85%. The average annual total return was 5.00% for
the ten year period ended December 31, 1998.
In determining the average annual total return (calculated as
provided above), recurring fees, if any, that are charged to all shareholder
accounts are taken into consideration. For any account fees that vary with the
size of the account, the account fee used for purposes of the above computation
is assumed to be the fee that would be charged to the High-Yield Series' mean
account size.
The High-Yield Series may also from time-to-time advertise its
taxable equivalent yield. The High-Yield Series' taxable equivalent yield is
determined by dividing that portion of the High-Yield Series' yield (calculated
as described above) that is tax-exempt by one minus the stated marginal federal
income tax rate and adding the product to that portion, if any,of the yield of
the High-Yield Series that is not tax-exempt. The taxable equivalent yield of
the High-Yield Series for the one-month period ended December 31, 1998 was 2.52%
for a taxpayer whose income was subject to the then highest marginal federal
income tax rate of 39.60%.
The High-Yield Series' yield and average annual total return will
vary from time-to-time depending on market conditions, the composition of the
High-Yield Series' portfolio and operating expenses of the High-Yield Series.
These factors and possible differences in the methods used in calculating yields
and returns should be considered when comparing performance information
regarding the High-Yield Series' to information published for other investment
companies and other investment vehicles. Yields and return quotations should
also be considered relative to changes in the value of the High-Yield Series'
shares and the risk associated with the High-Yield Series' investment objective
and policies. At any time in the future, yields and return quotations may be
higher or lower than past yields or
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<PAGE>
return quotations and there can be no assurance that any historical yield or
return quotation will continue in the future. In addition, the yield and average
annual total return figures set forth above in this Statement of Additional
Information should be evaluated in light of the limited operating history of the
High-Yield Series.
FINANCIAL STATEMENTS
The Financial Statements for the High-Yield Series are
incorporated by reference to the High-Yield Series' Audited Annual Report dated
December 31, 1998. Shareholders will receive a copy of the Audited Annual Report
at no additional charge when requesting a copy of the Statement of Additional
Information.
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<PAGE>
APPENDIX
Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities such as bridges, highways, housing, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to loan to
other public institutions. In addition, certain types of private activity bonds
are issued by or on behalf of public authorities to obtain funds to provide
privately operated housing facilities, airport, mass transit, port facilities,
and certain local facilities for water supply, gas, electricity or sewage or
solid waste disposal. Such obligations are included within the term Municipal
Bonds if the interest paid thereon qualifies as exempt from federal income tax.
Other types of private activity bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Bonds, although the current
federal tax laws place substantial limitations on the volume of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The payment of such bonds may be dependent upon an
appropriation by the issuer's legislative body. The characteristics and
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Private activity
bonds which are Municipal Bonds are in most cases revenue bonds and do not
generally constitute the pledge of the credit of the issuer of such bonds. There
are, of course, variations in the security of Municipal Bonds, both within a
particular classification and between classifications, depending on numerous
factors.
The yields on Municipal Bonds are dependent on a variety of
factors, including general money market conditions, supply and demand and
general conditions of the Municipal Bond market, size of a particular offering,
the maturity of the obligation and rating of the issue. The ratings of Moody's
Investors Service, Inc. and Standard & Poor's Corporation represent their
opinions as to the quality of various Municipal Bonds. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and rating may have different
yields while Bonds of the same maturity and coupon with different ratings may
have the same yield.
A-1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CORNERSTONE FIXED INCOME FUNDS
CORNERSTONE TAX-FREE MONEY MARKET SERIES
THIS STATEMENT IS DATED APRIL 30, 1999 AND SUPPLEMENTS
THE FUND'S PROSPECTUS OF THE SAME DATE.
This Statement of Additional Information provides certain
detailed information concerning the Tax-Free Money Market Series (the "Money
Market Series") of Cornerstone Fixed Income Funds. It is not a prospectus. The
Fund's Prospectus may be obtained, without charge, by writing to the Fund at
Cornerstone Family of Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box
701, Milwaukee, WI 53201-0701, or by calling (800) 322-6864. This Statement of
Additional Information should be read in conjuction with the Fund's Prospectus
dated April 30, 1999, and the Fund's Annual Report dated December 31, 1998,
which are hereby incorporated by reference.
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY .................................................................
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS...............................
INVESTMENT LIMITATIONS ...............................................
MANAGEMENT OF THE FUND ...............................................
OWNERSHIP OF SECURITIES ......................................................
INVESTMENT MANAGEMENT AND OTHER SERVICES .....................................
DISTRIBUTION PLAN ....................................................
PORTFOLIO TRANSACTIONS................................................
TAXES.................................................................
DESCRIPTION OF SHARES.................................................
CERTAIN LIABILITIES...................................................
PURCHASE OF SHARES ...........................................................
PRICING OF SHARES ............................................................
CALCULATION OF YIELD..........................................................
FINANCIAL STATEMENTS..................................................
APPENDIX...........................................................A-1
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<PAGE>
FUND HISTORY
Cornerstone Fixed Income Funds (the "Fund") was organized as a
Massachusetts business trust on March 19, 1987. On April 30, 1999, the Fund
changed its name from Fundamental Fixed Income Fund to Cornerstone Fixed Income
Funds. The Company has three series: Cornerstone High-Yield Municipal Bond
Series, Cornerstone U.S. Government Strategic Income Fund, and Cornerstone
Tax-Free Money Market Series (the "Money Market Series"). This Statement of
Additional Information pertains to the Money Market Series, which is an
open-end, diversified management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus of the Money Market Series dated April 30, 1999
(the "Prospectus") identifies the investment objective and the principal
investment policies of the Money Market Series. Other investment policies and a
further description of certain of the policies described in the Prospectus are
set forth below.
"When-Issued" Securities. As described in the Prospectus under
"INVESTMENT OBJECTIVE AND POLICIES," the Money Market Series may purchase new
issues of tax-exempt securities on a "when-issued" basis. In order to invest the
Money Market Series' assets immediately, while awaiting delivery of securities
purchased on a "when-issued" basis, short-term obligations that offer same day
settlement and earnings will normally be purchased. Although short-term
investments will normally be in tax-exempt securities, short-term taxable
securities may be purchased if suitable short-term tax-exempt securities are not
available. When a commitment to purchase a security on a "when-issued" basis is
made, procedures are established consistent with the General Statement of Policy
of the Securities and Exchange Commission concerning such purchases. Because
that policy currently recommends that an amount of the assets of the Money
Market Series equal to the amount of the purchase be held aside or segregated to
be used to pay for the commitment, cash or high-quality debt securities
sufficient to cover any commitments are always expected to be available.
Nonetheless, such purchases may involve more risk than other types of purchases,
as described in the Prospectus.
Standby Commitments. The Money Market Series may acquire standby
commitments with respect to Municipal Bonds held in its portfolio. A standby
commitment is an agreement in which a dealer agrees to purchase, at the Money
Market Series' option, specified Municipal Bonds at specified prices. The total
amount paid by the Money Market Series for outstanding standby commitments it
holds will not exceed 1/2 of 1% of the Money Market Series' total assets
calculated immediately after each standby commitment is acquired. The
acquisition of a standby commitment will not affect the valuation of the
underlying security, which will continue to be valued in accordance with the
amortized cost method. See "DETERMINATION OF NET ASSET VALUE" below. The actual
standby commitment will be valued at zero in determining net asset value. The
cost of the standby commitment will be reflected as an unrealized loss for the
period during which the commitment is held by the Money
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<PAGE>
Market Series and will be reflected in realized gain or loss when the commitment
is exercised or expires.
Temporary Defensive Investments. The Money Market Series may,
from time to time, take temporary defensive positions that are inconsistent with
its prinicpal investment strategies. Such investments are made only under
conditions that in the opinion of the investment adviser of the Money Market
Series make such investments advisable. For example, the Money Market Series may
invest in taxable obligations pending investment in municipal bonds of proceeds
from the sale of its shares or investments or to ensure the liquidity needed to
satisfy redemptions of shares and the day-to-day operating expenses of the Money
Market Series. The Money Market Series invests in only those taxable obligations
that are (1) rated AA or higher by S&P or Aa or higher by Moody's or unrated but
judged by its investment adviser to be of at least comparable quality, (2)
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or (3) obligations of banks (including certificates of
deposit, bankers' acceptances, and repurchase agreements) with at least
$1,000,000,000 of assets. No more than 50% of the assets of the Money Market
Series may be invested in taxable obligations at any one time, and the Money
Market Series anticipates that on a 12-month average, taxable obligations will
constitute less than 10% of the value of its total investments.
Private Activity Bonds. The Internal Revenue Code of 1986, as
amended (the "Code") treats interest from certain municipal bonds (referred to
as private activity bonds) as a tax preference item under the alternative
minimum tax. Thus, corporate and individual shareholders may incur an
alternative minimum tax liability as a result of receiving tax-exempt dividends
from the Money Market Series to the extent such dividends are attributable to
interest from private activity bonds. The Money Market Series will invest in
private activity bonds only when it believes that the yield disparity between
private activity bonds and other municipal bonds makes an investment in private
activity bonds attractive. In addition, because all tax-exempt dividends are
included in a corporate shareholder's adjusted current earnings (which are used
in computing a separate preference item for corporations), corporate
shareholders may incur an alternative minimum tax liability as a result of
receiving any tax-exempt dividends from the Money Market Series. Tax-exempt
interest and income referred to throughout this Prospectus means interest and
income that is excluded from gross income for federal income tax purposes but
may be a tax preference item subject to the alternative minimum tax. Further,
such tax-exempt interest and income may be subject to taxation under the tax
laws of any state or local taxing authority.
Portfolio Turnover. Pursuit by the Money Market Series of its
investment objective may lead to frequent changes in the securities held in its
portfolio, which is known as "portfolio turnover." Portfolio turnover may
involve payments by the Money Market Series of broker commissions, dealer
spreads and other transaction costs relating to the purchase and the sale of
securities. Portfolio turnover rate for a given fiscal year is calculated by
dividing the lesser of the amount of the purchases or the amount of the sales of
portfolio securities during the year by the monthly average of the value of the
portfolio securities during the year.
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<PAGE>
INVESTMENT LIMITATIONS
In addition to its investment objective, the Money Market Series
has adopted the following policies as "fundamental policies," which cannot be
changed without the approval of the holders of a majority of the shares of the
Money Market Series (which, as used in this Statement of Additional Information,
means the lesser of (i) more than 50% of the outstanding shares, or (ii) 67% or
more of the shares present at a meeting at which holders of more than 50% of the
outstanding shares are represented in person or by proxy). The Money Market
Series may not:
1. purchase the securities of any issuer, if, as a result of such
purchase, more than 25% of its total assets would be invested in
non-governmental industrial revenue bonds, the payment of the principal and
interest on which are the responsibility of issuers in the same industry,
provided that it may invest more than 25% of its total assets in industrial
revenue bonds, in banks or in U.S. government securities;
2. borrow money, except to meet redemptions in amounts not
exceeding 33 1/3% (taken at the lower of cost or current value) of its total
assets (including the amount borrowed);
3. commit more than 10% of its assets to illiquid securities,
including repurchase agreements that mature in more than seven days;
4. make short sales of securities;
5. purchase securities on margin;
6. write, purchase or otherwise invest in any put (except for
standby commitments, as described in the Prospectus), call, straddle or spread
option or buy or sell real estate, commodities or commodity futures contracts or
invest in oil, gas or mineral exploration or development programs;
7. make loans to any person, except by (a) the purchase of a debt
obligation in which the Money Market Series is permitted to invest and (b)
engaging in repurchase agreements;
8. knowingly purchase any security that is subject to legal or
contractual restrictions on resale or for which there is no readily available
market;
9. purchase or retain the securities of any issuer if any officer
or Trustee of the Fund or of the Fund's investment advisor is an officer or
director of such issuer and owns beneficially more than 1/2 of 1% of the
securities of such issuer and all of the officers and Trustees of the Fund and
of the Fund's investment advisor together own more than 5% of the securities of
such issuer;
-5-
<PAGE>
10. act as an underwriter, except as it may be deemed to be an
underwriter in a sale of restricted securities;
11. invest in companies for the purpose of exercising control
or management; or
12. issue senior securities.
For the purposes of the Money Market Series' investment
restrictions, the issuer of a tax-exempt security is deemed to be the entity
(public or private) ultimately responsible for the payment of the principal and
interest on the security.
Operating Policies. The Money Market Series has adopted the
following operating policy which is not fundamental and which may be changed
without shareholder approval: To comply with certain state statutes, the Money
Market Series will not pledge, mortgage or hypothecate its portfolio securities
if at the time the value of the securities so pledged, mortgaged or hypothecated
would exceed 10% of the value of the Money Market Series.
Percentage Restrictions. If a percentage restriction on
investment or utilization of assets set forth above is adhered to at the time an
investment is made or assets are so utilized, a later change in percentage
resulting from changes in the value of the portfolio securities of the Money
Market Series will not be considered a violation of such policy.
The Money Market Series has adopted a number of investment restrictions and
policies that may help to reduce risk:
* The Money Market Series will not purchase a municipal bond if as
a result more than 25% of the assets of the Money Market Series
would be invested in the securities of a particular industry.
This limitation does not apply to the investment of its assets in
banks, U.S. Government securities, or federal agency obligations.
* The Money Market Series will not borrow money except to meet
redemptions, and then in amounts not exceeding 33.33% (taken at
the lower of cost or current value) of its total assets
(including the amount borrowed) or mortgage, pledge or
hypothecate its assets except in connection with any such
borrowing and in amounts not in excess of the dollar amounts
borrowed.
* At no time will the Money Market Series commit more than 10% of
its assets to illiquid securities, including repurchase
agreements that mature in more than seven days.
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<PAGE>
Borrowings are subject to the additional restriction that the value of
the Money Market Series' assets, less its liabilities other than borrowings,
must always be equal to or greater than 300% of all of its borrowings (including
the proposed borrowing). If this 300% coverage requirement is not met, the Money
Market Series must, within three days, reduce its debt to the extent necessary
to meet such coverage requirement, and to do so, it may have to sell a portion
of its investments at a time when such a sale would otherwise be inadvisable.
Interest on money borrowed is an expense of the Money Market Series.
MANAGEMENT OF THE FUND
Trustees and Officers
The business of the Company is managed under the direction of the
Board of Trustees. Specifically, the Board of Trustees is responsible for
oversight of the Money Market Series by reviewing and approving necessary
agreements with the Money Market Series' service providers, and mandating
policies for the Money Market Series' operations.
Trustees and officers of the Fund, together with information as
to their principal business occupations during the last five years, are shown
below. Each trustee who is considered to be an "interested person" of the Fund,
as defined in the 1940 Act, is indicated by as asterisk (*). The Board Members
listed below were elected by the Fund's shareholders at a Special Meeting held
on March 12, 1999.
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<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
Position(s) Held Principal Occupation(s) During
Name, Address, and Age with Fund Past Five Years
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
William J. Armstrong Trustee Vice President and Treasurer,
Ingersoll-Rand Company Ingersoll-Rand Company (5/86 -
200 Chestnut Ridge Road Present); Trustee, Chase Vista
Woodcliff Lake, NJ 07675 Funds.
Age: 56
- -----------------------------------------------------------------------------------------------------
L. Greg Ferrone Trustee Consultant (3/99 - Present);
83 Ronald Court Senior Manager, ARC Partners
Ramsey, New Jersey 07446 (10/97 - 3/99); Consultant,
IntraNet, Inc. (4/90 - 10/97);
Age: 47 Sales & Marketing Director,
RAV Communications (4/85 -
4/90); Vice President/Regional
Manager, National Westminster
Bank USA (3/78 - 4/85).
- -----------------------------------------------------------------------------------------------------
Stephen C. Leslie* President and Chairman and CEO,
Cornerstone Equity Advisors Trustee Cornerstone Equity Advisors,
Inc. Inc. (6/97 - Present); Partner,
67 Wall Street Wall Street Capital Group (3/97
New York, New York 10005 - 6/97); Partner, Wall Street
Investment Corp. (11/95 -3/97);
Age: 45 Partner, Tucker Anthony
Securities (8/95 - 10/95); Senior
Vice President, Pryor
McClendon Counts & Co. (5/94
- 8/95); Senior Vice President,
Siebert Capital Markets (6/93 -
5/94).
- -----------------------------------------------------------------------------------------------------
G. John Fulvio* Treasurer/Chief Treasurer, Cornerstone Equity
Speer & Fulvio Financial Officer Advisors, Inc. (4/97 - Present);
60 East 42nd Street and Trustee Partner, Speer & Fulvio (3/87 -
New York, New York 10165 Present).
Age: 41
- -----------------------------------------------------------------------------------------------------
- 8 -
<PAGE>
- -----------------------------------------------------------------------------------------------------
Leroy E. Rodman Trustee Counsel, Morrison, Cohen,
Morrison, Cohen, Singer & Singer & Weinstein, LLP
Weinstein LLP (1996 - Present); Senior Partner,
750 Lexington Avenue Teitelbaum, Hiller, Rodman,
New York, NY 10022 Paden & Hibsher, P.C. (1990 -
1996).
Age: 85
- -----------------------------------------------------------------------------------------------------
Dr. Yvonne Scruggs-Leftwich Trustee Executive Director and Chief
11510 Bucknell Drive Operating Officer, Black
Condo #204 Leadership Forum, Inc.;
Wheaton, MD 20902 Director, Joint Center For
Political and Economic Studies
Age: 65 (1991 - Present).
=====================================================================================================
</TABLE>
Mr. Leslie is the chief portfolio manager and Mr. Fulvio the
Treasurer of the Fund's adviser, Cornerstone Equity Advisors, Inc. All of the
Trustees of the Fund are also Trustees of The California Muni Fund and Directors
of Cornerstone Funds Inc.
For services and attendance at board meetings and meetings of
committees which are common to the Fund, Cornerstone Funds, Inc. and The
California Muni Fund (other affiliated mutual funds for which the Fund's
investment manager acts as the investment adviser), each Trustee of the Fund who
is not affiliated with the Fund's investment manager is compensated at the rate
of $5,000 per quarter prorated among the three funds based on their respective
net assets at the end of each quarter. Each such Trustee is also reimbursed by
the three funds, on the same basis, for actual out-of-pocket expenses relating
to his or her attendance at meetings. Some Trustees received additional
compensation at a rate of $125 per hour for services related to servicing on the
Portfolio Review Committee. As of the date of this Statement of Additional
Information, Trustees and officers of the Fund as a group owned beneficially
less than 1% of the Money Market Series' outstanding shares.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(for each current Board Member for the
most recently completed fiscal year)
==========================================================================================================
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual From Fund and
Name of Person*, Compensation as Part of Fund Benefits Upon Fund Complex
Position From Fund Expenses Retirement Paid to Trustees
- -------- --------- -------- ---------- ----------------
- 9 -
<PAGE>
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
L. Greg Ferrone, $12,401 N/A N/A $19,500
Trustee
==========================================================================================================
</TABLE>
* Mr. Ferrone is the only current Board Member who served in that capacity
during the fiscal year ended 1998.
- 10 -
<PAGE>
OWNERSHIP OF SECURITIES
As of March 31, 1999, no person owned beneficially or of record
more than 5% of the outstanding shares of the Money Market Series. As of that
date, the officers and Board Members of the Money Market Series beneficially
owned less than 1% of the shares of the Money Market Series.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Advisory Services
The Money Market Series is currently managed by Cornerstone
Equity Advisors, Inc. ("Cornerstone" or the "Manager"). Cornerstone's Chairman
and Chief Executive Officer is Mr. Stephen C. Leslie, who is also President of
the Money Market Series. Mr. Leslie is one of two individuals who may be
considered a "control person" of Cornerstone. Cornerstone's Treasurer, Mr. G.
John Fulvio, is the Treasurer and Chief Financial Officer of the Money Market
Series. Mr. Fulvio is not considered a "control person" of Cornerstone.
Cornerstone receives an advisory fee equal to the following
percentages of the Fund's average daily net asset value:
Average Daily Net Asset Value Annual Fee Payable
Net asset value to $500,000,000 .75%
Net asset value of $500,000,000 or more but less than $1,000,000,000 .72%
Net asset value of $1,000,000,000 or more .70%
The fee levels noted above are identical to those received by the
Money Market Series' previous advisers, Tocqueville Asset Management, L.P.
("Tocqueville"), and Fundamental Portfolio Advisors, Inc. ("FPA").
From September 29, 1998 to December 31, 1998 Cornerstone received
an aggregate advisory fee of $46,064. From June 1, 1998 to September 28, 1998
Tocqueville, as an interim adviser, received an aggregate advisory fee of
$20,732. From January 1, 1998 to May 30, 1998 FPA received an aggregate advisory
fee of $90,268. For the fiscal year ended December 31, 1997 FPA received an
aggregate advisory fee of $245,844. For the fiscal year ended December 31, 1996
FPA received an aggregate advisory fee of $787,962.
- 11 -
<PAGE>
Administrator, Transfer Agent, and Accounting Agent
Firstar Mutual Fund Services, LLC, 615 East Michigan Street,
Milwaukee, WI 53201-0701 currently acts as Administrator, Transfer Agent, and
Accounting Agent of the Fund. Firstar Mutual Fund Services, LLC provides various
administrative and accounting services necessary for the operations of the Fund.
Services provided by the Administrator include: facilitating general Fund
management; monitoring Fund compliance with federal and state regulations;
supervising the maintenance of the Fund's general ledger, the preparation of the
Fund's financial statements, the determination of the net asset value of the
Fund's assets and the declaration and payment of dividends and other
distributions to shareholders; and preparing specified financial, tax and other
reports. The Fund pays the Administrator an annual fee for administrative
services of 0.06% on the first $200 million on the Fund's average net assets;
0.05% of the next $300 million of the Fund's average net assets; 0.03% of the
remaining value of the Fund's average net assets, subject to a minimum annual
fee of $30,000 for the Money Market Series. The Fund reimburses the
Administrator for certain out-of-pocket expenses. In addition, the Fund pays
Firstar Mutual Funds Services, LLC a fee for accounting services of $25,000 on
the first $40 million of assets, and 0.02% annually on the next $200 million of
such assets; 0.01% of any remaining assets, determined as of the end of the
month; plus certain expenses.
Custodian and Independent Public Accountant
Firstar Bank Milwaukee, N.A. (the "Bank"), 615 East Michigan
Street, Milwaukee, WI 53201-0701, acts as Custodian of the Fund's cash and
securities.
McGladrey & Pullen, LLP acts as independent certified public
accountants for the Fund, performing an annual audit of the Fund's financial
statements and preparing its tax returns.
DISTRIBUTION PLAN
The Fund has entered into a Distribution Agreement with Cresvale
International (US) LLC ("Cresvale"). The Trustees who are not, and were not at
the time they voted, interested persons of the Money Market Series, as defined
in the 1940 Act (the "Independent Trustees"), have approved the Distribution
Agreement. The Distribution Agreement provides that Cresvale will bear the
distribution expenses of the Money Market Series not borne by the
Money Market Series. The Distribution Agreement was approved by action of the
Trustees of the Fund on February 10, 1999. The Distribution Agreement will
continue in effect from year-to-year if it is specifically approved, at least
annually, in the manner required by the 1940 Act.
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<PAGE>
Cresvale bears all expenses it incurs in providing services under
the Distribution Agreement. Such expenses include compensation to it and to
securities dealers and other financial institutions and organizations such as
banks, trust companies, savings and loan associations and investment advisors
for distribution related and/or administrative services performed for the Money
Market Series. Cresvale also pays certain expenses in connection with the
distribution of the Money Market Series' shares, including the cost of
preparing, printing and distributing advertising or promotional materials. The
Money Market Series bears the cost of registering its shares under federal and
state securities law.
The Money Market Series and Cresvale have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. Under the Distribution Agreement, Cresvale
will use its best efforts in rendering services to the
Money Market Series.
The Money Market Series has adopted a plan of distribution
pursuant to Rule 12b-1 under the 1940 Act (the "Plan") pursuant to which the
High-Yield Series pays Cresvale compensation accrued daily and paid monthly at
the annual rate of 1/2 of 1.0% of the Money Market Series' average daily net
assets. The Plan was adopted by a majority vote of the Board of Trustees,
including all of the Independent Trustees (none of whom had or have any direct
or indirect financial interest in the operation of the Plan), cast in person at
a meeting called for the purpose of voting on the Plan on September 29, 1987 by
the then sole shareholders of the Money Market Series.
Pursuant to the Plan, Cresvale provides the Money Market Series,
for review by the Trustees, and the Trustees review, at least quarterly, a
written report of the amounts expended under the Plan and the purpose for which
such expenditures were made.
No interested person of the Money Market Series nor any Trustee
of the Fund who is not an interested person of the Money Market Series, as
defined in the 1940 Act, has any direct financial interest in the operation of
the Plan except to the extent that Cresvale and certain of its employees may be
deemed to have such an interest as a result of receiving a portion of the
amounts expended thereunder by the Money Market Series.
The Plan has been approved and will continue in effect from
year-to-year thereafter, provided such continuance is approved annually by vote
of the Trustees in the manner described above. It may not be amended to increase
materially the amount to be spent for the services described therein without
approval of the shareholders of the Money Market Series, and material amendments
of the Plan must also be approved by the Trustees in the manner described above.
The Plan may be terminated at any time, without payment of any penalty, by vote
of the majority of the Trustees who are not interested persons of the Money
Market Series, and with no direct or indirect financial interest in the
operations of the Plan, or by a vote of a majority of the outstanding voting
securities of the Money Market Series (as defined in the 1940 Act). The Plan
will automatically terminate in the event of its assignment (as defined in the
1940 Act). So long as the Plan is in effect, the election and nomination of the
- 13 -
<PAGE>
Independent Trustees shall be committed to the discretion of the Independent
Trustees. In the Trustees' quarterly review of the Plan, they will consider its
continued appropriateness and the level of compensation provided therein.
During the year ended December 31, 1998, the Money Market Series
paid $95,728 for expenses incurred pursuant to the Plan, which amount was spent
in the distribution of the Money Market Series' shares, including expenses for:
advertising -- ($678); printing and mailing of Prospectuses to other than
current shareholders -- ($3,135); and sales, and shareholder servicing support
services and other distribution services, -- ($91,915). Of the amount paid by
the Money Market Series during last year, $81,827 was paid to Fundamental
Service Corporation and $9,000 was paid to Tocqueville Securities, LP. for
expenses incurred and services rendered by it pursuant to the Plan.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are
placed on behalf of the Money Market Series by the Manager pursuant to authority
contained in the Management Agreement (subject to the right of the Trustees to
reverse any such transaction). The Manager is and may in the future also be
responsible for the placement of transaction orders for the other series of the
Fund and other funds for which the Manager acts as investment advisor.
Securities purchased and sold on behalf of the Money Market Series will be
traded on a net basis (i.e. without commission) through dealers acting for their
own account and not as brokers or otherwise involve transactions directly with
the issuer of the instrument. In selecting brokers or dealers, the Manager will
consider various relevant factors, including, but not limited to, the size and
type of the transaction; the nature and character of the markets for the
security to be purchased or sold; the execution efficiency, settlement
capability, and financial condition of the dealer; the dealer's execution
services rendered on a continuing basis; and the reasonableness of any dealer
spreads.
Dealers may be selected who provide brokerage and/or research
services to the Fund or Money Market Series and/or other investment companies
over which the Manager exercises investment discretion. Such services may
include advice concerning the value of securities; the advisability of investing
in, purchasing or selling securities; the availability of securities or the
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement). The
Manager maintains a listing of dealers who provide such services on a regular
basis. However, because it is anticipated that many transactions on behalf of
the Money Market Series, other series of the Fund and other funds over which the
Manager exercises investment discretion are placed with dealers (including
dealers on the list) without regard to the furnishing of such services, it is
not possible to estimate the proportion of such transactions directed to such
dealers solely because such services were provided.
- 14 -
<PAGE>
The receipt of research from dealers may be useful to the Manager
in rendering investment management services to the Money Market Series and/or
other series of the Fund and other funds over which the Manager exercises
investment discretion, and conversely, such information provided by brokers or
dealers who have executed transaction orders on behalf of such other clients of
the Manager may be useful to the Manager in carrying out its obligations to the
Money Market Series. The receipt of such research has not reduced the Manager's
normal independent research activities; however, it enables the Manager to avoid
the additional expenses which might otherwise be incurred if it were to attempt
to develop comparable information through its own staff.
Dealers who execute portfolio transactions on behalf of the Money
Market Series may receive spreads or commissions which are in excess of the
amount of spreads or commissions which other brokers or dealers would have
charged for effecting such transactions. In order to cause the Money Market
Series to pay such higher spreads or commissions, the Manager must determine in
good faith that such spreads or commissions are reasonable in relation to the
value of the brokerage and/or research services provided by such executing
broker or dealers viewed in terms of a particular transaction or the Manager's
overall responsibilities to the Money Market Series, the Fund or the Manager's
other clients. In reaching this determination, the Manager will not attempt to
place a specific dollar value on the brokerage and/or research services provided
or to determine what portion of the compensation should be related to those
services.
The Manager is authorized to place portfolio transactions with
dealer firms that have provided assistance in the distribution of shares of the
Money Market Series or shares of other series of the Fund or other funds for
which the Manager acts as investment advisor if it reasonably believes that the
quality of the transaction and the amount of the spread are comparable to what
they would be with other qualified dealers.
During the years ended December 31, 1989 through 1998 the Money
Market Series did not pay any brokerage commissions.
The Fund's Trustees and brokerage allocation committee (comprised
solely of non-interested Trustees) periodically review the Manager's performance
of its responsibilities in connection with the placement of portfolio
transactions on behalf of the Money Market Series and the Fund and review the
dealer spreads paid by the Money Market Series and the Fund over representative
periods of time to determine if they are reasonable in relation to the benefits
to the Fund and its portfolios.
TAXES
The following is only a summary of certain additional federal
income tax considerations generally affecting the Money Market Series and its
shareholders that are not described in the Prospectus. No attempt is made to
present a detailed explanation of the tax
- 15 -
<PAGE>
treatment of the Money Market Series or its shareholders, and the discussions
here and in the Prospectus are not intended as substitutes for careful tax
planning.
Qualification as a Regulated Investment Company
The Money Market Series has elected to be taxed as a regulated
investment company for federal income tax purposes under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). As a regulated
investment company, the Money Market Series is not subject to federal income tax
on the portion of its net investment income (i.e., taxable interest, dividends
and other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net
short-term capital gain over net long-term capital loss) and at least 90% of its
tax-exempt income (net of expenses allocable thereto) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the Money Market Series made
during the taxable year or, under specified circumstances, within twelve months
after the close of the taxable year, will be considered distributions of income
and gains of the taxable year and will therefore count toward satisfaction of
the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a
regulated investment company must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement").
In general, gain or loss recognized by the Money Market Series on
the disposition of an asset will be a capital gain or loss. However, gain
recognized on the disposition of a debt obligation (including municipal
obligations) purchased by the Money Market Series at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Money Market Series held the debt
obligation.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
- 16 -
<PAGE>
In addition to satisfying the requirements described above, the
Money Market Series must satisfy an asset diversification test in order to
qualify as a regulated investment company. Under this test, at the close of each
quarter of the Money Market Series' taxable year, at least 50% of the value of
the Money Market Series' assets must consist of cash and cash items, U.S.
Government securities, securities of other regulated investment companies, and
securities of other issuers (as to each of which the Money Market Series has not
invested more than 5% of the value of the Money Market Series' total assets in
securities of such issuer and does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Money Market Series controls and
which are engaged in the same or similar trades or businesses.
If for any taxable year the Money Market Series does not qualify
as a regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the Money
Market Series' current and accumulated earnings and profits. Such distributions
generally will be eligible for the dividends-received deduction in the case of
corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated
investment company that fails to distribute in each calendar year an amount
equal to 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year (a "taxable year
election")). (Tax-exempt interest on municipal obligations is not subject to the
excise tax.) The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year; and (2)
exclude foreign currency gains and losses incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The Money Market Series intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and capital gain net
income prior to the end of each calendar year to avoid liability for the excise
tax. However, investors should note that the
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<PAGE>
Money Market Series may in certain circumstances be required to liquidate
portfolio investments to make sufficient distributions to avoid excise tax
liability.
Money Market Series Distributions
The Money Market Series anticipates distributing substantially
all of its investment company taxable income for each taxable year. Such
distributions will be taxable to shareholders as ordinary income and treated as
dividends for federal income tax purposes, but they will not qualify for the 70%
dividends-received deduction for corporate shareholders.
The Money Market Series may either retain or distribute to
shareholders its net capital gain for each taxable year. The Money Market Series
currently intends to distribute any such amounts. Net capital gain that is
distributed and designated as a capital gain dividend, will be taxable to
shareholders as long-term capital gain, regardless of the length of time the
shareholder has held his shares or whether such gain was recognized by the Money
Market Series prior to the date on which the shareholder acquired his shares.
The Money Market Series intends to qualify to pay exempt-interest
dividends by satisfying the requirement that at the close of each quarter of the
Money Market Series' taxable year at least 50% of the Money Market Series' total
assets consists of tax-exempt municipal obligations. Distributions from the
Money Market Series will constitute exempt-interest dividends to the extent of
the Money Market Series' tax-exempt interest income (net of expenses and
amortized bond premium). Exempt-interest dividends distributed to shareholders
of the Money Market Series are excluded from gross income for federal income tax
purposes. However, shareholders required to file federal income tax returns will
be required to report the receipt of exempt-interest dividends on their returns.
Moreover, while exempt-interest dividends are excluded from gross income for
federal income tax purposes, they may be subject to alternative minimum tax
("AMT") in certain circumstances and may have other collateral tax consequences
as discussed below. Distributions by the Money Market Series of any investment
company taxable income or of any net capital gain will be taxable to
shareholders as discussed above.
AMT is imposed in addition to, but only to the extent it exceeds,
the regular tax and is computed at a maximum marginal rate of 28% for
noncorporate taxpayers and 20% for corporate taxpayers on the excess of the
taxpayer's alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 generally will constitute an item of tax
preference includable in AMTI for both corporate and noncorporate taxpayers. In
addition, exempt-interest dividends derived from all municipal obligations,
regardless of the date of issue, must be included in adjusted current earnings,
which are used in computing an additional corporate preference item (i.e., 75%
of the excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
- 18 -
<PAGE>
Exempt-interest dividends must be taken into account in computing
the portion, if any, of social security or railroad retirement benefits that
must be included in an individual shareholder's gross income and subject to
federal income tax. Further, a shareholder of the Money Market Series is denied
a deduction for interest on indebtedness incurred or continued to purchase or
carry shares of the Money Market Series. Moreover, a shareholder who is (or is
related to) a "substantial user" of a facility financed by industrial
development bonds held by the Money Market Series will likely be subject to tax
on dividends paid by the Money Market Series which are derived from interest on
such bonds. Receipt of exempt-interest dividends may result in other collateral
federal income tax consequences to certain taxpayers, including financial
institutions, property and casualty insurance companies and foreign corporations
engaged in a trade or business in the United States. Prospective investors
should consult their own tax advisers as to such consequences.
Distributions by the Money Market Series that do not constitute
ordinary income dividends, exempt-interest dividends or capital gain dividends
will be treated as a return of capital to the extent of (and in reduction of)
the shareholder's tax basis in his shares; any excess will be treated as gain
realized from the sale of the shares, as discussed below.
Distributions by the Money Market Series will be treated in the
manner described above regardless of whether such distributions are paid in cash
or reinvested in additional shares of the Money Market Series (or of another
fund). Shareholders receiving a distribution in the form of additional shares
will be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment date. In
addition, if the net asset value at the time a shareholder purchases shares of
the Money Market Series reflects realized but undistributed income or gain, or
unrealized appreciation in the value of the assets held by the Money Market
Series, distributions of such amounts will be taxable to the shareholder in the
manner described above, although such distributions economically constitute a
return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by
the Money Market Series into account in the year in which the distributions are
made. However, dividends declared in October, November or December of any year
and payable to shareholders of record on a specified date in such a month will
be deemed to have been received by the shareholders (and made by the Money
Market Series) on December 31 of such calendar year provided such dividends are
actually paid in January of the following year. Shareholders will be advised
annually as to the U.S. federal income tax consequences of distributions made
(or deemed made) during the year.
The Money Market Series will be required in certain cases to
withhold and remit to the U.S. Treasury 31% of ordinary income dividends and
capital gain dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has failed to provide a correct taxpayer identification
number, (2) who is subject to backup withholding for failure properly to report
the receipt of interest or dividend income, or (3) who has failed to certify to
the Money
- 19 -
<PAGE>
Market Series that it is not subject to backup withholding or that it is an
"exempt recipient" (such as a corporation).
Sale or Redemption of Shares
The Money Market Series seeks to maintain a stable net asset
value of $1.00 per share; however, there can be no assurance that the Money
Market Series will do this. If the net asset value varies from $1.00 per share,
a shareholder will recognize gain or loss on the sale or redemption of shares of
the Money Market Series in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of the Money Market Series within 30 days
before or after the sale or redemption. In general, any gain or loss arising
from (or treated as arising from) the sale or redemption of shares of the Money
Market Series will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year. However,
any capital loss arising from the sale or redemption of shares held for six
months or less will be disallowed to the extent of the amount of exempt-interest
dividends received on such shares and (to the extent not disallowed) will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special holding period
rules of Code Section 246(c)(3) and (4) generally will apply in determining the
holding period of shares. Capital losses in any year are deductible only to the
extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of
ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Money Market Series is "effectively connected" with a U.S. trade or business
carried on by such shareholder.
If the income from the Money Market Series is not effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
ordinary income dividends paid to the shareholder will be subject to U.S.
withholding tax at the rate of 30% (or lower applicable treaty rate) on the
gross amount of the dividend. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale or redemption
of shares of the Money Market Series, capital gain dividends and exempt-interest
dividends and amounts retained by the Money Market Series that are designated as
undistributed capital gains.
If the income from the Money Market Series is effectively
connected with a U.S. trade or business carried on by a foreign shareholder,
then ordinary income and capital gain dividends received in respect of, and any
gains realized on the sale of shares of, the Money
- 20 -
<PAGE>
Market Series will be subject to U.S. federal income tax at the rates applicable
to U.S. taxpayers.
In the case of a foreign noncorporate shareholder, the Money
Market Series may be required to withhold U.S. federal income tax at a rate of
31% on distributions that are otherwise exempt from withholding tax (or subject
to withholding at a reduced treaty rate) unless the shareholder furnishes the
Money Market Series with proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim
the benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Money
Market Series, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and Treasury Regulations issued thereunder as
in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect.
Rules of state and local taxation of ordinary income dividends,
exempt-interest dividends and capital gain dividends from regulated investment
companies may differ from the rules for U.S. federal income taxation described
above. Shareholders are urged to consult their tax advisers as to the
consequences of these and other state and local tax rules affecting investment
in the Money Market Series.
DESCRIPTION OF SHARES
The Fund's Declaration of Trust permits its Board of Trustees to
authorize the issuance of an unlimited number of full and fractional shares of
beneficial interest (without par value), which may be divided into such separate
series as the Trustees may establish. The Fund currently has three series of
shares: the Money Market Series, the High-Yield Municipal Bond Series and the
Fundamental U.S. Government Strategic Income Fund Series. The Trustees may
establish additional series of shares, and may divide or combine the shares of a
series into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in the series. Each share represents an equal
proportionate interest in the relevant series with each other share of such
series. The shares of any additional series would participate equally in the
earnings, dividends and assets of the particular series, and would be entitled
to vote separately to approve investment advisory agreements or changes in
investment restrictions, but shareholders of all series would vote together in
the election and selection of Trustees and
- 21 -
<PAGE>
accountants. Upon liquidation of the Fund, the Fund's shareholders are entitled
to share pro rata in the Fund's net assets available for distribution to
shareholders.
Shareholders are entitled to one vote for each share held and may
vote in the election of Trustees and on other matters submitted to meetings of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have under certain circumstances the right to remove one or more
Trustees. No material amendment may be made to the Fund's Declaration of Trust
without the affirmative vote of a majority of its shares. Shares have no
preemptive or conversion rights. Shares are fully paid and non-assessable,
except as set forth below. See "Certain Liabilities."
CERTAIN LIABILITIES
As a Massachusetts business trust, the Fund's operations are
governed by its Declaration of Trust dated March 19, 1987, a copy of which is on
file with the office of the Secretary of The Commonwealth of Massachusetts.
Theoretically, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable for the obligations of the trust.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Fund or any series of the Fund and
requires that notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Fund or its Trustees. Moreover,
the Declaration of Trust provides for the indemnification out of Fund property
of any shareholders held personally liable for any obligations of the Fund or
any series of the Fund. The Declaration of Trust also provides that the Fund
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss beyond his or
her investment because of shareholder liability would be limited to
circumstances in which the Fund itself will be unable to meet its obligations.
In light of the nature of the Fund's business, the possibility of the Fund's
liabilities exceeding its assets, and therefore a shareholder's risk of personal
liability, is extremely remote.
The Declaration of Trust further provides that the Fund shall
indemnify each of its Trustees and officers against liabilities and expenses
reasonably incurred by them, in connection with, or arising out of, any action,
suit or proceeding, threatened against or otherwise involving such Trustee or
officer, directly or indirectly, by reason of being or having been a Trustee or
officer of the Fund. The Declaration of Trust does not authorize the Fund to
indemnify any Trustee or officer against any liability to which he or she would
otherwise be subject by reason of or for willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties.
PURCHASE OF SHARES
For information regarding the manner in which shares of the
Money Market Series are offered to the public, see "Purchase of Shares" in the
Prospectus.
- 22 -
<PAGE>
PRICING OF SHARES
The net asset value per share of the Money Market Series is
determined as of the close of trading on the New York Stock Exchange (currently
4:00 P.M., New York time) on each day that both the New York Stock Exchange and
the Money Market Series' custodian bank are open for business. The net asset
value per share of the Money Market Series is also determined on any other day
in which the level of trading in its portfolio securities is sufficiently high
that the current net asset value per share might be materially affected by
changes in the value of its portfolio securities. On any day in which no
purchase orders for the shares of the Money Market Series become effective and
no shares are tendered for redemption, the net asset value per share is not
determined.
Except as set forth in the following paragraph, the Money Market
Series' portfolio instruments are valued on each business day on the basis of
amortized cost. This technique involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Series would receive if it sold
the instrument. During periods of declining interest rates, the daily yield on
shares of the Money Market Series computed as described above may tend to be
higher than a like computation made by a fund with identical investments
utilizing a method of valuation based upon market prices and estimates of market
prices for all of its portfolio instruments. Thus, if the use of amortized cost
by the Money Market Series resulted in a lower aggregate portfolio value on a
particular day, a prospective investor in the Money Market Series would be able
to obtain a somewhat higher yield than would result from investment in a fund
utilizing solely market values and existing investors in the Money Market Series
would receive less investment income. The converse would apply in a period of
rising interest rates.
Standby commitments will be valued at zero in determining net
asset value. "When-issued" securities will be valued at the value of the
security at the time the commitment to purchase is entered into.
The valuation of the Money Market Series' portfolio instruments
based upon their amortized cost and the concomitant maintenance of the Money
Market Series' per share net asset value of $1.00 is permitted in accordance
with Rule 2a-7 under the Investment Company Act of 1940, pursuant to which the
Money Market Series must adhere to certain conditions. The Money Market Series
must maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of 13 months or less and
invest only in securities determined by the Trustees to present minimal credit
risks. (See the Prospectus for additional information). The maturities of
variable rate demand instruments held in the Money Market Series' portfolio will
be deemed to be the longer of the demand period, or the period remaining until
the next interest rate adjustment, although stated maturities may be in excess
of one year. The Trustees must establish procedures designed to stabilize, to
the extent reasonably
- 23 -
<PAGE>
possible, the Money Market Series' price per share as computed for the purpose
of sales and redemptions at a single value. It is the intention of the Money
Market Series to maintain a per-share net asset value of $1.00 but there can be
no assurance of this. Such procedures will include review of the Money Market
Series' portfolio holdings by the Trustees, at such intervals as they may deem
appropriate, to determine whether the Money Market Series' net asset value
calculated by using available market quotations deviates from $1.00 per share
and, if so, whether such deviation may result in material dilution or is
otherwise unfair to existing shareholders. In the event the Trustees determine
that such a deviation exists, they have agreed to take such corrective action as
they regard 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; redeeming shares in kind; or
establishing a net asset value per share by using available market quotations.
CALCULATION OF YIELD
The Money Market Series' yield quotations as they may appear in
the Prospectus, this Statement of Additional Information or in advertising and
sales material are calculated by a standard method prescribed by the Securities
and Exchange Commission. Under this method, the yield quotation is based on a
hypothetical account having a balance of exactly one share at the beginning of a
seven-day period.
The yield quotation is computed as follows: The net change,
exclusive of capital changes (i.e., realized gains and losses from the sale of
securities and unrealized appreciation and depreciation), in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the base period is determined by subtracting a hypothetical charge reflecting
expense deductions from the hypothetical account, and dividing the net change in
value by the value of the share at the beginning of the base period. This base
period return is then multiplied by 365/7 with the resulting yield figure
carried to the nearest 100th of 1%. The determination of net change in account
value reflects the value of additional shares purchased with dividends from the
original share, dividends declared on both the original share and any such
additional shares, and all fees that are charged to the Money Market Series, in
proportion to the length of the base period and the Money Market Series' average
account size (with respect to any fees that vary with the size of an account).
The Money Market Series also may advertise a quotation of
effective yield. Effective yield is computed by compounding the unannualized
base period return determined as in the preceding paragraph by adding 1 to the
base period return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result, according to the following formula:
Effective Yield = [(Base Period Return + 1) 365/7] - 1.
- 24 -
<PAGE>
The Money Market Series' taxable equivalent yield is determined
by dividing that portion of the Money Market Series' yield (calculated as
described above) that is tax-exempt by one minus a stated marginal federal
income tax rate and adding the product to that portion, if any, of the yield of
the Money Market Series that is not tax-exempt. The Money Market Series' taxable
equivalent effective yield is determined by dividing that portion of the Money
Market Series' effective yield (calculated as described above) that is
tax-exempt by one minus a stated marginal federal income tax rate and adding the
product to that portion, if any, of the effective yield of the Money Market
Series that is not tax-exempt. The Money Market Series' taxable equivalent yield
and taxable equivalent effective yield assume that the proportion of income of
the Money Market Series that is tax-exempt over the seven-day period used in
determining the yield and effective yield quotations is constant over the
52-week period over which such yield quotations are annualized.
The yield and effective yield of the Money Market Series for the
seven-day period ended December 31, 1998 was 1.67% and 1.68%, respectively.
The taxable equivalent yield and taxable equivalent effective
yield of the Money Market Series for the seven-day period ended December 31,
1998 was .28% and .28%, respectively, for a taxpayer whose income was subject to
the then highest marginal federal income tax rate of 39.6%.
FINANCIAL STATEMENTS
The Financial Statements for the Money Market Series are
incorporated by reference to the Money Market Series' Audited Annual Report
dated December 31, 1998. Shareholders will receive a copy of the Audited Annual
Report at no additional charge when requesting a copy of the Statement of
Additional Information.
- 25 -
<PAGE>
APPENDIX
Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities such as bridges, highways, housing, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to loan to
other public institutions. In addition, certain types of private activity bonds
are issued by or on behalf of public authorities to obtain funds to provide
privately operated housing facilities, airport, mass transit, port facilities,
and certain local facilities for water supply, gas, electricity or sewage or
solid waste disposal. Such obligations are included within the term Municipal
Bonds if the interest paid thereon qualifies as exempt from federal income tax.
Other types of private activity bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Bonds, although the current
federal tax laws place substantial limitations on the volume of such issues.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The payment of such bonds may be dependent upon an
appropriation by the issuer's legislative body. The characteristics and
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Private activity
bonds which are Municipal Bonds are in most cases revenue bonds and do not
generally constitute the pledge of the credit of the issuer of such bonds. There
are, of course, variations in the security of Municipal Bonds, both within a
particular classification and between classifications, depending on numerous
factors.
The yields on Municipal Bonds are dependent on a variety of
factors, including general money market conditions, supply and demand and
general conditions of the Municipal Bond market, size of a particular offering,
the maturity of the obligation and rating of the issue. The ratings of Moody's
Investors Service, Inc. and Standard & Poor's Corporation represent their
opinions as to the quality of various Municipal Bonds. It should be emphasized,
however, that ratings are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and rating may have different
yields while Bonds of the same maturity and coupon with different ratings may
have the same yield.
A-1
<PAGE>
CORNERSTONE FIXED INCOME FUNDS
REGISTRATION STATEMENT ON FORM N-1A
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Declaration of Trust.*
(b) By-Laws of Registrant.*
(c) None.
(d) Form of Advisory Agreement with Cornerstone Equity
Advisors, Inc.
(e) Inapplicable.
(f) Form of Distribution Agreement.* (g) Form of Custody
Agreement.*
(h) Inapplicable.
(i) (a) Opinion of Counsel as to the legality of securities
being issued.*
(b) Consent of Counsel is filed herewith.
(j) Consent of Accountants is filed herewith.
(k) None.
(l) Form of Stock Purchase Agreement.*
(m) Form of Distribution and Marketing Plans (and related
agreements)pursuant to Rule 12b-1 is filed herewith.
(n) Financial Data Schedule is filed herewith.
(o) Inapplicable.
Item 24. Persons Controlled by or under Common Control with Registrant
None.
Item 25. Indemnification
Except pursuant to the Declaration of Trust, dated March 13,
1987, establishing the Registrant as a Trust under Massachusetts law, there is
no contract, arrangement or statute under which any Trustee, director, officer,
underwriter, distributor or affiliated person of the Registrant is insured or
indemnified. The Declaration of Trust provides that no Trustee or officer will
be indemnified against any liability to which the Registrant would otherwise be
subject by reason of or for willful misfeasance, bad faith, gross negligence or
reckless disregard of
- --------
* Previously filed.
<PAGE>
such person's duties. See the Registrant's undertaking with respect to
indemnification in Item 30 below.
Item 26. Business and other Connections of Investment Advisor
All of the information required by this item is set forth in the
Forms ADV, as amended, of Cornerstone Equity Advisors, Inc.
The following sections of such Forms ADV are incorporated herein by reference:
(a) Items 1 and 2 of Part 2; and
(b) Item 6, Business Background, of each Schedule D.
Item 27. Principal Underwriters
(a) Cresvale International (US) LLC is the distributor of shares
of the Cornerstone U.S. Government Strategic Income Fund
Series, Cornerstone High- Yield Municipal Bond Series and
Cornerstone Tax- Free Money Market Series of the Registrant.
(b)
Positions and Positions and
Offices with Offices with
Name* Distributor Registrant
- ----- ----------- ----------
James F. Curley Chairman/Chief None
Executive Officer
Joseph R. Randazzo Executive Vice None
President
Jerry Marer Executive Vice None
President
Jad Damouni International Sales None
Fred Miller Chicago Sales and None
Administration
- --------
* Address of each person listed above is 55 Broadway, New York, New York
10006.
<PAGE>
Item 28. Location of Accounts and Records
The accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the possession of Registrant, 67 Wall Street, New York, N.Y.
10005 and Firstar Trust Company, 615 East Michigan Street, Milwaukee, WI 53202,
the Registrant's Custodian and Firstar Mutual Fund Services, LLC, 615 East
Michigan Street, Milwaukee, WI 53202, the Registrant's Administrator and
Transfer Agent.
Item 29. Management Services
Inapplicable.
Item 30. Undertakings
The Registrant undertakes to limit indemnification of officers
and Trustees as follows:
Indemnification
Section 1. The Registrant shall indemnify each of its Trustees
and officers (including persons who serve at the Registrant's request as
directors, trustees or officers of another organization in which the Registrant
has any interest as a shareholder, creditor or otherwise) (hereinafter referred
to as a "Covered Person") against all liabilities and expenses, including but
not limited to amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and counsel fees reasonably incurred by any Covered Person
in connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or been threatened, while in office or thereafter, by reason of being
or having been such a Covered Person except with respect to any matter as to
which such Covered Person shall have been finally adjudicated in any such
action, suit or other proceeding (a) not to have acted in good faith in the
reasonable belief that such Covered Persons action was in the best interest of
the Registrant or (b) to be liable to the Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's office
("disabling conduct"). Expenses, including counsel fees so incurred by any such
Covered Person (but excluding amounts paid in satisfaction of judgments, in
compliance or as fines or penalties) shall be paid from time to time by the
Registrant in advance of the final disposition of any
<PAGE>
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such Covered Person to repay amounts so paid to the Registrant if it is
ultimately determined that indemnification of such expenses is not authorized
under Sections 1, 2 and 3 hereof, provided, however, that either (a) such
Covered Person shall have provided appropriate security of such undertaking, (b)
the Registrant shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (provided that a majority of the disinterested Trustees then in office
act on the matter), or independent legal counsel in a written opinion shall have
determined, based upon a review of readily available facts (as opposed to a full
trial type inquiry) that there is reason to believe that such Covered Person
will be found entitled to indemnification under Sections 1 and 2 hereof.
Compromise Payment
Section 2. Its to any matter disposed of (whether by a compromise
payment, pursuant to a consent decree or otherwise) without an adjudication to a
court, or by any body before which the proceeding was brought, that such Covered
Person either (a) did not act in good faith in the reasonable belief that his or
her action was in the best interests of the Registrant or (b) is liable to the
Registrant or its shareholders by reason of disabling conduct, indemnification
shall be proved if (a) it is approved as in the best interests of the
Registrant, after notice that it involves such indemnification, by at least a
majority of the disinterested Trustees acting on the matter (provided that a
majority of the disinterested Trustees then in office act on the matter) upon a
determination, based upon a review of readily available facts (as opposed to a
full trial type inquiry) that such Covered Person acted in good faith in the
reasonable belief that his or her action was in the best interests of the
Registrant and is not liable to the Registrant or its shareholders Iq reasons of
disabling conduct, or (b) there has been obtained an opinion in writing of
independent legal counsel, based upon a review of readily available facts (as
opposed to a full trial type inquiry) to the effect that such Covered Person
appears to have acted in good faith in the reasonable belief that his or her
action was in the best interests of the Registrant and that such indemnification
would not protect such Covered Person against any liability to the Registrant to
which he or she would otherwise be subject by reason of disabling conduct. Any
approval pursuant to this Section shall not prevent the recovery from any
Covered Person of any amount paid to such Covered Person in accordance with this
Section as indemnification if such Covered Person is subsequently adjudicated by
a court of competent jurisdiction not to have acted in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Registrant or to have been liable to the Registrant or its shareholders by
reason of willful misfeasance,
<PAGE>
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct or such Covered Person's office.
Indemnification Not Exclusive
Section 3. The right of indemnification hereby provided shall not
be exclusive of or affect any other rights to which such Covered Person may be
entitled. As used in Sections 1, 2 and 3 hereof, the term "Covered Persons"
shall include such person's heirs, executors and administrators, and a
"disinterested Trustee" is a Trustee who is not an "interested person" of the
Registrant as defined in Section 2(a)(19) of the 1940 Act, as amended (or who
has been exempt from being an "interested person" by any rule, regulation or
order of the Commission and against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending). Nothing contained in Sections 1, 2 and 3
hereof shall affect any rights to indemnification to which personnel of the
Registrant, other than Trustees or officers, and other persons may be entitled
by contract or otherwise under law, nor the power of the Registrant to purchase
and maintain liability insurance on behalf of any such person; provided,
however, that the Registrant shall not purchase or maintain any such liability
insurance in contravention of applicable law, including without limitation the
1940 Act, and the rules and regulations thereunder.
Registrant undertakes to furnish to each person to whom a
prospectus relating to its Cornerstone U.S. Government Strategic Income Fund
Series, Cornerstone Tax-Free Money Market Series or Cornerstone High-Yield
Municipal Bond Series is delivered, a copy of the Fund's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 30th day of April, 1999.
Registrant: CORNERSTONE FIXED INCOME FUNDS
By:/s/ Stephen C. Leslie
---------------------------------------
Stephen C. Leslie
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Stephen C. Leslie President (Principal April 30, 1999
- ----------------------------- Executive Officer) and
Stephen C. Leslie Trustee
/s/ L. Greg Ferrone
- ----------------------------- Trustee April 30, 1999
*L. Greg Ferrone
G. John Fulvio
- ----------------------------- Treasurer (Principal April 30, 1999
G. John Fulvio Financial and Accounting
Officer) and Trustee
/s/ William J. Armstrong
- ----------------------------- Trustee April 30, 1999
*William J. Armstrong
- ----------------------------- Trustee April 30, 1999
Leroy E. Rodman
/s/ Dr. Yvonne Scruggs-Leftwich
- ----------------------------- Trustee April 30, 1999
*Dr. Yvonne Scruggs-Leftwich
*By: /s/ Jules Buchwald
---------------------------------
Jules Buchwald, Attorney-in-Fact
pursuant to a power of attorney
dated March 31, 1999, filed herewith;
and with regard to L. Greg Ferrone,
pursuant to a power of attorney dated
April 24, 1991, previously filed with
the Securities and Exchange Commission.
</TABLE>
<PAGE>
Index to Exhibit
----------------
Ex. 99.B10 Consent of Kramer Levin Naftalis & Frankel LLP
Ex. 99.B11 Consent of McGladrey & Pullen, LLP
Ex. 99.B15 Forms of Distribution and Marketing Plans pursuant to Rule
12b-1 and related Agreements
Ex. 24.1 Power of Attorney William J. Armstrong
Ex. 24.2 Power of Attorney Dr. Yvonne Scruggs-Leftwich
Ex. 99.B27 Financial Data Schedules
[Letterhead of Kramer Levin Naftalis & Frankel LLP]
April 30, 1999
Cornerstone Fixed Income Funds
67 Wall Street
New York, New York 10005
Re: Registration No. 33-12738
-------------------------
Gentlemen:
We hereby consent to the reference to our firm as counsel in
Post-Effective Amendment No. 21 to Registration Statement No. 33-12738.
Very truly yours,
/s/ Kramer Levin Naftalis & Frankel LLP
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our reports dated February 26, 1999, except
for the last two paragraphs of Note 8 as to which the date is March 31, 1999, on
the financial statements of Cornerstone Fixed Income Funds -Cornerstone High
Yield Municipal Bond Series and Cornerstone Fixed Income Funds -Cornerstone Tax
Free Money Market Series (formerly Fundamental Fixed Income Funds -High Yield
Municipal Bond Series and Fundamental Fixed Income Funds -Tax Free Money Market
Series), and our report dated February 26, 1999, except for the last two
paragraphs of Note 9 as to which the date is March 31, 1999 on the financial
statements of the Cornerstone Fixed Income Funds -U.S. Government Strategic
Income Fund (formerly Fundamental Fixed Income Funds -Fundamental U.S.
Government Strategic Income Fund) incorporated by reference therein in
Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A, File
No. 33-12738, as filed with the Securities and Exchange Commission.
We also consent to the reference to our firm in the Prospectus under the
caption "Financial Highlights".
McGladrey & Pullen, LLP
New York, New York
April 29, 1999
DISTRIBUTION PLAN
FUNDAMENTAL FIXED INCOME FUND
High-Yield Municipal Bond Series
(As amended March 31, 1999)
DISTRIBUTION PLAN of FUNDAMENTAL FIXED INCOME FUND, a Massachusetts
business trust (the "Trust"), pertaining to shares of beneficial interest of the
Trust's High-Yield Municipal Bond Series (the "Fund").
W I T N E S S E T H :
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940,
as amended (collectively with the rules and regulations promulgated thereunder,
the "1940 Act"); and
WHEREAS, the shares of beneficial interest of the Trust are at present
divided into three separate series, one of which is the Fund; and
WHEREAS, the Trust intends to distribute the shares of beneficial
interest of the Fund (the "Shares") in accordance with Rule 12b-1 under the 1940
Act ("Rule 12b-1"), and desires to adopt this Distribution Plan (the "Plan") as
a plan of distribution pursuant to such Rule; and
WHEREAS, the Trust desires to engage Cresvale International (US) LLC to
provide certain distribution services for the Fund (the "Distributor"); and
WHEREAS, the Trust desires to enter into a distribution agreement (in
such form as may from time to time be approved by the Board of Trustees of the
Trust) with the Distributor, whereby the Distributor will provide facilities and
personnel and render services to the Trust in connection with the offering and
distribution of the Shares (the "Distribution Agreement"); and
WHEREAS, the Trust recognizes and agrees that (a) the Distributor may
enter into arrangements with one or more financial institutions, such as banks,
trust companies or savings and loan associations, investment advisors or similar
entities (the "Shareholder Servicing Agents") pursuant to which a Shareholder
Servicing Agent will, as agent for its customers, provide certain administrative
services to its customers who own Shares, (b) the agreement between the
Distributor and any Shareholder Servicing Agent may require the Distributor to
compensate such Shareholder Servicing Agent for its services, and (c) the
Distributor may make such payments to the Shareholder Servicing Agents for such
services out of the fee paid to the Distributor hereunder, its profits or any
other source available to it; and
WHEREAS, the Trust also recognizes and agrees that (a) the Distributor
may retain the services of firms or individuals to act as dealers (the
"Dealers") of the Shares in connection with the offering of Shares, (b) the
Distributor may compensate any Dealer that sells Shares in the
<PAGE>
manner and at the rate or rates to be set forth in an agreement between the
Distributor and such Dealer, and (c) the Distributor may make such payments to
the Dealers for distribution services out of the fee paid to the Distributor
hereunder, its profits or any other source available to it; and
WHEREAS, the Board of Trustees of the Trust, in considering whether the
Trust should adopt and implement this Plan has evaluated such information as it
deemed necessary to an informed determination whether this Plan should be
adopted and implemented and has considered such pertinent factors as it deemed
necessary to form the basis for a decision to use assets of the Trust for such
purposes, and has determined that there is a reasonable likelihood that the
adoption and implementation of this Plan will benefit the Fund and its
shareholders;
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts this
Plan for the Fund as a plan for distribution in accordance with Rule 12b-1, on
the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall
provide facilities and personnel with respect to the offering and sale of
Shares. Among other things, the Distributor shall be responsible for fees
payable to Shareholder Servicing Agents, commissions and other fees payable to
Dealers, distributing prospectuses to prospective shareholders and providing
such other related services as are reasonably necessary in connection therewith.
2. As specified in the Distribution Agreement, the Distributor shall
bear all distribution-related expenses in providing the services described in
paragraph 1, including without limitation, the compensation of its personnel
necessary to provide such services and all costs of travel, office expenses
(including rent and overhead) and equipment, and of distributing prospectuses to
prospective shareholders (including printing, delivery and mailing costs, but
excluding typesetting).
3. As consideration for all services performed and expenses incurred in
the performance of its obligations under the Distribution Agreement, the Trust
shall pay the Distributor a daily distribution fee payable monthly and equal on
an annual basis to .50% of the Fund's average daily net assets. Such daily
distribution fee may be spent on or allocated by the Distributor to any
activities or expenses primarily intended to result in the sale of the Fund's
shares, including without limitation those expenses identified in paragraph 2,
telemarketing, advertising, and any amounts payable by the Distributor to any
Shareholder Servicing Agent or Dealer.
4. The Trust understands that agreements between the Distributor and
Shareholder Servicing Agents or Dealers may provide for payment of fees to
Shareholder Servicing Agents or Dealers in connection with the provision of
certain services to their customers who are shareholders of the Fund or in
connection with the sale of Shares and may provide for a portion (which may be
all or substantially all) of the fees payable by the Trust to the Distributor
under the Distribution Agreement to be paid by the Distributor to the
Shareholder Servicing Agents or Dealers in consideration of their services.
Nothing in this Plan shall be construed as requiring the Trust to make any
payment to any Shareholder Servicing Agent or Dealer or to have any
2
<PAGE>
obligations to any Shareholder Servicing Agent or Dealer in connection with
services as a shareholder servicing agent for or a dealer of the Shares. The
Distributor shall agree and undertake that any agreement entered into between
the Distributor and any Shareholder Servicing Agent or Dealer shall provide that
such Shareholder Servicing Agent or Dealer shall look solely to the Distributor
for compensation for its services thereunder and that in no event shall such
Shareholder Servicing Agent or Dealer seek any payment from the Trust.
5. The Trust shall pay all fees and expenses of any independent auditor,
legal counsel, investment adviser, administrator, transfer agent, custodian,
registrar or dividend disbursing agent of the Fund or Trust; expenses of
printing and distributing certificates for Shares, if any, and redeeming Shares
and servicing shareholder accounts (other than expenses of servicing shareholder
accounts required to be paid by the Distributor pursuant to any agreement
between the Distributor and a Shareholder Servicing Agent); expenses of
preparing, printing and mailing prospectuses, shareholder reports, notices,
proxy statements and reports,to governmental officers and commissions and to
shareholders of the Fund, except that the Distributor shall be responsible for
the expenses of printing (excluding typesetting) and distributing prospectuses
to prospective shareholders as provided in paragraphs 1 and 2 hereof; expenses
connected with the execution, recording and settlement of portfolio security
transactions; insurance premiums; expenses of calculating the net asset value of
Shares; expenses of shareholder meetings; and expenses relating to - the
issuance, registration and qualification of Shares, including the expenses of
continuing qualification of the shares in such states of the United States or
other jurisdictions as shall be approved by the Trust.
6. Nothing herein contained shall be deemed to require the Trust to take
any action contrary to its Declaration of Trust or By-Laws or any applicable
statutory or regulatory requirement to which it is subject or by which it is
bound, or to relieve or deprive the Trust's Board of Trustees of the
responsibility for and control of the conduct of the affairs of the Trust.
7. This Plan shall become effective upon (a) approval by a vote of at
least a "majority of the outstanding voting securities" of the Fund, and (b)
approval by a vote of the Board of Trustees and vote of a majority of the
Trustees who are not "interested persons" of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan (the "Qualified Trustees"), such votes to be cast in person
at a meeting called for the purpose of voting on this Plan.
8. This Plan will remain in effect indefinitely, provided that such
continuance is "specifically approved at least annually" by a vote of both a
majority of the Trustees of the Trust and a majority of the Qualified Trustees.
If such annual approval is not obtained, this Plan shall expire on the date
which is 15 months after the date of the last approval.
9. This Plan may be amended at any time by the Board of Trustees;
provided that this Plan may not be amended to increase materially the amount of
permitted expenses hereunder without the approval of holders of a "majority of
the outstanding voting securities" of the Fund and may not be materially amended
in any case without a vote of a majority of both the Trustees and the Qualified
Trustees. This plan may be terminated at any time by a vote of a majority of
3
<PAGE>
the Qualified Trustees or by a vote of the holders of a "majority of the
outstanding voting securities" of the Fund.
10. The Trust and the Distributor shall provide the Trust's Board of
Trustees, and the Board of Trustees shall review, at least quarterly, a written
report of the amounts expended under this Plan and the purposes for which such
expenditures were made.
11. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not "interested persons" of the Trust.
12. For the purposes of this Plan, the terms "interested persons",
"majority of the outstanding voting securities" and "specifically approved at
least annually" are used as defined in the 1940 Act. In addition, for purposes
of determining the fees payable to the Distributor hereunder, the value of the
Fund's net assets shall be computed in the manner specified in the Trust's
then-current prospectus and statement of additional information for computation
of the net asset value of the Shares.
13. The Trust shall preserve copies of this Plan, and each agreement
related hereto and each report referred to in paragraph 10 hereof (collectively,
the "Records") for a period of six years from the end of the fiscal year in
which such Record was made and each such Record shall be kept in an easily
accessible place for the first two years of said record-keeping.
14. This Plan shall be construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
15. If any provision of this Plan shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Plan shall not
be affected thereby.
4
<PAGE>
MARKETING PLAN
FUNDAMENTAL FIXED-INCOME FUND
FUNDAMENTAL U.S. GOVERNMENT STRATEGIC INCOME FUND
(As amended March 31, 1999)
MARKETING PLAN, dated as of February 18, 1992, as amended March
31, 1999 of FUNDAMENTAL FIXED-INCOME FUND, a Massachusetts business trust (the
"Trust"), pertaining to shares of beneficial interest of the Trust's Fundamental
U.S. Government Strategic Income Fund (the "Fund").
W I T N E S S E T H :
WHEREAS, the Trust is engaged in business as an open-end
management investment company and is registered under the Investment Company Act
of 1940, as amended (collectively with the rules and regulations promulgated
thereunder, the "1940 Act"); and
WHEREAS, the shares of beneficial interest of the Trust are at
present divided into three separate series, one of which is the Fund; and
WHEREAS, the Trust intends to distribute the shares of beneficial
interest of the Fund (the "Shares") In accordance with Rule 12b-1 under the 1940
Act ("Rule 12b-1"), and desires to adopt this Marketing Plan (the "Plan") as a
plan of distribution pursuant to such Rule; and
WHEREAS, the Trust desires to engage Cresvale International (US)
LLC to provide certain distribution services for the Fund (the "Distributor");
and
WHEREAS, the Trust desires to enter into a distribution agreement
(in such form as may from time to time be approved by the Board of Trustees of
the Trust) with the Distributor, whereby the Distributor will provide facilities
and personnel and render services to the Trust in connection with the offering
and distribution of the Shares (the "Distribution Agreement"); and
WHEREAS, the Trust recognizes and agrees that (a) the Distributor
may enter into arrangements with one or more financial institutions, such as
banks, trust companies or savings and loan associations, investment advisers or
similar entities (the "Shareholder Servicing Agents") pursuant to which a
Shareholder Servicing Agent will, as agent for its customers, provide certain
administrative services to its customers who own Shares, (b) the agreement
between the Distributor and any Shareholder Servicing Agent may require the
Distributor to compensate such Shareholder Servicing Agent for its services, and
(c) the Distributor may make such payments to the Shareholder Servicing Agents
for such services out of the fee paid to the Distributor hereunder, its profits
or any other source available to it; and
WHEREAS, the Trust also recognizes and agrees that (a) the
Distributor may retain the services of firms or individuals to act as dealers
(the "Dealers") of the Shares in
<PAGE>
connection with the offering of Shares, (b) the Distributor may compensate any
Dealer that sells Shares in the manner and at the rate or rates to be set forth
in an agreement between the Distributor and such Dealer, and (c) the Distributor
may make such payments to the Dealers for distribution services out of the fee
paid to the Distributor hereunder, its profits or any other source available to
it; and
WHEREAS, the Board of Trustees of the Trust, in considering
whether the Trust should adopt and implement this Plan, has evaluated such
information as it deemed necessary to make an informed determination whether
this Plan should be adopted and implemented and has considered such permanent
factors as it deemed necessary to form the basis for a decision to use assets of
the Trust for such purposes, and has determined that there is a reasonable
likelihood that the adoption and implementation of this Plan will benefit the
Fund and its shareholders;
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts
this Plan for the Fund as a plan for distribution in accordance with Rule 12b-1,
on the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall
provide facilities and personnel with respect to the offering and sale of
Shares. Among other things, the Distributor shall be responsible for fees
payable to Shareholder Servicing Agents, commissions and other fees payable to
Dealers, distributing prospectuses to prospective shareholders and providing
such other related services as are reasonably necessary in connection therewith.
2. As specified in the Distribution Agreement, the Distributor shall
bear all distribution-related expenses in providing the services described in
paragraph 1, including without limitation, the compensation of its personnel
necessary to provide such services and all costs of travel, office expenses
(including rent and overhead) and equipment, and of distributing prospectuses to
prospective shareholders (including printing, delivery and mailing costs, but
excluding typesetting).
3. As consideration for all services performed and expenses incurred in
the performance of its obligations under the Distribution Agreement, the Trust
shall pay the Distributor a daily distribution fee payable monthly and equal on
an annual basis to .25% of the Fund's average daily net assets. Such daily
distribution fee may be spent on or allocated by the Distributor to any
activities or expenses primarily intended to result in the sale of the Fund's
shares, including without limitation those expenses identified in paragraph 2,
telemarketing, advertising, and any amounts payable by the Distributor to any
Shareholder Servicing Agent or Dealer.
4. The Trust understands that agreements between the Distributor and
Shareholder Servicing Agents or Dealers may provide for payment of fees to
Shareholder Servicing Agents or Dealers in connection with the provision of
certain services to their customers who are shareholders of the Fund or in
connection with the sale of Shares and may provide for a portion (which may be
all or substantially all) of the fees payable by the Trust to the Distributor
under the Distribution Agreement to be paid by the Distributor to the
Shareholder Servicing Agents
2
<PAGE>
or Dealers in consideration of their services. Nothing in this Plan shall be
construed as requiring the Trust to make any payment to any Shareholder
Servicing Agent or Dealer or to have any obligations to any Shareholder
Servicing Agent or Dealer in connection with services as a shareholder servicing
agent for or a dealer of the Shares. The Distributor shall agree and undertake
that any agreement entered into between the Distributor and any Shareholder
Servicing Agent or Dealer shall provide that such Shareholder Servicing Agent or
Dealer shall look solely to the Distributor for compensation for its services
thereunder and that in no event shall such Shareholder Servicing Agent or Dealer
seek any payment from the Trust.
5. The Trust shall pay all fees and expenses of any independent auditor,
legal counsel, investment adviser, administrator, transfer agent, custodian,
registrar or dividend disbursing agent of the Fund or Trust; expenses of
printing and distributing certificates for Shares, if any, and redeeming Shares
and servicing shareholder accounts (other than expenses of servicing shareholder
accounts required to be paid by the Distributor pursuant to any agreement
between the Distributor and a Shareholder Servicing Agent): expenses of
preparing, printing and mailing prospectuses, shareholder reports, notices,
proxy statements and reports to governmental officers and commissions and to
shareholders of the Fund, except that the Distributor shall be responsible for
the expenses of printing (excluding typesetting) and distributing prospectuses
to prospective shareholders as provided in paragraphs 1 and 2 hereof; expenses
connected with the execution, recording and settlement of portfolio security
transactions; insurance premiums; expenses of calculating the net asset value of
Shares, expenses of shareholder meetings; and expenses relating to the issuance,
registration and qualification of Shares, including the expenses of continuing
qualification of the shares in such states of the United States or other
jurisdictions as shall be approved by the Trust.
6. Nothing herein contained shall be deemed to require the Trust to take
any action contrary to its Declaration of Trust or By-laws or any applicable
statutory or regulatory requirement to which it is subject or by which it is
bound, or to relieve or deprive the Trust's Board of Trustees of the
responsibility for and control of the conduct of the affairs of the Trust.
7. This Plan shall become effective upon (a) approval by a vote of at
least a "majority of the outstanding voting securities" of the Fund, and (b)
approval by a vote of the Board of Trustees and vote of a majority of the
Trustees who are not "interested persons" of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan (the "Qualified Trustees"), such votes to be cast in person
at a meeting called for the purpose of voting on this Plan.
8. This Plan will remain in effect indefinitely, provided that such
continuance is "specifically approved at least annually" by a vote of both a
majority of the Trustees of the Trust and a majority of the Qualified Trustees.
9. This Plan may be amended at any time by the Board of Trustees;
provided that this Plan may not be amended to increase materially the amount of
permitted expenses hereunder without the approval of holders of a "majority of
the outstanding voting securities" of the Fund and may not be materially amended
in any case without a vote of a majority of both the Trustees and the Qualified
Trustees. This Plan may be terminated at any time by a vote of a majority of
3
<PAGE>
the Qualified Trustees or by a vote of the holders of a "majority of the
outstanding voting securities" of the Fund.
10. The Trust and the Distributor shall provide the Trust's Board of
Trustees, and the Board of Trustees shall review, at least quarterly, a written
report of the amounts expended under this Plan and the purposes for which such
expenditures were made.
11. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not "interested persons" of the Trust.
12. For the purposes of this Plan, the terms "interested persons",
"majority of the outstanding voting securities" and "specifically approved at
least annually" are used as defined in the 1940 Act. In addition, for purposes
of determining the fees payable to the Distributor hereunder, the value of the
Fund's net assets shall be computed in the manner specified in the Trust's
then-current prospectus and statement of additional information for computation
of the net asset value of the Shares.
13. The Trust shall preserve copies of this Plan, and each agreement
related hereto and each report referred to in paragraph 10 hereof (collectively,
the "Records") for a period of six years from the end of the fiscal year in
which such Record was made and each such Record shall be kept in an easily
accessible place for the first two years of said recordkeeping.
14. This Plan shall be construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
15. If any provision of this Plan shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Plan shall not
be affected thereby.
4
<PAGE>
EXHIBIT A
TO PLAN
FORM OF SELECTED DEALER AGREEMENT
Gentlemen:
Fundamental Funds, Inc. (the "Fund") is a Maryland corporation
registered a non-diversified open-end investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Fund offers
its shares, $.001 par value ("Shares"), to the public in accordance with the
terms and conditions contained in the Prospectus and Statement of Additional
Information (the "SAI") of the Fund. The terms "Prospectus" and "SAI" as used
herein refer to the prospectus or statement of additional information on file
with the Securities and Exchange Commission which is part of the most recent
registration statement effective from time to time under the Securities Act of
1933, as amended (the "Securities Act").
In connection with the offering of Shares to the public, you may place
orders for purchase and redemption of Shares for and on behalf of your customers
on the following terms and conditions:
1. You are hereby authorized to (i) place orders directly through
Firstar Mutual Fund Services, LLC, the Fund's transfer agent, for purchases of
Shares and (ii) tender Shares through Firstar Mutual Fund Services, LLC for
redemption, in each case subject to the terms and conditions set forth in the
Prospectus and SAI.
2. No person is authorized to make any representations concerning the
Fund or the Shares except those contained in the Prospectus and SAI and in such
printed information as the Fund may subsequently prepare. No person is
authorized to distribute any sales material relating to the Fund without the
prior written approval of the Fund.
3. You agree to undertake from time to time certain shareholder
servicing activities for customers of yours who have purchased Shares and who
use your facilities to communicate with the Fund or to effect redemptions or
additional purchases of the Shares. In consideration of the services and
facilities provided by you hereunder, the Fund will pay to you the fee set forth
in the attached Schedule based upon the average daily net asset value of the
Shares held from time to time by or on behalf of your customers (the "Customers'
Fund Shares"), which fee will be computed daily and payable monthly. For
purposes of determining the fees payable under this computation, the average
daily net asset value of the Customers' Fund Shares will be computed in the
manner specified in the Fund's registration statement (as the same is in effect
from time to time) in connection with the computation of the net asset value of
Shares for purposes of purchases and redemptions. The fee rate stated above may
be prospectively increased or decreased by the Fund in its sole discretion, at
any time upon notice to you. Further, the Fund may, in its discretion and
without notice, suspend or withdraw the sale of Shares, including the sale of
such Shares to you for the account of any customer or customers. The Fund
represents to you that this Agreement and the payment of such service fee by the
Fund has been authorized and approved by the Board of Directors of the Fund.
<PAGE>
4. You agree to comply with the provisions contained in the Securities
Act governing the distribution of Prospectuses to persons to whom you offer
Shares, and, if requested, will deliver SAI's. You further agree to deliver,
upon our request, copies of any amended Prospectus (and SAI) to customers whose
Shares you are holding as record owner and to deliver to such customers copies
of the annual and interim financial reports and proxy solicitation materials of
the Fund. We agree to furnish to you as many copies of the Prospectus and SAI,
annual and interim reports and proxy solicitation materials as you may
reasonably request.
5. You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc. You agree that you will not offer Shares
to persons in any jurisdiction in which you may not lawfully make such offer due
to the fact that you have not registered under, or are not exempt from, the
applicable registration or licensing requirements of such jurisdiction.
6. The Fund has registered an indefinite number of Shares under the
Securities Act. Upon application to us, we will inform you as to the states or
other jurisdictions in which we believe the Shares have been qualified for sale
under, or are exempt from the requirements of, the respective securities laws of
such states, but we assume no responsibility or obligation as to your right to
sell Shares in any jurisdiction.
7. The Fund shall have full authority to take such action as it deems
advisable in respect of all matters pertaining to the offering of the Shares,
including the right in its discretion, without notice, to suspend sales or
withdraw the offering of Shares entirely.
8. You will (i) maintain all records by law relating to transactions in
Shares of the Fund and, upon request by the Fund, promptly make such of these
records available to the Fund and the Fund may reasonably request in connection
with its operations; and (ii) promptly notify the Fund if you experience any
difficulty in maintaining the records described in the foregoing clauses in an
accurate manner.
9. The Fund shall be under no liability to you except for lack of good
faith and for obligations expressly assumed by them hereunder. In carrying out
your obligations, you agree to act in good faith and without negligence. Nothing
contained in this agreement is intended to operate as waiver by the Fund or you
of compliance with any provision of the Investment Company Act, Securities Act,
the Securities Exchange Act of 1934, as amended, or the rules and regulations
promulgated by the Securities and Exchange Commission thereunder.
10. This Agreement may be terminated by either party, without penalty,
upon ten (10) days' written notice to the other party and shall automatically
terminate in the event of its assignment, as defined in the Investment Company
Act. This Agreement may also be terminated at any time without penalty by the
vote of a majority of the members of the Board of Directors of the Fund who are
not "interested persons" (as such phrase is defined in the Investment Company
Act) and have no direct or indirect financial interest in the operation of the
plan of distribution with respect to the Fund and any related agreement, or by
the vote of a majority of the outstanding voting securities of the Fund.
2
<PAGE>
11. All communications to us should be sent to:
Fundamental Funds, Inc.
67 Wall Street
New York, New York 10005
Any notice to you shall be duly given if mailed or telegraphed to you at
the address specified by you below.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a copy of this Agreement.
FUNDAMENTAL FUNDS, INC.
By:
Confirmed and Accepted: --------------------
Authorized Signature
Firm Name:
-------------------------
By:
--------------------------------
Address:
---------------------------
Date:
------------------------------
3
DISTRIBUTION PLAN
FUNDAMENTAL FIXED INCOME FUND
Tax-Free Money Market Series
(As amended March 31, 1999)
DISTRIBUTION PLAN of FUNDAMENTAL FIXED INCOME FUND, a Massachusetts
business trust (the "Trust"), pertaining to shares of beneficial interest of the
Trust's Tax-Free Money Market Series (the "Fund").
W I T N E S S E T H :
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is registered under the Investment Company Act of 1940,
as amended (collectively with the rules and regulations promulgated thereunder,
the "1940 Act"); and
WHEREAS, the shares of beneficial interest of the Trust are at present
divided into three separate series, one of which is the Fund; and
WHEREAS, the Trust intends to distribute the shares of beneficial
interest of the Fund (the "Shares") in accordance with Rule 12b-1 under the 1940
Act ("Rule 12b-1"), and desires to adopt this Distribution Plan (the "Plan") as
a plan of distribution pursuant to such Rule; and
WHEREAS, the Trust desires to engage Cresvale International (US) LLC to
provide certain distribution services for the Fund (the "Distributor"); and
WHEREAS, the Trust desires to enter into a distribution agreement (in
such form as may from time to time be approved by the Board of Trustees of the
Trust) with the Distributor, whereby the Distributor will provide facilities and
personnel and render services to the Trust in connection with the offering and
distribution of the Shares (the "Distribution Agreement"); and
WHEREAS, the Trust recognizes and agrees that (a) the Distributor may
enter into arrangements with one or more financial institutions, such as banks,
trust companies or savings and loan associations, investment advisors or similar
entities (the "Shareholder Servicing Agents") pursuant to which a Shareholder
Servicing Agent will, as agent for its customers, provide certain administrative
services to its customers who own Shares, (b) the agreement between the
Distributor and any Shareholder Servicing Agent may require the Distributor to
compensate such Shareholder Servicing Agent for its services, and (c) the
Distributor may make such payments to the Shareholder Servicing Agents for such
services out of the fee paid to the Distributor hereunder, its profits or any
other source available to it; and
WHEREAS, the Trust also recognizes and agrees that (a) the Distributor
may retain the services of firms or individuals to act as dealers (the
"Dealers") of the Shares in connection with the offering of Shares, (b) the
Distributor may compensate any Dealer that sells Shares in the
<PAGE>
manner and at the rate or rates to be set forth in an agreement between the
Distributor and such Dealer, and (c) the Distributor may make such payments to
the Dealers for distribution services out of the fee paid to the Distributor
hereunder, its profits or any other source available to it; and
WHEREAS, the Board of Trustees of the Trust, in considering whether the
Trust should adopt and implement this Plan has evaluated such information as it
deemed necessary to an informed determination whether this Plan should be
adopted and implemented and has considered such pertinent factors as it deemed
necessary to form the basis for a decision to use assets of the Trust for such
purposes, and has determined that there is a reasonable likelihood that the
adoption and implementation of this Plan will benefit the Fund and its
shareholders;
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts this
Plan for the Fund as a plan for distribution in accordance with Rule 12b-1, on
the following terms and conditions:
1. As specified in the Distribution Agreement, the Distributor shall
provide facilities and personnel with respect to the offering and sale of
Shares. Among other things, the Distributor shall be responsible for fees
payable to Shareholder Servicing Agents, commissions and other fees payable to
Dealers, distributing prospectuses to prospective shareholders and providing
such other related services as are reasonably necessary in connection therewith.
2. As specified in the Distribution Agreement, the Distributor shall
bear all distribution-related expenses in providing the services described in
paragraph 1, including without limitation, the compensation of its personnel
necessary to provide such services and all costs of travel, office expenses
(including rent and overhead) and equipment, and of distributing prospectuses to
prospective shareholders (including printing, delivery and mailing costs, but
excluding typesetting).
3. As consideration for all services performed and expenses incurred in
the performance of its obligations under the Distribution Agreement, the Trust
shall pay the Distributor a daily distribution fee payable monthly and equal on
an annual basis to .50% of the Fund's average daily net assets. Such daily
distribution fee may be spent on or allocated by the Distributor to any
activities or expenses primarily intended to result in the sale of the Fund's
shares, including without limitation those expenses identified in paragraph 2,
telemarketing, advertising, and any amounts payable by the Distributor to any
Shareholder Servicing Agent or Dealer.
4. The Trust understands that agreements between the Distributor and
Shareholder Servicing Agents or Dealers may provide for payment of fees to
Shareholder Servicing Agents or Dealers in connection with the provision of
certain services to their customers who are shareholders of the Fund or in
connection with the sale of Shares and may provide for a portion (which may be
all or substantially all) of the fees payable by the Trust to the Distributor
under the Distribution Agreement to be paid by the Distributor to the
Shareholder Servicing Agents or Dealers in consideration of their services.
Nothing in this Plan shall be construed as requiring the Trust to make any
payment to any Shareholder Servicing Agent or Dealer or to have any
2
<PAGE>
obligations to any Shareholder Servicing Agent or Dealer in connection with
services as a shareholder servicing agent for or a dealer of the Shares. The
Distributor shall agree and undertake that any agreement entered into between
the Distributor and any Shareholder Servicing Agent or Dealer shall provide that
such Shareholder Servicing Agent or Dealer shall look solely to the Distributor
for compensation for its services thereunder and that in no event shall such
Shareholder Servicing Agent or Dealer seek any payment from the Trust.
5. The Trust shall pay all fees and expenses of any independent auditor,
legal counsel, investment adviser, administrator, transfer agent, custodian,
registrar or dividend disbursing agent of the Fund or Trust; expenses of
printing and distributing certificates for Shares, if any, and redeeming Shares
and servicing shareholder accounts (other than expenses of servicing shareholder
accounts required to be paid by the Distributor pursuant to any agreement
between the Distributor and a Shareholder Servicing Agent); expenses of
preparing, printing and mailing prospectuses, shareholder reports, notices,
proxy statements and reports,to governmental officers and commissions and to
shareholders of the Fund, except that the Distributor shall be responsible for
the expenses of printing (excluding typesetting) and distributing prospectuses
to prospective shareholders as provided in paragraphs 1 and 2 hereof; expenses
connected with the execution, recording and settlement of portfolio security
transactions; insurance premiums; expenses of calculating the net asset value of
Shares; expenses of shareholder meetings; and expenses relating to - the
issuance, registration and qualification of Shares, including the expenses of
continuing qualification of the shares in such states of the United States or
other jurisdictions as shall be approved by the Trust.
6. Nothing herein contained shall be deemed to require the Trust to take
any action contrary to its Declaration of Trust or By-Laws or any applicable
statutory or regulatory requirement to which it is subject or by which it is
bound, or to relieve or deprive the Trust's Board of Trustees of the
responsibility for and control of the conduct of the affairs of the Trust.
7. This Plan shall become effective upon (a) approval by a vote of at
least a "majority of the outstanding voting securities" of the Fund, and (b)
approval by a vote of the Board of Trustees and vote of a majority of the
Trustees who are not "interested persons" of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or in any agreement
related to the Plan (the "Qualified Trustees"), such votes to be cast in person
at a meeting called for the purpose of voting on this Plan.
8. This Plan will remain in effect indefinitely, provided that such
continuance is "specifically approved at least annually" by a vote of both a
majority of the Trustees of the Trust and a majority of the Qualified Trustees.
If such annual approval is not obtained, this Plan shall expire on the date
which is 15 months after the date of the last approval.
9. This Plan may be amended at any time by the Board of Trustees;
provided that this Plan may not be amended to increase materially the amount of
permitted expenses hereunder without the approval of holders of a "majority of
the outstanding voting securities" of the Fund and may not be materially amended
in any case without a vote of a majority of both the Trustees and the Qualified
Trustees. This plan may be terminated at any time by a vote of a majority of
3
<PAGE>
the Qualified Trustees or by a vote of the holders of a "majority of the
outstanding voting securities" of the Fund.
10. The Trust and the Distributor shall provide the Trust's Board of
Trustees, and the Board of Trustees shall review, at least quarterly, a written
report of the amounts expended under this Plan and the purposes for which such
expenditures were made.
11. While this Plan is in effect, the selection and nomination of
Qualified Trustees shall be committed to the discretion of the Trustees who are
not "interested persons" of the Trust.
12. For the purposes of this Plan, the terms "interested persons",
"majority of the outstanding voting securities" and "specifically approved at
least annually" are used as defined in the 1940 Act. In addition, for purposes
of determining the fees payable to the Distributor hereunder, the value of the
Fund's net assets shall be computed in the manner specified in the Trust's
then-current prospectus and statement of additional information for computation
of the net asset value of the Shares.
13. The Trust shall preserve copies of this Plan, and each agreement
related hereto and each report referred to in paragraph 10 hereof (collectively,
the "Records") for a period of six years from the end of the fiscal year in
which such Record was made and each such Record shall be kept in an easily
accessible place for the first two years of said record-keeping.
14. This Plan shall be construed in accordance with the laws of The
Commonwealth of Massachusetts and the applicable provisions of the 1940 Act.
15. If any provision of this Plan shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Plan shall not
be affected thereby.
4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of
Fundamental Fixed-Income Fund, a Massachusetts business trust, (the "Trust")
constitutes and appoints Carl Frischling, Jules Buchwald and Peter Song my true
and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities as a trustee of the Trust, to sign for me and in my name in the
appropriate capacity, any and all Pre-Effective Amendments to any Registration
Statement of the Trust, any and all Post-Effective Amendments to said
Registration Statements, any Registration Statements on Form N-14, and any
supplements or other instruments in connection therewith, and generally to do
all such things in my name and behalf in connection therewith as said
attorneys-in-fact deem necessary or appropriate, and that have been approved by
the Board of Trustees of the Trust or by the appropriate officers of the Trust,
acting in good faith and in a manner they reasonably believe to be in the best
interests of the Trust, upon the advice of counsel, such approval to be
conclusively evidenced by their execution thereof, to comply with the provisions
of the Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, and all related requirements of the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes may do or cause to be done by virtue hereof.
Witness my hand on this 31st day of March, 1999.
/s/ William J. Armstrong
------------------------
William J. Armstrong
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of
Fundamental Fixed-Income Fund, a Massachusetts business trust, (the "Trust")
constitutes and appoints Carl Frischling, Jules Buchwald and Peter Song my true
and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities as a trustee of the Trust, to sign for me and in my name in the
appropriate capacity, any and all Pre-Effective Amendments to any Registration
Statement of the Trust, any and all Post-Effective Amendments to said
Registration Statements, any Registration Statements on Form N-14, and any
supplements or other instruments in connection therewith, and generally to do
all such things in my name and behalf in connection therewith as said
attorneys-in-fact deem necessary or appropriate, and that have been approved by
the Board of Trustees of the Trust or by the appropriate officers of the Trust,
acting in good faith and in a manner they reasonably believe to be in the best
interests of the Trust, upon the advice of counsel, such approval to be
conclusively evidenced by their execution thereof, to comply with the provisions
of the Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, and all related requirements of the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes may do or cause to be done by virtue hereof.
Witness my hand on this 31st day of March, 1999.
/s/ Dr. Yvonne Scruggs-Leftwich
---------------------------
Dr. Yvonne Scruggs-Leftwich
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