PROSPECTUS
Capital Builder Fund
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
(402) 476-3000
1-(800)-279-7437
The Capital Builder Fund (the "Fund") is a diversified open-end management
company organized as a series of the SMITH HAYES Trust, Inc. (the "Trust") The
Trust is a Minnesota Corporation offering its shares in series, each series
operating as separate investment management companies with their own investment
objectives and policies. This Prospectus relates only to the Fund.
The primary investment objective of the Fund is to seek long-term
capital appreciation with a secondary objective of providing current income. The
Fund invests in a diversified portfolio of common and preferred stocks,
convertible securities, U.S. Government Securities, repurchase agreements,
mortgage backed securities, corporate debt securities and money market
instruments. At least 65% of the Fund's total assets will be invested in common
and preferred stocks and securities convertible in to common stocks. In making
selections for the Fund, the adviser will utilize an investment approach based
on fundamental analysis incorporating a value and growth philosophy. See
"Investment Objective and Policies."
Shares of the Fund are not deposits or obligations of, or insured,
guaranteed, or endorsed by, the U.S. government, any bank, the Federal Deposit
Insurance Corporation, the Federal Reserve, or any other agency, entity or
person. The purchase of shares necessarily involves investment risks, including
the possible loss of principal.
This Prospectus concisely describes information about the Fund that an
investor ought to know before investing. Please read it carefully before
investing and retain it for future reference. A Statement of Additional
Information about the Fund dated as of the date of this Prospectus is available
free of charge by writing to the Fund, 200 Centre Terrace, 1225 L Street,
Lincoln, Nebraska 68508, or telephone (402) 476-3000 or 1-(800) 279-7437. The
Statement of Additional Information has been filed with the Securities and
Exchange Commission and is incorporated in its entirety by reference in this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 6, 1995.
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INTRODUCTION
The Fund is a diversified open-end management investment company organized
as a series of the Trust. The Trust is a Minnesota corporation, commonly called
a series mutual fund. The Trust, which was organized in 1988, has one class of
capital stock that is issued in series, each series referred to as a fund which
is operated as a separate open-end management investment company. This
Prospectus only relates to the series Capital Builder Fund. For information
regarding the Trust's other funds, call or write to the Trust at the address and
telephone number on the cover page of this Prospectus.
The Investment Advisor and Administrator
The Trust is managed by CONLEY-SMITH, Inc. ("CSI") formerly SMITH HAYES
Portfolio Management, Inc., a wholly owned subsidiary of Consolidated Investment
Corporation ("Consolidated"). CSI acts as the investment adviser for the Fund
("Adviser"). The Administrator of the Trust is Lancaster Administrative
Services, Inc. ("LAS"). LAS acts as transfer agent and provides or contracts
with others to provide all necessary recordkeeping services. The Trust pays LAS
a monthly fee for such services. The Trust pays the Adviser a monthly fee for
advisory services rendered.
The Distributor
SMITH HAYES Financial Services Corporation ("SMITH HAYES"), also a wholly
owned subsidiary of Consolidated, acts as the distributor ("Distributor") of the
Trust's shares. Pursuant to the Trust's Rule 12b-1 Plan, the Trust will
reimburse the Distributor monthly for certain expenses incurred in connection
with the distribution and promotion of the Trust's shares, not to exceed .50%
annually of the Fund's average net assets. See "Distribution of Portfolio
Shares."
Purchase of Shares
Shares of the Fund are offered to the public at the next determined net asset
value after receipt of an order by the Distributor, without a sales charge. The
minimum initial investment in the Fund is $1,000, and subsequent investments can
be made in any amount.
Certain Risk Factors to Consider
An investment in the Fund is subject to certain risks, as set forth in
detail under "Investment Objective and Policies." As with other mutual funds,
there can be no assurance that the Fund will achieve its objective.
Shareholder Inquiries
Any questions or communications regarding a shareholder account should be
directed to the Fund or your investment executive or other broker-dealer.
General inquiries regarding the Fund should be directed to one of the telephone
numbers set forth on the cover page of this Prospectus.
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Redemptions
Shares of the Fund may be redeemed at any time at their net asset value
next determined after receipt of a redemption request by the Distributor. The
Trust reserves the right, upon 30 days' written notice, to redeem a
shareholder's investment in the Fund if the net asset value of the shares held
by such shareholder falls below $500 as a result of redemptions or transfers.
See "Redemption of Shares-Involuntary Redemption."
Expenses
The payments made by the Fund under the Rule 12b-1 Plan may result in
long-term shareholders paying more than the economic equivalent of the maximum
front end sales charge permitted by the National Association of Securities
Dealers, Inc.
The table below is provided to assist the investor in understanding the
various expenses that an investor in the Fund will bear, whether directly or
indirectly, through an investment in the Fund. For more complete descriptions of
the various costs and expenses, see "Management-Investment Adviser and
Administrator", "Management-Expenses" and "Distribution of Portfolio Shares."
Annual Operating Expenses
The table below provides information regarding expenses for the Fund
expressed as annual percentages of average net assets. "Other Expenses" is
estimated.
Management Fees
Investment Advisory Fees .75%
Administration Fees .25%
-----
Total Management Fees 1.00%
12b-1 Fees .50%
Other Expenses .25%
----
Total Fund Operating Expenses 1.75%
====
Example: You would pay these expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period.
1 year 3 years 5 years 10 years
$18 $55 $95 $207
The example should not be considered a representation of past or future
expenses or yield. Actual expenses and yield may be greater or lower than those
shown.
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INVESTMENT OBJECTIVE AND POLICIES
Investment Objectives
The primary investment objective of the Fund is to seek long-term capital
appreciation with a secondary objective of providing current income. The Fund
invests in a diversified portfolio of common and preferred stocks, securities
convertible in common stocks, U.S. Government Securities, repurchase agreements,
mortgage backed securities, corporate debt securities and money market
instruments. At least 65% of the Fund's total assets will be invested in common
and preferred stocks and securities convertible into common stocks. In making
selections for the Fund, the Adviser will utilize an investment approach based
on fundamental analysis incorporating a value and growth philosophy.
Investment Policies and Techniques
The Adviser will maintain a portfolio of securities broadly diversified
among industries and companies so as to reduce its exposure to certain
investment and market risks. Stock selection criteria are value and
growth-oriented with an emphasis on price in relation to either earnings, cash
flow, or book value. Generally, the Advisers look for companies that are selling
at a discount relative to their peer group and/or relative to the market as a
whole. Dividend or interest income, although considered, is not the primary
factor in the selection of securities by the Fund.
The Fund will be growth oriented and invest its assets primarily in common
stock. If the market condition, in the Advisers' judgment, is unfavorable for
investments in common stock the Fund may choose temporarily to take defensive
positions by investing all or part of its assets in U.S. Government securities,
corporate debt securities or money market instruments. Corporate debt securities
purchased by the Fund will be of investment grade rated BBB-Baa or better by
Standard & Poor's ("S&P") or by Moody's Investors Service ("Moody's").
In the event that the rating of an investment grade security is lowered to
below investment grade, the Investment Adviser will assess the creditworthiness
of the issuer, evaluate the likelihood of the security's being upgraded to
investment grade or being further down-graded and may choose to hold or sell the
security as appropriate.
The Fund may also write listed covered call options on the securities in
its portfolio, purchase exchange listed put and call options, and enter into
closing purchase and sale transactions with respect thereto. See "Special
Investment Methods - Options Transactions."
Portfolio Turnover
While it is not the policy of the Fund to trade actively for short-term
(less than six months) profits, the Fund will dispose of securities without
regard to the time they have been held when such action appears advisable to the
Adviser, subject to, among other factors, the constraints imposed on regulated
investment companies by Subchapter M of the Internal Revenue Code. See
"Dividends and Taxes." In the case of the Fund, frequent changes will result in
increased brokerage and other costs. In
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conjunction with the objective of long-term capital appreciation, the turnover
in the Fund is not expected to exceed 50% annually.
The method of calculating portfolio turnover rate is set forth in the
Statement of Additional Information under "Investment Objectives, Policies and
Restrictions-Portfolio Turnover."
The investment objectives of the Fund described above are fundamental and
may not be changed without shareholder approval. The investment policies and
techniques employed in pursuit of the Fund's objectives described above are
considered non-fundamental and do not require shareholder approval to be
changed. In view of the risks inherent in all investments in securities, there
is no assurance that these objectives will be achieved.
SPECIAL INVESTMENT METHODS
The Fund may invest in U.S. Government Securities, mortgage-related
securities, repurchase agreements, convertible securities, options, and money
market instruments. Descriptions of such securities, and the inherent risks of
investing in such securities are set forth below.
U.S. Government Securities
The Fund may invest in U.S. Government Securities which are obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
Obligations issued by the U.S. Treasury include Treasury Bills, Notes and Bonds
which differ from each other mainly in their interest rates and the length of
their maturity at original issue. In this regard, Treasury Bills have a maturity
of one year or less, Treasury Notes have maturities of one to ten years and
Treasury Bonds generally have maturities greater than ten years. Such Treasury
Securities are backed by the full faith and credit of the U.S. Government.
Obligations of certain agencies and instrumentalities of the U.S.
Government, such as the Government National Mortgage Association, are supported
by the full faith and credit of the U.S. Treasury; others, such as those of the
Federal National Mortgage Association, are supported by the right of the issuer
to borrow from the Treasury; others, such as those of the Student Loan Marketing
Association and the Federal Home Loan Banks, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Federal Farm Credit Banks or the Federal Home Loan
Mortgage Corporation, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The Fund will invest in the obligations of such
agencies or instrumentalities only when the Adviser believes that the credit
risk is minimal.
As with all fixed income securities, various market forces influence the
value of such securities. There is an inverse relationship between the market
value of such securities and yield. As interest rates
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rise, the value of the securities falls; conversely, as interest rates fall, the
market value of such securities rises.
Repurchase Agreements
The Fund may also enter into repurchase agreements on U.S. Government
Securities to invest cash awaiting investment and/or for temporary defensive
purposes. A repurchase agreement involves the purchase by the Fund of U.S.
Government Securities with the condition that after a stated period of time
(usually seven days or less) the original seller will buy back the same
securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investment in
securities. In the event the original seller defaults on its obligation to
repurchase, as a result of its bankruptcy or otherwise, the Fund will seek to
sell the collateral, which action could involve costs or delays. In such case,
the Fund's ability to dispose of the collateral to recover such investment may
be restricted or delayed. While collateral will at all times be maintained in an
amount equal to the repurchase price under the agreement (including accrued
interest due thereunder), to the extent proceeds from the sale of collateral
were less than the repurchase price, a Fund would suffer a loss.
Mortgage-Backed Securities
Mortgage loans made by banks, savings and loans institutions, and other
lenders are often assembled into pools which are issued and guaranteed by an
agency or instrumentality of the U.S. Government, though not necessarily backed
by the full faith and credit of the U.S. Government itself. Pools are also
created directly by banks, savings and loans and other mortgage lenders with
mortgage loans that have been made by these institutions. Interest in such loans
are described as "Mortgage-Backed Securities". These include securities issued
by the Government National Mortgage Association ("GNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC"), and the Federal National Mortgage Association
("FNMA"). The Fund may invest in U.S. Government mortgage-related securities
representing undivided ownership interests in pools of mortgage loans, including
GNMA, FHLMC, FNMA Certificates and loans issued directly by banks, savings, and
loans and other mortgage lenders. All mortgage backed securities purchased by
the Fund will have investment grade BBB or Baa by S&P's or Moody's or be of
comparable grade and none will be "interest only" or "principal only".
Options Transactions
The Fund may write covered call options, with respect to the securities in
which they may invest. A put option is sometimes referred to as a "standby
commitment" and a call option is sometimes referred to as a "reverse standby
commitment". By writing a call option, the Fund becomes obligated during the
term of the option to deliver the securities underlying the option upon payment
of the exercise price if the option is exercised. By writing a put option, the
Fund becomes obligated during the term of the option to purchase the securities
underlying the option at the exercise price if the option is exercised.
The Fund may write only "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to option (or comparable securities satisfying the cover
requirements of securities exchanges). The Fund will be considered "covered"
with
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respect to a put option it writes if, so long as it is obligated as the writer
of a put option, it deposits and maintains with its custodian cash, U.S.
Government Securities or other liquid high-grade debt obligations having a value
equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain, through
the receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund receives premiums from writing call or put
options, which it retains whether or not the options are exercised. By writing a
call option, the Fund might lose the potential for gain on the underlying
security while the option is open, and by writing a put option the Fund might
become obligated to purchase the underlying security for more than its current
price upon exercise.
The Fund may purchase put options, solely for hedging purposes, in order to
protect portfolio holdings in an underlying security against a substantial
decline in the market value of such holdings ("protective puts"). Such
protection is provided during the life of the put because the Fund may sell the
underlying security at the put exercise price, regardless of a decline in the
underlying security's market price. Any loss to the Fund is limited to the
premium paid for, and transaction costs paid in connection with, the put plus
the initial excess, if any, of the market price of the underlying security over
the exercise price. However, if the market price of such security increases, the
profit a portfolio realizes on the sale of the security will be reduced by the
premium paid for the put option less any amount for which the put is sold.
The Fund may only purchase and sell exchange-traded put and call options.
Exchange-traded options are third party contracts with standardized strike
prices and expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while other options may
not. See "Special Investment Methods - Investment Restrictions."
Convertible Securities
The Fund may invest in convertible securities which are rated investment
grade BBB/Baa or better by S&P or by Moody's. In the event that the rating of an
investment grade security is lowered to below investment grade, the Investment
Adviser will assess the creditworthiness of the issuer, evaluate the likelihood
of the security's being upgraded to investment grade or being further
down-graded and may choose to hold or sell the security as appropriate.
Convertible Securities are equity type securities that may be exchanged or
converted into a predetermined number of the issuer's underlying common shares
at the option of the holder during a specified time period. Convertible
securities may take the form of convertible preferred stock, convertible bonds
or debentures, and stock purchase warrants, or a combination of the features of
these securities. The investment characteristics of convertible securities vary
widely, allowing convertible securities to be employed for different investment
objectives.
Convertible bonds and convertible preferred stocks are fixed income
securities entitling the holder to receive the fixed income of a bond or the
dividend preference of a preferred stock until the holder elects to exercise the
conversion privilege. Holders of convertible securities have a claim on the
assets of the issuer prior to the common stockholders but may be subordinated to
holders of similar non-convertible securities of the same issuer. The interest
income and dividends from convertible bonds and preferred
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stocks provide a stream of income with generally higher yields than common
stocks, but lower than non-convertible securities of similar quality.
The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of the
underlying common stock. The value of a convertible security viewed without
regard to its conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." The investment value of the
convertible security will typically fluctuate inversely with changes in
prevailing interest rates. However, at the same time, the convertible security
will be influenced by its "conversion value," which is the market value of the
underlying common stock that would be obtained if the convertible security were
converted. Conversion value fluctuates directly with the price of the underlying
common stock.
If, because of a low price of the common stock, the conversion value is
substantially below the investment value of the convertible security, the price
of the convertible security is governed principally by its investment value. If
the conversion value of a convertible security increases to a point that
approximates or exceeds its investment value, the value of the security will be
principally influenced by its conversion value. A convertible security will sell
at a premium over its conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding a fixed income
security.
Money Market Instruments
The Fund may invest in money market instruments which include:
(i) U.S. Treasury Bills;
(ii) U.S. Treasury Notes with maturities of 18 months or less;
(iii) U.S. Government Securities subject to repurchase agreements;
(iv) Obligations of domestic branches of U.S. banks (including
certificates of deposit and banker's acceptances with
maturities of 18 months or less) which at the date of
investment have capital, surplus, and undivided profits (as of
the date of their most recently published financial
statements) in excess of $10,000,000 and obligations of other
banks or savings and loan associations if such obligations are
insured by the Federal Deposit Insurance Corporation ("FDIC");
(v) Commercial paper which at the date of investment is rated A-1
by S&P or P-1 by Moody's or, if not rated, is issued or
guaranteed as to payment of principal and interest by
companies which at the date of investment have an outstanding
debt issue rated AA or better by S&P or Aa or better by
Moody's;
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(vi) Short-term (maturing in one year or less) corporate
obligations which at the date of investment are rated AA or
better by S&P or Aa or better by Moody's;
(vii) Shares of no-load money market mutual funds (subject to the
ownershiprestrictions of the Investment Company Act of 1940).
See "Investment Policies and Restrictions" in the Statement
of Additional Information.
Investment by the Fund in shares of a money market mutual fund indirectly
results in the investor paying not only the advisory fee and related fees
charged by the Fund, but also the advisory fees and related fees charged by the
adviser and other entities providing services to the money market mutual fund.
Borrowing
The Fund may borrow money from banks for temporary or emergency purposes in
an amount of up to 10% of the value of the Fund's total assets. Interest paid by
the Fund on borrowed funds would decrease the net earnings of the Fund. The Fund
will not purchase portfolio securities while outstanding borrowings exceed 5% of
the value of the Fund's total assets. The Fund may mortgage, pledge, or
hypothecate its assets in an amount not exceeding 10% of the value of its total
assets to secure temporary or emergency borrowing. The polices set forth in this
paragraph are fundamental and may not be changed with respect to a Fund without
the approval of a majority of the Fund's shares.
Temporary Defensive Positions
The Fund may deviate from its fundamental and non-fundamental investment
policies during periods of adverse or abnormal market, economic, political and
other circumstances requiring immediate action to protect assets. In such cases,
the Fund may invest up to 100% of its assets in U.S. Government Securities
investment grade corporate debt securities, rated BBB, Baa or better by S&P or
by Moody's and any Money Market Instrument described above.
Investment Restrictions
The Fund has adopted certain investment restrictions, which are set forth
in detail in the Statement of Additional Information. These restrictions, which
are fundamental and may not be changed without shareholder approval, include the
following: (1) the Fund may not purchase any securities which would, at the time
of purchase, cause 25% or more of the value of its total assets to be invested
in any one industry (this restriction does not apply to securities of the U.S.
Government or its agencies and instrumentalities and repurchase agreements
relating thereto; (2) the Fund may not purchase a security of any one issuer, if
at the time of purchase, such investment would result in the Fund holding more
than 5% of the value of its total assets in such security or hold more than 10%
of the outstanding voting securities of such issuer, except that up to 25% of
the value of the Fund's total assets may be invested without regard to such
limitations. Additional investment restrictions are set forth in the Statement
of Additional Information.
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If a percentage restriction set forth under "Investment Objective and
Policies" is adhered to at the time of an investment, a later increase or
decrease in percentage resulting from changes in values or assets will not
constitute a violation of such restrictions. The foregoing investment
restrictions, as well as all investment objectives and policies designed by the
Fund as fundamental policies in the Statement of Additional Information, may not
be changed without the approval of a "majority" of the Fund's shares
outstanding, defined as the lesser of: (a) 67% of the votes cast at a meeting of
shareholders for the Fund at which more than 50% of the shares are represented
in person or by proxy, or (b) a majority of the outstanding voting shares of the
Fund. The Adviser may also agree to certain additional non-fundamental
investment policies from time to time in order to qualify the shares of the Fund
in various states.
MANAGEMENT
Board of Directors
As in all corporations, the Trust's Board of Directors has the primary
responsibility for over seeing the business of the Trust. The Board of Directors
meets periodically to review the activities of the Fund and the Adviser and to
consider policy matters relating to the Fund and the Trust.
Investment Adviser and Administrator
CONLEY-SMITH, Inc. ("CSI") has been retained under an Investment Advisory
Agreement with the Trust to act as the Fund's Adviser subject to the authority
of the Board of Directors. CONLEY-SMITH, Inc. was incorporated in October, 1987,
under the name SMITH HAYES Portfolio Management, Inc. and changed its name in
April of 1995. CSI has advised and managed the Trust since it inception. CSI is
a wholly owned subsidiary of Consolidated Investment Corporation, which is
engaged through its subsidiaries in various aspects of the financial services
industry. Thomas C. Smith is a controlling person of Consolidated Investment
Corporation and Mr. Smith is an officer and director of the Trust. John H
Conley, the Fund's Portfolio Manager, owns 5% of the voting stock of
Consolidated Investment Corporation. The address of the Adviser is 200 Centre
Terrace, 1225 L Street, Lincoln, Nebraska 68508.
The Adviser furnishes the Fund with investment advice and, in general,
supervises the management and investment programs of the Trust. The Adviser
furnishes at its own expense all necessary administrative services, office
space, equipment, and clerical personnel for servicing the investments of the
Fund, and investment advisory facilities and executive and supervisory personnel
for managing the investment and effecting the securities transactions of the
Fund. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Trust who are affiliated persons of the Adviser and pays the
advisory fee to Conley. Under the Investment Advisory Agreement, the Adviser
receives a monthly fee computed separately for the Fund at an annual rate of
.75% of the daily average net asset value of the Fund.
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John H. Conley, President of the Adviser, and will have the day-to-day
responsibility of managing the Fund investments. Mr. Conley is a Chartered
Financial Analyst with a finance and business degree from Nebraska Wesleyan
University. Mr. Conley has been an investment analyst since 1974 and Mr. Conley
was the President and owner of Conley Investment Counsel, Inc. an investment
advisory firm which transferred all of investment advisery business to CSI on or
about April 7, 1995. At the time of the transfer of the investment advisery
business to CSI, Mr. Conley managed over $40 million in assets.
Lancaster Administrative Services, Inc. ("LAS") has been retained as the
Trust's Administrator under a Transfer Agent and Administrative Services
Agreement with the Trust. LAS is a wholly owned subsidiary of Consolidated
Investment Corporation. The Administrator provides, or contracts with others to
provide, the Trust with all necessary recordkeeping services and share transfer
services. The Administrator receives an administration fee, computed and paid
monthly at an annual rate of 0.25% of the Fund's daily average net assets.
Expenses
The expenses paid by the Fund are deducted from total income before
dividends are paid. These expenses include, but are not limited to, the fees
paid to the Adviser and the Administrator, taxes, interest, ordinary and
extraordinary legal and auditing fees, distribution expenses pursuant to the
Rule 12b-1 Plan, custodial charges, registration and blue sky fees incurred in
registering and qualifying the Fund under state and federal securities laws,
association fees paid to directors who are not affiliated with the Adviser and
any other fees not expressly assumed by the Adviser or Administrator. Any
general expenses of the Trust that are not readily identifiable as belonging to
a particular Fund will be allocated among the Funds on a pro rata basis at the
time such expenses are accrued. The Fund pays its own brokerage commissions and
related transaction costs.
Portfolio Brokerage
The primary consideration in effecting transactions for the Fund is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in which, and the broker-dealers through or with which (acting on an
agency basis or as principal), it seeks this result. The Adviser may consider a
number of factors in determining which broker-dealers to use for the Fund's
transactions. These factors, which are more fully discussed in the Statement of
Additional Information, include, but are not limited to, research services, the
reasonableness of commissions and quality of services and execution. Fund
transactions may be effected through SMITH HAYES, which also acts as the
Distributor of the Trust's shares (see "Distribution of Fund Shares" below) if
the commissions, fees or other remuneration received by SMITH HAYES are
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on an exchange during a comparable period of
time. SMITH HAYES has represented that, in executing Fund transactions for the
Trust, it intends to charge commissions which are substantially less than
non-discounted retail commissions. In effecting portfolio transactions through
SMITH HAYES, the Fund intends to comply with Section 17(e)(1) of the Investment
Company Act of 1940 (the "1940 Act"), as amended.
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DISTRIBUTION OF PORTFOLIO SHARES
SMITH HAYES acts as the principal distributor of the Trust's shares. The
Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act
(the "Plan"), pursuant to which SMITH HAYES is entitled to reimbursement each
month (subject to the limitation discussed below) for its actual expenses
incurred in the distribution and promotion of the Trust's shares. These expenses
include, but are not limited to, compensation paid to investment executives of
SMITH HAYES and to broker-dealers which have entered into sales agreements with
SMITH HAYES, expenses incurred in the printing of reports used for sales
purposes, preparation and printing of sales literature, advertising, promotion,
marketing and sales expenses, payments to banks for shareholder services and
accounting services and other distribution-related expenses. Reimbursement to
SMITH HAYES for the Fund may not exceed 0.50% per annum of the average daily net
assets of the Fund. Compensation will be paid out of such amounts to SMITH HAYES
investment executives, to broker-dealers which have entered into sales
agreements with SMITH HAYES and to banks which provide services to the Trust for
the Fund. The Glass-Steagall Act and other applicable laws prohibit banks from
engaging in the business of underwriting, selling, or distributing securities.
Insofar as banks are compensated, their only function will be to perform
administrative and shareholder services for their clients who wish to invest in
the Fund. If a bank at a future date is prohibited from acting in this capacity,
the shareholder may lose the services provided by the bank; however, it is not
expected that the shareholders would incur any adverse financial consequences.
It is intended that none of the services provided by such banks other than
through registered brokers will involve the solicitation or sale of shares of
the Fund. In the event distribution expenses for the Fund in any one year exceed
the maximum reimbursable under the Plan, such expenses may not be carried
forward to the following year. In its sole discretion, SMITH HAYES can waive all
or part of payments under the Plan. Any such waiver can be discontinued at any
time. Further information regarding the Plan is contained in the Statement of
Additional Information.
PURCHASE OF SHARES
The Fund's shares may be purchased at the net asset value per share from
SMITH HAYES and from certain other broker-dealers who have sales agreements with
SMITH HAYES. The address of SMITH HAYES is that of the Trust. Shareholders will
receive written confirmation of their purchases. Stock Certificates will not be
issued. SMITH HAYES reserves the right to reject any purchase order. Shares of
the Fund are offered to the public without a sales charge at the net asset value
per share next determined following receipt of an order by SMITH HAYES.
Investors may purchase shares by completing the Purchase Application
included in this Prospectus and submitting it with a check payable to:
SMITH HAYES Trust, Inc.
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
<PAGE>
For subsequent purchases, the name of the account and account number should
be included with any purchase order to properly identify your account.
Payment for shares may also be made by bank wire. To do so the investor
must direct his or her bank to wire immediately available funds directly to the
Custodian as indicated below.
1. Telephone the Trust (402) 476-3000 and furnish the name, the account
number and the telephone number of the investor, as well as the amount
being wired and the name of the wiring bank. If a new account is being
opened, additional account information will be requested and an account
number will be provided.
2. Instruct the bank to wire the specific amount of immediately available
funds to the Custodian. The Trust will not be responsible for the
consequences of delays in the bank or Federal Reserve wire system. The
investor's bank must furnish the full name of the investor's account
and the account number. The wire should be addressed as follows:
UNION BANK AND TRUST COMPANY
Lincoln, Nebraska
Trust Department, ABA# 104910795
Lincoln, Nebraska 68506
Account of SMITH HAYES Trust, Inc.
FBO (Account Registration name)
3. Complete a Purchase Application and mail it to the Trust if shares
being purchased by bank wire transfer represent an initial purchase.
(The completed Purchase Application must be received by the Trust
before subsequent instructions to redeem Trust shares will be
accepted.) Banks may impose a charge for the wire transfer of funds.
Acquiring Shares in Exchange for Securities
Shares may also be purchased by transferring to the Fund marketable
securities for which market quotations are readily available and which are
acceptable to the Fund. The minimum value of securities or securities and cash
accepted is $5,000. Investors contemplating an exchange of securities for shares
should contact the Fund before delivering a purchase application or any
securities in certificate form to determine specific procedures and to determine
whether the securities are acceptable to the Fund. Exchanging securities for
Fund shares may result in a tax consequence to the investor and investors are
encouraged to consult with their tax advisor regarding the Federal, State and or
local tax consequences of such transactions.
<PAGE>
Minimum Investment
A minimum initial aggregate investment of $1,000 is required. Subsequent
investments can be made in any amount.
All investments must be made through your SMITH HAYES investment executive or
other broker-dealer.
REDEMPTION OF SHARES
Redemption Procedure
Shares of the Fund, in any amount, may be redeemed at any time at their
current net asset value next determined after a request in good order is
received by SMITH HAYES plus any accrued but unpaid dividends thereon. To redeem
shares of the Fund, an investor must make a redemption request through a SMITH
HAYES investment executive or other broker-dealer. If the redemption request is
made to a broker-dealer other than SMITH HAYES, such broker-dealer will wire a
redemption request to SMITH HAYES immediately following the receipt of such a
request. A redemption request will be considered to be in "good order" if made
in writing and accompanied by the following:
1. a letter of instruction or stock assignment specifying the number or
dollar value of shares to be redeemed, signed by all owners of the
shares in the exact names in which they appear on the account, or by an
authorized officer of a corporate shareholder indicating the capacity
in which such officer is signing;
2. a guarantee of the signature of each owner by an eligible institution
which is a participant in the Securities Transfer Agent Medallion
Program which includes many U.S. commercial banks and members of
recognized securities exchanges; and
3. other supporting legal documents, if required by applicable law, in
the case of estates, trusts, guardianships, custodianships, corporations
and pension and profit-sharing plans.
Payment of Redemption Proceeds
Normally, the Fund will make payment for all shares redeemed within five
business days, but in no event will payment be made more than seven days after
receipt by SMITH HAYES of a redemption request in good order. However, payment
may be postponed or the right of redemption suspended for more than seven days
under unusual circumstances, such as when trading is not taking place on the New
York Stock Exchange. Payment of redemption proceeds may also be delayed until
the check used to purchase the shares to be redeemed has cleared the banking
system, which may take up to 15 days from the purchase date.
<PAGE>
A shareholder may request that the Trust transmit redemption proceeds by
bank wire to a bank account designated on the shareholder's account application
form provided such bank wire redemptions are in amounts of $5,000 or more and
all requisite account information is provided to the Trust.
Involuntary Redemption
The Fund reserves the right to redeem a shareholder's account at any time
the net asset value of the account falls below $500 as the result of a
redemption or transfer request. Shareholders will be notified in writing that
the value of their account is less than $500 and will be allowed 30 days to make
additional investments before the redemption is processed.
VALUATION OF SHARES
The Fund determines its net asset value on each day the New York Stock
Exchange (the "Exchange") is open for business, provided that the net asset
value need not be determined when no portfolio shares are tendered for
redemption and no order for Fund shares is received. The calculation is made as
of the close of the Exchange (currently 3:00 p.m. Lincoln, Nebraska time) after
the Fund has declared any applicable dividends.
The net asset value per share for the Fund is determined by dividing the
value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected) less all
liabilities by the number of Fund shares outstanding. For the purposes of
determining the aggregate net assets of the Fund, cash and receivables will be
valued at their face amounts. Interest will be recorded as accrued and dividends
will be recorded on the ex-dividend date. Securities traded on a national
securities exchange or on the NASDAQ National Market System are valued at the
last reported sale price that day. Securities traded on a national securities
exchange or on the NASDAQ National Market System for which there were no sales
on that day and securities traded on other over-the-counter markets for which
market quotations are readily available are valued at the mean between the bid
and asked prices. If the Fund should have an open short position as to a
security, the valuation of the contract will be at the average of the bid and
asked prices. Portfolio securities underlying actively traded options will be
valued at their market price as determined above. The current market value of
any exchange-traded option held or written by the Fund is its last sales price
on the exchange prior to the time when assets are valued unless the bid price is
higher or the asked price is lower, in which event such bid or asked price is
used. Lacking any sales that day, the options will be valued at the mean between
the current closing bid and asked prices. Securities and other assets for which
market prices are not readily available, are valued at fair value as determined
in good faith by the Board of Directors. With the approval of the Board of
Directors, the Fund may utilize a pricing service, bank, or broker-dealer
experienced in such matters to perform any of the above-described functions.
<PAGE>
DIVIDENDS AND TAXES
Dividends
All net investment income dividends and net realized capital gains with
respect to the shares of the Fund will be payable in additional shares of the
Fund unless the shareholder notifies his or her SMITH HAYES investment executive
or other broker-dealer of an election to receive cash. The taxable status of the
income dividends and/or net capital gains distributions is not affected by
whether they are reinvested or paid in cash.
The Fund will pay dividends from net investment income to its shareholders
at least annually or as may be required to remain a regulated investment company
under the Internal Revenue Code and distribute net realized capital gains, if
any, to its shareholders on an annual basis.
Taxes
The Fund will be treated as a separate entity for federal income tax
purposes. The Trust intends to qualify the Fund as a "regulated investment
company" as defined in the Internal Revenue Code (the "Code"). Provided certain
distribution requirements are met, the Fund will not be subject to federal
income tax on its net investment income and net capital gains that it
distributes to its shareholders.
Shareholders subject to federal income taxation will receive taxable
dividend income or capital gains, as the case may be, from distributions,
whether paid in cash or reinvested in the form of additional shares. Promptly
after the end of each calendar year, each shareholder will receive a statement
of the federal income tax status of all dividends and distributions paid during
the year.
The Trust is subject to the backup withholding provisions of the Code and
is required to withhold income tax from dividends and/or redemptions paid to a
shareholder, if such shareholder fails to furnish the Trust with a taxpayer
identification number or under certain other circumstances. Accordingly,
shareholders are urged to complete and return Form W-9 when requested to do so
by the Trust.
This discussion is only a summary and relates solely to federal tax
matters. Dividends may also be subject to state and local taxation. Shareholders
are urged to consult with their personal tax advisors. See "Dividends and Taxes"
in the Statement of Additional Information.
GENERAL INFORMATION
Capital Stock
The Trust is authorized to issue a total of one billion shares of common
stock, with a par value of $.001 per share. Of these shares, the Board of
Directors has authorized the issuance of 50,000,000 shares in a series
designated Capital Builder Fund shares. The Board of Directors is empowered
under the Trust's Articles of Incorporation to issue other series of the Trust's
common stock without
<PAGE>
shareholder approval or to designate additional authorized but unissued shares
for issuance by one or more existing funds. The Trust presently has authorized
the issuance of shares in nine other series.
All shares, when issued, will be fully paid and nonassessable and will be
redeemable and freely transferable. All shares have equal voting rights. They
can be issued as full or fractional shares. A fractional share has pro rata the
same rights and privileges as a full share. The shares possess no preemptive or
conversion rights.
Voting Rights
Each share of the Fund has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the Trust's
shares. On some issues, such as the election of directors, all shares of the
Trust, irrespective of series, vote together as one series. Cumulative voting is
not authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and, in such event, the holders of the remaining shares will be
unable to elect any directors.
On an issue affecting only the Fund, the shares of the Fund vote as a
separate series. Examples of such issues would be proposals to (i) change a
Fund's Investment Advisory Agreement, (ii) change a fundamental investment
restriction pertaining to only a Fund or (iii) change a Fund's Distribution
Plan. In voting on the Investment Advisory Agreement or proposals affecting only
one Fund, approval of such an agreement or proposal by the shareholders of one
Fund would make that agreement effective as to that Fund whether or not the
agreement or proposal had been approved by the Trust's other Funds.
Shareholders Meeting
The Trust does not intend to hold annual or periodically scheduled regular
meetings of shareholders unless it is required to do so. Minnesota corporation
law requires only that the Board of Directors convene shareholder meetings when
it deems appropriate. However, Minnesota law provides that if a regular meeting
of shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting shares of the Trust
may demand a regular meeting of shareholders by written notice given to the
chief executive officer or chief financial officer of the Trust. Within 30 days
after receipt of the demand, the Board of Directors shall cause a regular
meeting of shareholders to be called, which meeting shall be held no later than
90 days after receipt of the demand, all at the expense of the Trust. In
addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions, for all investment advisory
contracts and amendments thereto, and for all amendments to Rule 12b-1
distribution plans. Finally, the Trust's Articles of Incorporation provide that
shareholders also have the right to remove Directors upon two-thirds vote of the
outstanding shares and may call a meeting to remove a Director upon the
application of 10% or more of the outstanding shares. The Trust is obligated to
facilitate shareholder communications in this situation if certain conditions
are met.
<PAGE>
Allocation of Income and Expenses
The assets received by the Trust for the issue or sale of shares of the
Fund, and all income, earnings, profits, and proceeds thereof, subject only to
the rights of creditors, are allocated to the Fund, and constitute the
underlying assets of the Fund. The underlying assets of the portfolio are
required to be segregated on the books of account, and are to be charged with
the expenses of the Fund and with a share of the general expenses of the Trust.
Any general expenses of the Trust not readily identifiable as belonging to a
particular series are allocated among all series based upon the relative net
assets of each series at the time such expenses were accrued.
Transfer Agent, Dividend Disbursing Agent and Custodian
Union Bank and Trust Company, Lincoln Nebraska, serves as Custodian for the
Trust's portfolio securities and cash. The Administrator acts as Transfer Agent
and Dividend Disbursing Agent. In its capacity as Transfer Agent and Dividend
Disbursing Agent, the Administrator performs many of the clerical and
administrative functions for the Funds.
Total Return and Performance Comparisons
Advertisements and other sales literature for the Fund may refer to "total
return". Total return is the percentage change between the public offering price
of a Fund share at the beginning of a period and the net asset value of such
share at the end of the period, with dividends and capital gains distributions
treated as reinvested. In addition, comparative performance information may be
used from time to time in advertising the Fund's shares, including data from
Lipper Analytical Services, Inc. and the S&P 500 Index.
Report to Shareholders
The Trust will issue semi-annual reports which will include a list of
securities of the Fund owned by the Trust and financial statements, which in the
case of the annual report, will be examined and reported upon by the Trust's
independent auditor.
Legal Opinion
The legality of the shares offered hereby will be passed upon, and the opinion
with respect to all tax matters will be rendered by, Messrs. Cline, Williams,
Wright, Johnson & Oldfather, 1900 FirsTier Bank Building, Lincoln, Nebraska
68508.
Auditors
The Trust's auditors are Deloitte Touche LLP, Lincoln, Nebraska,
independent certified public accountants.
<PAGE>
TABLE OF CONTENTS
Introduction..................................... 3
Annual Operating Expenses........................ 4
Investment Objective
and Policies..................................... 5
Special Investment Methods....................... 6
Management....................................... 11
Distribution of Portfolio Shares................. 13
Purchase of Shares............................... 13
Redemption of Shares............................. 15
Valuation of Shares.............................. 16
Dividends and Taxes.............................. 17
General Information.............................. 17
No dealer, sales representative or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus (and/or in the Statement of Additional Information referred to on the
cover page of this Prospectus), and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund or
SMITH HAYES Financial Services Corporation. This Prospectus does not constitute
an offer or solicitation by anyone in any state in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation.
<PAGE>
SMITH HAYES TRUST, INC.
CAPITAL BUILDER
FUND
PROSPECTUS
INVESTMENT ADVISER
CONLEY-SMITH, INC.
ADMINISTRATOR,
TRANSFER AGENT AND
DIVIDEND PAYING AGENT
Lancaster Administrative
Services, Inc.
DISTRIBUTOR
SMITH HAYES Financial
Services Corporation
CUSTODIAN
Union Bank and Trust Company
Lincoln, Nebraska
April 6, 1995
<PAGE>
SMITH HAYES TRUST, Inc. Date ___________________
500 Centre Terrace, 1225 L Street, Lincoln, NE 68508 ount #____________________
In accordance with the terms and conditions set forth in this form, the current
prospectus, and my instructions below, I wish to establish or revise a
Shareholder Account as follows:
ACCOUNT REGISTRATION (Please Print)
NOTE: In the case of two or more co-owners, the account will be registered "
Joint Tenants with Right of Survivorship" and not as "Tenants-in-common" unless
otherwise specified.
O Individual
__________________________________________________________________ O Jt. WROS
Name of Shareholder O Corporation
O Trust
_________________________________________________________ O Other______________
Name of Co-Owner (if any)
- --------------------------------------------------------------------------------
Street Address City State Zip Code
_________________________ Citizen of______U.S.____ Other(specify)__________
Social Security or T.I.N. #
- ------------------------------------ -----------------------------------------
(Area Code) Home Telephone (Area Code) Business Telephone
DIVIDEND AND INVESTMENT OPTION (One box must be checked)
O Reinvest all dividends and capital gains distributions. O Reinvest capital
gain distributions only. O Receive all dividends and capital gain distributions
in cash.
SYSTEMATIC WITHDRAWAL PLAN
Mail a check for $___________________ prior to the last day of each -- O Month O
Quarter O Year First check to be mailed__________________(specify month)
SHAREHOLDER AUTHORIZATION AND CERTIFICATION
I authorize any instructions contained herein and certify under penalties of
perjury:(Strike number 2 if not true) 1. that the social security or other
taxpayer identification number is correct; 2. that I am not subject to
withholding either because of a failure to report all interest or dividends
or I was subject to withholding and the Internal Revenue Service has
notified me that I am no longer subject to withholding.
O Exempt from backup withholding
O Non-exempt from backup withholding
X______________________________ X____________________________________________
Signature of Shareholder/or Authorized Officer Signature of Co-Owner (if any)
FOR DEALER ONLY (We hereby authorize SMITH HAYES Trust, Inc. as our agent in
connection with transactions under this authorization form. We guarantee the
shareholder's signature.)
- ---------------------------- -----------------------------------------------
Dealer Name Signature of Registered Representative
- ---------------------------- -----------------------------------------------
Home Office Address Address of Office Serving Account
- ---------------------------- -----------------------------------------------
City State Zip Code City State Zip Code
- ---------------------------- ----------------------------------------------
Authorized Signature of Dealer Branch No. Reg. Rep. No. Reg. Rep. Last Name
<PAGE>
SMITH HAYES Trust, Inc.
Capital Builder Fund
STATEMENT OF ADDITIONAL INFORMATION
April 6, 1995
Table of Contents
Page
Investment Objectives, Policies and Restrictions .......................2
Directors and Executive Officers .......................................4
Investment Advisory and Other Services .................................5
Distribution Plan ..................................................... 6
Portfolio Transactions and Brokerage
Allocations ...................................................8
Capital Stock and Control ..............................................9
Net Asset Value and Public Offering Price ..............................9
Redemption ............................................................10
Tax Status ............................................................10
Calculation of Performance Data .......................................11
Auditors ..............................................................11
Appendix A - Ratings of Corporate
Obligations and Commercial Paper ............................A-1
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated April 6,
1995, and should be read in conjunction there with. A copy of the Prospectus may
be obtained from the Trust at 200 Centre Terrace, 1225 L Street, Lincoln,
Nebraska 68508.
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The shares of SMITH HAYES Trust, Inc. (the "Fund") are offered in
series. This Statement of Additional Information only relates to the Capital
Builder Fund (referred to herein as a "Fund").
Repurchase Agreements
The Fund may invest in repurchase agreements on U.S. Government
Securities. The Fund's Custodian will hold the securities underlying any
repurchase agreement or such securities will be part of the Federal Reserve Book
Entry System. The market value of the collateral underlying the repurchase
agreement will be determined on each business day. If at any time the market
value of the collateral falls below the repurchase price of the repurchase
agreement (including any accrued interest), the Fund will promptly receive
additional collateral so that the total collateral is an amount at least equal
to the repurchase price plus accrued interest.
Portfolio Turnover
Portfolio turnover is the ratio of the lesser of annual purchases or
sales of portfolio securities to the average monthly value of portfolio
securities, not including short-term securities maturing in less than 12 months.
A 100% portfolio turnover rate would occur, for example, if the lesser of the
value of purchases or sales of portfolio securities for a particular year were
equal to the average monthly value of the portfolio securities owned during such
year. The turnover rate will not be a limiting factor when management deems
portfolio changes appropriate.
Investment Restrictions
In addition to the investment objectives and policies set forth in the
Prospectus, the Fund is subject to certain investment restrictions, as set forth
below, which may not be changed without the vote of a majority of the Fund's
outstanding shares. "Majority," as used in the Prospectus and in this Statement
of Additional Information, means the lesser of (a) 67% of the Fund's outstanding
shares voting at a meeting of shareholders at which more than 50% of the
outstanding shares are represented in person or by proxy or (b) a majority of
the Fund's outstanding shares.
Unless otherwise specified below, the Fund will not:
1. Invest more than 5% of its assets in the securities of any one
issuer with regard to 75% of the value of its assets (other than
securities of the U.S. Government or its agencies or
instrumentalities), up to 25% may be invested without such
limitations.
2. Purchase more than 10% of any class of securities of any one
issuer (taking all preferred stock issues of an issuer as a
single class and all debt issues of an issuer as a single class)
or acquire more than 10% of the outstanding voting securities of
an issuer. In the aggregate, the Fund may not own more than 15%
of any class of securities or more than 10% of the outstanding
voting securities of an issuer.
<PAGE>
3. Invest 25% or more of the value of its total assets in the
securities of issuers conducting their principal business
activities in any one industry. This restriction does not apply
to securities of the U.S. Government or its agencies and
instrumentalities and repurchase agreements relating thereto.
4. Invest more than 5% of the value of its total assets in the
securities of any issuers which, with their predecessors, have a
record of less than three years' continuous operation.
(Securities of such issuers will not be deemed to fall within
this limitation if they are guaranteed by an entity in
continuous operation for more than three years. The value of all
securities issued or guaranteed by such guarantor and owned by
the Fund shall not exceed 10% of the value of the total assets
of the Fund).
5. Issue any senior securities (as defined in the Investment
Company Act of 1940, as amended), except to the extent that
using options contracts or purchasing or selling securities on a
when-issued or forward commitment basis may be deemed to
constitute issuing a senior security.
6. Borrow money except from banks for temporary or emergency
purposes. The amount of such borrowing may not exceed 10% of the
value of the Fund's total assets. The Fund will not purchase
securities while outstanding borrowing exceeds 5% of the value
of the Fund's total assets. The Fund will not borrow money for
leverage purposes.
7. Mortgage, pledge or hypothecate its assets except in an amount
not exceeding 10% of the value of its total assets to secure
temporary or emergency borrowing. For purposes of this policy,
collateral arrangements for margin deposits on futures contracts
or with respect to the writing of options are not deemed to be a
pledge of assets.
8. Make short sales of securities or maintain a short position.
9. Purchase any securities on margin except to obtain such
short-term credits as may be necessary for the clearance of
transactions.
10. Purchase or retain the securities of any issuer if, to the
Fund's knowledge, those officers or directors of the Fund or its
affiliates or of its investment adviser who individually own
beneficially more than 0.5% of the outstanding securities of
such issuer, or together own more than 5% of such outstanding
securities.
11. Invest for the purpose of exercising control or management.
12. Purchase or sell commodities or commodity futures contracts.
13. Purchase or sell real estate or real estate mortgage loans,
except that the Fund may invest in securities secured by real
estate or interests therein or issued by companies that invest
in real estate or interest therein.
14. Purchase or sell oil, gas or other mineral leases, rights or
royalty contracts, except that the Fund may purchase or sell
securities of companies investing in the foregoing.
<PAGE>
15. Participate on a joint or a joint and several basis in any
securities trading account (as prohibited by Section 12(a)2 of
the Investment Company Act of 1940) except to the extent that
the staff of the Securities and Exchange Commission may in the
future grant exemptive relief therefrom.
16. Act as an underwriter of securities of other issuers.
17. Invest more than 5% of the Fund's net assets in restricted
securities or more than 10% of the Fund's net assets in
repurchase agreements with a maturity of more than seven days,
and other illiquid assets, such as securities with no readily
available market quotation.
18. Purchase the securities of other investment companies except as
provided by Section 12(d)(1) of the Investment Company Act of
1940.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage of
securities or assets, shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and results therefrom.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five
years of the directors and executive officers of the Fund are as follows:
<TABLE>
<S> <C>
Name, Position with Fund and Address Principal Occupation Last Five Years
*Thomas C. Smith, Chairman, President, Chief Chairman, CONLEY-SMITH, Inc., Omaha, Nebraska;
Executive Officer and Treasurer; 200 Centre Chairman and President, SMITH HAYES
Terrace, 1225 L Street, Lincoln, Nebraska 68508 Financial Services Corporation, Lincoln, Nebraska;
Chairman and President, Lancaster Administrative
Services, Inc., Lincoln, Nebraska; Chairman
and President, Consolidated Investment Corporation,
Lincoln, Nebraska; Vice President and Director,
Consolidated Realty Corporation, Lincoln, Nebraska
Thomas D. Potter, Director; 1800 Memorial Drive, President and Chief Executive Officer, Lincoln Mutual
Lincoln, Nebraska 68502 Life Insurance Company, Lincoln, Nebraska;
December, 1987 - Current
Dale C. Tinstman, Director; Suite 200, Financial and Investment Consultant; Chairman of
1201 "O" Street, Lincoln, Nebraska 68508 University of Nebraska Foundation; Director and
Consultant of IBP, Inc. (meat packing and
agribusiness), Lincoln, Nebraska
Thomas R. Larsen, C.P.A., Director; 6211 "O" Certified Public Accountant, Chairman, and President
Street, Lincoln, Nebraska 68510 Larsen Bryant & Porter CPA's, P.C., Lincoln,
Nebraska
Jean B. Norris, Vice President and Secretary; Vice President and Secretary, CONLEY- SMITH,
200 Centre Terrace, 1225 L Street, Lincoln, Inc., Omaha, Nebraska; Vice President and Secretary
Nebraska 68508 .of Lancaster Administrative Services, Inc., Lincoln,
Nebraska; Operations Manager of SMITH HAYES
Trust, Inc., Lincoln, Nebraska
</TABLE>
<PAGE>
The addresses of the directors and officers of the Fund are that of the Fund
unless otherwise indicated.
*Interested director of the Fund by virtue of his affiliation with CONLEY-SMITH,
Inc., as defined under the Investment Company Act of 1940.
The following table represents the compensation amounts received for
services as a director of the Fund:
<TABLE>
<CAPTION>
Compensation Table
Pension or
Aggregate Retirement Benefits Total Compensation
Compensation Accrued as Part From the Fund
Name and Position From Fund of the Fund Expenses Paid to Directors
- ----------------- ------------- -------------------- -----------------
<S> <C> <C> <C>
Thomas D. Potter, Director $1,200 $0 $1,200
Dale C. Tinstman, Director $1,200 $0 $1,200
Thomas R. Larsen, Director $1,200 $0 $1,200
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
General
The investment adviser for the Fund is CONLEY-SMITH, Inc. ("CSI")
(formerly SMITH HAYES Portfolio Management, Inc. the "Adviser"). Lancaster
Administrative Services, Inc. ("LAS") acts as the administrator
("Administrator") and SMITH HAYES Financial Services Corporation acts as the
Fund's distributor ("Distributor"). The adviser, administrator and distributor
act as such pursuant to written agreements which are periodically reviewed and
approved by the directors or the shareholders of the Fund. The Adviser's address
is 444 Regency Parkway, Suite 202, Omaha, Nebraska, 68114 and the address of the
LAS is 200 Centre Terrace, 1225 L Street, Lincoln, Nebraska, 68508.
Control of the Adviser, Administrator and the Distributor
The adviser, administrator and distributor are wholly owned
subsidiaries of Consolidated Investment Corporation, ("Consolidated") a Nebraska
corporation, which is engaged through its subsidiaries in various aspects of the
financial services industry. As a result of his ownership of 77%, Thomas C.
Smith has a controlling interest of the outstanding stock of Consolidated
Investment Corporation. John H. Conley, President of the adviser, as a result of
his ownership of 5% also has a controlling interest in Consolidated.
Investment Advisory Agreement and Administration Agreement
CSI acts as the investment adviser to the Fund under an Investment
Advisory Agreement ("Advisory Agreement"). LAS successor to the transfer agent
and administrative services functions of the adviser will act as the Fund's
Administrator under the Transfer Agent and Administrative Services Agreement
(the "Administration Agreement"). The Advisory Agreement, and Administration
Agreement were approved by the Board of Directors (including a majority of the
directors who are not parties to the Advisory and Administration Agreements, or
interested persons of any such party, other than as directors of the Fund) on
April 18, 1995.
<PAGE>
The Advisory Agreement and Administration Agreement terminate
automatically in the event of their assignment. In addition, the Advisory
Agreement and the Administration Agreement are terminable at any time, without
penalty, by the Board of Directors of the Fund or by vote of a majority of the
Fund's outstanding voting securities on not more than 60 days' written notice to
the Adviser and the Administrator, as the case may be, and by the Adviser and
Administrator, as the case may be, on 60 days' written notice to the Fund.
Unless sooner terminated, the Advisory Agreement and Administration Agreement
shall continue in effect only so long as such continuance is specifically
approved at least annually by either the Board of Directors or by vote of a
majority of the outstanding voting securities of the Fund, provided that in
either event such continuance is also approved by a vote of a majority of the
directors who are not parties to such agreement, or interested person of such
parties, cast in person at a meeting called for the purpose of voting on such
approval.
Pursuant to the Advisory Agreement, the Fund pays the Adviser a monthly
advisory fee equal on an annual basis to .75% of the Fund's average daily net
assets. Under the Advisory Agreement, the Adviser provides the Fund with advice
and assistance in the selection and disposition of the Fund's investments. All
investment decisions are subject to review by the Board of Directors of the
Fund. The Adviser is obligated to pay the salaries and fees of any affiliates of
the Adviser serving as officers or directors of the Fund.
Pursuant to the Administration Agreement, the Administrator acts as
transfer agent and provides, or contracts with others to provide, the Fund all
necessary bookkeeping and shareholder recordkeeping services, share transfer
services, and custodial services. Under the Administration Agreement, the
Administrator receives an administration fee, computed separately for the Fund
and paid monthly, at an annual rate of .25% of the daily average net assets of
the Fund.
The laws of certain states require that if a mutual fund's expenses
(including advisory fees but excluding interest, taxes, brokerage commissions
and extraordinary expenses) exceed certain percentages of average net assets,
the fund must be reimbursed for such excess expenses. The Fund should not ever
exceed such limits.
Custodian
The Custodian for the Fund is Union Bank and Trust Company ("Union"),
3643 South 48th, Lincoln, Nebraska 68506. Union, as Custodian, holds all of
securities and cash owned by the Fund.
DISTRIBUTION PLAN
Rule 12b-1(b) under the Investment Company Act of 1940 provides that
any payments made by the Fund in connection with financing the distribution of
their shares may only be made pursuant to a written plan describing all aspects
of the proposed financing of distribution, and also requires that all agreements
with any person relating to the implementation of the plan must be in writing.
Because some of the payments described below to be made by the Fund are
distribution expenses within the meaning of Rule 12b-1, the Fund has entered
into an Underwriting and Distribution Agreement with the Distributor pursuant to
a Distribution Plan adopted in accordance with such Rule. Under the Underwriting
and Distribution Agreement, the Distributor, on a best efforts basis,
continuously distributes the Fund's shares.
In addition, Rule 12b-1(b)(1) requires that such plan be approved by a
majority of a Fund's outstanding shares, and Rule 12b-1(b)(2) requires that such
plan, together with any related agreements, be approved by a vote of the Board
of Directors who are not interested persons of the Fund and who have no direct
or indirect
<PAGE>
interest in the operation of the plan, cast in person at a meeting for the
purpose of voting on such plan or agreement. Rule 12(b)-1(b)(3) requires that
the plan or agreement provide, in substance:
(a) that it shall continue in effect for a period of more than
one year from the date of its execution or adoption only so long as
such continuance is specifically approved at least annually in the
manner described in paragraph (b)(2) of Rule 12b-1;
(b) that any person authorized to direct the disposition of
moneys paid or payable by the Fund pursuant to the plan or any related
agreement shall provide to the Fund's Board of Directors, and the
directors shall review, at least quarterly, a written report of the
amounts so expended and the purposes for which such expenditures were
made; and
(c) in the case of a plan, that it may be terminated at any
time by a vote of a majority of the members of the Board of Directors
of the Fund who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plan or
in any agreements related to the plan or by a vote of a majority of the
outstanding voting securities of the Fund.
Rule 12b-1(b)(4) requires that such a plan may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments to the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Fund may rely upon Rule 12b-1(b) only
if the selection and nomination of the Fund's disinterested directors are
committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the Fund may implement or continue a plan pursuant to Rule
12b-1(b) only if the directors who vote to approve such implementation or
continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the Investment Company Act of 1940, that there is a reasonable likelihood
that the plan will benefit the Fund and its shareholders. The Board of Directors
has concluded that there is a reasonable likelihood that the Distribution Plan
will benefit the Fund and its shareholders.
Pursuant to the provisions of the Distribution Plan, as amended, the
Fund pays a fee to the Distributor computed and paid monthly at an annual rate
of up to .50% of the Fund's average daily net assets in order to reimburse the
Distributor for its actual expenses incurred in the distribution and promotion
of the Fund's shares.
Expenses for which the Distributor will be reimbursed under the
Distribution Plan include, but are not limited to, compensation paid to
registered representatives of the Distributor and to broker-dealers which have
entered into sales agreements with the Distributor; expenses incurred in the
printing of prospectuses, statements of additional information and reports used
for sales purposes; expenses of preparation and printing of sales literature;
advertisement, promotion, marketing and sales expenses; and other
distribution-related expenses. Compensation will be paid out of such amounts to
investment executives of the Distributor and to broker-dealers which have
entered into sales agreements with the Distributor as follows. If shares of the
Fund are sold by a representative of a broker-dealer other than the Distributor,
that portion of the reimbursement which is attributable to shares sold by such
representative is paid to such broker-dealer. If shares of the Fund are sold by
an investment executive of the Distributor, compensation will be paid to the
investment executive by the Distributor in an amount not to exceed that portion
of .50% of the average daily net assets of the Fund which is attributable to
shares sold by such investment executive. Thomas C. Smith, a director and
officer of the Trust, controls the Distributor and as a result has a financial
interrest in the Distribution Plan.
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
The Adviser is responsible for decisions to buy and sell securities for
the Fund, the selection of broker-dealers to effect the transactions and the
negotiation of brokerage commissions, if any. In placing orders for securities
transactions, the primary criterion for the selection of a broker-dealer is the
ability of the broker-dealer, in the opinion of the Adviser, to secure prompt
execution of the transactions at the most favorable prices. In selecting
broker-dealers the Adviser may consider a number of factors including but not
limited to the reasonableness of the commission (if any), quality of services,
research services and execution.
When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research and/or services to the Adviser.
Such research or services include advice, both directly and in writing, as to
the value of securities; the advisability of investing in, purchasing or selling
securities; and the availability of securities, or purchasers or sellers of
securities, as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. This allows the Adviser to supplement its own investment research
activities and enable the Adviser to obtain the views and information of
individuals and research staffs of many different securities firms prior to
making investment decisions for the Fund. To the extent Fund transactions are
effected with broker-dealers who furnish research services to the Adviser, the
Adviser receives a benefit, not capable of evaluation in dollar amounts, without
providing any direct monetary benefit to the Fund from these transactions. The
Adviser believes that most research services obtained by it generally benefit
several or all of the accounts which it manages, as opposed to solely benefiting
one specific managed fund or account. Normally, research services obtained
through managed funds or accounts investing in common stocks would primarily
benefit the managed funds or accounts which invest in common stock; similarly,
services obtained from transactions in fixed-income securities would normally be
of greater benefit to the managed funds or accounts which invest in debt
securities.
The Adviser has not entered into any formal or informal agreements with
any broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Fund's transactions in exchange for
research services provided the Adviser except as noted below. However, from time
to time, the Adviser may elect to use certain brokers to execute transactions in
order to encourage them to provide the Adviser with research services which the
Adviser anticipates will be useful to it. The Adviser will authorize the Fund to
pay an amount of commission for effecting a securities transaction in excess of
the amount of commission another broker-dealer would have charged only if the
Adviser determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either that particular transaction or the
Adviser's overall responsibilities with respect to the accounts as to which it
exercises investment discretion.
Securities transactions for the Fund may be effected through the
Distributor, as discussed in the Prospectus under "Management-Portfolio
Brokerage." In determining the commissions to be paid to the Distributor, it is
the policy of the Fund that such commissions will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time,
and (b) at least as favorable as commissions contemporaneously charged by the
Distributor on comparable transactions for its most favored comparable
unaffiliated customers. While the Fund does not deem it practicable and in its
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given to posted commission rates as
well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.
<PAGE>
In certain instances, there may be securities which are suitable
investments for the Fund as well as for one or more of the advisory clients of
the Adviser. Investment decisions for the Fund and for such advisory clients are
made by the Adviser with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client of the Adviser even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients of the Adviser when one or more other clients are selling that same
security. Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser, particularly when
the same security is suitable for the investment objectives of more than one
client. When two or more clients of the Adviser are simultaneously engaged n the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed by the Adviser to be equitable to each (and may
result, in the case of purchases, in allocation of that security only to some of
those clients and the purchase of another security for other clients regarded by
the Adviser, as a satisfactory substitute). It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned. At the same time, however, it is
believed that the ability of the Fund to participate in volume transactions will
sometime produce better execution prices.
Option Trading Limits
The writing by the Fund of options on securities is subject to
limitations established by each of the registered securities exchanges on which
such options are traded. Such limitations govern the maximum number of options
in each class which may be written by a single investor or group of investors
acting in concert, regardless of whether the options are written on the same or
different securities exchanges or are held or written in one or more accounts or
through one or more brokers. Thus, the number of options which the Fund may
write may be affected by options written by the other Funds and by other
investment advisory clients of the Adviser. An exchange may order the
liquidations of positions found to be in excess of these limits, and it may
impose certain other sanctions. The Adviser believes it is unlikely that the
level of option trading by the Fund will exceed applicable limitations.
CAPITAL STOCK AND CONTROL
A complete description of the rights and characteristics of the Fund's
capital stock is included in the Prospectus.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares is
summarized in the Prospectus in the text following the heading "Purchase of
Shares"--"Valuation of Shares." The net asset value of each Fund's shares is
determined on each day on which the New York Stock Exchange is open, provided
that the net asset value need not be determined on days when no Fund shares are
tendered for redemption and no order for Fund's shares is received. The New York
Stock Exchange is not open for business on the following holidays (or on the
nearest Monday or Friday if the holiday falls on a weekend): New Year's Day,
President's Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving
and Christmas.
<PAGE>
The portfolio securities in which the Fund invests fluctuate in value,
and hence the net asset value per share of the Fund also fluctuates. An example
of how the net asset value per share for the Fund is calculated is as follows:
Net Assets ($100,000 = Net Asset Value
Shares Outstanding (10,000) per Share ($10)
REDEMPTION
Redemption of shares, or payment, may be suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekend or
holiday closings, (b) when trading on said exchange is restricted, (c) when an
emergency exists, as a result of which disposal by the Fund of securities owned
is not reasonably practicable, or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the Securities and Exchange Commission, by order, so permits, provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist.
TAX STATUS
The Fund has qualified and intends to continue as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended so as to be relieved of federal income tax on its capital gains and net
investment income distributed to shareholders. To qualify as a regulated
investment company, the Fund must, among other things, receive at least 90% of
its gross income each year from dividends, interest, gains from the sale or
other disposition of securities and certain other types of income including,
with certain exceptions, income from options and futures contracts. However,
gains from the sale or other disposition of stock or securities held for less
than three months must constitute less than 30% of the Fund's gross income. This
restriction may limit the extent to which the Fund may effect sales of
securities held for less than three months or transactions in futures contracts
and options even when the Adviser otherwise would deem such transaction to be in
the best interest of the Fund. The Code also requires a regulated investment
company to diversify its holdings. The Internal Revenue Service has not made its
position clear regarding the treatment of options for purposes of the
diversification test, and the extent to which the Fund could buy or sell options
may be limited by this requirement.
The Code requires that all regulated investment companies pay a
nondeductible 4% excise tax to the extent the regulated investment company does
not distribute 98% of its ordinary income, determined on a calendar year basis,
and 98% of its capital gains, determined, in general, on an October 31 year end.
The required distributions are based only on the taxable income of a regulated
investment company.
Ordinarily, distributions and redemption proceeds earned by the Fund
shareholder are not subject to withholding of federal income tax. However, if a
shareholder fails to furnish a tax identification number or social security
number, or certify under penalties of perjury that such number is correct, the
Fund may be required to withhold federal income tax ("backup withholding") from
all dividend, capital gain and/or redemption payments to such shareholder.
Dividends and capital gain distributions may also be subject to backup
withholding if a shareholder fails to certify under penalties of perjury that
such shareholder is not subject to backup withholding due to the under reporting
of certain income. These certifications are contained in the purchase
application enclosed with the Prospectus.
<PAGE>
CALCULATIONS OF PERFORMANCE DATA
From time to time the Fund may quote the yield for the Fund in
advertisements or in reports and other communications to shareholders. For this
purpose, yield is calculated by dividing the Fund's net investment income per
share for the base period which is 30 days or one month, by the Fund's maximum
offering purchase price on the last day of the period and annualizing the
result. The Fund's net investment income changes in response to fluctuations in
interest rates and in the expenses of the Fund. Consequently, any given
quotation should not be considered as a representative of what the Fund's yield
may be for any specified period in the future.
Yield information may be useful in reviewing the Fund's performance and
for providing a basis for comparison with investment alternatives. However, the
Fund's yield will fluctuate, unlike other investments which pay a fixed yield
for a stated period of time. Current yield should be considered together with
fluctuations in the Fund's net asset value over the period for which yield has
been calculated, which, when combined, will indicate the Fund's total return to
shareholders for that period. Other investment companies may calculate yields on
a different basis. In addition, investors should give consideration to the
quality and maturity of the fund securities of the respective investment
companies when comparing investment alternatives.
In connection with the quotations of yields in advertisements described
above, the Fund may also provide average annual total returns from the date of
inception for one, five and ten-year periods if applicable. Total return is a
calculation which equates an initial amount invested to the ending redeemable
value at a specified time. It assumes the reinvestment of all dividends and
capital gains distributions. Average total return will be the average of the
total returns for each year in the period. The Fund may also provide a total
return figure for the most recent calendar quarter prior to the publication of
the advertisement.
AUDITORS
On April 18, 1995, the Board of Directors, including all disinterested
directors, unanimously approved the appointment of Deloitte & Touche LLP, 1040
NBC Center, Lincoln, Nebraska 68508-1469 as the Fund's accountants.
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS,
COMMERCIAL PAPER, AND PREFERRED STOCK
Ratings of Corporate Obligations
Moody's Investors Services, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa: Bonds rated Caa are of poor standing. Such bonds may be in
default or there may be present elements of danger with respect to principal
and interest.
Ca: Bonds rated Ca represent obligations which are speculative in
a high degree. Such bonds are often in default or have other marked
shortcomings.
A-1
<PAGE>
Those securities in the A and Baa groups which Moody's believes possess the
strongest investment attributes are designed by the symbols A-a and Baa-1. Other
A and Baa securities comprise the balance of their respective groups. These
rankings (1) designate the securities which offer the maximum in security within
their quality groups, (2) designate securities which can be bought for possible
upgrading in quality, and (3) additionally afford the investor an opportunity to
gauge more precisely the relative attractiveness of offerings in the
marketplace.
Standard & Poor's Corporation
AAA: Bonds rated AAA have the highest rating assigned by Standard and
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest
and repay principal and differ from the highest rated issues only in a small
degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Although they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rate categories.
Bonds rated BBB are regarded as having speculation characteristics.
BB--B--CCC-CC: Bonds rated BB, B, CCC, and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation among such bonds and CC the highest
degree of speculation. Although such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
Commercial Paper Ratings
Standard & Poor's Corporation
Commercial paper ratings are graded into four categories, ranging from
"A" for the highest quality obligations to "D" for the lowest. Issues assigned
the A rating are regarded as having the greatest capacity for timely payments.
Issues in this category are further refined with the designation 1, 2 and 3 to
indicate the relative degree of safety. The "A-1" designation indicates that the
degree of safety regarding timely payment is very strong. Those issues
determined to possess overwhelming safety characteristics will be denoted with a
plus sign designation.
A-2
<PAGE>
Moody's Investors Services, Inc.
Moody's commercial paper ratings are opinions of the ability of the
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933, nor
does it represent that any specific note is a valid obligation of a rated issuer
or issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment
Prime-2 Strong capacity for repayment
Prime-3 Acceptable capacity for repayment
Ratings of Preferred Stock
Standard & Poor's Corporation
Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be assigned to the
senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment--capacity and willingness of the issuer
to meet the timely payment of preferred stock dividends and
any applicable sinking fund requirements in accordance with
the terms of the obligation.
2. Nature of an provisions of the issue.
3. Relative position of the issue in the event of
bankruptcy, reorganization, or other arrangements affecting
creditors' rights.
AAA: This is the highest rating that may be assigned by Standard
and Poor's to a preferred stock issue and indicates an
extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
A-3
<PAGE>
BBB: An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
A category.
CC: The rating CC is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments but that is currently
paying.
C: A preferred stock rated C is a nonpaying issue.
D: A preferred stock rated D is a nonpaying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does
not rate a particular type of obligation as a matter of policy.
Plus (+) or Minus (-): To provide more detailed indications of
preferred stock quality, the ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Moody's Investors Services, Inc.
aaa: An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa: An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained in
the foreseeable future.
a: An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the aaa and aa classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa: An issue which is rated baa is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.
ba: An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks
in this class.
b: An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
A-4
<PAGE>
caa: An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca: An issue which is rated ca is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payment.
c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
A-5