As filed via EDGAR with the Securities and Exchange Commission on May 5, 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. 22 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 24 [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 _______ 1999 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.
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STATEMENT OF ADDITIONAL INFORMATION
CORNERSTONE U.S. GOVERNMENT STRATEGIC INCOME FUND
A SERIES OF CORNERSTONE FIXED-INCOME FUNDS
This Statement of Additional Information provides certain
detailed information concerning the Cornerstone U.S. Government Strategic Income
Fund (the "U.S. Government Series") of Cornerstone Fixed Income Funds. It is not
a Prospectus and should be read in conjunction with the U.S. Government Series'
current Prospectus, a copy of which may be obtained by writing to the
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. Shareholder
inquiries may also be placed through this number.
THIS STATEMENT IS DATED MAY 5, 1999 AND
SUPPLEMENTS THE FUND'S PROSPECTUS DATED APRIL 30, 1999
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TABLE OF CONTENTS
Page
FUND HISTORY ..................................................................3
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS..................................3
INVESTMENT LIMITATIONS ...............................................11
MANAGEMENT OF THE FUND ...............................................13
OWNERSHIP OF SECURITIES ......................................................16
INVESTMENT MANAGEMENT AND OTHER SERVICES .....................................16
DISTRIBUTION PLAN ....................................................18
PORTFOLIO TRANSACTIONS................................................19
TAXES.................................................................21
DESCRIPTION OF SHARES.................................................26
CERTAIN LIABILITIES...................................................27
PURCHASE OF SHARES ...........................................................28
PRICING OF SHARES ............................................................28
PERFORMANCE INFORMATION.......................................................28
FINANCIAL STATEMENTS..................................................30
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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 High-Yield Municipal Bond Series, and Cornerstone U.S. Government
Strategic Income Fund (the "U.S. Government Series"). This Statement of
Additional Information pertains to the U.S. Government Series, which is an
open-end, diversified management investment company.
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS
The Prospectus of the U.S. Government Series dated April 30, 1999
(the "Prospectus") identifies the investment objective and the principal
investment policies of the U.S. Government Series. Other investment policies,
investment limitations and a further description of certain of the policies
described in the Prospectus are set forth below.
Reverse Repurchase Agreements
The U.S. Government Series may enter into reverse repurchase
agreement transactions. Such transactions involve the sale of Government
Securities held by the U.S. Government Series, with an agreement that the U.S.
Government Series will repurchase such securities at an agreed upon price and
date. The U.S. Government Series will employ reverse repurchase agreements when
necessary to meet unanticipated net redemptions so as to avoid liquidating other
portfolio investments during unfavorable market conditions, or as a technique to
enhance income. At the time it enters into a reverse repurchase agreement, the
U.S. Government Series will place in a segregated custodial account high-quality
liquid debt securities having a dollar value equal to the repurchase price. The
U.S. Government Series will utilize reverse repurchase agreements when the
interest income to be earned from portfolio investments is greater than the
interest expense incurred as a result of the reverse repurchase transactions.
Lending of Portfolio Securities
In order to generate additional income, the U.S. Government
Series may lend its portfolio securities in an amount up to 33-1/3% of total
assets to broker-dealers, major banks or other recognized domestic institutional
borrowers of securities not affiliated with the Manager. The borrower at all
times during the loan must maintain cash or cash equivalent collateral or
provide to the U.S. Government Series an irrevocable letter of credit equal in
value to at least 100% of the value of the securities loaned. During the time
portfolio securities are on loan, the borrower pays the U.S. Government Series
any dividends or interest paid on such securities, and the U.S. Government
Series may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral or a letter of credit.
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Inverse Floating Rate Instruments
Certain securities that may be purchased by the U.S. Government
Series, such as those with interest rates that flucutate directly or indirectly
(inverse floaters) based on multiples of a stated index, are designed to be
highly sensitive to changes in interest rates. 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 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.
Options, Futures Contracts and Related Options
Call and Put Options
Call and put options on various U.S. Treasury notes and U.S.
Treasury bonds are listed and traded on Exchanges, and are written in
over-the-counter transactions. Call and put options on Agencies are currently
written or purchased only in over-the-counter transactions.
Writing Call and Put Options
Purpose. The principal reason for writing options is to obtain,
through receipt of premiums, a greater current return than would be realized on
the underlying securities alone. Such current return can be expected to
fluctuate because premiums earned from an option writing program and interest
income yields on portfolio securities vary as economic and market conditions
change. Actively writing options on portfolio securities is likely to result in
the U.S. Government Series having a substantially higher portfolio turnover rate
than that of most other investment companies. Higher portfolio involves
correspondingly greater brokerage commissions and other transaction costs, which
are borne directly by the U.S. Government Series.
Writing Options. The purchaser of a call option pays a premium to
the writer (i.e., the seller) for the right to buy the underlying security from
the writer at a specified price during a certain period. The U.S. Government
Series writes call options either on a covered basis, or for cross-hedging
purposes. A call option is covered if the U.S. Government Series owns or has the
right to acquire the underlying securities subject to the call option at all
times during the option period. Thus the U.S. Government Series may write
options on Government Securities. An option is for cross-hedging purposes if it
is not covered, but is designed to provide a hedge against a security which the
U.S. Government Series owns or has the right to acquire. In such circumstances,
the U.S. Government Series will collateralize the option by maintaining in a
segregated account with the U.S. Government Series' Custodian, cash or
Government Securities in an amount not less than the market value of the
underlying security, marked to market daily, while the option is outstanding.
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The purchaser of a put option pays a premium to the writer (i.e.,
the seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The U.S. Government Series would write
put options only on a secured basis, which means that, at all times during the
option period, the U.S. Government Series would maintain in a segregated account
with its Custodian, cash, money market instruments or high grade liquid debt
securities in an amount of not less than the exercise price of the option, or
would hold a put on the same underlying security at an equal or greater exercise
price.
Closing Purchase Transactions and Offsetting Transactions. In
order to terminate its position as a writer of a call or put option, the U.S.
Government Series could enter into a "closing purchase transaction," which is
the purchase of a call (put) on the same underlying security and having the same
exercise price and expiration date as the call (put) previously written by the
U.S. Government Series. The U.S. Government Series would realize a gain (loss)
if the premium plus commission paid in the closing purchase transaction is less
(greater) than the premium it received on the sale of the option. The U.S.
Government Series would also realize a gain if an option it has written lapses
unexercised.
The U.S. Government Series can write options that are listed on
an Exchange as well as options which are privately negotiated in
over-the-counter transactions. The U.S. Government Series can close out its
position as a writer of an option only if a liquid secondary market exists for
options of that series, but there is no assurance that such a market will exist,
particularly in the case of over-the-counter options, since they can be closed
out only with the other party to the transaction. Alternatively, the U.S.
Government Series could purchase an offsetting option, which would not close out
its position as a writer, but would provide an asset of equal value to its
obligation under the option written. If the U.S. Government Series is not able
to enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has written, it will be required to maintain the
securities subject to the call or the collateral securing the option until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
Risks of Writing Options. By writing a call option, the U.S.
Government Series loses the potential for gain on the underlying security above
the exercise price while the option is outstanding; by writing a put option, the
U.S. Government Series might become obligated to purchase the underlying
security at an exercise price that exceeds the then current market price.
Purchasing Call and Put Options
The U.S. Government Series may purchase either listed or
over-the-counter options. The U.S. Government Series may purchase call options
to protect (i.e., hedge) against anticipated increases in the price of
securities it wishes to acquire. Since the premium paid for a call option is
typically a small fraction of the price of the underlying security, a given
amount of funds will purchase call options covering a much larger quantity of
such security than could be purchased directly. By purchasing call options, the
U.S. Government Series could benefit from any significant increase in the price
of the underlying security to a greater extent than if it had invested the same
amount in the security directly. However, because of the very high volatility of
option premiums, the U.S. Government Series would bear a significant risk of
losing
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the entire premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option expired.
Conversely, put options may be purchased to protect (i.e., hedge)
against anticipated declines in the market value of either specific portfolio
securities or of the U.S. Government Series' assets generally. The U.S.
Government Series will not purchase call or put options on securities if as a
result, more than ten percent of its net assets would be invested in premiums on
such options.
Interest Rate Futures Contracts
The U.S. Government Series may engage in transactions involving
futures contracts and related options in accordance with the rules and
interpretations of the Commodity Futures Trading Commission ("CFTC") under which
the U.S. Government Series would be exempt from registering as a "commodity
pool."
An interest rate futures contract is an agreement pursuant to
which a party agrees to take or make delivery of a specified debt security (such
as U.S. Treasury bonds, U.S. Treasury notes, U.S. Treasury bills and GNMA
Certificates) at a specified future time and at a specified price. Interest rate
futures contracts also include cash settlement contracts based upon a specified
interest rate such as the London Interbank Offering Rate for dollar deposits
("LIBOR").
Initial and Variation Margin. In contrast to the purchase or sale
of a security, no price is paid or received upon the purchase or sale of a
futures contract. Initially, the U.S. Government Series will be required to
deposit with its Custodian in an account in the broker's name an amount of cash,
money market instruments or liquid high-grade debt securities equal to not more
than five percent of the contract amount. This amount is known as "initial
margin." The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the U.S. Government Series upon
termination of the futures contract and satisfaction of its contractual
obligations. Subsequent payments to and from the broker, called "variation
margin," will be made on a daily basis as the price of the underlying security
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking to market."
For example, when the U.S. Government Series has purchased a
futures contract and the price of the underlying security has risen, that
position will have increased in value, and the U.S. Government Series will
receive from the broker a variation margin payment equal to that increase in
value. Conversely, when the U.S. Government Series has purchased a futures
contract and the value of the underlying security has declined, the position
would be less valuable, and the U.S. Government Series would be required to make
a variation payment to the broker.
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At any time prior to expiration of the futures contract, the U.S.
Government Series may elect to terminate the position by taking an opposite
position. A final determination of variation margin is then made, additional
cash is required to be paid by or released to the U.S. Government Series, and
the U.S. Government Series realizes a loss or a gain.
Futures Strategies. When the U.S. Government Series anticipates a
significant market or market sector advance, the purchase of a futures contract
affords a hedge against not participating in the advance at a time when the U.S.
Government Series is not fully invested ("anticipatory hedge"). Such purchase of
a futures contract would serve as a temporary substitute for the purchase of
individual securities, which may be purchased in an orderly fashion once the
market is established. As individual securities are purchased, an equivalent
amount of futures contracts can then be terminated by offsetting sales. The U.S.
Government Series may sell futures contracts in anticipation of, or during, a
general market or market sector decline that may adversely affect the market
value of the U.S. Government Series' securities ("defensive hedge"). To the
extent that the U.S. Government Series' portfolio of securities changes in value
in correlation with the underlying security, the sale of futures contracts would
substantially reduce the risk to the U.S. Government Series of a market decline
and, by so doing, provide an alternative to the liquidation of securities
positions in the U.S. Government Series. Ordinarily, commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of Government Securities.
Transactions will be entered into by the U.S. Government Series
only with brokers or financial institutions deemed creditworthy by the Manager.
However, in the event of the bankruptcy of a broker through which the U.S.
Government Series engages in transactions in listed options, futures or related
options, the U.S. Government Series might experience delays and/or losses in
liquidating open positions purchased and/or incur a loss of all or part of its
margin deposits with the broker.
Special Risks Associated with Futures Transactions. There are
several risks connected with the use of futures contracts as a hedging device.
These include the risk of imperfect correlation between movements in the price
of the futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between
movements in the price of the futures contracts and the securities being hedged.
The risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the U.S. Government Series could buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the historical volatility of the securities being
hedged is greater than the historical volatility of the securities underlying
the futures contract. Conversely, the U.S. Government Series could buy or sell
futures contracts in a lesser dollar amount than the dollar amount of securities
being hedged if the historical volatility of the securities being hedged is less
than the historical volatility of the securities underlying the futures
contract. It is also possible that the value of futures
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contracts held by the U.S. Government Series could decline at the same time as
portfolio securities being hedged; if this occurred, the U.S. Government Series
would lose money on the futures contract in addition to suffering a decline in
value in the portfolio securities being hedged.
There is also the risk that the price of a futures contract may
not correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to margin depository and maintenance requirements.
Rather than meet additional margin depository requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the futures market and the securities underlying the
futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Manager may
still not result in a successful hedging transaction judged over a very short
time frame.
There is also the risk that futures markets may not be
sufficiently liquid. Futures contracts may be closed out only on an Exchange or
board of trade that provides a market for such futures contracts. Although the
U.S. Government Series intends to purchase or sell futures only on Exchanges and
boards of trade where there appears to be an active secondary market, there can
be no assurance that an active secondary market will exist for any particular
contract or at any particular time. In the event of such illiquidity, it may not
be possible to close a futures position and, in the event of adverse price
movement, the U.S. Government Series would continue to be required to make daily
payments of variation margin. Since the securities being hedged would not be
sold until the related futures contract is sold, an increase, if any, in the
price of the securities may to some extent offset losses on the related futures
contract. In such event, the U.S. Government Series would lose the benefit of
the appreciation in value of the securities.
Successful use of futures is also subject to the Manager's
ability to correctly predict the direction of movements in the market. For
example, if the U.S. Government Series hedges against a decline in the market
and market prices instead advance, the U.S. Government Series will lose part or
all of the benefit of the increase in value of its securities holdings because
it will have offsetting losses in futures contracts. In such cases, if the U.S.
Government Series has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
The use of futures contracts to shorten the weighted average
duration of the U.S. Government Series' portfolio, while reducing the exposure
of the U.S. Government Series' portfolio to interest rate risk does subject the
U.S. Government Series' portfolio to basis risk. Basis refers to the
relationship between a futures contract and the underlying security. In the case
of futures contracts on U.S. Treasury Bonds, the contract specifies delivery of
a "bench-mark" 8% 20 year U.S. Treasury Bond. Any outstanding treasury with a
maturity of
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more than 15 years is deliverable against the contract, with the principal
amount per contract adjusted according to a formula which takes into account the
coupon and maturity of the treasury bond being delivered. This means that at any
given time there is one treasury issue that is "the cheapest to deliver" against
the contract. The supply and demand of the available float of treasury
securities determines which treasury security is cheapest to deliver at any
given time. This, combined with the supply and demand for futures relative to
the underlying cash securities markets, causes the relationship between the cash
security markets and the futures markets to exhibit perturbations of variance
from an exact one-to-one correlation. The U.S. Government Series could
experience losses if the value of the prices of the futures positions the U.S.
Government Series has entered into are poorly correlated with the U.S.
Government Series' other investments.
For example, on a day that the price on a treasury bond
deliverable against the futures contract declined by ten points, the futures
contract might decline by nine or eleven points. In this example, a nine point
decline in the price of a futures contract would not fully offset the price
decline in the cash security price. This would cause a downward fluctuation in
the value of the U.S. Government Series' portfolio. Likewise, a basis
fluctuation whereby the futures prices fell more or rose less than the cash
securities prices due to basis change would cause an upward fluctuation in the
value of the U.S. Government Series' portfolio.
CFTC regulations require, among other things, (i) that futures
and related options be used solely for bona fide hedging purposes (or that the
underlying commodity value of the U.S. Government Series' long futures positions
not exceed the sum of certain identified liquid investments) and (ii) that the
U.S. Government Series not enter into futures and related options for which the
aggregate initial margin and premiums exceed five percent of the fair market
value of the U.S. Government Series' assets. In order to minimize leverage in
connection with the purchase of futures contracts by the U.S. Government Series,
an amount of cash, money market instruments or liquid high grade debt securities
equal to the market value of the obligations under the futures contracts (less
any related margin deposits) will be maintained in a segregated account with the
Custodian.
Options on Futures Contracts
The U.S. Government Series may also purchase and write options on
futures contracts. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put), at a specified exercise price at any time during the option
period. As a writer of an option on a futures contract, the U.S. Government
Series would be subject to initial margin and maintenance requirements similar
to those applicable to futures contracts. In addition, net option premiums
received by the U.S. Government Series are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The U.S. Government Series can purchase put options on futures contracts
in lieu of, and for the same purpose as selling a futures contract. The purchase
of call options on futures contracts would be intended to serve the same purpose
as the actual purchase of the futures contract.
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Risks of Transactions in Options on Futures Contracts. In
addition to the risks described above which apply to all options transactions,
there are several special risks relating to options on futures. The Manager will
not purchase options on futures on any Exchange unless in the Manager's opinion,
a liquid secondary Exchange market for such options exists. Compared to the use
of futures, the purchase of options on futures involves less potential risk to
the U.S. Government Series because the maximum amount at risk is the premium
paid for the options (plus transaction costs). However, there may be
circumstances, such as when there is no movement in the price of the underlying
security, where the use of an option on a future would result in a loss to the
U.S. Government Series whereas the use of a future would not.
Additional Risks of Options and Futures Transactions
Each of the Exchanges has established limitations governing the
maximum number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Manager are combined for purposes of these
limits. An Exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the U.S.
Government Series may write.
Although the U.S. Government Series intends to enter into futures
contracts only if there is an active market for such contracts, there is no
assurance that an active market will exist for the contracts at any particular
time. Most U.S. 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. It is possible that futures contract
prices would move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, and in
the event of adverse price movements, the U.S. Government Series would be
required to make daily cash payments of variation margin. In such circumstances,
an increase in the value of the portion of the portfolio being hedged, if any,
may partially or completely offset losses on the futures contract. However,
there is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus provide
an offset to losses on the futures contract.
Certain additional risks relate to the fact that the U.S.
Government Series might purchase and sell options on mortgage-related
securities. Since the remaining principal balance of mortgage-related securities
declines each month as a result of mortgage payments, if the U.S. Government
Series has written a call and is holding such securities as "cover" to satisfy
its delivery obligation in the event of exercise, it may find that the
securities it holds no longer have a sufficient remaining principal balance for
this purpose. Should this occur, the U.S. Government Series would purchase
additional mortgage-related securities from the same pool (if obtainable) or
replacements in the cash market in order to maintain its cover. A
mortgage-related security held by the U.S. Government Series to cover an option
position in any
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but the nearest expiration month may cease to represent cover for the option in
the event of a decrease in the coupon rate at which new pools are originated. If
this should occur, the option would no longer be covered, and the U.S.
Government Series would either enter into a closing purchase transaction or
replace the mortgage-related security with one which represents cover. In either
case, the U.S. Government Series may realize an unanticipated loss and incur
additional transactions costs.
INVESTMENT LIMITATIONS
The U.S. Government 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 U.S. Government 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 U.S. Government Series may not:
1. Purchase the securities of any one issuer, other than
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, if, immediately after such purchase, (i) more than 5% of the
value of its total assets would be invested in such issuer, or (ii) it would own
more than 10% of the outstanding voting securities of such issuer; except that
up to 25% of the value of its total assets may be invested without regard to
such limitations.
2. Invest 25% or more of its total assets in a single industry;
provided, however, that such limitation shall not be applicable to obligations
issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
3. Issue senior securities, as defined in the Investment Company
Act of 1940 (the "1940 Act"), except to the extent such issuance might be
involved with borrowings described under subparagraph (4) below or with respect
to hedging and risk management transactions or the writing of options within
limits described in the U.S. Government Series' current Prospectus.
4. Borrow money, except for temporary or emergency purposes, or
by engaging in reverse repurchase transactions, and then only in an amount not
exceeding one-third of the U.S. Government Series' total assets, including the
amount borrowed. The U.S. Government Series will not mortgage, pledge or
hypothecate any assets except to secure permitted borrowings and reverse
repurchase transactions. Collateral arrangements with respect to the U.S.
Government Series' permissible futures and options transactions, including
initial and variation margin, are not considered to be a pledge of assets for
purposes of this restriction.
5. Make loans of money or property to any person, other than by
entering into repurchase agreements, and except to the extent the securities in
which the U.S. Government Series may invest are considered to be loans.
6. Buy any securities "on margin". Neither the deposit of initial
or variation margin in connection with hedging and risk management transactions
nor short-term credits as
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may be necessary for the clearance of transactions is considered the purchase of
a security on margin.
7. Sell any securities "short", write, purchase or sell puts,
calls or combinations thereof, or purchase or sell financial futures or options,
except as described under the heading "Certain Investment Techniques and
Policies" in the U.S. Government Series' current Prospectus.
8. Act as an underwriter of securities, except to the extent the
U.S. Government Series may be deemed to be an underwriter in connection with the
sale of securities held in its portfolio.
9. Make investments for the purpose of exercising control or
participation in management.
10. Invest in securities of other investment companies in an
amount exceeding the limitations set forth in the 1940 Act and the rules
thereunder, except as part of a merger, consolidation or other acquisition.
11. Invest in equity interests in oil, gas or other mineral
exploration or development programs.
12. Purchase or sell real estate (but this shall not prevent
investments in securities secured by real estate or interests therein),
commodities or commodity contracts, except to the extent that financial futures
and related options that the U.S. Government Series may invest in are considered
to be commodities or commodities contracts.
13. Invest more than 10% of the U.S. Government Series' total
assets in illiquid securities and repurchase agreements with remaining
maturities in excess of seven days.
Operating Policies. The U.S. Government Series has adopted the
following operating policies which are not fundamental and which may be changed
without shareholder approval: To comply with certain state statutes, the U.S.
Government Series will not: (1) make investments in oil, gas or other mineral
leases; (2) make investments in real estate limited partnerships; (3) purchase
or retain securities of an issuer when one or more officers and trustees of the
Fund or the Fund's Manager, or a person owning more than 10% of the shares of
either, own beneficially more than 1/2 of 1% of the securities of such issuer
and such persons owning more than 1/2 of 1% of such securities together own
beneficially more than 5% of the securities of such issuer; (4) purchase
securities of other investment companies, except in connection with a merger,
consolidation, acquisition or reorganization, or by purchase in the open market
of securities of open-end or closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved; or (5) invest more than 15% of its total assets in the
securities of issuers which together with any predecessors have a record of less
than three years continuous operation or securities of issuers which are
restricted as to disposition.
- 12 -
<PAGE>
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 U.S.
Government Series will not be considered a violation of such policy.
Temporary Defensive Investments
The U.S. Government Series retains the flexibility to respond to
changes in the market or in the economy. Consequently, the U.S. Government
Series may use a temporary defensive investment strategy. When employing a
temporary defensive investment strategy, the U.S. Government Series may hold
cash (U.S. dollars), or invest without limitation in high quality debt
securities or money market instruments.
Portfolio Turnover
The U.S. Government Series' portfolio turnover rate was
approximately 13% for the year ended December 31, 1997, and was approximately
68% for the year ended December 31, 1998. The U.S. Government Series experienced
a substantially higher portfolio turnover rate for the year ended December 31,
1998 primarily as a result of the restructuring of the U.S.
Government Series' portfolio by Tocqueville Asset Management, LP.
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 Fund by reviewing and approving necessary agreements with the
Fund's service providers, and mandating policies for the Fund's 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.
- 13 -
<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, 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
- -----------------------------------------------------------------------------------------------------
- 14 -
<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, New York 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 Director 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.
COMPENSATION TABLE
(for each current Board Member for the
most recently completed fiscal year)
<TABLE>
<CAPTION>
==========================================================================================================
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.
- 15 -
<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 U.S.
Government Series. As of that date, the officers and Board Members of the U.S.
Government Series beneficially owned less than 1% of the shares of the U.S.
Government Series.
Number of Percentage of
Name & Address Shares Owned Outstanding Shares
- -------------- ------------ ------------------
Fleet National Bank Custodian 353,770.422 10.52%
FBO Peter & Ruth Nicholas
P.O. Box 92800
Rochester, NY 14692-8900
INVESTMENT MANAGEMENT AND OTHER SERVICES
Advisory Services
The U.S. Government 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 U.S. Government 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 U.S. Government
Series. Mr. Fulvio is not considered a "control person" of Cornerstone.
Cornerstone receives an advisory fee equal to the following
percentages of the U.S. Government Series' average daily net asset value:
<TABLE>
<CAPTION>
Average Daily Net Asset Value Annual Fee Payable
- ----------------------------- ------------------
<S> <C>
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%
</TABLE>
The fee levels noted above are identical to those received by the
U.S. Government Series' previous advisers, Tocqueville Asset Management, L.P.
("Tocqueville"), and Fundamental Portfolio Advisors, Inc. ("FPA").
- 16 -
<PAGE>
From September 29, 1998 to December 31, 1998 Cornerstone received
an aggregate advisory fee of $10,498. From June 1, 1998 to September 28, 1998
Tocqueville, as an interim adviser, received an aggregate advisory fee of
$18,058. From January 1, 1998 to May 30, 1998 FPA received an aggregate advisory
fee of $29,973. For the fiscal year ended December 31, 1997 FPA received an
aggregate advisory fee of $88,681. 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 U.S. Government Series. 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 $25,000 for the U.S. Government 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 U.S. Government
Series' cash and securities.
McGladrey & Pullen, LLP acts as independent certified public
accountants for the U.S. Government Series, performing an annual audit of the
U.S. Government Series' financial statements and preparing its tax returns.
- 17 -
<PAGE>
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 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 U.S. Government 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 loan associations and investment advisors
for distribution related and/or administrative services performed for the U.S.
Government Series. Cresvale also pays certain expenses in connection with the
distribution of the U.S. Government Series' shares, including the cost of
preparing, printing and distributing advertising or promotional materials. The
U.S. Government Series bears the cost of registering its shares under federal
and state securities law.
The U.S. Government 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 U.S. Government Series.
The U.S. Government Series has adopted a plan of distribution
pursuant to Rule 12b-1 under the 1940 Act (the "Plan") pursuant to which the
U.S. Government Series pays Cresvale compensation accrued daily and paid monthly
at the annual rate of 1/2 of 1.0% of the U.S. Government 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 U.S. Government 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 U.S.
Government 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
- 18 -
<PAGE>
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 U.S. Government 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 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 U.S. Government 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 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 U.S. Government
Series paid $11,401 for expenses incurred pursuant to the Plan, which amount was
spent in the distribution of the U.S. Government Series' shares, including
expenses for: advertising -- ($141); printing and mailing of Prospectuses to
other than current shareholders -- ($2,802); and sales, and shareholder
servicing support services and other distribution services, -- ($8,458). Of the
amount paid by the U.S. Government Series during last year, $7,893 was paid to
Fundamental Service Corporation 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 U.S. Government 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 for other investment companies for which the Manager acts as
investment advisor. Securities purchased and sold on behalf of the U.S.
Government Series will be traded in the over-the-counter market 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 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 and commissions (if any).
Dealers may be selected who provide brokerage and/or research
services to the Fund or U.S. Government 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
- 19 -
<PAGE>
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 U.S.
Government 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.
The receipt of research from dealers may be useful to the Manager
in rendering investment management services to the U.S. Government 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 it in carrying out its obligations to the U.S.
Government 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 U.S.
Government 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 U.S. Government
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 U.S. Government 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
U.S. Government 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 last three fiscal years from 1996-98, the Fund paid $
- -0-, $ -0-, and $ -0-, respectively, in 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 U.S. Government Series and the Fund and review the
dealer spreads paid by the U.S. Government 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.
- 20 -
<PAGE>
TAXES
The following is only a summary of certain additional tax
considerations generally affecting the U.S. Government 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 U.S. Government
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 U.S. Government 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 U.S. Government 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) for the taxable
year (the "Distribution Requirement"), and satisfies certain other requirements
of the Code that are described below. Distributions by the U.S. Government
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.
If the Fund 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 Fund
has capital loss carryforwards of $15,791,100 expiring through December 31,
2005. Under Code Section 382, if the Fund has an "ownership change," the Fund's
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 Fund
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 in which the ownership change occurs (the rate
for April 1998 is 5.04%). The Fund will use its best efforts to avoid having an
ownership change. However, because of circumstances which may be beyond the
control of the Fund, there can be no assurance that the Fund will not have, or
has not already had, an ownership change. If the Fund 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 Fund and will be taxable to
shareholders as described under "Fund 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
- 21 -
<PAGE>
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 U.S. Government Series
on the disposition of an asset will be a capital gain or loss. However, gain
recognized on the disposition of a debt obligation purchased by the U.S.
Government 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 U.S.
Government Series held the debt obligation.
In general, for purposes of determining whether capital gain or
loss recognized by the U.S. Government 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 another asset
so used, (2) the asset is otherwise held by the U.S. Government Series as part
of a "straddle" (which term generally excludes a situation where the asset is
stock and the U.S. Government Series grants a qualified covered call option
(which, among other things, must not be deep-in-the-money) with respect thereto)
or (3) the asset is stock and the U.S. Government Series grants an in-the-money
qualified covered call option with respect thereto. In addition, the U.S.
Government 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 U.S. Government Series on the lapse
of, or any gain or loss recognized by the U.S. Government Series from a closing
transaction with respect to, an option written by the U.S. Government Series
will be treated as a short-term capital gain or loss.
Certain transactions that may be engaged in by the U.S.
Government Series (such as regulated futures contracts and options on 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 U.S. Government Series, however, may elect
not to have this special tax treatment apply to Section 1256 contracts that are
part of a "mixed straddle" with other investments of the U.S. Government Series
that are not Section 1256 contracts.
- 22 -
<PAGE>
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 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
U.S. Government 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 U.S. Government Series' taxable year, at least 50% of the value
of the U.S. Government 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 U.S. Government Series has
not invested more than 5% of the value of the U.S. Government 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 U.S. Government 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. However, with regard to
forward currency contracts, there does not appear to be any formal or informal
authority which identifies the issuer of such instrument. For purposes of asset
diversification testing, obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal Agricultural
Mortgage Corporation, the Farm Credit System Financial Assistance Corporation, a
Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, the Federal
National Mortgage Association, the Government National Mortgage Corporation, and
the Student Loan Marketing Association are treated as U.S.
Government securities.
If for any taxable year the U.S. Government 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 U.S.
Government 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")). 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.
- 23 -
<PAGE>
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 U.S. Government 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 U.S. Government Series
may in certain circumstances be required to liquidate portfolio investments to
make sufficient distributions to avoid excise tax liability.
U.S. Government Series Distributions
The U.S. Government 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 U.S. Government Series may either retain or distribute to
shareholders its net capital gain for each taxable year. The U.S. Government
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 U.S.
Government Series prior to the date on which the shareholder acquired his
shares.
Distributions by the U.S. Government Series that do not
constitute ordinary income 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 a sale
of the shares, as discussed below.
Distributions by the U.S. Government 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 U.S. Government 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 U.S. Government Series reflects realized but undistributed income
or gain, or unrealized appreciation in the value of the assets held by the U.S.
Government 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 U.S. Government Series into account in the year in which they are made.
However, dividends declared in
- 24 -
<PAGE>
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 U.S. Government 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) to them during
the year.
The U.S. Government 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 U.S. Government 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 U.S. Government 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 U.S. Government
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 U.S. Government 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. Long-term capital gain recognized by an individual shareholder will be
taxed at the lowest rates applicable to capital gains if the holder has held
such shares for more than 18 months at the time of the sale. However, any
capital loss arising from the sale or redemption of shares held for six months
or less 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 U.S. Government Series is "effectively connected" with a U.S. trade or
business carried on by such shareholder.
If the income from the U.S. Government 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
- 25 -
<PAGE>
of the U.S. Government Series, capital gain dividends and amounts retained by
the U.S. Government Series that are designated as undistributed capital gains.
If the income from the U.S. Government 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 U.S. Government Series will be
subject to U.S. federal income tax at the rates applicable to U.S.
taxpayers.
In the case of a noncorporate foreign shareholder, the U.S.
Government 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
U.S. Government 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 U.S.
Government 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
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 U.S.
Government 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 U.S. Government Series, the Cornerstone Tax-Free Money Market Series
and the Cornerstone High-Yield Municipal Bond 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 of each series. Each share of a series
represents an equal proportionate interest in the series with each other share
of such series. The shares of any additional series would participate
- 26 -
<PAGE>
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 Fund, the shareholders of each series are entitled to share
pro rata in the net assets available for distribution to shareholders of 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, as amended, 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 willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties.
- 27 -
<PAGE>
PURCHASE OF SHARES
For information regarding the manner in which shares of the U.S.
Government Series are offered to the public, see "Purchase of Shares" in the
Prospectus.
PRICING OF SHARES
The net asset value per share of the U.S. Government 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 U.S. Government 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 U.S. Government Series become effective and no shares are
tendered for redemption, the net asset value per share is not determined.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the U.S.
Government Series to that of other mutual funds and to stock or other relevant
indices in advertisements or in reports to shareholders, performance will be
stated both in terms of total return and in terms of yield. The total return
basis combines principal and dividend income changes for the periods shown.
Principal changes are based on the difference between the beginning and closing
net asset values for the period and assume reinvestment of dividends and
distributions paid by the U.S. Government Series. Dividends and distributions
are comprised of net investment income and net realized capital gains. Under the
rules of the Securities and Exchange Commission, funds advertising performance
must include total return quotes calculated according to the following formula:
P(1 + T)n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year periods or at the end of the 1, 5 or 10 year
periods (or fractional portion thereof)
Under the foregoing formula the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to
- 28 -
<PAGE>
submission of the advertising for publication, and will cover one, five, and ten
year periods or a shorter period dating from the effectiveness of the U.S.
Government Series' registration statement. In calculating the ending redeemable
value, the pro rata share of the account opening fee is deducted from the
initial $1,000 investment and all dividends and distributions by the U.S.
Government Series are assumed to have been reinvested at net asset value as
described in the prospectus on the reinvestment dates during the period. Total
return, or "T" in the formula above, is computed by finding the average annual
compounded rates of return over the 1, 5 and 10 year periods (or fractional
portion thereof) that would equate the initial amount invested to the ending
redeemable value.
The U.S. Government Series' aggregate annualized total rate of
return, reflecting the initial investment and reinvestment of all dividends and
distributions, for the period from March 2, 1992 (commencement of public
offering of shares) to December 31, 1998, was .88%.
The U.S. Government Series may also from time to time include in
such advertising a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately the U.S. Government
Series' performance with other measures of investment return. For example, in
comparing the U.S. Government Series's total return with data published by
Lipper Analytical Services, Inc. or similar independent services or financial
publications, the U.S. Government Series calculates its aggregate total return
for the specified periods of time by assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial net asset value of the
investment from the ending net asset value and by dividing the remainder by the
beginning net asset value. The U.S. Government Series does not, for these
purporses, deduct the pro rata share of the account opening fee from the initial
value invested. The U.S. Government Series will, however, disclose the pro rata
share of the account opening fee and will disclose that the performance data
does not reflect such non-recurringcharge and that inclusion of such charge
would reduce the performance quoted. Such alternative total return information
will be given no greater prominence in such advertising than the information
prescribed under the Securities and Exchange Commission's rules.
In addition to the total return quotations discussed above, the
U.S. Government Series may advertise its yield based on a 30-day (or one month)
period ended on the date of the most recent balance sheet included in the U.S.
Government Series' Post-Effective Amendment to its Registration Statement,
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to 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).
- 29 -
<PAGE>
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 the period.
Under this formula, interest earned on debt obligations for
purposes of "a" above, is calculated by (1) computing the yield to maturity of
each obligation held by the U.S. Government Series based on the market value of
the obligation (including actual accrued interest) 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), (2) dividing that
figure by 360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest as referred to above) to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the U.S. Government Series' portfolio (assuming a month of 30
days) and (3) computing the total of the interest earned on all debt obligations
and all dividends accrued on all equity securities during the 30-day or one
month period. In computing dividends accrued, dividend income is recognized by
accruing 1/360 of the stated dividend rate of a security each day that the
security is in the U.S. Government Series' portfolio. For purposes of "b" above,
Rule 12b-1 expenses are included among the expenses accrued for the period. Any
amounts representing sales charges will not be included among these expenses;
however, the U.S. Government Series will disclose the pro rata share of the
account opening fee. Undeclared earned income, computed in accordance with
generally accepted accounting principles, may be subtracted from the maximum
offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be
given no greater prominence than the information prescribed under the Securities
and Exchange Commission's rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The U.S. Government Series' yield as of December 31, 1998, based
on a 30-day period, was 1.79%.
FINANCIAL STATEMENTS
The Financial Statements for the U.S. Government Series are
incorporated by reference to the U.S. Government 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.
- 30 -
<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.*
(j) Consent of Accountants.*
(k) None.
(l) Form of Stock Purchase Agreement.*
(m) Form of Distribution and Marketing Plans (and related
agreements)pursuant to Rule 12b-1.*
(n) Financial Data Schedule.*
(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 such person's duties. See the Registrant's undertaking
with respect to indemnification in Item 30 below.
- -----------------------
* Previously filed
<PAGE>
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 such action, suit or
proceeding upon receipt of an undertaking by
<PAGE>
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 5th day of May, 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 May 5, 1999
- -------------------------------- Executive Officer) and
Stephen C. Leslie Trustee
- -------------------------------- Trustee May 5, 1999
*L. Greg Ferrone
/s/ G. John Fulvio
- -------------------------------- Treasurer (Principal May 5, 1999
G. John Fulvio Financial and Accounting
Officer) and Trustee
- -------------------------------- Trustee May 5, 1999
*William J. Armstrong
- -------------------------------- Trustee
Leroy E. Rodman
- -------------------------------- Trustee May 5, 1999
*Dr. Yvonne Scruggs-Leftwich
</TABLE>
*By: /s/ Jules Buchwald
---------------------------------
Jules Buchwald, Attorney-in-Fact
pursuant to a power of attorney
dated March 31, 1999, previously filed
with the Securities and Exchange Commission;
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.
