As filed with the Securities and Exchange Commission
on July 8, 1996
1933 Act Registration No. 33-19894
1940 Act Registration No. 811-5463
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 21 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 23 [X]
(Check appropriate box or boxes.)
------------------------
SMITH HAYES Trust, Inc.
d/b/a Lancaster Funds
(Exact Name of Registrant as Specified in Charter)
200 Centre Terrace, 1225 "L" Street
Lincoln, Nebraska 68508
(Address of Principal Executive Offices)(Zip Code)
(402)476-3000
(Registrant's Telephone Number, Including Area Code)
Thomas C. Smith, President
SMITH HAYES Trust, Inc.
200 Centre Terrace, 1225 L Street
Lincoln, Nebraska 68508
(Name and Address of Agent for Service)
------------------------
Copies of all communications to:
DONALD F. BURT, ESQ.
Cline, Williams, Wright, Johnson & Oldfather
1900 First Bank Building
Lincoln, Nebraska 68508
Approximate Date of Proposed Public Offering: As soon as practicable after the
Registration Statement becomes effective.
It is proposed that this filing will become effective on the September 13, 1996
pursuant to paragraph (a) of Rule 485.
The Registrant has registered an indefinite number of its shares pursuant to
Rule 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice for
the fiscal year ended June 30, 1995 was filed on or about August 25, 1995. The
Rule 24f-2 Notice for the fiscal year ended June 30, 1996 has not yet been
filed.
<PAGE>
SMITH HAYES Trust, Inc.
d/b/a Lancaster Funds
Cross-Reference Sheet
Required by Rule 404(a)
N-1A Item No.................................... Location in Prospectuses
PART A
1. Cover Page.............................. Cover Page
2. Synopsis................................ Introduction
3. Condensed Financial Information......... Financial Highlights
4. General Description of Registrant....... Investment Objective and
Policies; General Information
5. Management of the Fund.................. Management; General Information
6. Capital Stock and Other Securities...... Cover Page;Redemption of Shares;
Dividends and Taxes;
General Information
7. Purchase of Securities Being Offered.... Purchase of Shares
8. Redemption or Repurchase................ Redemption of Shares
9. Pending Legal Proceedings............... Not Applicable
PART B
Location in Statements of
Additional Information
10. Cover Page.............................. Cover Page
11. Table of Contents....................... Table of Contents
12. General Information and History......... General Information
13. Investment Objective and Policies....... Investment Objectives,
Policies and Restrictions
14. Management of the Fund.................. Directors and Executive Officers
15. Control Persons and Principal
Holders of Securities................... Investment Advisory and Other
Services-Control of the Adviser
and the Distributor; Capital
Stock and Control
<PAGE>
16. Investment Advisory and Other Services.. Investment Advisory and Other
Services - Investment Advisory
Agreements and Administration
Agreement
17. Brokerage Allocation and Other Practices. Portfolio Transactions and
Brokerage Allocations
18. Capital Stock and Other Securities....... Capital Stock and Control
19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Net Asset Value and Public
Offering Price; Redemption
20. Tax Status............................ Tax Status
21. Underwriters.......................... Distribution Plan
22. Calculation of Performance Data....... Calculation of Performance Data
23. Financial Statements.................. Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
Lancaster Funds
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
investment company organized as a series of the Lancaster Funds (the "Company").
The Company is a Minnesota corporation offering its shares in series, each
series operating as a separate management investment company with its own
investment objectives and policies. This Prospectus relates only to the Select
and Investor shares of 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 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. 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 __________, 1996.
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
INTRODUCTION
The Fund is a diversified open-end management investment company organized
as a series of the Company. The Company is a Minnesota corporation, commonly
called a series mutual fund. The Company, which was organized in 1988, has three
classes of capital stock that are 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 designated Capital Builder Fund and
the classes of shares thereof designated "Select" and "Investor" shares. For
information regarding the Company's other funds, call or write to the Company at
the address and telephone number on the cover page of this Prospectus.
The Investment Adviser and Administrator
The Company is managed by CONLEY SMITH, Inc. ("CSI"), a wholly owned
subsidiary of Consolidated Investment Corporation ("Consolidated"). CSI acts as
the investment adviser for the Fund ("Adviser"). The Administrator of the
Company is Lancaster Administrative Services, Inc. ("LAS"). LAS acts as transfer
agent and provides or contracts with others to provide all necessary
recordkeeping services. The Company pays LAS and the Adviser monthly fees for
such services.
The Distributor
SMITH HAYES Financial Services Corporation ("SMITH HAYES"), also a wholly
owned subsidiary of Consolidated, acts as the distributor ("Distributor") of the
Fund's shares. Pursuant to the Company's Rule 12b-1 Plan, the Company will
reimburse the Distributor monthly for certain expenses incurred in connection
with the distribution and promotion of the Fund's Investor shares, not to exceed
.50% annually of the Fund's Investor shares average net assets. See
"Distribution of Fund Shares."
Multiple Classes of Shares
Currently the Fund offers two classes of shares, each with its own expense
and load structure. Each class of shares represents an interest in the same
portfolio of investments owned by the Fund. Per share dividends will be the
highest in the Select shares because the Select shares do not bear any 12b-1
fees or related shareholder servicing fees.
Select shares. The minimum net investment for Select shares is $1,000.
Select shares are offered to the public at their net asset value next determined
after an order is received by the Distributor and other selected financial
service firms, plus a varying sales charge, depending on the amount invested or
the nature of the investor as set forth below. Select shares do not bear any
12b-1 fees or related shareholder servicing fees.
<PAGE>
Select Shares Sales Charges
-----------------------------------------
Dealer
As a % of As a % of Reallowance
Public Offering Net Amount as a % of
Price Invested Offering Price
On Purchases of:
less than $25,000 3.90 4.06 3.00
$25,000 but less than $50,000 2.50 2.56 2.00
$50,000 but less than $100,000 1.30 1.32 1.00
$100,000 and over -0- -0- -0-
Investor shares. The minimum investment for Investor shares is $1,000.
Investor shares are offered to the public at their net asset value next
determined after an order is received by the Distributor and other selected
financial service firms, without a sales charge. Investor shares bear the
expense of a 12b-1 distribution fee of .50% of average daily net assets which is
paid monthly to the Distributor.
Purchase and Redemption of Shares
Shares of the Fund are available through SMITH HAYES and other selected
financial service firms by completing the Purchase Application included in this
Prospectus and following the instructions under "Purchase of Shares." Certain
investors may purchase Select shares at a reduced sales charge or no sales
charge if they have a relationship with Lancaster Funds, the Distributor, the
Adviser, the Administrator or purchase or agree to invest certain amounts in the
Fund. See "Purchase of Shares - Net Asset Value Purchases" and "Purchase of
Shares - Reduced Sales Charge."
Shares of the Fund are redeemable at any time at the next-determined net
asset value per share, without any deduction by the Fund or the imposition of
any deferred sales charge, subject to certain requirements. See "Redemption of
Shares." The Company 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."
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.
<PAGE>
EXPENSES
The payments made by the Investor shares of 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 Fund Shares."
Shareholder Transaction Expenses
The Fund's shares do not bear any fees, charges or expenses on their sale or
redemption, except as set forth below:
Select Shares Investor Shares
Maximum Sales Charge on Purchases 3.90% None
(as a percentage of offering price)
Annual Fund Operating Expenses
(as a percentage of net assets)
Select Shares Investor Shares
Management Fees
Investment Advisory Fees .75% .50%
Administration Fees .25% .25%
------ -----
Total Management Fees 1.00% 1.00%
12b-1 Fees None .50%
Other Expenses .25% .25%
------ ------
Total Fund Operating Expenses 1.25% 1.75%
Example: You could 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
Select $51 $77 $105 $184
Investor $18 $55 $95 $207
The example should not be considered a representation of past or future
expenses. Actual expenses could be greater or lower than those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial information, which provides selected data for a
share of the Fund outstanding throughout the period indicated, has been audited
by Deloitte & Touche, LLP, independent certified public accountants, for the
year ended June 30, 1996 to the extent of the audit report appearing in the
Company's Annual Financial Report, which is contained in the Statement of
Additional Information and which is available upon request without charge as set
forth on the cover page of this Prospectus. Further information about the
performance of the Fund is also contained in the Company's Annual Financial
Report.
Investor Shares
For the Period from August 24, 1995 (commencement of operations)
to June 30, 1996
1996
Net asset value:
Beginning of period $11.59
------
Income from investment operations:
Net investment loss (0.08)
Net realized and unrealized gain on investments 2.34
------
Total income from investment operations 2.26
------
Distributions from capital gains (0.36)
------
End of period $13.49
=====
Total return 20.33%
=====
Ratios/Supplemental data:
Net assets, end of period (in millions) $9,590
Ratio of expenses to average net assets 1.93%
Ratio of net income to average net assets (0.60%)
Portfolio turnover rate 86.50%
<PAGE>
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 into 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."
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.
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
("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 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.
<PAGE>
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;
(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
ownership restrictions 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.
<PAGE>
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 policies 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 (except those concerning borrowing, diversification and concentration)
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.
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.
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 turnover rate will not be a factor when
management deems portfolio changes
appropriate.
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.
<PAGE>
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 (except for the restriction on
borrowing). The foregoing investment restrictions, as well as all investment
objectives and policies designated 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.
The Fund has adopted a non-fundamental policy prohibiting it from holding 5% or
more of its assets in below investment grade securities.
MANAGEMENT
Board of Directors
As in all corporations, the Company's Board of Directors has the primary
responsibility for overseeing the business of the Company. 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 Company.
Investment Adviser and Administrator
CONLEY SMITH, Inc. ("CSI") has been retained under an Investment Advisory
Agreement with the Company to act as the Fund's Adviser subject to the authority
of the Board of Directors. CSI, incorporated in October, 1987, has advised and
managed the Company since its inception. CSI presently manages $57 million in
assets of investment companies and $58 million in private accounts. CSI is a
wholly owned subsidiary of Consolidated, which is engaged through its
subsidiaries in various aspects of the financial services industry. Thomas C.
Smith is a controlling person of Consolidated and Mr. Smith is an officer and
director of the Company. John H. Conley, the Fund's Portfolio Manager, owns 5%
of the voting stock of Consolidated. The address of the Adviser is 444 Regency
Parkway, Suite 202 Lake Regency Building, Omaha, Nebraska 68114.
The Adviser furnishes the Fund with investment advice and, in general,
supervises the management and investment programs of the Company. 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 investments and effecting the securities transactions of the
Fund. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated persons of the Adviser. 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.
<PAGE>
John H. Conley, President of the Adviser, 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 was the
President and owner of Conley Investment Counsel, Inc., an investment advisory
firm which transferred all of its investment advisory business to CSI on or
about April 20, 1995. At the time of the transfer of the investment advisory
business to CSI, Mr. Conley managed over $40 million in assets.
Lancaster Administrative Services, Inc. ("LAS") has been retained as the
Company's Administrator under a Transfer Agent and Administrative Services
Agreement with the Company. LAS is a wholly owned subsidiary of Consolidated
Investment Corporation. The Administrator provides, or contracts with others to
provide, the Company 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 its 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, custodial charges, 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
Company 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. Other expenses are deducted at the share level. Investor shares bear
distribution expenses pursuant to the Rule 12b-1 Plan and Select and Investor
shares each bear their own respective registration and blue sky fees incurred in
registering and qualifying these shares under state and federal securities laws.
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 Company'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
Company, 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.
<PAGE>
DISTRIBUTION OF FUND SHARES
SMITH HAYES acts as the principal distributor of the Company's shares. The
Company 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 Fund's Investor 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 from the Fund may not exceed 0.50% per annum of the
average daily net assets attributable to the Investor shares 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 Company 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 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 Company. 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 load at the net asset value per share next determined following
receipt of an order by SMITH HAYES.
<PAGE>
Investors may purchase shares by completing the Purchase Application
included in this Prospectus and submitting it with a check payable to:
Lancaster Funds
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
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, Union Bank & Trust, Co., as indicated below.
1. Telephone the Company (402) 476-3000 or 1-(800)-279-7437 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 Company 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 & TRUST CO.
Lincoln, Nebraska
Trust Department, ABA# 104910795
Lincoln, Nebraska 68506
Account of Lancaster Funds, Inc.
Capital Builder Fund
FBO-------------------
(Account Registration name)
3. Complete a Purchase Application and mail it to the Company if shares
being purchased by bank wire transfer represent an initial purchase.
(The completed Purchase Application must be received by the Company
before subsequent instructions to redeem Fund shares will be accepted.)
Banks may impose a charge for the wire transfer of funds.
Investor shares of the Fund are offered to the public at their net asset
value next determined after an order is received by the Distributor and other
selected financial service firms with whom the Distributor has entered into
selling agreements, without a sales charge. Select shares are offered at their
net asset value next determined after an order is received with a varying sales
charge as set forth below.
<PAGE>
Sales Charges
--------------------------------------
Dealer
As a % of As a % of Reallowance
Public Offering Net Amount as a % of
Price Invested Offering Price
On Purchases of:
less than $25,000 3.90 4.06 3.00
$25,000 but less than $50,000 2.50 2.56 2.00
$50,000 but less than $100,000 1.30 1.32 1.00
$100,000 and over -0- -0- -0-
Net Asset Value Purchases
Select shares of the Fund may be sold without a sales charge to (1)
directors and employees (and their families) of the Company, the Distributor,
the Adviser, the Administrator, and securities dealers having sales agreements
with the Distributor; (2) investors purchasing shares with proceeds of
redemptions from any U.S. mutual fund not distributed by the Distributor which
imposes front-end sales charges or deferred sales charges; and (3) persons who
have entered into an investment advisory agreement with the Distributor or the
Adviser as to any portion of their assets that is invested in the Fund or any
other Fund of the Company. To be eligible to purchase shares without the
imposition of sales charges as described above, the investor or the investor's
broker must establish such eligibility at the time shares are purchased by
advising the Distributor.
Reduced Sales Charge
Select shares of the Fund may also be purchased at the reduced sales charges
as set forth in this Prospectus if the investor agrees to purchase at least the
aggregate amount necessary to qualify for the reduced sales charge under a
statement of intent. Under the statement of intent, an investor agrees to
purchase a certain amount over a 13 month period, and in so doing qualifies for
the reduced sales charge for the aggregate amount for all purchases in
furtherance of the statement of intent. The statement of intent does not create
a binding obligation on the shareholder to purchase the requisite number and
amount of shares and consequently, 2.5% of the value of the total shares to be
purchased will be segregated from the shareholder's account as statement of
intent shares. All such shares will be credited with the appropriate amount of
dividends and capital gains distributions. In the event that the statement of
intent is fulfilled, all shares will be credited to the shareholder's regular
account. In the event that the statement of intent is not fulfilled, a
sufficient amount of the statement of intent shares will be redeemed to realize
the difference in sales charges based on the number and amount of the shares
actually purchased and the balance of such shares will be released to the
shareholder's regular account. (See account application).
<PAGE>
Investor may also qualify for the reduced sales charges by aggregating their
investments in the Fund with a spouse and children under the age of 21 or a
business entity or trust of which they are a shareholder, partner, owner or
beneficiary.
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 advisors regarding the Federal, State
and/or local tax consequences of such transactions.
Minimum Investment
A minimum initial net investment of $1,000 is required for both the Select
shares and Investor shares. 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
<PAGE>
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.
A shareholder may request that the Company 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 Company.
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
<PAGE>
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.
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 Company 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 Company 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 Company 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 Company.
<PAGE>
As a result of certain reorganization transactions completed in August, 1995
the Fund acquired securities having a net unrealized appreciation of $752,965.
If the Fund sells such securities the amount of any gain will be taxable to
shareholders, including new shareholders. The effect of this would be to subject
new shareholders to income tax on distributions which economically represent a
return of their purchase price rather than an increase in the value of their
investment.
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 advisers. See "Tax Status" in the
Statement of Additional Information.
GENERAL INFORMATION
Capital Stock
The Company 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 120,000,000 shares in three classes of
40,000,000 shares each designated Select, Investor and Market shares in one
series designated Capital Builder Fund shares. The Board of Directors is
empowered under the Company's Articles of Incorporation to issue other series of
the Company's common stock without shareholder approval or to designate
additional authorized but unissued shares for issuance by one or more existing
Funds. The Company presently has authorized the issuance of shares in seven
other series. The Board of Directors is also authorized to divide any new or
existing series into two or more sub-series or classes, which could be used to
create differing expense and fee structures for investors in the same Fund. The
creation of additional classes in the future would not affect the rights of
existing shareholders.
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 Company's
shares. On some issues, such as the election of Directors, all shares of the
Company, 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.
<PAGE>
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 the
Fund's Investment Advisory Agreement, (ii) change a fundamental investment
restriction pertaining to only the Fund or (iii) change the 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 Company's other Funds.
Shareholders Meeting
The Company 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
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. 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 Company. 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 Company'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 Company is obligated
to facilitate shareholder communications in this situation if certain conditions
are met.
Allocation of Income and Expenses
The assets received by the Company 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 Fund 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 Company. Any general
expenses of the Company 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 & Trust Co., Lincoln, Nebraska, serves as Custodian for the
Company'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 Fund.
<PAGE>
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 Company will issue semi-annual reports which will include a list of
securities of the Fund owned by the Company and financial statements, which in
the case of the annual report, will be examined and reported upon by the
Company'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 First Bank Building, Lincoln,
Nebraska 68508.
Auditors
The Company's auditors are Deloitte & Touche LLP, Lincoln, Nebraska,
independent certified public accountants.
<PAGE>
APPLICATION
<TABLE>
<CAPTION>
<S> <C>
Lancaster Funds, 200 Centre Terrace, 1225 L Street, Lincoln, NE 68508 Date ____________________
Capital Builder Fund |_| Investor Shares |_| Select Shares Account # ___________________
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:
STATEMENT OF INTENTION
I plan to invest over a 13-month period an aggregate amount of at least
|_| $25,000 |_| $50,000 |_| $100,000 (and above)
RIGHT OF ACCUMULATION
The registration of some of my shares differs or I am affiliated with the
following accounts.
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.
|_| Individual
___________________________________________________________________________ |_| Jt. WROS
Name of Shareholder |_| Corporation
|_| Trust
___________________________________________________________________________ |_| 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)
|_| Reinvest all dividends and capital gains distributions. |_| Reinvest capital gain distributions
only.
|_| Receive all dividends and capital gain distributions in cash.
SYSTEMATIC WITHDRAWAL PLAN
Mail a check for $___________________ prior to the last day of each |_| Month
|_| Quarter |_| 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.
|_| Exempt from backup withholding
|_| Non-exempt from backup
withholding
X____________________________________________ X____________________________________________
Signature of Shareholder/or Authorized Officer, if corporation Signature of Co-Owner (if any)
FOR DEALER ONLY (We hereby authorize Lancaster Funds as our agent in connection
with transactions under this authorization form. We guarantee the shareholder's
signature.)
- ------------------------------------------------ ---------------------------------------------
Dealer Name (Please Print) 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
</TABLE>
<PAGE>
TABLE OF CONTENTS
Introduction............................ 1
Expenses................................ 3
Financial Highlights.................... 4
Investment Objective and Policies....... 5
Special Investment Methods.............. 6
Management.............................. 11
Distribution of Fund Shares............. 13
Purchase of Shares...................... 13
Redemption of Shares.................... 16
Valuation of Shares..................... 17
Dividends and Taxes..................... 18
General Information..................... 19
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 & Trust Co.
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 Lancaster
Funds 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>
PROSPECTUS
Lancaster Funds
Crestone Small Cap Fund
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
(402) 476-3000
1-(800)-279-7437
The Crestone Small Cap Fund (the "Fund") is a diversified open-end
management Investment company organized as a series of the Lancaster Funds (the
"Company"). The Company is a Minnesota corporation offering its shares in
series, each series operating as a separate management investment company with
its own investment objectives and policies. This Prospectus relates only to the
Select and Investor shares of the Fund.
The primary investment objective of the Fund is to seek long-term capital
appreciation. The Fund will normally invest at least 90% of its assets
(excluding Money Market Instruments) in stocks of companies which have market
capitalizations of between $50 million and $2 billion, with the average market
capitalization of these companies owned by the Fund in the aggregate normally
between $350 million to $600 million. 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 ______________, 1996.
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
INTRODUCTION
The Fund is a diversified open-end management investment company organized
as a series of the Company. The Company is a Minnesota corporation, commonly
called a series mutual fund. The Company, which was organized in 1988, has three
classes of capital stock that are 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 designated Crestone Small Cap Fund
and the classes of shares thereof designated "Select" and "Investor" shares. For
information regarding the Company's other funds, call or write to the Company at
the address and telephone number on the cover page of this Prospectus.
The Investment Adviser and Administrator
The Company is managed by CONLEY SMITH, Inc. ("CSI"), a wholly owned
subsidiary of Consolidated Investment Corporation ("Consolidated"). CSI acts as
the investment adviser for the Fund ("Adviser"). The Administrator of the
Company is Lancaster Administrative Services, Inc. ("LAS"). LAS acts as transfer
agent and provides or contracts with others to provide all necessary
recordkeeping services. The Company pays LAS and the Adviser monthly fees for
such services.
The Adviser has entered into a Sub-Investment Advisory Agreement with
Crestone Capital Management, Inc. ("Crestone"), 7720 East Belleview Avenue,
Suite 220, Englewood, Colorado 80111, to assist in rendering investment advisory
services to the Fund. Crestone will be compensated solely by the Adviser. See
"Management."
The Distributor
SMITH HAYES Financial Services Corporation ("SMITH HAYES"), also a wholly
owned subsidiary of Consolidated, acts as the distributor ("Distributor") of the
Fund's shares. Pursuant to the Company's Rule 12b-1 Plan, the Company will
reimburse the Distributor monthly for certain expenses incurred in connection
with the distribution and promotion of the Fund's Investor shares, not to exceed
.50% annually of the Fund's Investor shares average net assets. See
"Distribution of Fund Shares."
Multiple Classes of Shares
Currently the Fund offers two classes of shares, each with its own expense
and load structure. Each class of shares represents an interest in the same
portfolio of investments owned by the Fund. Per share dividends will be the
highest in the Select shares because the Select shares do not bear any 12b-1
fees or related shareholder servicing fees.
Select shares. The minimum net investment for Select shares is $1,000.
Select shares are offered to the public at their net asset value next determined
after an order is received by the Distributor and other selected financial
service firms, plus a varying sales charge, depending on the amount invested or
the nature of the investor as set forth below. Select shares do not bear any
12b-1 fees or related shareholder servicing fees.
<PAGE>
Select Shares Sales Charges
---------------------------
Dealer
As a % of As a % of Reallowance
Public Offering Net Amount as a % of
Price Invested Offering Price
On Purchases of:
less than $25,000 3.90 4.06 3.00
$25,000 but less than $50,000 2.50 2.56 2.00
$50,000 but less than $100,000 1.30 1.32 1.00
$100,000 and over -0- -0- -0-
Investor shares. The minimum investment for Investor shares is $1,000.
Investor shares are offered to the public at their net asset value next
determined after an order is received by the Distributor and other selected
financial service firms, without a sales charge. Investor shares bear the
expense of a 12b-1 distribution fee of .50% of average daily net assets which is
paid monthly to the Distributor.
Purchase and Redemption of Shares
Shares of the Fund are available through SMITH HAYES and other selected
financial service firms by completing the Purchase Application included in this
Prospectus and following the instructions under "Purchase of Shares." Certain
investors may purchase Select shares at a reduced sales charge or no sales
charge if they have a relationship with Lancaster Funds, the Distributor, the
Adviser, the Administrator or purchase or agree to invest certain amounts in the
Fund. See "Purchase of Shares - Net Asset Value Purchases" and "Purchase of
Shares - Reduced Sales Charge."
Shares of the Fund are redeemable at any time at the next-determined net
asset value per share, without any deduction by the Fund or the imposition of
any deferred sales charge, subject to certain requirements. See "Redemption of
Shares." The Company 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."
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.
<PAGE>
EXPENSES
The payments made by the Investor shares of 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 Fund Shares."
Shareholder Transaction Expenses
The Fund's shares do not bear any fees, charges or expenses on their sale or
redemption, except as set forth below:
Select Shares Investor Shares
Maximum Sales Charge on Purchases 3.90% None
(as a percentage of offering price)
Annual Fund Operating Expenses
(as a percentage of net assets)
Select Shares Investor Shares
Management Fees
Investment Advisory Fees .75% .75%
Administration Fees .25% .25%
------ ------
Total Management Fees 1.00% 1.00%
12b-1 Fees None .50%
Other Expenses .24% .24%
------ ------
Total Fund Operating Expenses 1.24% 1.74%
Example: You could 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
Select $51 $77 $105 $184
Investor $18 $55 $94 $205
The example should not be considered a representation of past or future
expenses. Actual expenses could be greater or lower than those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial information, which provides selected data for an
Investor share of the Fund outstanding throughout the periods indicated, has
been audited by Deloitte & Touche, LLP, independent certified public
accountants, for the year ended June 30, 1996 and 1995 and by KPMG Peat Marwick,
LLP, independent certified public accountants, for all preceding years
presented, to the extent of the audit report appearing in the Company's Annual
Financial Report, which is contained in the Statement of Additional Information
and which is available upon request without charge as set forth on the cover
page of this Prospectus. The offering of Select and Investor shares of the Fund
commenced on the date hereof and as a result, no data is provided for Select
shares. Data for Investor shares is provided and is identified as such because
Investor shares bear the same expense structure as the single class of shares
previously offered by the Fund. Further information about the performance of the
Fund is also contained in the Company's Annual Financial Report.
<TABLE>
<CAPTION>
Investor Shares
Years Ended June 30, 1996, 1995, 1994 and 1993
<S> <C> <C> <C> <C>
1996 1995 1994 1993
---- ---- ---- ----
Net asset value:
Beginning of period $11.59 11.77 10.00
------ ----- -----
Income from investment operations:
Net investment loss (0.08) (0.07) (0.05)
Net realized and unrealized gain
on investments 2.34 0.20 1.83
---- ---- ----
Total income from investment operations 2.26 0.13 1.78
---- ---- ----
Distributions from capital gains (0.36) (0.31) (0.01)
------ ------ ------
End of period $13.49 11.59 11.77
====== ===== =====
Total return 20.33% 1.21% 17.80%
====== ===== ======
Ratios/Supplemental data:
Net assets, end of period (in millions) $9,590 7,219 3,138
Ratio of expenses to average net assets 1.93% 1.91% 2.18%
Ratio of net income to average net assets (0.60%) (0.60%) (0.87%)
Portfolio turnover rate 86.50% 75.23% 47.55%
</TABLE>
<PAGE>
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
has an investment objective of long-term capital appreciation.
Investment Policies and Techniques
The Fund will normally invest at least 90% of its assets (excluding
investments in Money Market Instruments) in stocks of companies which have
market capitalizations between $50 million and $2 billion, with the average
market capitalization of these companies owned by the Fund in the aggregate
normally between $350 million and $600 million. Market capitalization, for
purposes of this policy, is determined by multiplying the per share market value
of a company's shares by the total number of shares outstanding. For purposes of
the percentage restrictions, such percentage restriction shall not be deemed
violated as a result of a change in the market capitalization subsequent to the
acquisition of the security. While the Fund intends to be virtually fully
invested at all times, it may take defensive positions from time to time in
Money Market Instruments without regard to these policies and it will from time
to time maintain investments in Money Market Instruments pending investment in
stocks.
The Fund will be conservatively managed under an investment strategy that is
referred to as "growth at a discount." The Fund will seek to invest in companies
which (i) show above average growth (as compared to long term overall market
growth of 7% to 8% per year), (ii) on average trade at a discount to the S&P 500
price-earnings ratio, (iii) have consistent positive historical earnings over
the last three to five years, (iv) have debt to capital ratios of 35% or less,
and (v) either have cash on their balance sheets exceeding 10% of shareholder
equity, or have employee ownership exceeding 10% of shares outstanding, or are
currently paying a dividend. All of the foregoing investment policies and
techniques are non-fundamental and may be changed without shareholder approval.
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, repurchase agreements,
convertible securities, and money market instruments. Descriptions of such
securities, and the inherent risks of investing in such securities, are set
forth below.
<PAGE>
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 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.
<PAGE>
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;
(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
ownership restrictions 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 policies 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.
<PAGE>
Temporary Defensive Positions
The Fund may deviate from its fundamental and non-fundamental investment
policies (except those concerning borrowing, diversification and concentration)
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.
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
Portfolio Manager, 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.
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 turnover rate will not be a factor when
management deems portfolio changes
appropriate.
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, as to 75% of the value of its total assets, such investment would result in
the Fund holding more than 5% of the value of its total assets in such security;
(3) the Fund may not purchase a security if as a result, more than 10% of any
class of securities, or more than 10% of the outstanding voting securities of
such issuer; (4) the Fund may not invest more than 5% of its total assets in
restricted securities; (5) the Fund will not cause more than 10% of the value of
its total assets to be invested collectively in repurchase agreements maturing
in more than seven days and other illiquid securities; and (6) the Fund will not
invest more than 5% of its total assets in foreign securities. Additional
investment restrictions are set forth in the Statement of Additional
Information.
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 (except for the restriction on
borrowing). The foregoing investment restrictions, as well as all investment
objectives and policies designated by the Fund as fundamental policies in the
Statement of Additional Information, may not be changed without the
<PAGE>
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 Company's Board of Directors has the primary
responsibility for overseeing the business of the Company. 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 Company.
Investment Adviser and Administrator
CONLEY SMITH, Inc. ("CSI") has been retained under an Investment Advisory
Agreement with the Company to act as the Fund's Adviser subject to the authority
of the Board of Directors. CSI, incorporated in October, 1987, has advised and
managed the Company since its inception. CSI presently manages $57 million in
assets of investment companies and $58 million in private accounts. CSI is a
wholly owned subsidiary of Consolidated, which is engaged through its
subsidiaries in various aspects of the financial services industry. Thomas C.
Smith is a controlling person of Consolidated and Mr. Smith is an officer and
director of the Company. The address of the Adviser is 444 Regency Parkway,
Suite 202 Lake Regency Building, Omaha, Nebraska 68114.
The Adviser furnishes the Fund with investment advice and, in general,
supervises the management and investment programs of the Company. 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 investments and effecting the securities transactions of the
Fund. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated persons of the Adviser. 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.
The Adviser has entered into a Sub-Investment Advisory Agreement with
Crestone Capital Management, Inc. ("Crestone"), 7720 East Belleview Avenue,
Suite 220, Englewood, Colorado 80111, to assist in advising the Fund. Kirk
McCown, C.F.A., is the founder, President and one of two directors of Crestone,
which was incorporated in 1990. He and Norwest Bank, N.A. Minneapolis own the
controlling interests in Crestone. Mr. McCown is the Portfolio Manager of the
Small Cap Fund and has been involved in the investment industry since 1977.
Other principals of Crestone include Mark S. Sunderhuse, Senior Vice President,
and Garth E. Anderson, Senior Vice President. All of Crestone's revenues are
currently derived from investment advisory services and Crestone currently has
over 42
<PAGE>
clients and $397 million under management. In return for the investment advisory
services rendered to the Small Cap Fund, Crestone is paid by the Adviser a
monthly fee at an annual rate of .75% on the first $1,000,000 and .5% over
$1,000,000 of the daily average net assets of the Fund. The Adviser is solely
responsible for and will pay Crestone's advisory fees based upon the average net
assets values of the Fund.
Lancaster Administrative Services, Inc. ("LAS") has been retained as the
Company's Administrator under a Transfer Agent and Administrative Services
Agreement with the Company. LAS is a wholly owned subsidiary of Consolidated
Investment Corporation. The Administrator provides, or contracts with others to
provide, the Company 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 its 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, custodial charges, 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
Company 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. Other expenses are deducted at the share level. Investor shares bear
distribution expenses pursuant to the Rule 12b-1 Plan and Select and Investor
shares each bear their own respective registration and blue sky fees incurred in
registering and qualifying these shares under state and federal securities laws.
Portfolio Brokerage
The primary consideration in effecting transactions for the Fund is
execution at the most favorable prices. Crestone 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. Crestone 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 Company'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
Company, 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.
<PAGE>
DISTRIBUTION OF FUND SHARES
SMITH HAYES acts as the principal distributor of the Company's shares. The
Company 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 Fund's Investor 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 from the Fund may not exceed 0.50% per annum of the
average daily net assets attributable to the Investor shares 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 Investor shares of 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 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 Company. Shareholders will receive written confirmation of
their purchases. Stock certificates will not be issued. SMITH HAYES reserves the
right to reject any purchase order.
Investors may purchase shares by completing the Purchase Application
included in this Prospectus and submitting it with a check payable to:
Lancaster Funds
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
For subsequent purchases, the name of the account and account number should
be included with any purchase order to properly identify your account.
<PAGE>
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, Union Bank & Trust Co., as indicated below.
1. Telephone the Company (402) 476-3000 or 1-(800)-279-7437 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 Company 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 & TRUST CO.
Lincoln, Nebraska
Trust Department, ABA# 104910795
Lincoln, Nebraska 68506
Account of Lancaster Funds
Crestone Small Cap Fund
FBO-------------------
(Account Registration name)
3. Complete a Purchase Application and mail it to the Company if shares
being purchased by bank wire transfer represent an initial purchase.
(The completed Purchase Application must be received by the Company
before subsequent instructions to redeem Fund shares will be accepted.)
Banks may impose a charge for the wire transfer of funds.
Investor shares of the Fund are offered to the public at their net asset
value next determined after an order is received by the Distributor and other
selected financial service firms with whom the Distributor has entered into
selling agreements, without a sales charge. Select shares are offered at their
net asset value next determined after an order is received with a varying sales
charge as set forth below.
Sales Charges
-------------
Dealer
As a % of As a % of Reallowance
Public Offering Net Amount as a % of
Price Invested Offering Price
On Purchases of:
less than $25,000 3.90 4.06 3.00
$25,000 but less than $50,000 2.50 2.56 2.00
$50,000 but less than $100,000 1.30 1.32 1.00
$100,000 and over -0- -0- -0-
<PAGE>
Net Asset Value Purchases
Select shares of the Fund may be sold without a sales charge to (1)
directors and employees (and their families) of the Company, the Distributor,
the Adviser, the Administrator, and securities dealers having sales agreements
with the Distributor; (2) investors purchasing shares with proceeds of
redemptions from any U.S. mutual fund not distributed by the Distributor which
imposes front-end sales charges or deferred sales charges; and (3) persons who
have entered into an investment advisory agreement with the Distributor or the
Adviser as to any portion of their assets that is invested in the Fund or any
other Fund of the Company. To be eligible to purchase shares without the
imposition of sales charges as described above, the investor or the investor's
broker must establish such eligibility at the time shares are purchased by
advising the Distributor.
Reduced Sales Charge
Select shares of the Fund may also be purchased at the reduced sales charges
as set forth in this Prospectus if the investor agrees to purchase at least the
aggregate amount necessary to qualify for the reduced sales charge under a
statement of intent. Under the statement of intent, an investor agrees to
purchase a certain amount over a 13 month period, and in so doing qualifies for
the reduced sales charge for the aggregate amount for all purchases in
furtherance of the statement of intent. The statement of intent does not create
a binding obligation on the shareholder to purchase the requisite number and
amount of shares and consequently, 2.5% of the value of the total shares to be
purchased will be segregated from the shareholder's account as statement of
intent shares. All such shares will be credited with the appropriate amount of
dividends and capital gains distributions. In the event that the statement of
intent is fulfilled, all shares will be credited to the shareholder's regular
account. In the event that the statement of intent is not fulfilled, a
sufficient amount of the statement of intent shares will be redeemed to realize
the difference in sales charges based on the number and amount of the shares
actually purchased and the balance of such shares will be released to the
shareholder's regular account. (See account application).
Investors may also qualify for the reduced sales charges by aggregating
their investments in the Fund with a spouse and children under the age of 21 or
a business entity or trust of which they are a shareholder, partner, owner or
beneficiary.
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 advisors regarding the Federal, State
and/or local tax consequences of such transactions.
<PAGE>
Minimum Investment
A minimum initial net investment of $1,000 is required for both Select
shares and Investor shares. 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 ofestates, 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 Company 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 Company.
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. 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.
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.
<PAGE>
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 Company 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 Company 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 Company 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 Company.
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 advisers. See "Tax Status" in the
Statement of Additional Information.
GENERAL INFORMATION
Capital Stock
The Company 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 120,000,000 shares in three classes of
40,000,000 shares each designated Select, Investor and Market shares in one
series designated Crestone Small Cap Fund shares. The Board of Directors is
empowered under the Company's Articles of Incorporation to issue other series of
the Company's common stock without shareholder approval or to designate
additional authorized but unissued shares for issuance by one or more existing
Funds. The Company presently has authorized the issuance of shares in six other
series. The Board of Directors is also authorized to divide any new or existing
series into two or more sub-series or classes, which could be used to create
differing expense and fee structures for investors in the same Fund. The
creation of additional classes in the future would not affect the rights of
existing shareholders.
<PAGE>
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 Company's
shares. On some issues, such as the election of Directors, all shares of the
Company, 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 the
Fund's Investment Advisory Agreement, (ii) change a fundamental investment
restriction pertaining to only the Fund or (iii) change the 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 Company's other Funds.
Shareholders Meeting
The Company 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
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. 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 Company. 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 Company'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 Company 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 Company 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 Fund 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 Company. Any general
expenses of the Company 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 & Trust Co., Lincoln, Nebraska, serves as Custodian for the
Company'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 Fund.
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 the
Russell 2000 index and the S&P 400 Index.
Report to Shareholders
The Company will issue semi-annual reports which will include a list of
securities of the Fund owned by the Company and financial statements, which in
the case of the annual report, will be examined and reported upon by the
Company'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 First Bank Building, Lincoln,
Nebraska 68508.
Auditors
The Company's auditors are Deloitte & Touche LLP, Lincoln, Nebraska,
independent certified public accountants.
<PAGE>
APPLICATION
<TABLE>
<CAPTION>
<S> <C>
Lancaster Funds, 200 Centre Terrace, 1225 L Street, Lincoln, NE 68508 Date ____________________
Crestone Small Cap Fund |_| Investor Shares |_| Select Shares Account # ___________________
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:
STATEMENT OF INTENTION
I plan to invest over a 13-month period an aggregate amount of at least
|_| $25,000 |_| $50,000 |_| $100,000 (and above)
RIGHT OF ACCUMULATION
The registration of some of my shares differs or I am affiliated with the
following accounts.
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.
|_| Individual
___________________________________________________________________________ |_| Jt. WROS
Name of Shareholder |_| Corporation
|_| Trust
___________________________________________________________________________ |_| 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)
|_| Reinvest all dividends and capital gains distributions. |_| Reinvest capital gain distributions
only.
|_| Receive all dividends and capital gain distributions in cash.
SYSTEMATIC WITHDRAWAL PLAN
Mail a check for $___________________ prior to the last day of each |_| Month
|_| Quarter |_| 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.
|_| Exempt from backup withholding
|_| Non-exempt from backup
withholding
X____________________________________________ X____________________________________________
Signature of Shareholder/or Authorized Officer, if corporation Signature of Co-Owner (if any)
FOR DEALER ONLY (We hereby authorize Lancaster Funds as our agent in connection
with transactions under this authorization form. We guarantee the shareholder's
signature.)
- ------------------------------------------------ ---------------------------------------------
Dealer Name (Please Print) 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
</TABLE>
<PAGE>
TABLE OF CONTENTS
Introduction............................ 1
Expenses................................ 3
Financial Highlights.................... 4
Investment Objective and Policies....... 5
Special Investment Methods.............. 5
Management.............................. 9
Distribution of Fund Shares............. 11
Purchase of Shares...................... 11
Redemption of Shares.................... 14
Valuation of Shares..................... 15
Dividends and Taxes..................... 15
General Information..................... 16
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 & Trust Co.
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 Lancaster
Funds 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>
PROSPECTUS
Lancaster Funds
Convertible Fund
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
(402) 476-3000
1-(800)-279-7437
The Convertible Fund (the "Fund") is a diversified open-end management
investment company organized as a series of the Lancaster Funds (the "Company").
The Company is a Minnesota Corporation offering its shares in series, each
series operating as a separate management investment company with its own
investment objectives and policies. This Prospectus relates only to the Select
and Investor shares of the Fund.
The Fund has as its investment objective the preservation of capital while
maximizing total return (a combination of capital gains, interest and
dividends). The Fund will invest primarily in convertible corporate debt
securities and/or convertible preferred stock. 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 ______________, 1996.
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
INTRODUCTION
The Fund is a diversified open-end management investment company organized
as a series of the Company. The Company is a Minnesota corporation, commonly
called a series mutual fund. The Company, which was organized in 1988, has three
classes of capital stock that are 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 designated Convertible Fund and the
classes of shares thereof designated "Select" and "Investor" shares. For
information regarding the Company's other funds, call or write to the Company at
the address and telephone number on the cover page of this Prospectus.
The Investment Adviser and Administrator
The Company is managed by CONLEY SMITH, Inc. ("CSI"), a wholly owned
subsidiary of Consolidated Investment Corporation ("Consolidated"). CSI acts as
the investment adviser for the Fund ("Adviser"). The Administrator of the
Company is Lancaster Administrative Services, Inc. ("LAS"). LAS acts as transfer
agent and provides or contracts with others to provide all necessary
recordkeeping services. The Company pays LAS and the Adviser monthly fees for
such services.
The Adviser has entered into a Sub-Investment Advisory Agreement with
Calamos Asset Management, Inc. ("Calamos") to assist in rendering investment
advisory services to the Fund. Calamos will be compensated solely by the
Adviser. See "Management."
The Distributor
SMITH HAYES Financial Services Corporation ("SMITH HAYES"), also a wholly
owned subsidiary of Consolidated, acts as the distributor ("Distributor") of the
Fund's shares. Pursuant to the Company's Rule 12b-1 Plan, the Company will
reimburse the Distributor monthly for certain expenses incurred in connection
with the distribution and promotion of the Fund's Investor shares, not to exceed
.50% annually of the Fund's Investor shares average net assets. See
"Distribution of Fund Shares."
Multiple Classes of Shares
Currently the Fund offers two classes of shares, each with its own expense
and load structure. Each class of shares represents an interest in the same
portfolio of investments owned by the Fund. Per share dividends will be the
highest in the Select shares because the Select shares do not bear any 12b-1
fees or related shareholder servicing fees.
Select shares. The minimum net investment for Select shares is $1,000.
Select shares are offered to the public at their net asset value next determined
after an order is received by the Distributor and other selected financial
service firms, plus a varying sales charge, depending on the amount invested or
the nature of the investor as set forth below. Select shares do not bear any
12b-1 fees or related shareholder servicing fees.
<PAGE>
Select Shares Sales Charges
---------------------------
Dealer
As a % of As a % of Reallowance
Public Offering Net Amount as a % of
Price Invested Offering Price
On Purchases of:
less than $25,000 3.90 4.06 3.00
$25,000 but less than $50,000 2.50 2.56 2.00
$50,000 but less than $100,000 1.30 1.32 1.00
$100,000 and over -0- -0- -0-
Investor shares. The minimum investment for Investor shares is $1,000.
Investor shares are offered to the public at their net asset value next
determined after an order is received by the Distributor and other selected
financial service firms, without a sales charge. Investor shares bear the
expense of a 12b-1 distribution fee of .50% of average daily net assets which is
paid monthly to the Distributor.
Purchase and Redemption of Shares
Shares of the Fund are available through SMITH HAYES and other selected
financial service firms by completing the Purchase Application included in this
Prospectus and following the instructions under "Purchase of Shares." Certain
investors may purchase Select shares at a reduced sales charge or no sales
charge if they have a relationship with Lancaster Funds, the Distributor, the
Adviser, the Administrator or purchase or agree to invest certain amounts in the
Fund. See "Purchase of Shares - Net Asset Value Purchases" and "Purchase of
Shares - Reduced Sales Charge."
Shares of the Fund are redeemable at any time at the next-determined net
asset value per share, without any deduction by the Fund or the imposition of
any deferred sales charge, subject to certain requirements. See "Redemption of
Shares." The Company 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."
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.
<PAGE>
EXPENSES
The payments made by the Investor shares of 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 Fund Shares."
Shareholder Transaction Expenses
The Fund's shares do not bear any fees, charges or expenses on their sale or
redemption, except as set forth below:
Select Shares Investor Shares
Maximum Sales Charge on Purchases 3.90% None
(as a percentage of offering price)
Annual Fund Operating Expenses
(as a percentage of net assets)
Select Shares Investor Shares
Management Fees
Investment Advisory Fees .75% .75%
Administration Fees .25% .25%
------ ------
Total Management Fees 1.00% 1.00%
12b-1 Fees None .50%
Other Expenses .56% .56%
------ ------
Total Fund Operating Expenses 1.56% 2.06%
Example: You could 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
Select $54 $86 $120 $217
Investor $21 $65 $111 $239
The example should not be considered a representation of past or future
expenses. Actual expenses could be greater or lower than those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial information, which provides selected data for a
share of the Fund outstanding throughout the periods indicated, has been audited
by Deloitte & Touche, LLP, independent certified public accountants, for the
years ended June 30, 1996 and 1995 and by KPMG Peat Marwick, LLP, independent
certified public accountants, for all preceding years presented, to the extent
of the audit report appearing in the Company's Annual Financial Report, which is
contained in the Statement of Additional Information and which is available upon
request without charge as set forth on the cover page of this Prospectus. The
offering of Select and Investor shares of the Fund commenced on the date hereof
and as a result, no data is provided for Select shares. Data for Investor shares
is provided and is identified as such because Investor shares bear the same
expense structure as the single class of shares of the Fund previously offered.
Further information about the performance of the Fund is also contained in the
Company's Annual Financial Report.
<TABLE>
<CAPTION>
Investor Shares
Years Ended June 30, 1996, 1995, 1994, 1993, 1992, 1991 and 1990 and the Periods
from January 1, 1989 to June 30, 1989 and June 23, 1988 (commencement of
operations) to December 31, 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ----
Net asset value:
Beginning of period $11.69 12.58 10.76 9.96 9.86 9.68 9.24 10.00
------ ----- ----- ---- ---- ---- ---- -----
Income (loss) from investment operations:
Net investment income 0.30 0.29 0.33 0.31 0.40 0.39 0.23 0.22
Net realized and
unrealized gain
(loss) on investments 1.01 (0.53) 2.16 0.80 (0.06) 0.16 0.43 (0.76)
---- ------ ---- ---- ------ ---- ---- ------
Total income (loss) from
investment operations 1.31 (0.24) 2.49 1.11 0.34 0.55 0.66 (0.54)
---- ------ ---- ---- ---- ----- ---- ------
Less distributions:
Dividends from net
investment income (0.30) (0.29) (0.33) (0.31) (0.21) (0.37) (0.22) (0.22)
Distributions from
capital gains (0.73) (0.36) (0.34) - (0.03) - - -
------ ------ ------ ---------- ----------- ------- ----
Total distributions (1.03) (0.65) (0.67) (0.31) (0.24) (0.37) (0.22) (0.22)
------ ------ ------ ------ ------ ------ ------ ------
End of period $11.97 11.69 12.58 10.76 9.96 9.86 9.68 9.24
====== ===== ===== ===== ==== ==== ==== ====
Total return 14.09% (2.26%) 24.06% 10.95% 5.09% 5.74% 14.36%*(10.87%)*
====== ======= ====== ====== ===== ===== ================
Ratios/Supplemental data:
Net assets, end of
period (in millions) $1,765 2,708 2,369 1,791 1,189 1,645 1,498 1,544
Ratio of expenses to
average net assets 2.25% 2.06% 2.13% 2.48% 2.79% 2.57% 2.57%* 2.52%*
Ratio of net income to
average net assets 2.58% 2.27% 2.91% 2.85% 3.48% 3.73% 4.73%* 4.58%*
Portfolio turnover rate 51.31% 65.76% 69.72% 96.02% 70.77% 96.40% 1.75% 33.60%
*Annualized for those periods less than twelve months in duration.
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objectives
The Fund has the investment objective the preservation of capital while
maximizing total return (a combination of capital gains, interest and
dividends). The Fund will invest primarily in convertible corporate debt
securities and/or convertible preferred stock.
Investment Policies and Techniques
In seeking to accomplish its objective, the Fund normally invests at least
65% of its total assets in a diversified portfolio of convertible securities,
primarily bonds and preferred stocks which are convertible into common stock.
See "Special Investment Methods Convertible Securities." Generally, the Fund
emphasizes investments in securities that are in the higher rating categories of
the recognized rating agencies (i.e., securities rated BBB or higher by Standard
& Poor's Corporation ("S&P") or Ba or lower by Moody's Investors Services, Inc.
("Moody's")) and other securities of comparable quality as determined by the
Portfolio Manager or unrated securities, which are commonly referred to as
("junk bonds"). There are no restrictions as to the ratings of convertible debt
securities acquired by the Convertible Fund's assets that may be invested in
debt securities in a particular ratings category, except that the Convertible
Fund will not acquire any security rated below C. In an attempt to earn
additional income on its portfolio, the Fund may write covered call options in
securities the Fund holds or has an immediate right to acquire upon conversion
or exchange of securities held by the Fund. See "Special Investment Methods -
Options Transactions." The Fund's investment in convertible securities offers
the potential for capital appreciation through the conversion feature of such
securities, which enables the Fund to benefit from increases in the market
prices of the underlying common stock. However, the Fund's emphasis on
convertible securities will also necessarily result in fluctuations in the net
asset value and yield of the Fund as interest rate changes and corresponding
inverse changes in market values of the underlying stock occur. Generally, there
is an inverse relationship between the market value of fixed income securities
and the yield of such securities. As interest rates rise, the value of the
security falls. Conversely, as interest rates fall, the market value of the
security rises.
Securities rated BBB and Baa have speculative characteristics while
securities rated BB and Ba or lower are considered speculative. Securities rated
C are of poor standing and may be in default and have serious questions of
payment. See Appendix A to the Statement of Additional Information for a
complete description of the S&P and Moody's ratings. Investment in junk bonds
involves greater investment risk, including the possibility of issuer default or
bankruptcy. An economic down-turn could severely disrupt the market for such
securities and adversely affect the value of such securities. In addition, junk
bonds are less sensitive to interest rate changes than higher quality
instruments and generally are more sensitive to adverse economic changes or
individual corporate developments. During a period of adverse economic changes,
including a period of rising interest rates, issuers of such securities may
experience difficulty in servicing their principal and interest payment
obligations. Lower rated and unrated convertible securities normally offer a
current yield appreciably above that generally available on bonds in the highest
rating categories but involve a higher risk of default than securities with
<PAGE>
higher ratings. Market prices of lower rated convertible securities tend to
fluctuate more than market prices of higher rated securities, and the market for
such securities tends to be less liquid than the market for higher rated
securities. Changes in the market value of convertible securities subsequent to
acquisition do not affect cash income of the Fund but are reflected in the net
asset value of the Fund's shares and the Fund's effective yield.
As of June 30, 1996, the Fund had 6%, 1%, and 1% of its net assets invested
in convertible debt securities rated B+, B and B- by Moody's.
In selecting the Fund's securities, including unrated securities, the
Portfolio Manager performs its own credit analysis, in addition to depending
upon recognized rating agencies and other sources, giving consideration, among
other things, to the issuer's financial soundness, its anticipated cash flow,
interest or dividend coverage, asset coverage, sinking fund provisions,
responsiveness to changes in interest rates, business conditions, and
liquidation value related to the market price of the security. The Fund
diversifies its holdings to reduce risk. Although risk cannot be eliminated,
diversification reduces the impact of any single investment. Furthermore,
convertible securities, because of their fixed income features, are less
susceptible to declines in the equity market than the common stock of the same
issuer.
The Fund may invest up to 20% of the value of its total assets in
non-convertible income-producing securities consisting of stocks, bonds, U.S.
Government Securities and repurchase agreements on U.S. Government Securities.
Although it is intended that the Fund will invest primarily in convertible
securities, securities received upon conversion or exercise of warrants and
securities remaining upon the breakup of units or detachments of warrants may be
retained to permit orderly disposition or to establish long-term holding periods
for Federal income tax purposes. The Fund is not required to immediately sell
securities for the purpose of assuring that 65% of its total assets are invested
in convertible securities.
The Fund may invest up to 15% of the value of its total assets at the time
of purchase in warrants (not including those acquired in units or attached to
other securities), including up to 5% of its total assets in warrants that are
not listed on the New York or American Stock Exchanges. A warrant is a right to
purchase common stock at a specific price (usually at a premium above the market
value of the underlying common stock at time of issuance) during a specified
period of time. A warrant may have a life ranging from less than a year to
twenty years or longer, but a warrant becomes worthless unless it is exercised
or sold before expiration. In addition, if the market price of the common stock
does not exceed the warrant's exercise price during the life of the warrant, the
warrant will be worthless and will expire. Warrants have no voting rights, pay
no dividends and have no rights with respect to the assets of the corporation
issuing them. The percentage increase or decrease in the market price of the
warrant may tend to be greater than the percentage increase or decrease in the
market price of the underlying common stock. Warrants not listed on the New York
or American Stock Exchanges are considered to be illiquid and as such are
subject to the Fund's 10% limitation on investments in illiquid securities. See
"Special Investment Methods - Investment Restrictions."
<PAGE>
The Fund may write (i.e., sell) covered call options on stocks, purchase put
options on stocks and stock indices, and enter into closing transactions with
respect to certain of such options. All options traded by the Fund will be
listed on national securities exchanges. See "Special Investment Methods -
Options Transactions."
The Fund may write covered call options and purchase put options on stocks
and stock indices in order to hedge its portfolio and reduce investment risks.
Hedging strategies are defensive in nature; some capital gain potential is
forsaken in advancing markets in order to reduce risk in declining markets.
However, the Portfolio Manager believes that hedging strategies designed to
reduce risk can be pursued without unduly sacrificing the potential for capital
gains over the long term. See "Special Investment Methods."
The Fund may make short sales of common stock, provided it owns an equal
amount of such securities or owns securities that are convertible or
exchangeable, without payment of further consideration, into an equal amount of
such common stock. The Fund may make a short sale when the Portfolio Manager
believes the price of the stock may decline and, for tax or other reasons, the
Portfolio Manager does not want to currently sell the stock or convertible
security it owns. In such case, any decline in the value of the Fund's
securities would be reduced by a gain in the short sale transaction. Conversely,
any increase in the value of the Fund's securities would be reduced by a loss in
the short sale transaction. The Fund may not make short sales or maintain a
short position unless at all times when a short position is open, not more than
10% of its total assets (taken at a current value) are held as collateral for
such sales at any one time.
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, 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.
<PAGE>
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 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.
Options Transactions
The Fund may write covered call options, with respect to the securities in
which it 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
<PAGE>
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 wish to protect certain portfolio securities against a decline
in market value at a time when no put options on those particular securities are
available for purchase. In that case, the Fund may purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities when, in the opinion of the Adviser or Portfolio Manager,
changes in the value of the put option should generally offset changes in the
value of the securities to be hedged, the correlation will be less than in
transactions in which the Fund purchases put options on underlying securities it
owns.
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."
The securities exchanges have established limitations governing the maximum
number of options which may be written by an investor or group of investors
acting in concert. These position limits may restrict the Fund's ability to
purchase or sell options on a particular security. It is possible that the Fund
and other clients of the Adviser may be considered to be a group of investors
acting in concert. Thus the number of options which the Fund may write may be
affected by other investment advisory clients, if any, of the Adviser or
Portfolio Manager.
<PAGE>
Options on Stock Index Contracts
The Fund may purchase put options on stock index contracts. Stock index
contracts are based upon broad-based stock indexes such as the Standard & Poor's
500 or upon narrow-based stock indexes. A buyer entering into a stock index
contract will, on a specified future date, pay or receive a final cash payment
equal to the difference between the actual value of the stock index on the last
day of the contract and the value of the stock index established by the
contract. The Fund may use such index options in connection with its hedging
strategies in lieu of purchasing and writing options directly on the underlying
index contract and the underlying securities. For example, to hedge against a
possible decrease in the value of its securities, the Fund may purchase put
options on stock index contracts. Further information concerning index contracts
and options thereon is found in Appendix B to the Statement of Additional
Information.
In connection with transactions in index options, the Fund will be required
to deposit as "initial margin" an amount of cash and short-term U.S. Government
Securities equal to 5% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract. The Fund will not purchase or sell
options on index contracts if (a) as a result the sum of the initial margin
deposit on the Fund's existing futures and related options positions and
premiums paid for options on futures contracts would exceed 5% of the Fund's
assets, or (b) the sum of the aggregate purchase prices of options on index
contracts would exceed one-third of the value of the Fund's total assets.
The use of options on stock index contracts also involves additional risk.
The effective use of options strategies is dependent, among other things, on the
Fund's ability to terminate options positions at a time when the Portfolio
Manager deems it desirable to do so. Although the Fund will enter into an option
position only if the Portfolio Manager believes that a liquid secondary market
exists for such option, there is no assurance that the Fund will be able to
effect closing transactions at any particular time or at an acceptable price.
The Fund's transactions involving options on index contracts will be concluded
only on recognized exchanges.
The Fund's purchase or sale of put options on stock index contracts will be
based upon predictions as to anticipated market trends by the Portfolio Manager,
which could prove to be inaccurate. Even if the expectations of the Portfolio
Manager are correct, there may be an imperfect correlation between the change in
the value of the options and of the Fund's securities.
Additional information with respect to stock index contracts and options on
such contracts is set forth in Appendix B to the Statement of Additional
Information.
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
<PAGE>
likelihood of the security's being upgraded to investment grade or being further
downgraded 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 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;
<PAGE>
(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;
(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
ownership restrictions 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 policies 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 (except those concerning borrowing, diversification and concentration)
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.
<PAGE>
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
Portfolio Manager, 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.
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 turnover rate will not be a factor when
management deems portfolio changes
appropriate.
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 will not invest 25% or more of its total assets 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; however, utility companies, gas, electric, telephone,
telegraph, satellite, and microwave communications companies are considered as
separate industries); (2) no security can be purchased by the Fund if as a
result more than 5% of the value of the total assets of the Fund would then be
invested in the securities of a single issuer (other than U.S. Government
obligations); (3) no security can be purchased by the Fund if as a result more
than 10% of any class of securities, or more than 10% of the outstanding voting
securities of an issuer, would be held by the Fund; and with respect to the
Company, in the aggregate the Company may not own more than 15% of any class of
securities or more than 10% of the outstanding voting securities of an issuer;
(4) the Fund will not invest more than 5% of its total assets in restricted
securities; (5) the Fund will not cause more than 10% of the value of its total
assets to be invested collectively in repurchase agreements maturing in more
than seven days and other illiquid securities; and (6) the Fund will not invest
more than 5% of its total assets in foreign securities.
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 designated by
the Company as fundamental policies, may not be changed without the approval of
a "majority" of the shares outstanding, defined as the lesser of: (a) 67% of the
votes cast at a meeting of shareholders 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.
<PAGE>
MANAGEMENT
Board of Directors
As in all corporations, the Company's Board of Directors has the primary
responsibility for overseeing the business of the Company. 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 Company.
Investment Adviser and Administrator
CONLEY SMITH, Inc. ("CSI") has been retained under an Investment Advisory
Agreement with the Company to act as the Fund's Adviser subject to the authority
of the Board of Directors. CSI, incorporated in October, 1987, has advised and
managed the Company since its inception. CSI presently manages $57 million in
assets of investment companies and $58 million in private accounts. CSI is a
wholly owned subsidiary of Consolidated, which is engaged through its
subsidiaries in various aspects of the financial services industry. Thomas C.
Smith is a controlling person of Consolidated and Mr. Smith is an officer and
director of the Company. The address of the Adviser is 444 Regency Parkway,
Suite 202 Lake Regency Building, Omaha, Nebraska 68114.
The Adviser furnishes the Fund with investment advice and, in general,
supervises the management and investment programs of the Company. 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 investments and effecting the securities transactions of the
Fund. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated persons of the Adviser. 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.
The Adviser has entered into a Sub-Investment Advisory Agreement with
Calamos Asset Management, Inc. ("Calamos"), 1111 East Warrenville Road,
Naperville, Illinois 60563-1448, to assist in advising the Fund. Calamos is
controlled by its President and Chief Investment Officer, John P. Calamos. Mr.
Calamos is the Portfolio Manager of the Fund and has over 24 years experience in
investment research and portfolio management of convertible securities. Mr.
Calamos is also President and controlling shareholder of Calamos Financial
Services, Inc., an NASD broker-dealer, and is Trustee and President of CFS
Investment Trust, an open end diversified registered investment company. Calamos
acts as the investment adviser to the CFS Investment Trust which has a net asset
value of over $38 million. Calamos has over $1.6 billion under management
excluding the CFS Investment Trust. In return for its investment advisory
services rendered to the Fund, Calamos is paid by the Adviser a monthly fee at
an annual rate of .75% of the first $1,000,000 and .5% over $1,000,000 of the
daily average net assets of the Fund. The Adviser is solely responsible for and
will pay Calamos' advisory fees based upon the average net asset value of the
Fund.
Lancaster Administrative Services, Inc. ("LAS") has been retained as the
Company's Administrator under a Transfer Agent and Administrative Services
Agreement with the Company. LAS is a wholly
<PAGE>
owned subsidiary of Consolidated Investment Corporation. The Administrator
provides, or contracts with others to provide, the Company 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 its 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, custodial charges, 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
Company 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. Other expenses are deducted at the share level. Investor shares bear
distribution expenses pursuant to the Rule 12b-1 Plan and Select and Investor
shares each bear their own respective registration and blue sky fees incurred in
registering and qualifying these shares under state and federal securities laws.
Portfolio Brokerage
The primary consideration in effecting transactions for the Fund is
execution at the most favorable prices. Calamos 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. Calamos 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 Company'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
Company, 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.
DISTRIBUTION OF FUND SHARES
SMITH HAYES acts as the principal distributor of the Company's shares. The
Company 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 Fund's Investor shares. These
expenses include, but are not limited to, compensation paid to investment
executives of SMITH HAYES
<PAGE>
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
from the Fund may not exceed 0.50% per annum of the average daily net assets
attributable to the Investor shares 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 Company 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 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 Company. Shareholders will receive written confirmation of
their purchases. Stock certificates will not be issued. SMITH HAYES reserves the
right to reject any purchase order.
Investors may purchase shares by completing the Purchase Application
included in this Prospectus and submitting it with a check payable to:
Lancaster Funds
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
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, Union Bank & Trust Co., as indicated below.
<PAGE>
1. Telephone the Company (402) 476-3000 or 1-(800)-279-7437 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 Company 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 & TRUST CO.
Lincoln, Nebraska
Trust Department, ABA# 104910795
Lincoln, Nebraska 68506
Account of Lancaster Funds
Convertible Fund
FBO-----------------
(Account Registration name)
3. Complete a Purchase Application and mail it to the Company if shares
being purchased by bank wire transfer represent an initial purchase.
(The completed Purchase Application must be received by the Company
before subsequent instructions to redeem Fund shares will be accepted.)
Banks may impose a charge for the wire transfer of funds.
Investor shares of the Fund are offered to the public at their net asset
value next determined after an order is received by the Distributor and other
selected financial service firms with whom the Distributor has entered into
selling agreements, without a sales charge. Select shares are offered at their
net asset value next determined after an order is received with a varying sales
charge as set forth below.
Sales Charges
-------------
Dealer
As a % of As a % of Reallowance
Public Offering Net Amount as a % of
Price Invested Offering Price
On Purchases of:
less than $25,000 3.90 4.06 3.00
$25,000 but less than $50,000 2.50 2.56 2.00
$50,000 but less than $100,000 1.30 1.32 1.00
$100,000 and over -0- -0- -0-
<PAGE>
Net Asset Value Purchases
Select shares of the Fund may be sold without a sales charge to (1)
directors and employees (and their families) of the Company, the Distributor,
the Adviser, the Administrator, and securities dealers having sales agreements
with the Distributor; (2) investors purchasing shares with proceeds of
redemptions from any U.S. mutual fund not distributed by the Distributor which
imposes front-end sales charges or deferred sales charges; and (3) persons who
have entered into an investment advisory agreement with the Distributor or the
Adviser as to any portion of their assets that is invested in the Fund or any
other Fund of the Company. To be eligible to purchase shares without the
imposition of sales charges as described above, the investor or the investor's
broker must establish such eligibility at the time shares are purchased by
advising the Distributor.
Reduced Sales Charge
Select shares of the Fund may also be purchased at the reduced sales charges
as set forth in this Prospectus if the investor agrees to purchase at least the
aggregate amount necessary to qualify for the reduced sales charge under a
statement of intent. Under the statement of intent, an investor agrees to
purchase a certain amount over a 13 month period, and in so doing qualifies for
the reduced sales charge for the aggregate amount for all purchases in
furtherance of the statement of intent. The statement of intent does not create
a binding obligation on the shareholder to purchase the requisite number and
amount of shares and consequently, 2.5% of the value of the total shares to be
purchased will be segregated from the shareholder's account as statement of
intent shares. All such shares will be credited with the appropriate amount of
dividends and capital gains distributions. In the event that the statement of
intent is fulfilled, all shares will be credited to the shareholder's regular
account. In the event that the statement of intent is not fulfilled, a
sufficient amount of the statement of intent shares will be redeemed to realize
the difference in sales charges based on the number and amount of the shares
actually purchased and the balance of such shares will be released to the
shareholder's regular account. (See account application).
Investors may also qualify for the reduced sales charges by aggregating
their investments in the Fund with a spouse and children under the age of 21 or
a business entity or trust of which they are a shareholder, partner, owner or
beneficiary.
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 advisors regarding the Federal, State
and/or local tax consequences of such transactions.
<PAGE>
Minimum Investment
A minimum initial net investment of $1,000 is required for both the Select
shares and Investor shares. 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 Company 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 Company.
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.
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
<PAGE>
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 Company 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 Company 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 Company 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 Company.
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 advisers. See "Tax Status" in the
Statement of Additional Information.
GENERAL INFORMATION
Capital Stock
The Company 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 120,000,000 shares in three classes of
40,000,000 shares each designated Select, Investor and Market shares in one
series designated Convertible Fund shares. The Board of Directors is empowered
under the Company's Articles of Incorporation to issue other series of the
Company's common stock without shareholder approval or to designate additional
authorized but unissued shares for issuance by one or more existing Funds. The
Company presently has authorized the issuance of shares in seven other series.
The Board of Directors is also authorized to divide any new or existing series
into two or more sub-series or classes, which could be used to create differing
expense and fee structures for investors in the same Fund. The creation of
additional classes in the future would not affect the rights of existing
shareholders.
<PAGE>
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 Company's
shares. On some issues, such as the election of Directors, all shares of the
Company, 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 the
Fund's Investment Advisory Agreement, (ii) change a fundamental investment
restriction pertaining to only the Fund or (iii) change the 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 Company's other Funds.
Shareholders Meeting
The Company 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
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. 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 Company. 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 Company'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 Company 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 Company 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 Fund 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 Company. Any general
expenses of the Company 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 & Trust Co., Lincoln, Nebraska, serves as Custodian for the
Company'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 Fund.
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., First Boston Convertible Securities Index and
the S&P 500 Index.
Report to Shareholders
The Company will issue semi-annual reports which will include a list of
securities of the Fund owned by the Company and financial statements, which in
the case of the annual report, will be examined and reported upon by the
Company'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 First Bank Building, Lincoln,
Nebraska 68508.
Auditors
The Company's auditors are Deloitte & Touche LLP, Lincoln, Nebraska,
independent certified public accountants.
<PAGE>
APPLICATION
<TABLE>
<CAPTION>
<S> <C>
Lancaster Funds, 200 Centre Terrace, 1225 L Street, Lincoln, NE 68508 Date ____________________
Convertible Fund |_| Investor Shares |_| Select Shares Account # ___________________
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:
STATEMENT OF INTENTION
I plan to invest over a 13-month period an aggregate amount of at least
|_| $25,000 |_| $50,000 |_| $100,000 (and above)
RIGHT OF ACCUMULATION
The registration of some of my shares differs or I am affiliated with the
following accounts.
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.
|_| Individual
___________________________________________________________________________ |_| Jt. WROS
Name of Shareholder |_| Corporation
|_| Trust
___________________________________________________________________________ |_| 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)
|_| Reinvest all dividends and capital gains distributions. |_| Reinvest capital gain distributions
only.
|_| Receive all dividends and capital gain distributions in cash.
SYSTEMATIC WITHDRAWAL PLAN
Mail a check for $___________________ prior to the last day of each |_| Month
|_| Quarter |_| 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.
|_| Exempt from backup withholding
|_| Non-exempt from backup
withholding
X____________________________________________ X____________________________________________
Signature of Shareholder/or Authorized Officer, if corporation Signature of Co-Owner (if any)
FOR DEALER ONLY (We hereby authorize Lancaster Funds as our agent in connection
with transactions under this authorization form. We guarantee the shareholder's
signature.)
- ------------------------------------------------ ---------------------------------------------
Dealer Name (Please Print) 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
</TABLE>
<PAGE>
TABLE OF CONTENTS
Introduction............................ 1
Expenses................................ 3
Financial Highlights.................... 4
Investment Objective and Policies....... 5
Special Investment Methods.............. 7
Management.............................. 14
Distribution of Fund Shares............. 15
Purchase of Shares...................... 16
Redemption of Shares.................... 19
Valuation of Shares..................... 20
Dividends and Taxes..................... 20
General Information..................... 21
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 & Trust Co.
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 Lancaster
Funds 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>
PROSPECTUS
Lancaster Funds
Government/Quality Bond Fund
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
(402) 476-3000
1-(800)-279-7437
The Government/Quality Bond Fund (the "Fund") is a diversified open-end
management investment company organized as a series of the Lancaster Funds (the
"Company"). The Company is a Minnesota corporation offering its shares in
series, each series operating as a separate management investment company with
its own investment objectives and policies. This Prospectus relates only to the
Select and Investor shares of the Fund.
The Fund has as its investment objective income with capital appreciation
consistent with preservation of capital. The Fund will invest in U.S. Government
Securities and debt obligations which are rated A or higher by Moody's Investor
Services, Inc. and A or higher by Standard & Poor's Corporation. 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 ___________, 1996.
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
INTRODUCTION
The Fund is a diversified open-end management investment company organized
as a series of the Company. The Company is a Minnesota corporation, commonly
called a series mutual fund. The Company, which was organized in 1988, has three
classes of capital stock that are 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 designated Government/Quality Bond
Fund and the classes of shares thereof designated "Select" and "Investor"
shares. For information regarding the Company's other funds, call or write to
the Company at the address and telephone number on the cover page of this
Prospectus.
The Investment Adviser and Administrator
The Company is managed by CONLEY SMITH, Inc. ("CSI"), a wholly owned
subsidiary of Consolidated Investment Corporation ("Consolidated"). CSI acts as
the investment adviser for the Fund ("Adviser"). The Administrator of the
Company is Lancaster Administrative Services, Inc. ("LAS"). LAS acts as transfer
agent and provides or contracts with others to provide all necessary
recordkeeping services. The Company pays LAS and the Adviser monthly fees for
such services.
The Distributor
SMITH HAYES Financial Services Corporation ("SMITH HAYES"), also a wholly
owned subsidiary of Consolidated, acts as the distributor ("Distributor") of the
Fund's shares. Pursuant to the Company's Rule 12b-1 Plan, the Company will
reimburse the Distributor monthly for certain expenses incurred in connection
with the distribution and promotion of the Fund's shares, not to exceed .50%
annually of the Fund's Investor shares average net assets. See "Distribution of
Fund Shares."
Multiple Classes of Shares
Currently the Fund offers two classes of shares, each with its own expense
and load structure. Each class of shares represents an interest in the same
portfolio of investments owned by the Fund. Per share dividends will be the
highest in the Select shares because the Select shares do not bear any 12b-1
fees or related shareholder servicing fees.
Select shares. The minimum net investment for Select shares is $1,000.
Select shares are offered to the public at their net asset value next determined
after an order is received by the Distributor and other selected financial
service firms, plus a varying sales charge, depending on the amount invested or
the nature of the investor as set forth below. Select shares do not bear any
12b-1 fees or related shareholder servicing fees.
<PAGE>
Select Shares Sales Charges
---------------------------
Dealer
As a % of As a % of Reallowance
Public Offering Net Amount as a % of
Price Invested Offering Price
On Purchases of:
less than $25,000 1.50 1.52 1.20
$25,000 but less than $50,000 1.00 1.01 .80
$50,000 but less than $100,000 .50 .503 .40
$100,000 and over -0- -0- -0-
Investor shares. The minimum investment for Investor shares is $1,000.
Investor shares are offered to the public at their net asset value next
determined after an order is received by the Distributor and other selected
financial service firms, without a sales charge. Investor shares bear the
expense of a 12b-1 distribution fee of .25% of average daily net assets which is
paid monthly to the Distributor.
Purchase and Redemption of Shares
Shares of the Fund are available through SMITH HAYES and other selected
financial service firms by completing the Purchase Application included in this
Prospectus and following the instructions under "Purchase of Shares." Certain
investors may purchase Select shares at a reduced sales charge or no sales
charge if they have a relationship with Lancaster Funds, the Distributor, the
Adviser, the Administrator or purchase or agree to invest certain amounts in the
Fund. See "Purchase of Shares - Net Asset Value Purchases" and "Purchase of
Shares - Reduced Sales Charge."
Shares of the Fund are redeemable at any time at the next-determined net
asset value per share, without any deduction by the Fund or the imposition of
any deferred sales charge, subject to certain requirements. See "Redemption of
Shares." The Company 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."
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.
<PAGE>
EXPENSES
The payments made by the Investor shares of 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 Fund Shares."
Shareholder Transaction Expenses
The Fund's shares do not bear any fees, charges or expenses on their sale or
redemption, except as set forth below:
Select Shares Investor Shares
Maximum Sales Charge on Purchases 1.50% None
(as a percentage of offering price)
Annual Fund Operating Expenses
(as a percentage of net assets)
Select Shares Investor Shares
Management Fees
Investment Advisory Fees .60% .60%
Administration Fees .25% .25%
------ -----
Total Management Fees .85% .85%
12b-1 Fees None .25%
Other Expenses .28% .28%
------ -----
Total Fund Operating Expenses 1.13% 1.38%
Example: You could 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
Select $26 $50 $76 $150
Investor $14 $44 $76 $166
The example should not be considered a representation of past or future
expenses. Actual expenses could be greater or lower than those shown.
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial information, which provides selected data for an
Investor share of the Fund outstanding throughout the periods indicated, has
been audited by Deloitte & Touche, LLP, independent certified public
accountants, for the years ended June 30, 1996 and 1995 and by KPMG Peat
Marwick, LLP, independent certified public accountants, for all preceding years
presented, to the extent of the audit report appearing in the Company's Annual
Financial Report, which is contained in the Statement of Additional Information
and which is available upon request without charge as set forth on the cover
page of this Prospectus. The offering of Select and Investor shares of the Fund
commenced on the date hereof and as a result, no data is provided for Select
shares. Data for Investor shares is provided and is identified as such because
Investor shares bear the same expense structure as the single class of shares of
the Fund previously offered. Further information about the performance of the
Fund is also contained in the Company's Annual Financial Report.
<TABLE>
<CAPTION>
Investor Shares
Years Ended June 30, 1996, 1995, 1994, 1993, 1992, 1991 and 1990 and the
Periods from January 1, 1989 to June 30, 1989 and June 23, 1988 (commencement
of operations) to December 31, 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ----
Net asset value:
Beginning of period $10.21 11.17 10.93 10.42 10.31 10.56 10.01 10.00
------ ----- ----- ----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income 0.60 0.54 0.64 0.73 0.57 0.57 0.32 0.22
Net realized and
unrealized gain
(loss) on investments 0.22 (0.75) 0.43 0.60 0.11 (0.16) 0.49 0.01
---- ------ ---- ---- ---- ----- ---- ----
Total income (loss) from
investment operations 0.82 (0.21) 1.07 1.33 0.68 0.41 0.81 0.23
---- ------ ---- ---- ---- ----- ---- ----
Less distributions:
Dividends from net
investment income (0.60) (0.54) (0.64) (0.71) (0.51) (0.55) (0.26) (0.22)
Distributions from
capital gains - (0.21) (0.19) (0.11) (0.06) (0.11) -
--------- ------ ------ ------ ------ ------ --
- -
Total distributions (0.60) (0.75) (0.83) (0.82) (0.57) (0.66) (0.26) (0.22)
------ ------ ------ ------ ------ ------ ------ ------
End of period $10.43 10.21 11.17 10.93 10.42 10.31 10.56 10.01
====== ===== ===== ===== ===== ===== ===== =====
Total return 9.42% (2.00%)11.00% 12.79% 8.91% 5.27% 16.46%* 3.68*
===== ============= ====== ===== ===== ======= =====
Ratios/Supplemental data:
Net assets, end of
period (in millions) $4,694 8,832 9,709 8,112 6,060 4,080 2,555 1,313
Ratio of expenses to
average net assets 1.47% 1.37% 1.38% 1.50% 1.58% 1.61% 1.51%* 1.55%*
Ratio of net income to
average net assets 5.86% 4.94% 6.25% 6.64% 6.92% 7.11% 7.26%* 6.62%*
Portfolio turnover rate 9.33%218.11%175.95% 507.52%102.55%103.60% 7.60% 0.00%
*Annualized for those periods less than twelve months in duration.
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objectives
The investment objective of the Government/Quality Bond Fund is income and
capital appreciation, consistent with preservation of capital.
Investment Policies and Techniques
The Fund will attempt to achieve its objective by investing solely in U.S.
Government Securities, repurchase agreements on U.S. Government Securities, and
corporate bonds rated A or better by Moody's or Standard & Poor's. See Appendix
A to the Statement of Additional Information for a description of these debt
rating categories. To achieve capital appreciation, the Portfolio Manager may
sell those U.S. Government Securities and corporate bonds which have appreciated
in value during periods of declining interest rates. Except for temporary
defensive investment situations when the Fund will invest in Money Market
Instruments, the Fund will normally maintain at least 65% of its total assets in
U.S. Government Securities and no more than 10% in corporate bonds rated A by
Moody's or Standard & Poor's. The Fund's average maturity of all U.S. Government
Securities and corporate bonds will not exceed ten years. See "Special
Investment Methods - U.S. Government Securities."
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 including U.S. Government,
mortgage-related securities, repurchase agreements, 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.
<PAGE>
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 rise, the value of the
securities falls; conversely, as interest rates fall, the market value of such
securities rises.
Mortgage-Related 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.
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.
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;
(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
ownership restrictions 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 policies 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.
<PAGE>
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.
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 turnover rate will not be a factor when
management deems portfolio changes
appropriate.
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 will not invest 25% or more of its total assets 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) no security can be purchased by any Fund if as a result
more than 5% of the value of the total assets of the Fund would then be invested
in the securities of a single issuer (other than U.S. Government obligations);
(3) no security can be purchased by the Fund if as a result more than 10% of any
class of securities, or more than 10% of the outstanding voting securities of an
issuer, would be held by the Fund; and with respect to the Company, in the
aggregate the Company may not own more than 15% of any class of securities or
more than 10% of the outstanding voting securities of an issuer; (4) the Fund
will not invest more than 5% of its total assets in restricted securities; (5)
the Fund will not cause more than 10% of the value of its total assets to be
invested collectively in repurchase agreements maturing in more than seven days
and other illiquid securities; and (6) the Fund will not invest more than 5% of
its total assets in foreign securities.
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 (except for the restriction on
borrowing). The foregoing investment restrictions, as well as all investment
objectives and policies designated 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.
<PAGE>
MANAGEMENT
Board of Directors
As in all corporations, the Company's Board of Directors has the primary
responsibility for overseeing the business of the Company. 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 Company.
Investment Adviser and Administrator
CONLEY SMITH, Inc. ("CSI") has been retained under an Investment Advisory
Agreement with the Company to act as the Fund's Adviser subject to the authority
of the Board of Directors. CSI, incorporated in October, 1987, has advised and
managed the Company since its inception. CSI presently manages $57 million in
assets of investment companies and $58 million in private accounts. CSI is a
wholly owned subsidiary of Consolidated, which is engaged through its
subsidiaries in various aspects of the financial services industry. Thomas C.
Smith is a controlling person of Consolidated and Mr. Smith is an officer and
director of the Company. The address of the Adviser is 444 Regency Parkway,
Suite 202 Lake Regency Building, Omaha, Nebraska 68114.
The Adviser furnishes the Fund with investment advice and, in general,
supervises the management and investment programs of the Company. 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 investments and effecting the securities transactions of the
Fund. In addition, the Adviser pays the salaries and fees of all officers and
directors of the Company who are affiliated persons of the Adviser. Under the
Investment Advisory Agreement, the Adviser receives a monthly fee computed
separately for the Fund at an annual rate of .6% of the daily average net asset
value of the Fund.
John H. Conley, President of the Adviser, 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 was the
President and owner of Conley Investment Counsel, Inc., an investment advisory
firm which transferred all of its investment advisory business to CSI on or
about April 20, 1995. At the time of the transfer of the investment advisory
business to CSI, Mr. Conley managed over $40 million in assets.
Lancaster Administrative Services, Inc. ("LAS") has been retained as the
Company's Administrator under a Transfer Agent and Administrative Services
Agreement with the Company. LAS is a wholly owned subsidiary of Consolidated
Investment Corporation. The Administrator provides, or contracts with others to
provide, the Company 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.
<PAGE>
Expenses
The expenses paid by the Fund are deducted from its 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, custodial charges, 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
Company 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. Other expenses are deducted at the share level. Investor shares bear
distribution expenses pursuant to the Rule 12b-1 Plan and Select and Investor
shares each bear their own respective registration and blue sky fees incurred in
registering and qualifying these shares under state and federal securities laws.
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 Company'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
Company, 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.
DISTRIBUTION OF FUND SHARES
SMITH HAYES acts as the principal distributor of the Company's shares. The
Company 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 Fund's Investor 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 from the Fund may not exceed .25% per annum of the
average daily net assets attributable to the Investor shares
<PAGE>
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 Company
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 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 Company. Shareholders will receive written confirmation of
their purchases. Stock certificates will not be issued. SMITH HAYES reserves the
right to reject any purchase order.
Investors may purchase shares by completing the Purchase Application
included in this Prospectus and submitting it with a check payable to:
Lancaster Funds
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
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, Union Bank & Trust, Co., as indicated below.
1. Telephone the Company (402) 476-3000 or 1-(800)-279-7437 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.
<PAGE>
2. Instruct the bank to wire the specific amount of immediately available
funds to the Custodian. The Company 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 & TRUST CO.
Lincoln, Nebraska
Trust Department, ABA# 104910795
Lincoln, Nebraska 68506
Account of Lancaster Funds
Government/Quality Bond Fund
FBO-------------------
(Account Registration name)
3. Complete a Purchase Application and mail it to the Company if shares
being purchased by bank wire transfer represent an initial purchase.
(The completed Purchase Application must be received by the Company
before subsequent instructions to redeem Fund shares will be accepted.)
Banks may impose a charge for the wire transfer of funds.
Investor shares of the Fund are offered to the public at their net asset
value next determined after an order is received by the Distributor and other
selected financial service firms with whom the Distributor has entered into
selling agreements, without a sales charge. Select shares are offered at their
net asset value next determined after an order is received with a varying sales
charge as set forth below.
Sales Charges
-------------
Dealer
As a % of As a % of Reallowance
Public Offering Net Amount as a % of
Price Invested Offering Price
On Purchases of:
less than $25,000 1.50 1.52 1.20
$25,000 but less than $50,000 1.00 1.01 .80
$50,000 but less than $100,000 .50 .503 .40
100,000 and over
Net Asset Value Purchases
Select shares of the Fund may be sold without a sales charge to (1)
directors and employees (and their families) of the Company, the Distributor,
the Adviser, the Administrator, and securities dealers having sales agreements
with the Distributor; (2) investors purchasing shares with proceeds of
redemptions from any U.S. mutual fund not distributed by the Distributor which
imposes front-end sales charges or deferred sales charges; and (3) persons who
have entered into an investment advisory
<PAGE>
agreement with the Distributor or the Adviser as to any portion of their assets
that is invested in the Fund or any other Fund of the Company. To be eligible to
purchase shares without the imposition of sales charges as described above, the
investor or the investor's broker must establish such eligibility at the time
shares are purchased by advising the Distributor.
Reduced Sales Charge
Select shares of the Fund may also be purchased at the reduced sales charges
as set forth in this Prospectus if the investor agrees to purchase at least the
aggregate amount necessary to qualify for the reduced sales charge under a
statement of intent. Under the statement of intent, an investor agrees to
purchase a certain amount over a 13 month period, and in so doing qualifies for
the reduced sales charge for the aggregate amount for all purchases in
furtherance of the statement of intent. The statement of intent does not create
a binding obligation on the shareholder to purchase the requisite number and
amount of shares and consequently, 2.5% of the value of the total shares to be
purchased will be segregated from the shareholder's account as statement of
intent shares. All such shares will be credited with the appropriate amount of
dividends and capital gains distributions. In the event that the statement of
intent is fulfilled, all shares will be credited to the shareholder's regular
account. In the event that the statement of intent is not fulfilled, a
sufficient amount of the statement of intent shares will be redeemed to realize
the difference in sales charges based on the number and amount of the shares
actually purchased and the balance of such shares will be released to the
shareholder's regular account. (See account application).
Investors may also qualify for the reduced sales charges by aggregating
their investments in the Fund with a spouse and children under the age of 21 or
a business entity or trust of which they are a shareholder, partner, owner or
beneficiary.
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 advisors regarding the Federal, State
and/or local tax consequences of such transactions.
Minimum Investment
A minimum initial net investment of $1,000 is required for both the Select
shares and Investor shares. Subsequent investments can be made in any amount.
All investments must be made through your SMITH HAYES investment executive
or other broker-dealer.
<PAGE>
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.
A shareholder may request that the Company 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 Company.
<PAGE>
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. 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.
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.
<PAGE>
Taxes
The Fund will be treated as a separate entity for federal income tax
purposes. The Company 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 Company 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 Company 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 Company.
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 advisers. See "Tax Status" in the
Statement of Additional Information.
GENERAL INFORMATION
Capital Stock
The Company 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 120,000,000 shares in three classes of
40,000,000 shares each designated Select, Investor and Market shares in one
series designated Government/Quality Bond Fund shares. The Board of Directors is
empowered under the Company's Articles of Incorporation to issue other series of
the Company's common stock without shareholder approval or to designate
additional authorized but unissued shares for issuance by one or more existing
Funds. The Company presently has authorized the issuance of shares in six other
series. The Board of Directors is also authorized to divide any new or existing
series into two or more sub-series or classes, which could be used to create
differing expense and fee structures for investors in the same Fund. The
creation of additional classes in the future would not affect the rights of
existing shareholders.
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.
<PAGE>
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 Company's
shares. On some issues, such as the election of Directors, all shares of the
Company, 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 the
Fund's Investment Advisory Agreement, (ii) change a fundamental investment
restriction pertaining to only the Fund or (iii) change the 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 Company's other Funds.
Shareholders Meeting
The Company 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
Company may demand a regular meeting of shareholders by written notice given to
the chief executive officer or chief financial officer of the Company. 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 Company. 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 Company'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 Company is obligated
to facilitate shareholder communications in this situation if certain conditions
are met.
Allocation of Income and Expenses
The assets received by the Company 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 Fund 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 Company. Any general
expenses of the Company 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.
<PAGE>
Transfer Agent, Dividend Disbursing Agent and Custodian
Union Bank & Trust Co., Lincoln, Nebraska, serves as Custodian for the
Company'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 Fund.
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 indices of
bond prices and yields prepared by Shearson Lehman Brothers, Inc. and Merrill
Lynch & Company.
Report to Shareholders
The Company will issue semi-annual reports which will include a list of
securities of the Fund owned by the Company and financial statements, which in
the case of the annual report, will be examined and reported upon by the
Company'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 First Bank Building, Lincoln,
Nebraska 68508.
Auditors
The Company's auditors are Deloitte & Touche LLP, Lincoln, Nebraska,
independent certified public accountants.
<PAGE>
APPLICATION
<TABLE>
<CAPTION>
<S> <C>
Lancaster Funds, 200 Centre Terrace, 1225 L Street, Lincoln, NE 68508 Date--------------------
Government/Quality Bond Fund |_| Investor Shares |_| Select Shares Account #-------------------
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:
STATEMENT OF INTENTION
I plan to invest over a 13-month period an aggregate amount of at least
|_| $25,000 |_| $50,000 |_| $100,000 (and above)
RIGHT OF ACCUMULATION
The registration of some of my shares differs or I am affiliated with the
following accounts.
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.
|_| Individual
___________________________________________________________________________ |_| Jt. WROS
Name of Shareholder |_| Corporation
|_| Trust
___________________________________________________________________________ |_| 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)
|_| Reinvest all dividends and capital gains distributions. |_|
Reinvest capital gain distributions only.
|_| Receive all dividends and capital gain distributions in cash.
SYSTEMATIC WITHDRAWAL PLAN
Mail a check for $___________________ prior to the last day of each |_| Month |_| Quarter |_|
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.
|_| Exempt from backup withholding
|_| Non-exempt from backup
withholding
X____________________________________________ X____________________________________________
Signature of Shareholder/or Authorized Officer, if corporation Signature of Co-Owner (if any)
FOR DEALER ONLY (We hereby authorize Lancaster Funds as our agent in connection
with transactions under this authorization form. We guarantee the shareholder's
signature.)
- ---------------------------------------------------------------------------------------------
Dealer Name (Please Print) 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
</TABLE>
<PAGE>
TABLE OF CONTENTS
Introduction............................ 1
Expenses................................ 3
Financial Highlights.................... 4
Investment Objective and Policies....... 5
Special Investment Methods.............. 5
Management.............................. 9
Distribution of Fund Shares............. 10
Purchase of Shares...................... 11
Redemption of Shares.................... 14
Valuation of Shares..................... 15
Dividends and Taxes..................... 15
General Information..................... 16
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 & Trust Co.
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 Lancaster
Funds 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>
Lancaster Funds
CAPITAL BUILDER FUND
CRESTONE SMALL CAP FUND
CONVERTIBLE FUND
GOVERNMENT QUALITY BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
September ___, 1996
Table of Contents
Page
General Information .................................................. 2
Investment Objectives, Policies and Restrictions...................... 2
Directors and Executive Officers...................................... 4
Investment Advisory and Other Services................................ 5
Disribution Plan...................................................... 8
Portfolio Transactions and Brokerage Allocations...................... 10
Capital Stock and Control............................................. 12
Net Asset Value and Public Offering Price............................. 12
Redemption............................................................ 14
Tax Status............................................................ 14
Calculation of Performance Data....................................... 15
Financial Statements.................................................. 16
Auditors.............................................................. 16
Appendix A - Ratings of Corporate
Obligations and Commercial Paper.............................. A-1
Appendix B - Stock Index Options...................................... B-1
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated September
__, 1996 and should be read in conjunction therewith. A copy of the Prospectus
may be obtained from the Company at 200 Centre Terrace, 1225 L Street, Lincoln,
Nebraska 68508.
<PAGE>
GENERAL INFORMATION
Lancaster Funds is a Minnesota corporation incorporated in 1988 under the
name SMITH HAYES Trust, Inc. Commencing on the date hereof, the SMITH HAYES
Trust, Inc. adopted the trade name "Lancaster Funds" and will hence forth do
business under this name.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The shares of Lancaster Funds (the "Company") are offered in series.
This Statement of Additional Information only relates to the four series
designated: Capital Builder Fund, Crestone Small Cap Fund, Convertible Fund and
Government/Quality Bond Fund (sometimes referred to herein as a "Fund" or,
collectively, as the "Funds"). The investment objectives and policies of the
Funds are set forth in the Prospectus. Certain additional investment information
is set forth below.
Repurchase Agreements
All of the Funds may invest in repurchase agreements on U. S. Government
Securities. The Funds' 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 respective 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 Company and each of the Funds is subject to certain investment
restrictions, as set forth below, which may not be changed without the vote of a
majority of the Company's or 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 Company's or a 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 Company's or a Fund's outstanding
shares.
Unless otherwise specified below, none of the Funds will:
1. Invest more than 5% of the value of their total assets in the
securities of any one issuer (other than securities of the U.S. Government or
its agencies or instrumentalities), except that the Capital Builder Fund and
Crestone Small Cap Fund shall, as to 75% of the value of their assets, invest no
more than 5% of their assets in the securities of any one issuer.
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 Company 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 their 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. The various types of utilities companies, such as gas, electric,
telephone, telegraph, satellite and microwave communications companies, are
considered as separate industries.
4. Invest more than 5% of the value of their 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 a Fund shall not exceed 10%
of the value of the total assets of such Fund.)
5. Issue any senior securities (as defined in the Investment Company Act
of 1940, as amended), other than as set forth in restriction number 6 below and
except to the extent that using options and futures 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. None of the Funds will purchase securities while outstanding borrowing
exceeds 5% of the value of the Fund's total assets. None of the Funds will
borrow money for leverage purposes.
7. Mortgage, pledge or hypothecate their assets except in an amount not
exceeding 10% of the value of their 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; except
that the Convertible Fund may make short sales or maintain short positions if at
all times when a short position is open the Fund owns an equal amount of such
securities or owns securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short; and no more than
10% of the Fund's net assets (taken at current value) will be held as collateral
for such short sales at any one time.
9. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and except that
the Fund may make margin deposits in connection with futures contracts.
10. Write, purchase or sell puts, calls or combinations thereof, except
that Capital Builder Fund and Convertible Fund may write covered call options;
Capital Builder Fund may purchase put and call options; and Convertible fund may
purchase put options on stocks; and may purchase put options on stock index
contracts.
11. Purchase or retain the securities of any issuer if, to the Fund's
knowledge, those officers or directors of the Company or its affiliates or of
its investment adviser who individually own beneficially more than 0.5% of the
outstanding securities of such issuer, together own more than 5% of such
outstanding securities.
12. Invest for the purpose of exercising control or management.
13. Purchase or sell commodities or commodity futures contracts,
except that the Convertible Fund may purchase put options on stock index
contracts.
14. Purchase or sell real estate or real estate mortgage loans, except
that the Funds may invest in securities secured by real estate or interests
therein or issued by companies that invest in real estate or interests therein.
<PAGE>
15. Purchase or sell oil, gas or other mineral leases, rights or royalty
contracts, except that the Funds may purchase or sell securities of companies
investing in the foregoing.
16. 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.
17. Act as an underwriter of securities of other issuers.
18. 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 liquid assets, such as
securities with no readily available market quotation.
19. Invest more than 5% of its total assets in foreign securities.
20. 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.
None of the Funds will engage in the practice of lending their
securities until such time as the Prospectus is amended disclosing such practice
and furthermore disclosing that portfolio securities may be loaned only if
collateral values are continuously maintained at no less than 100% by "marking
to market daily" and the practice is fair, just and equitable as determined by a
finding by the Board of Directors that adequate provision has been made for
margin calls, termination of the loan, reasonable servicing fees (including
finder's fees), voting rights, dividend rights, shareholder approval and related
disclosure.
The Government/Quality Bond Fund will not invest in warrants until such
time as the Prospectus is amended to include disclosure regarding such practice
and furthermore will only invest in warrants if such warrants, valued at the
lower of cost or market, do not exceed 5% of the value of the Fund's net assets.
For purposes of calculating this percentage, no more than 1% of the value of the
Fund's net assets may be in warrants which are not listed on the New York or
American Stock Exchange and warrants acquired by the Fund in units or attached
to securities may be deemed without value for purposes of this limitation.
<TABLE>
<CAPTION>
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:
<S> <C> <C>
Name, Position with Fund and Address Principal Occupation Last Five Years
*Thomas C. Smith, Chairman, President, Chief Chairman, CONLEY SMITH, Inc., Omaha,
Executive Officer and Treasurer; age 51; 200 Centre Nebraska; Chairman and President,
Terrace, 1225 L Street, Lincoln, Nebraska 68508 SMITH HAYES Financial Services
Corporation, Lincoln, Nebraska;
Vice President, Lancaster
Administrative Services, Inc.,
Lincoln, Nebraska; Chairman
And President, Consolidated Investment
Corporation, Lincoln, Nebraska; Vice
President and Director, Consolidated
Realty Corporation, Lincoln, Nebraska
<PAGE>
Name, Position with Fund and Address Principal Occupation Last Five Years
Thomas D. Potter, Director; age 56; President and Chief Executive Officer,
1800 Memorial Drive, Lincoln, Nebraska 68502 Lincoln Mutual Life Insurance Company, Lincoln,
Nebraska; December, 1987 - Current
Dale C. Tinstman, Director; age 77; Suite 200, Financial and Investment Consultant;
1201 "O" Street, Lincoln, Nebraska 68508 Chairman of University of Nebraska
Foundation; Director and Consultant of
IBP, Inc. (meat packing and
agribusiness), Dakota City, Nebraska
Thomas R. Larsen, C.P.A., Director; age 55; Certified Public Accountant, Chairman, and
6211 "O" Street, Lincoln, Nebraska 68510 President Larsen Bryant & Porter
CPA's, P.C., Lincoln, Nebraska
*John H. Conley, Director; age 43; President, CONLEY SMITH, Inc. Omaha,
444 Regency Parkway, Omaha, Nebraska; Chairman, Lancaster
Nebraska 68114-3779 Administrative Services, Inc.,
Lincoln, Nebraska; President and Director
Conley Investment Counsel, Omaha,
Nebraska; December, 1986 - April, 1995.
Colleen Hector, Secretary; age 35; Investment Operations Coordinator,
200 Centre Terrace, 1225 L Street, Lincoln, Security Mutual Life Insurance Company,
Nebraska 68508 Lincoln, Nebraska
</TABLE>
*Interested director of the Company as defined under the Investment Company Act
of 1940 by virtue of his affiliation with CONLEY SMITH, Inc.
The following table represents the compensation amounts received for
services as a director of the Fund for the fiscal year ending June 30, 1996:
Compensation Table
Aggregate Total Compensation
Compensation From the Fund
Name and Position From Fund Paid to Directors
----------------- ------------- -----------------
Thomas D. Potter, Director $....................$
Dale C. Tinstman, Director $....................$
Thomas R. Larsen, Director $....................$
Thomas C. Smith, Chairman$ $ $
John H. Conley, Director $ $
INVESTMENT ADVISORY AND OTHER SERVICES
General
The investment adviser for the Funds is CONLEY SMITH , Inc., (formerly
SMITH HAYES Portfolio Management, Inc.) (the "Adviser" ). The administrator and
transfer agent for the Funds is Lancaster Administrative Services, Inc., (the
"Administrator"). Crestone Capital Management, Inc., and Calamos Asset
Management, Inc., act as the Sub-Advisers ("Sub-Adviser") to the Crestone Small
Cap Fund and Convertible Fund, respectively. SMITH HAYES Financial Services
Corporation acts as the Company's
<PAGE>
distributor ("Distributor"). The Adviser, Administrator and the Sub-Advisers act
as such pursuant to written agreements which are periodically reviewed and
approved by the directors or the shareholders of the Company. The Adviser's
address is 444 Regency Parkway, Suite 202 Lake Regency Building, Omaha, Nebraska
68114-3779. The Administrator's address is 200 Centre Terrace, 1225 L Street,
Lincoln, Nebraska 68508. The Sub-Advisers' addresses are:
Crestone Capital Management
7720 East Belleview Avenue
Suite 220
Englewood, Colorado 80111
Calamos Asset Management, Inc.
1111 East Warrenville Road
Naperville, Illinois 60563-1448
Control of the Adviser, Administrator and the Distributor
The Adviser, Administrator and the Distributor are wholly owned
subsidiaries of Consolidated Investment Corporation, a Nebraska corporation,
which is engaged through its subsidiaries in various aspects of the financial
services industry. Thomas C. Smith owns 62% and John H. Conley owns 10% of the
outstanding stock of Consolidated Investment Corporation.
Control of Sub-Advisers
Crestone Capital Management is controlled by Kirk McCowan and Norwest Bank,
N.A. Minnesota. Calamos Asset Management, Inc. is controlled by John P. Calamos.
Investment Advisory Agreements and Administration Agreement
The Advisory Agreement, Administration Agreement and the Sub-Advisory
Agreements have been approved by the Board of Directors (including a majority of
the directors who are not parties to the Advisory, Administration and
Sub-Advisory Agreements, or interested persons of any such party, other than as
directors of the Company).
The Advisory Agreement, Administration Agreement and Sub-Advisory
Agreements terminate automatically in the event of their assignment. In
addition, the Advisory Agreement, Administration Agreement and Sub-Advisory
Agreements are terminable at any time, without penalty, by the Board of
Directors of the Company or by vote of a majority of the Company's outstanding
voting securities on 60 days' written notice to the Adviser, the Administrator
or Sub-Adviser, as the case may be, and by the Adviser, Administrator or
Sub-Adviser, as the case may be, on 60 days' written notice to the Company. The
Advisory Agreement or Sub-Advisory Agreements may be terminated with respect to
a particular Fund at any time by a vote of the holders of a majority of the
outstanding voting securities of such Fund, upon 60 days' written notice to the
Adviser or Sub-Adviser. Each Sub-Advisory Agreement is also terminable by the
Adviser upon 60 days' written notice to the Sub-Adviser. The Administration
Agreement is terminable by the vote of a majority of all outstanding voting
securities of the Company. Unless sooner terminated, the Advisory Agreement,
Administration Agreement and Sub-Advisory Agreements shall continue in effect
only so long as such continuance is specifically approved at least annually by
either the Board of Directors or by a vote of a majority of the outstanding
voting securities of the Company, 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 persons of such parties, cast in person at a
meeting called for the purpose of voting on such approval. If a majority of the
outstanding voting securities of any of the Funds approves a Sub-Advisory
Agreement, the Sub-Advisory Agreement shall continue in effect with respect to
such approving Fund whether or not the shareholders of any other Fund approve
such Sub-Advisory Agreement.
<PAGE>
Pursuant to the Advisory Agreement, the Capital Builder, Small Cap and
Convertible Funds pay the Adviser a monthly advisory fee equal on an annual
basis to .75% of each Fund's average daily net assets. The Government/Quality
Bond Fund pays the Adviser a monthly advisory fee equal on an annual basis to
.6% of its average daily net assets.
During the fiscal years ended June 30, 1994, June 30, 1995 and June 30,
1996 the Company paid the Adviser $167,425, $180,013 and $____________
respectively for advisory and administration services rendered to all the Funds
allocated among them as follows:
7/1/93 to 7/1/94 to 7/1/95 to
6/30/94 6/30/95 6/30/96
Capital Builder Fund *
Convertible Fund 32,863 26,152
Government/Quality Bond Fund 74,363 53,741
Crestone Small Cap Fund 60,199 100,120
------- -------
$167,425 $180,013
Of these amounts, pursuant to the Sub-Advisory Agreements, the Adviser
paid the respective Sub-Adviser for the Funds $76,606, $81,467 and $_________
allocated among the Funds as follows:
7/1/93 to 7/1/94 to 7/1/95 to
6/30/94 6/30/95 6/30/96
Convertible Fund 16,342 13,137
Crestone Small Cap Fund 28,084 44,689
------- --------
$76,606 $81,467
*On August 24 and 25, 1995, the Capital Builder Fund acquired the assets and the
liabilities of a private limited partnership and three of the Company's other
existing funds in a structured reorganization.
Additionally, the Adviser has paid advisory and administrative fees in
the last three fiscal years and paid Sub-Advisers for investment advice out of
the fees paid for certain other Funds, which have now ceased operations.
Under the Sub-Advisory Agreements, the Adviser, as its sole obligation,
pays the Sub-Adviser monthly advisory fees equal on an annual basis to a certain
percentage of the respective Fund's average daily net assets as set forth in the
Prospectus.
Pursuant to the Administration Agreement, the Administrator acts as
transfer agent and provides, or contracts with others to provide, to the Company
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 each Fund
and paid monthly, at an annual rate of .25% of the daily average net assets of
the Company.
Under the Advisory Agreement, the Adviser provides each Fund with advice
and assistance in the selection and disposition of that Fund's investments. All
investment decisions are subject to review by the Board of Directors of the
Company. The Adviser is obligated to pay the salaries and fees of any affiliates
of the Adviser serving as officers or directors of the Company.
Under the Sub-Advisory Agreements, the Sub-Advisers provide the Adviser
with investment advice and assist in the selection and disposition of the Funds'
investments. The Sub-Advisers do not provide any administrative services for the
Funds nor do they pay any compensation to any of the Company's officers or
directors.
<PAGE>
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. At the present time the
Funds are not subject to any such restrictions.
Custodian
The Custodian for the Company and each of the Funds is Union Bank and
Trust Company ("Union"), 3643 South 48th, Lincoln, Nebraska 68506. Union, as
Custodian, holds all of the securities and cash owned by the Funds.
DISTRIBUTION PLAN
The shares of the Funds are offered in two classes designated Select
shares and Investor shares. Select shares of all the Funds bear a sales charge
(or load) equal to 3.90% except the Government/Quality Bond Fund which is equal
to 1.50% of the net asset value of the shares purchased or 4.06% (1.52% for the
Government/Quality Bond Fund) of the total amount invested. The sales charge
will be paid to the Distributor. The Distributor may enter into selling
agreements with other broker/dealers to sell shares. In the event that another
broker/dealer sells shares, the Distributor may reallow up to .90% (.30% for the
Government/Qualty Bond Fund) of the sales charge. The Distributor offers Select
and Investor shares of the Funds as agent on a continuous best efforts basis.
The Distributor did not receive any underwriting commissions in the last three
fiscal years from the Funds; however, commencing on the date hereof, the
Distributor will be receiving sales charges for selling Select shares and will
continue to receive distribution fees under a Rule 12b-1 Plan of Investor
shares.
Rule 12b-1(b) under the Investment Company Act of 1940 provides that any
payments made by the Funds 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 Funds are
distribution expenses within the meaning of Rule 12b-1, the Company has entered
into an Underwriting and Distribution Agreement with the Distributor pursuant to
a Distribution Plan adopted in accordance with such Rule.
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 Company and who have no
direct or indirect 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 Company pursuant to the plan or any
related agreement shall provide to the Company'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
Company who are not interested persons of the Company 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 a Fund.
<PAGE>
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 Company may rely upon Rule 12b-1(b) only
if the selection and nomination of the Company's disinterested directors are
committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the Company 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 Company and its shareholders. The Board of
Directors has concluded that there is a reasonable likelihood that the
Distribution Plan will benefit the Company and its shareholders.
Pursuant to the provisions of the Distribution Plan, as amended, Select
shares of the Capital Builder, Small Cap and Convertible Funds pay a fee to the
Distributor computed and paid monthly at an annual rate of up to .50% and the
Government/Quality Bond Fund pays a fee of .25% of such Fund's average daily net
assets in order to reimburse the Distributor for its actual expenses incurred in
the distribution and promotion of such 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
Funds 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
Funds 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% (.25% to the Government/Quality Bond Fund) of the
average daily net assets of the Funds which is attributable to shares sold by
such investment executive.
Under the Distribution Plan, the Company paid the Distributor a total of
$________ for the fiscal year ended June 30, 1996 allocated among the existing
Funds as follows:
7/1/95 to
6/30/96
Capital Builder Fund
Convertible Fund
Government/Quality Bond Fund
Crestone Small Cap Fund
Of the total amount the Distributor pursuant to the Distribution Plan in
these periods, the Distributor retained or paid to its agents $70,731. The
Distributor paid the balance to various other broker-dealers pursuant to selling
agreements between the Distributor and such persons for distribution services.
Additionally, the Distributor was paid $59,851 pursuant to the Distribution Plan
for certain other Funds which have now ceased operations. The Distributor
incurred additional expenses in excess of the remaining amount paid for printing
prospectuses, sales literature, a toll free watts line utilized in soliciting
orders for the Company shares, postage and other related promotion, marketing
and sales expenses. Thomas C. Smith, a director and officer of the Company,
controls the Distributor and as a result has a financial interest in the
Distribution Plan.
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
The Adviser and the Sub-Adviser are responsible for decisions to buy and
sell securities for the Funds, 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
Sub-Adviser, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission (if any) and considering the
state of the market at the time. In the case of principal transactions involving
new issues, the Sub-Adviser may have little discretion in controlling the
mark-up on such transactions. However, in the case of principal transactions
involving secondary sales, the Sub-Adviser will seek to negotiate the lowest
mark-up possible.
When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research and/or services to the Adviser
and Sub-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 and Sub-Adviser to
supplement their own investment research activities and enables the Adviser and
Sub-Adviser to obtain the views and information of individuals and research
staffs of many different securities firms prior to making investment decisions
for the Funds. To the extent portfolio transactions are effected with
broker-dealers who furnish research services to the Adviser and Sub-Adviser, the
recipient receives a benefit, not capable of evaluation in dollar amounts,
without providing any direct monetary benefit to the Funds from these
transactions. The Adviser and Sub-Adviser believe that most research services
obtained by them generally benefit several or all of the accounts which they
manage, 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.
Neither the Adviser nor any Sub-Adviser has 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 any Fund's
transactions in exchange for research services provided the Sub-Adviser except
as noted below. However, from time to time, the Adviser and Sub-Adviser may
elect to use certain brokers to execute transactions in order to encourage them
to provide research services which they anticipate will be useful to them. The
recipient 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 and Sub-Adviser doing so
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 and Sub-Adviser's overall responsibilities with respect to the accounts
as to which it exercises investment discretion.
Portfolio transactions for the Funds may be effected on an agency basis
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 Funds 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 Funds do not deem it practicable
and in their 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>
During the fiscal years ending June 30, 1994, June 30, 1995 and June 30,
1996, the Funds incurred $54,279, $26,567 and $_____ respectively of brokerage
commissions, some of which was paid to the Fund's Distributor, allocated among
the Portfolios as follows:
7/1/93 to 7/1/94 to 7/1/95 to
6/30/94 6/30/95 6/30/96
Capital Builder Fund
Convertible Fund 12,987 15,359
Government/Quality Bond Fund 0 0
Crestone Small Cap Fund 41,292 11,208
------ -------
$54,279 $26,567
The Fund's Distributor, SMITH HAYES Financial Services Corporation,
which is an affiliate of the Company's Adviser, was paid 100% and 89% of the
aggregate brokerage commissions incurred in the fiscal years ending June 30,
1994, and 1995, and $________ or ___% in 1996. The remaining brokerage
commissions were paid to other unaffiliated broker dealers. Of the aggregate
dollar amount of transactions involving payment of commissions, ___% were
effected through the Distributor in the fiscal year ending June 30, 1996. It is
the Company's intent that brokerage transactions executed through SMITH HAYES
will be effected pursuant to the Company's Guidelines Regarding Payment of
Brokerage Commissions to Affiliated Persons adopted by the Board of Directors
including a majority of the non-interested directors pursuant to Rule 17(e)-1
under the Investment Company Act of 1940.
In certain instances, there may be securities which are suitable for the
Company's Funds as well as for that of one or more of the advisory clients of
the Sub-Advisers or the Adviser. Investment decisions for the Company's Funds
and for such advisory clients are made by the Sub-Advisers or 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 a Sub-Adviser or
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 one of the Sub-Advisers or 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 a particular Sub-Adviser or
the Adviser are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed by the
Sub-Adviser or the Adviser, as the case may be, 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 Sub-Adviser or the Adviser, as the case may be, 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
involved is concerned. At the same time, however, it is believed that the
ability of the Fund to participate in volume transactions will sometimes produce
better execution prices.
Option Trading Limits
The writing by the Funds 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 one Fund may
write may be affected by options written by the other Funds and by other
investment advisory clients of the Adviser or the Sub-Advisers. An exchange may
order the liquidation 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 Company will exceed applicable limitations.
<PAGE>
CAPITAL STOCK AND CONTROL
A complete description of the rights and characteristics of the
Company's capital stock is included in the Prospectus.
The following table provides the name and address of any person who owns
of record or beneficially 5% or more of the outstanding shares of each Fund as
of June 30, 1996.
Fund Name & Address Shares % Ownership
Capital Builder Fund
Small Cap UBATCO & Company ___________ ___%
Union Bank and Trust Company
Trust Department-nominee name
4732 Calvert Street
Lincoln, NE 68506
Including
Linweld Inc. Profit ___________ ___%
Sharing/401K Plan
1225 "L" Street
Suite 600
Lincoln, NE 68501
Convertible The Eihusen ___________ ___%
Chief Foundation, Inc.
Old West Hwy 30
P.O. Box 2078
Grand Island, NE 68802
Thomas L. Williams ___________ ___%
Susan M. Williams JTWROS
2820 South 99th Avenue
Omaha, NE 68124
Government Quality
Bond Portfolio The Eihusen ___________ ____%
Chief Foundation, Inc.
Old West Hwy 30
P.O. Box 2078
Grand Island, NE 68802
As a group, the officers and directors of the Fund owned less than one
percent of the outstanding shares of Capital Builder, Convertible,
Government/Quality Bond and Crestone Small Cap Funds.
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 headings "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 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,
Presidents' Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving
and Christmas.
<PAGE>
The portfolio securities in which each Fund invests fluctuate in value,
and hence the net asset value per share of each Fund also fluctuates. The net
asset value per share for all Funds as of June 30, 1996 is calculated is as
follows:
Net Assets ($100,000) = Net Asset Value
Shares Outstanding (10,000) per Share ($10)
Investor shares of each of the Funds are offered with a sales charge set
forth in the Prospectus. The sale charges imposed are subject to scheduled
variations for different types of investors and based on a total amount
invested. These variations are intended to encourage investment by the various
types of investors and to attract accounts of significant size.
Investor shares of the Fund are offered to the public at their net asset
value next determined after an order is received by the Distributor and other
selected financial services firms with whom the Distributor has entered into
selling agreements, without a sales charge. Select shares are offered at their
net asset value next determined after an order is received with a varying sales
charge as set forth below.
Sales Charges
-------------
Dealer
As a % of As a % of Reallowance
Public Offering Net Amount as a % of
Price Invested Offering Price
On Purchases of:
less than $25,000 3.90 4.06 3.00
$25,000 but less than $50,000 2.50 2.56 2.00
$50,000 but less than $100,000 1.30 1.32 1.00
$100,000 and over -0- -0- -0-
Net Asset Value Purchases
Select shares of the Fund may be sold without a sales charge to (1)
directors and employees (and their families) of the Company, the Distributor,
the Adviser, the Administrator, and securities dealers having sales agreements
with the Distributor; (2) investors purchasing shares with proceeds of
redemptions from any U.S. mutual fund not distributed by the Distributor which
imposes front-end sales charges or deferred sales charges; and (3) persons who
have entered into an investment advisory agreement with the Distributor or the
Adviser as to any portion of their assets that is invested in the Fund or any
other Fund of the Company. To be eligible to purchase shares without the
imposition of sales charges as described above, the investor or the investor's
broker must establish such eligibility at the time shares are purchased by
advising the Distributor.
Reduced Sales Charge
Select shares of the Fund may also be purchased at the reduced sales
charges as set forth in this Prospectus if the investor agrees to purchase at
least the aggregate amount necessary to qualify for the reduced sales charge
under a statement of intent. Under the statement of intent, an investor agrees
to purchase a certain amount over a 13 month period, and in so doing qualifies
for the reduced sales charge for the aggregate amount for all purchases in
furtherance of the statement of intent. The statement of intent does not create
a binding obligation on the shareholder to purchase the requisite number and
amount of shares and consequently, 2.5% of the value of the total shares to be
purchased will be segregated from the shareholder's account as statement of
intent shares. All such shares will be credited with the appropriate amount of
dividends and capital gains distributions. In the event that the statement of
intent is fulfilled, all shares will be credited to the shareholder's regular
account. In the event that the statement of intent is not fulfilled, a
sufficient amount of the statement of intent shares will be redeemed to realize
the difference in sales charges based on the number and amount of the shares
actually purchased and the balance of such shares will be released to the
shareholder's regular account. (See account application).
<PAGE>
Investors may also qualify for the reduced sales charges by aggregating
their investments in the Fund with a spouse and children under the age of 21 or
a business entity or trust of which they are a shareholder, partner, owner or
beneficiary.
Statement of Intention
The reduced sales charges and offering prices set forth in the
Prospectus apply to purchases of $25,000 or more made within a 13-month period
pursuant to the terms of a written statement of intention (the "Statement") in
the application form provided by the Principal Underwriter and signed by the
purchaser. The Statement is not a binding obligation to purchase the indicated
amount. When a shareholder signs a Statement in order to qualify for a reduced
sales charge, shares equal to 5% of the dollar amount specified in the Statement
will be held in escrow in the shareholder's account out of the initial purchase
(or subsequent purchases, if necessary) by the Transfer Agent. All dividends and
capital gain distributions on shares held in escrow will be credited to the
shareholder's account in shares (or paid in cash, if requested). If the intended
investment is not completed within the specified 13-month period, the purchaser
will remit to the Principal Underwriter the difference between the sales charge
actually paid and the sales charge which would have been paid if the total
purchases had been made at a single time. If the difference is not paid within
20 days after written request by the Principal Underwriter or the investment
dealer, the appropriate number of escrowed shares will be redeemed to pay such
difference. If the proceeds from this redemption are inadequate, the purchaser
will be liable to the Principal Underwriter for the balance still outstanding.
The Statement may be revised upward at any time during the 13-month period, and
such a revision will be treated as a new Statement, except that the 13-month
period during which the purchase must be made will remain unchanged and there
will be no retroactive reduction of the sales charges paid on prior purchases.
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 Funds of securities owned by them
is not reasonably practicable, or it is not reasonably practicable for the Funds
fairly to determine the value of their 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 Company has qualified and intends to continue to qualify its Funds
as "regulated investment companies" 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, a Fund must, among other things, receive at
least 90% of its gross income each year from dividends, interest, gains from the
sale of 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 each Fund's gross
income. This restriction may limit the extent to which a 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 a 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 futures
contracts and options for purposes of the diversification test, and the extent
to which a Fund could buy or sell futures contracts and options may be limited
by this requirement.
<PAGE>
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 a 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 underreporting
of certain income. These certifications are contained in the purchase
application enclosed with the Prospectus.
CALCULATIONS OF PERFORMANCE DATA
From time to time the Company may quote the yield for the Funds in
advertisements or in reports and other communications to shareholders. For this
purpose, yield is calculated by dividing a 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 representative of what the Fund's yield
may be for any specified period in the future.
Yield information may be useful in reviewing a Fund's performance and
for providing a basis for comparison with other investment alternatives.
However, a 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 a 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 portfolio securities of the
respective investment companies when comparing investment alternatives.
Investors should recognize that in periods of declining interest rates a
bond portfolio's yield will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates, such portfolio's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to a bond portfolio from the continuous sale of its shares will likely
be invested in instruments producing lower yields than the balance of such
portfolio's holdings, thereby reducing the current yield of such portfolio. In
periods of rising interest rates, the opposite can be expected to occur.
The Company may also quote the indices of bond prices and yields
prepared by Shearson Lehman Hutton Inc. and Merrill Lynch & Company, leading
broker-dealer firms. These indices are not managed for any investment goal.
Their composition may, however, be changed from time to time.
The Government/Quality Bond Fund may quote the yield or total return on
Ginnie Maes, Fannie Maes, Freddie Macs, corporate bonds and Treasury bonds and
notes, either as compared to each other or as compared to the Fund's
performance. In considering such yields or total returns, investors should
recognize that the performance of securities in which the Fund may invest does
not reflect the Fund's performance, and does not take into account either the
effects of portfolio management or of management fees or other expenses; and
that the issuers of such securities guarantee that interest will be paid when
due and that principal will be fully repaid if the securities are held to
maturity, while there are no such guarantees with respect to shares of the Fund.
Investors should also be aware that the mortgages underlying mortgage-related
securities may be prepaid at any time. Prepayment is particularly likely in the
event of an interest rate decline, as the holders of the underlying mortgages
seek to pay off high-rate mortgages or renegotiate them at potentially lower
current rates. Because the underlying mortgages are more likely to be prepaid at
their par value when interest rates decline, the value of certain high-yielding
<PAGE>
mortgage-related securities may have less potential for capital appreciation
than conventional debt securities (such as U. S. Treasury bonds and notes) in
such markets. At the same time, such mortgage-related securities may have less
potential for capital appreciation when interest rates rise.
The yield of the Government/Quality Bond Fund for the 30-day period
ending June 30, 1996 was ___%.
In connection with the quotations of yields in advertisements described
above, the Company 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 Funds may also provide a total
return figure for the most recent calendar quarter prior to the publication of
the advertisement.
The average annual total return of the Funds for the one, inception to
date and five years ended on June 30, 1996 are as follows:
Inception to
1 year 5 years Date
Capital Builder Fund ___% NA ___%
Convertible Fund ___% ___% ___%
Government/Quality Bond Fund ___% ___% ___%
Crestone Small Cap Fund ___% NA ___%
FINANCIAL STATEMENTS
The Company hereby incorporates by reference the information in the
Company's Annual Financial Report dated June 30, 1996, attached hereto.
AUDITORS
On _________, 1996, the Board of Directors, including all disinterested
directors, unanimously approved the appointment of Deloitte & Touche LLP, 1040
NBC Center, Lincoln, Nebraska 68508 as the Company's accountants.
<PAGE>
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS,
COMMERCIAL PAPER, AND PREFERRED STOCK
Ratings of Corporate Obligations
Moody's Investors Service, 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.
<PAGE>
Those securities in the A and Baa groups which Moody's believes possess
the strongest investment attributes are designated by the symbols A-1 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 & 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 rated 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 payment.
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.
<PAGE>
Moody's Investors Service, 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 to, 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 and 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 & 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.
<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.
BB, B, CCC: Preferred stock issues rated BB, B, and CCC are
regarded, on balance, as predominantly speculative with respect to
the issuer's capacity to pay preferred stock obligations. BB
indicates the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
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 Service, 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.
<PAGE>
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.
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.
<PAGE>
APPENDIX B
STOCK INDEX FUTURES CONTRACTS AND RELATED OPTIONS
Stock Index Futures Contracts
Convertible Fund may purchase put options on stock indexes. Stock index
futures contracts are commodity contracts listed on commodity exchanges. They
presently include contracts on the Standard & Poor's 500 Stock Index (the "S&P
500 Index") and such other broad stock market indexes as the New York Stock
Exchange Composite Stock Index and the Value Line Composite Stock Index, as well
as narrower "sub-indexes" such as the S&P 100 Energy Stock Index and the New
York Stock Exchange Utilities Stock Index. A stock index assigns relative values
to common stocks included in the index and the index fluctuates with the value
of the common stocks so included. A futures contract is a legal agreement
between a buyer or seller and the clearing house of a futures exchange in which
the parties agree to make a cash settlement on a specified future date in an
amount determined by the stock index on the last trading day of the contract.
The amount is a specified dollar amount (usually $100 or $500) times the
difference between the index value on the last trading day and the value on the
day the contract was struck.
For example, the S&P 500 Index consists of 500 selected common stocks, most
of which are listed on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the common stocks included in the Index, and the Index
fluctuates with changes in the market values of those common stocks. In the case
of S&P 500 Index futures contracts, the specified multiple is $500. Thus, if the
value of the S&P 500 Index were 150, the value of one contract would be $75,000
(150 x $500). Unlike other futures contracts, a stock index futures contract
specifies that no delivery of the actual stocks making up the index will take
place. Instead, settlement in cash must occur upon the termination of the
contract with the settlement amount being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example (excluding any transaction costs), if a Fund enters into one futures
contract to buy the S&P 500 Index at a specified future date at a contract value
of 150 and the S&P 500 Index is at 154 on that future date, the Fund will gain
$500 x (154-150) or $2,000. If a Fund enters into one futures contract to sell
the S&P 500 Index at a specified future date at a contract value of 150 and the
S&P 500 Index is at 152 on that future date, the Fund will lose $500 x (152-150)
or $1,000.
Unlike the purchase or sale of an equity security, no price would be paid
or received by the Fund upon entering into stock index futures contracts. Upon
entering into a contract, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount of
cash or U.S. Treasury bills equal to a portion of the contract value. This
amount is known as "initial margin." The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve borrowing funds by the Fund to finance
the transactions. Rather, the initial margin is in the nature of a performance
bond or good faith deposit on the contract that is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. Subsequent payments, called "variation margin," to and from the
broker would be made on a daily basis as the price of the underlying stock index
fluctuates, making the long and short positions in the contract more or less
valuable, a process known as "marking to the market." For example, when a Fund
enters into a contract in which it benefits from a rise in the value of an index
and the price of the underlying stock index has risen, the Fund will receive
from the broker a variation margin payment equal to that increase in value.
Conversely, if the price of the underlying stock index declines, the Fund would
be required to make a variation margin payment to the broker equal to the
decline in value.
<PAGE>
The Fund intends to use stock index futures contracts and related options
for hedging and not for speculation. Hedging permits the Fund to gain rapid
exposure to or protect itself from changes in the market. For example, the Fund
may find itself with a high cash position at the beginning of a market rally.
Conventional procedures of purchasing a number of individual issues entail the
lapse of time and the possibility of missing a significant market movement. By
using futures contracts, the Fund can obtain immediate exposure to the market
and benefit from the beginning stages of a rally. The buying program can then
proceed, and once it is completed (or as it proceeds), the contracts can be
closed. Conversely, in the early stages of a market decline, market exposure can
be promptly offset by entering into stock index futures contracts to sell units
of an index and individual stocks can be sold over a longer period under cover
of the resulting short contract position.
The Fund may enter into contracts with respect to any stock index or
sub-index. To hedge a Fund's portfolio successfully, however, the Fund must
enter into contracts with respect to indexes or sub-indexes whose movements will
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
Options on Stock Index Futures and on Stock Indexes
Convertible Fund may purchase put options on stock indexes. Stock indexes
are securities traded on national securities exchanges. An option on a stock
index is similar to an option on a futures contract except all settlements are
in cash. A Fund exercising a put, for example, would receive the difference
between the exercise price and the current index level. Such options would be
used in a manner identical to the use of options on futures contracts.
As with options on stocks, the holder of an option on a stock index may
terminate a position by selling an option covering the same contract or index
and having the same exercise price and expiration date. Trading in options on
stock indexes began only recently. The ability to establish and close out
positions on such options will be subject to the development and maintenance of
a liquid secondary market. It is not certain that this market will develop. The
Fund will not purchase options unless and until the market for such options has
developed sufficiently so that the risks in connection with options are not
greater than the risks in connection with stock index futures contracts
transactions themselves. Compared to using futures contracts, purchasing options
involves less risk to the Fund because the maximum amount at risk is the premium
paid for the options (plus transaction costs). There may be circumstances,
however, when using an option would result in a greater loss to a Fund than
using a futures contract, such as when there is no movement in the level of the
stock index.
<PAGE>
Regulatory Matters
The Commodity Futures Trading Commission (the "CFTC"), a federal agency,
regulates trading activity on the exchanges pursuant to the Commodity Exchange
Act, as amended. The CFTC requires the registration of "commodity pool
operators," defined as any person engaged in a business which is of the nature
of an investment trust, syndicate or a similar form of enterprise, and who, in
connection therewith, solicits, accepts or receives from others, funds,
securities or property for the purpose of trading in any commodity for future
delivery on or subject to the rules of any contract market. The CFTC has
recently adopted Rule 4.5, which provides an exclusion from the definition of
commodity pool operator for any registered investment company which (i) will use
commodity futures or commodity options contracts solely for bona fide hedging
purposes (provided, however, that in the alternative, with respect to each long
position in a commodity future or commodity option contract, an investment
company may meet certain other tests set forth in Rule 4.5); (ii) will not enter
into commodity futures and commodity options contracts for which the aggregate
initial margin and premiums exceed 5% of its assets; (iii) will not be marketed
to the public as a commodity pool or as a vehicle for investing in commodity
interests; (iv) will disclose to its investors the purposes of and limitations
on its commodity interest trading; and (v) will submit to special calls of the
CFTC for information. Any investment company wishing to claim this exclusion
must file a notice of eligibility with both the CFTC and the National Futures
Association. Before engaging in transactions involving interest rate futures
contracts, the Funds will file such notices and meet the requirements of Rule
4.5, or such other requirements as the CFTC or its staff may from time to time
issue, in order to render registration as a commodity pool operator unnecessary.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(1) Included in Part A:
Financial Highlights to be completed by amendment
(2) Included in Part B:
Statement of Assets and Liabilities, June 30, 1996;
Statement of Operations, Year ended June 30, 1996;
Statements of Changes in Net Assets, Years ended June 30,
1996 and 1995; Schedules of Investments; Notes to
Financial Statements; Financial Highlights and Independent
Auditors' Report dated July __, 1996 for the Small Cap
Fund, Convertible Fund, Government/Quality Bond Fund,
Institutional Money Market Fund and Nebraska Tax-Free Fund
to be added by amendment.
(3) Included in Part C:
Consent of Deloitte & Touche LLP to be filed by amendment
(b) Exhibits
Exhibit No. Description
1. (a)(1) Articles of Incorporation
(b)(2) Articles of Amendment to the Articles of
Incorporation
(c)(2) Certificate of Redesignation
(d)(2) Certificate of Designation - Nebraska Tax-Free
Fund
(e)(3) Certificate of Designation of Capital Builder
Fund
(f) Certificate of Designation - Multiple Class
2. (a)(1) Bylaws of Company
<PAGE>
(b)(4) Amendment to Bylaws
5. (a)(5) Amended Transfer Agent and Administrative
Services Agreement
(b)(5) Investment Advisory Agreement for the Small Cap
Fund, Convertible Fund, Government/Quality Bond
Fund, Nebraska Tax-Free Fund and Capital Builder
Fund
(c)(1) Form of Sub-Investment Advisory Agreement
(d)(6) Investment Advisory Agreement for Institutional
Money Market Fund
6. (a)(3) Underwriting Agreement
(b)(3) Specimen Copy of Servicing Agreement
8. (7) Amended Custodian Agreement with Union Bank and
Trust Company
9. (6) Form of Declaration of Trust establishing the
Mid-America Student Finance Trust
10. (a)(4) Opinion and Consent of Messrs. Cline, Williams,
Wright, Johnson & Oldfather with respect to the
Convertible Fund and Government/Quality Bond
Fund
(b)(8) Opinion and Consent of Messrs. Cline, Williams,
Wright, Johnson & Oldfather with respect to the
Small Cap Fund
(c)(6) Opinion and Consent of Messrs. Cline, Williams,
Wright, Johnson & Oldfather with respect to the
Institutional Money Market Fund
(d)(2) Opinion and Consent of Messrs. Cline, Williams,
Wright, Johnson & Oldfather with respect to the
Nebraska Tax-Free Fund
(e) Opinion and Consent of Messrs. Cline, Williams,
Wright, Johnson & Oldfather with respect to
multiple classes of shares to be filed by
amendment
<PAGE>
15. Amended Rule 12 B-1 Plan
16. Schedule of Performance Computations to be filed
by amendment
17. To be filed by amendment
18. Rule 18f-3 Plan
Footnotes to Exhibits
(1) Incorporated by reference to Form N-1A Registration Statement File No.
33-19894 (the "Form N-1A") filed January 30, 1988
(2) Incorporated by reference to Post-Effective Amendment No. 14 to Form N-1A
filed May 10, 1993
(3) Incorporated by reference to Post-Effective Amendment No. 18 to
Form N-1A filed January 19, 1995
(4) Incorporated by reference to Pre-Effective Amendment No. 2 to Form N-1A
filed June 3, 1988
(5) Incorporated by reference to Pre-Effective Amendment No. 2 to
Form N-14 Registration Statement File No. 33-92012 filed July 14, 1995
(6) Incorporated by reference to Post-Effective Amendment No. 10 to
Form N-1A filed July 1, 1992
(7) Incorporated by reference to Post-Effective Amendment No. 17 to
Form N-1A filed October 28, 1994
(8) Incorporated by reference to Post-Effective Amendment No. 9 to Form N-1A
filed July 1, 1992
Item 25. Persons Controlled by or under Common Control with Registrant
None
<PAGE>
Item 26. Number of Holders of Securities
As of June 30, 1996:
Title of Class Number of Record Holders
Common Stock
Capital Builder Fund ____
Small Cap Fund ____
Convertible Fund ____
Government Quality Bond Fund ____
Institutional Money Market Fund ____
Nebraska Tax Free Fund ____
----
Item 27. Indemnification
Section 302A.521 of the Minnesota Business Corporation Act requires
indemnification of officers and directors of the Registrant under circumstances
set forth therein. Reference is made to Article 8.d. of the Articles of
Incorporation, Article XIII of the Bylaws of Registrant (Exhibit 2 hereto) and
to Section 10 of the Underwriting Agreement (Exhibit 6 hereto) for additional
indemnification provisions.
The general effect of such provisions is to require indemnification of
persons who are made or threatened to be made a party to a proceeding by reason
of the former or present official capacity of the person with the corporation
against judgments, penalties, fines and reasonable expenses including attorneys'
fees incurred by said person if: (1) the person has not been indemnified by
another organization for the same judgments, penalties, fines and expenses for
the same acts or omissions; (2) the person acted in good faith; (3) the person
received no improper personal benefit; (4) in the case of a criminal proceeding,
the person had no reasonable cause to believe the conduct was unlawful; and (5)
in the case of directors and officers and employees of the corporation, such
persons reasonably believed that the conduct was in the best interests of the
corporation, or in the case of directors, officers, or employees serving at the
request of the corporation for another organization, such person reasonably
believed that the conduct was not opposed to the best interests of the
corporation. A corporation is permitted to maintain insurance on behalf of any
officer, director, employee or agent of the corporation, or any person serving
as such at the request of the corporation, against any liability of such person.
Nevertheless, Article 8(d) of the Articles of Incorporation prohibits
any indemnification which would be in violation of Section 17(h) of the
Investment Company Act of 1940, as now enacted or hereafter amended and Article
XIII of the Fund's Bylaws prohibit any indemnification inconsistent with the
guidelines set forth in Investment Company Act Releases No. 7221 (June 9, 1972)
and No. 11330 (September 2, 1980). Such Releases prohibit indemnification in
cases involving willful misfeasance, bad faith, gross negligence and reckless
disregard of duty and establish procedures for the determination of entitlement
to indemnification and expense advances.
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification by the Registrant is against public policy as expressed in
the Act and, therefore, may be unenforceable. In the event that a claim for such
indemnification (except insofar as it provides for the payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person and the Securities
and Exchange Commission is still of the same opinion, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
or not such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
Item 28.(a) Business and Other Connections of Investment Adviser
CONLEY SMITH, Inc.
Name and Principal Occupations
Principal Business Positions with (Present and for
Address* Adviser Past Two Years)
Thomas C. Smith Chairman See caption "Management" in the
Statement of Additional
Information forming a part of this
Registration Statement
John H. Conley President See caption "Management" in the
Statement of Additional
Information forming a part of this
Registration Statement
Colleen Hector Secretary See caption "Management" in the
Statement of Additional
Information forming a part of this
Registration Statement
* The address is the address of the Adviser or Portfolio Manager unless
otherwise indicated, which is contained under "Management" in the Prospectus.
<PAGE>
(b) Business and Other Connections of the Portfolio Managers
CALAMOS ASSET MANAGEMENT, INC.
Name and Principal Occupations
Principal Business Positions with (Present and for
Address* Adviser Past Two Years)
---------------------------------------------------
John P. Calamos President and President,Calamos Asset Management, Inc.
Managing Director ("CAM"); President, Calamos Financial
Services, Inc. ("CFS"), a broker-dealer;
President and Trustee,
Calamos Investment Trust
("CIT"); an investment
adviser.
Robert M. Slotky Senior Vice President Senior Vice
President and Treasurer, CAM
and CFS; Treasurer CIT; from
1984 until September 1987,
Financial Vice President, NCA
and Treasurer, NCAM.
Joyce A. Cagnina Vice President Vice President and Secretary,
and Secretary, CAM and CFS;
Secretary, CIT; from 1986 to
September 1987, Vice
President, NCA; prior
thereto, employee,
NCA.
* The address is the address of the Adviser or Portfolio Manager unless
otherwise indicated, which is contained under "Management" in the Prospectus.
For the past two years, the directors, officers and partners of Crestone
Capital Management, have not been engaged in any other business, profession,
vocation or employment for their own account or as a director, officer,
employee, partner or trustee and have devoted substantially their full time to
their respective businesses. Further information about this Sub-Adviser included
in such Sub-Advisers' Form ADVs filed with the Commission and which is
incorporated by this reference herein.
Item 29. Principal Underwriters
(a) Not applicable.
(b)
Positions and Name Positions and
and Principal Offices with Offices with
Business Address* Underwriter Registrant
Thomas C. Smith Chairman and President Chairman, President, Chief
200 Centre Terrace Executive Officer, Treasurer
1225 L Street and Director
Lincoln, NE 68508
<PAGE>
(c) Not applicable.
Item 30. Location of Accounts and Records
All required accounts, books and records will be maintained by Thomas
C. Smith, 200 Centre Terrace, 1225 L Street, Lincoln, Nebraska 68508.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, has duly caused this Post-Effective Amendment to
the Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lincoln and the State of
Nebraska, on the ___ day of July, 1996.
SMITH HAYES Trust, Inc.
By: /s/ Thomas C. Smith
Thomas C. Smith, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities indicated on September 1, 1995.
Signature Title
/s/ Thomas C. Smith Chairman, President, Principal Executive
Thomas C. Smith Officer, Principal Financial and
Accounting Officer and Treasurer
/s/ Thomas D. Potter Director
Thomas D. Potter
/s/ Thomas R. Larsen Director /s/ Thomas C. Smith
Thomas R. Larsen Thomas C. Smith
Attorney-in-Fact
/s/ Dale C. Tinstman Director
Dale C. Tinstman
/s/ John H. Conley Director
John H. Conley
<PAGE>
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT
NO. 21
TO
FORM N-1A REGISTRATION STATEMENT
FOR
SMITH HAYES TRUST, INC.
d/b/a LANCASTER FUNDS
<PAGE>
EXHIBITS
TO
LANCASTER FUND
POST-EFFECTIVE AMENDMENT NO. 21
FORM N-1A REGISTRATION STATEMENT
Exhibit No. Description
1. (f) Certificate of Designation - Multiple Classes
15. Amended Rule 12b-1 Plan
18. Rule 18f-3 Plan
CERTIFICATE OF DESIGNATION OF
SMITH HAYES TRUST, INC.
I, _______________________, as Secretary of SMITH HAYES Trust, Inc. do
hereby certify that the Board of Directors unanimously adopted the following
resolution on ____________________, 1996 authorizing the implementation of a
multiple class structure of the Corporation's common stock.
BE IT RESOLVED that the number of shares allocated to each series of
the Corporation's Common Stock, except for the Institutional Money Market and
Money Market Funds, shall be increased to the number of shares set forth below,
all of such shares having the rights and preferences previously designated for
each such series.
Capital Builder Fund 120,000,000
Convertible Fund 120,000,000
Nebraska Tax-Free Fund 120,000,000
Government Quality Bond Fund 120,000,000
Small Cap Fund 120,000,000
BE IT FURTHER RESOLVED that the shares of the Corporation's various
series, as currently authorized or hereafter designated, except for the
Institutional Money Market Fund and Money Market Fund, shall be further divided
into three classes of 40,000,000 shares each designated Investor, Select and
Market shares. These classes will be offered to the public, subject to their
prior registration with the Securities and Exchange Commission and the states in
accordance and to the extent applicable with the Investment Company Act of 1940
("1940 Act"), as amended (together with the rules and regulations promulgated
thereunder including specifically Rule 18f-3), with the charges and expenses
(including by way of example, but not limited thereto front-end and deferred
sales charges, expenses under Rule 12b-1 plans, administrative plans, service
plans, or other plans or arrangements as may be adopted or amended from time to
time by the Board of Directors) as set forth below. Except for the special
rights that arise under the requirements of the 1940 Act (i.e., approval
amendments to the Corporation's 12b-1 plan applicable to each such class), all
classes shall have the same rights and preferences as set forth for each series
in the Corporation's Articles of Incorporation as amended, or in the designation
filed with the Secretary of State of Minnesota with respect to each series,
asset forth herein, or as otherwise required by Minnesota statute 302A.
Investor shares of any series shall be sold without any sales charge
(commonly referred to as a front-end load contingent deferred sales charge or
the like), but may bear the class expense of a Rule 12b-1 plan fee,
administrative services fee, shareholder's services plan fee or transfer agent
fee. Unless modified by the Board of Directors, commencing on the first public
offering of the Investor shares after the date hereof, Investor shares shall
bear only the expense of the Corporation's Rule 12b-1 plan as it is currently
applicable to the existing series, with all other expenses of each series,
<PAGE>
including the investment advisory fee, custodian fee or administrative services
fee borne by the series.
Unless modified by the Board of Directors, commencing on the first
public offering of the Select shares after the date hereof, Select shares shall
be offered with a sales charge as set forth in a resolution adopted by the Board
of Directors from time to time, and shall not bear the expense of the
Corporation's Rule 12b-1 plan. Select shares may be subject to the expense of
the shareholder's servicing plan fee, an administrative services plan fee,
and/or separate transfer agency fees, to the extent that the Board of Directors
further adopt such plans or agreements and makes them applicable to the Select
shares; however, at this time no such further fees are authorized for Select
shares. All other costs and expenses relating to the series relating to each
such class shall be borne at the series level including the investment advisory
fee, custodian fee, administrative services fee, and transfer agent fees.
Unless modified by the Board of Directors, commencing on the first
public offering of the Market shares after the date hereof, Market shares shall
be offered with a sales charge as set forth in a resolution adopted by the Board
of Directors from time to time, and shall bear the expense of the Corporation's
Rule 12b-1 plan. Market shares may be subject to the expense of the
shareholder's servicing plan fee, an administrative services plan fee, and/or
separate transfer agency fees, to the extent that the Board of Directors further
adopt such plans or agreements and makes them applicable to the Market shares;
however, at this time no such further fees are authorized for Market shares. All
other costs and expenses relating to the series relating to each such class
shall be borne at the series level including the investment advisory fee,
custodian fee, administrative services fee, and transfer agent fees.
SMITH HAYES TRUST, INC.
By: ____________________________________
Its: Secretary
<PAGE>
SMITH HAYES Trust, Inc.
AMENDED PLAN OF DISTRIBUTION
WHEREAS, Rule 12b-1 under the Investment Company Act of 1940 ("Rule
12b-1") provides that, except as provided in Rule 12b-1, it shall be unlawful
for any registered open-end management investment company (other than such
company complying with the provisions of Section 10(d) under the Investment
Company Act of 1940 (the "1940 Act")) to act as distributor of securities of
which such company is the issuer, except through an underwriter;
WHEREAS, Rule 12b-1 provides that a registered open-end management
investment company will be deemed to be acting as a distributor of securities of
which it is the issuer, other than through an underwriter, if it engages
directly or indirectly in financing any activity which is primarily intended to
result in the sale of shares issued by such company, including, but not
necessarily limited to, advertising, compensation of underwriters, dealers and
sales personnel, the printing and mailing of prospectuses to other than current
shareholders, and the printing and mailing of sales literature;
WHEREAS, SMITH HAYES Trust, Inc., a Minnesota corporation (the
"Company"), has appointed SMITH HAYES Financial Services Corporation, a Nebraska
corporation (the "Distributor"), the underwriter of the Company pursuant to an
Underwriting and Distribution Agreement, under which the Distributor agrees to
distribute and pay the costs of distributing shares of the Company, which shares
shall be issued in series corresponding to the portfolios of the Company
(referred to herein as the "Fund" or "Funds"), in consideration of all of which
the Distributor shall receive fees and reimbursements from the Company as
provided in the Underwriting and Distribution Agreement;
WHEREAS, Rule 12b-1 provides that a registered, open-end management
company may act as a distributor of securities of which it is the issuer,
provided that any payments made by such company in connection with such
distribution are made pursuant to a written plan describing all material aspects
of the proposed financing of distribution and that all agreements with any
person relating to implementation of the plan are in writing, and provided
further that certain additional conditions are met;
WHEREAS, the Company adopted this Plan of Distribution (the "Plan") on
June 8th, 1988 with respect to its then existing Funds and subsequently made the
plan applicable to all Funds of the Company thereafter created;
WHEREAS, the Board of Directors has authorized the issuance of multiple
classes of shares in each of the Funds and desires to restate this Plan to
conform the Plan to the multiple share class structure;
<PAGE>
NOW, THEREFORE, the Plan is hereby amended and restated as follows to
make the Plan applicable to the multiple class structure and to make such other
nonmaterial changes necessary to conform the Plan accordingly.
Section 1. Allocation of Responsibilities.
(a) The Company shall be solely responsible for all actions
required to be taken in connection with the offer, sale and distribution of the
shares, other than such actions as are expressly assumed by the Distributor
pursuant to (1) the terms of this Plan and (2) the Underwriting and Distribution
Agreement, which complies with the provisions of Sections 6 and 7 of this Plan.
(b) The Distributor shall be solely responsible for (1) the
distribution of and payment of the costs of distributing the shares, which costs
shall include, by way of example, but not by way of limitation, compensation (in
addition to sales loads) paid to registered representatives of the Distributor
and to broker/dealers that have entered into sales agreements with the
Distributor, the costs of printing and distributing prospectuses, statements of
additional information and shareholder reports to those who are not, at the time
of such distribution, Company shareholders, the costs of preparing, printing and
distributing sales literature, the costs of preparing and running advertisements
on radio, television, newspapers or magazines, and costs connected with the use
of a "toll-free" telephone number for the Company and other distribution-related
expenses, but excluding fees and expenses of registering and qualifying the
Company and the shares for distribution under federal and state securities laws;
(2) such other responsibilities assumed by the Distributor pursuant to the
Underwriting and Distribution Agreement; and (3) any other responsibilities in
connection with the distribution of the shares assumed by the Distributor
pursuant to a written agreement which complies with Sections 6 and 7 of this
Plan.
Section 2. Payment of Costs of Distribution.
(a) As long as the Underwriting and Distribution Agreement, or
any amendment thereto complying with Sections 6 and 7 of this Plan, shall remain
in effect, the Company shall reimburse the Distributor as provided therein for
its actual costs of distribution of the class of shares designated "Investor
shares" and "Market shares" incurred with respect to each of the Company's
Funds, with reimbursement computed separately for each Fund based on the costs
of distribution actually incurred with respect to each Fund, and such
reimbursements shall not exceed the percentages indicated on Exhibit 1 attached
hereto and incorporated by reference herein. Average daily net assets shall be
computed in accordance with the currently effective Prospectus of the Company.
Such reimbursements shall be made by the Company for the
following expenses, to the extent actually incurred by the Distributor:
-2-
<PAGE>
(1) if shares of any or all of the Company's Funds are sold by
registered representatives of the Distributor or by
broker/dealers that have entered into sales agreements with the
Distributor, compensation paid to such registered
representatives and broker/dealers in such proportions as may be
determined from time to time as set forth in written agreements;
(2) all other costs of distributing the shares, as set forth in
Section 1(b)(1) of this Plan;
(3) the total amount spent on all distribution activities shall be
in the sole discretion of the Distributor; provided, however,
that in the event the costs of distribution of the shares exceed
the maximum amount reimbursable pursuant to this Plan and the
Underwriting and Distribution Agreement for any or all of the
Company's Funds, the Distributor shall be solely responsible for
the payment of any such excess with respect to any or all of the
Funds and the Company and its Funds shall have no responsibility
therefor.
(b) The Investment Adviser to the Company may, at its option, make
payments from its own resources to cover the costs of additional distribution
activities.
(c) In the event the Underwriting and Distribution Agreement shall for
any reason be terminated and neither the Distributor, the Investment Adviser to
the Company, nor any other person shall have entered into a written agreement
complying with Sections 6 and 7 of this Plan which, by its terms, provides for
the payment of the costs of distributing the shares by the Distributor, the
Investment Adviser to the Company or such other person, as the case may be,
then, in such event, the Company shall directly pay all costs of distribution
referred to in Section 1(b)(1) of this Plan; provided that, subject to Section 7
of this Plan, the amount paid by the Company for distributing the shares shall
not exceed the percentage of average daily net assets set forth in Section 2(a)
of this Plan.
(d) Commencing on the date of effectiveness of the Company's
registration statement on Form N-1A adding the multiple class structure, all of
the Company's outstanding shares for the Capital Builder Fund, Small Cap Fund,
Government Quality Bond Fund, Convertible Fund and Institutional Money Market
Fund shall be redesignated Investor shares. The reimbursement percentage in
effect for the outstanding shares of these Funds prior to the effective date of
the registration statement shall become the reimbursement percentage for the
Investor shares of each Fund on and after the effective date of the registration
statement. Commencing on the date the Company's registration statement on Form
N-1A adding the multiple class structure, all of the Company's outstanding
shares for the Nebraska Tax Free Fund shall become shares designated Market
shares. The reimbursement percentage in effect for the outstanding shares of the
Nebraska Tax Free Fund before the effective date of the
-3-
<PAGE>
registration statement shall become the reimbursement rate for the Nebraska Tax
Free Fund Market shares on and after the effective date.
Section 3. Fund Approvals.
(a) The Company represents that this Plan, together with the
Underwriting and Distribution Agreement, has been and will be approved from time
to time by a vote of the Board of Directors of the Company and of the directors
of the Company who are not interested persons of the Company, as defined in
Section 2(a)(19) of the 1940 Act and the rules, regulations and releases
relating thereto, and have no direct or indirect financial interest in the
operation of the Plan, or in the Underwriting and Distribution Agreement, or any
other agreement related to the Plan ("Interested Persons"), cast in person at a
meeting called for the purpose of voting on the Plan and the Underwriting and
Distribution Agreement.
(b) In approving the Plan and the Underwriting and Distribution
Agreement, the directors of the Company have undertaken the
following:
(1) The Directors have concluded and will determine from time to
time in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law and Sections
36(a) and 36(b) of the 1940 Act, that the Plan will benefit the
Funds and their shareholders.
(2) The Directors have requested and evaluated and will request and
evaluate from time to time such information as was and will be
reasonably necessary to an informed determination of whether the
Plan should be implemented, and, in connection therewith,
officials of the Distributor, as a party to agreements related
to the Plan, have furnished and will furnish such information
reasonably necessary for the foregoing purposes.
(3) The directors have considered and given and will consider and
give appropriate weight to all pertinent factors, including,
without limitation, the following:
(A) the need for independent counsel or experts to assist
the directors in reaching a determination;
(B) the nature of the problems or circumstances which
purportedly make implementation of the Plan necessary
or appropriate;
(C) the causes of such problems or circumstances;
-4-
<PAGE>
(D) the way in which the Plan would address these problems
or circumstances and how it would be expected to
resolve or alleviate them, including the nature and
approximate amount of the expenditures to the overall
cost structure of the Company, the nature of the
anticipated benefits and the time it would take for
those benefits to be achieved;
(E) the merits of possible alternative plans;
(F) the interrelationship between the Plan and the
activities of any other person who finances or has
financed distribution of the shares, including whether
any payments by the Company to such other person are
made in such a manner as to constitute the indirect
financing of distribution by the Company; and
(G) the possible benefits of the Plan to any other person
relative to those expected to inure to the Company.
Section 4. Reports to and Review by the Board of Directors of the Company.
(a) Any person authorized to direct the disposition of monies paid or
payable by the Company pursuant to the Plan, the Underwriting and Distribution
Agreement or any other agreement related to the Plan shall provide the Board of
Directors of the Company, and the Board of Directors of the Company shall
review, at least quarterly, a written report of the specific purposes for which
such expenditures were made.
(b) The Underwriting and Distribution Agreement and any other agreement
related to the Plan shall, by their respective terms, provide that appropriate
officers of the Distributor, or any party to such other agreement, shall provide
the directors of the Company with such information as may be reasonably
necessary to the directors of the Company for the purposes required by Sections
3(a), 3(b) and 8(d) of this Plan.
Section 5. Selection of Directors. In connection with the implementation
and continuation of the Plan, the Company has undertaken and will continue to
undertake to commit the selection and nomination of directors of the Company who
are not Interested Persons to a committee comprised of such directors who are
not such Interested Persons.
Section 6. Concerning the Underwriting and Distribution Agreement and
Other Agreements Related to the Plan. In addition to the requirements contained
in Sections 4(b) and 8 of the Plan, the Underwriting and Distribution Agreement
and any other agreement related to the Plan shall be in writing and shall
provide in substance that such agreement shall be terminated:
-5-
<PAGE>
(a) at any time, without the payment of any penalty, by vote of a
majority of the members of the Board of Directors of the Company who are not
Interested Persons or by vote of a majority of the outstanding shares of the
Company on not more than sixty (60) days' written notice to the other party
thereto; provided that if a majority of the outstanding shares of any Fund votes
to terminate this Plan, such termination shall be effective with respect to such
Fund, whether or not the shareholders of any other Fund have voted to terminate
this Plan; and
(b) automatically, in the event of its assignment.
Section 7. Amendments and Modifications. The Plan, the Underwriting and
Distribution Agreement and any other agreement related to the Plan shall not be
amended, modified or superseded except by an agreement in writing, and, in
addition:
(a) may not be amended to increase materially the amount to be spent for
costs of distribution of any Fund of the Company, as provided in Section 2 of
this Plan, without the approval of a majority of the outstanding shares of such
Fund subject to such increase; and
(b) may not be amended in any material manner unless such amendment has
been approved in the manner provided in, and consistent with the procedures
specified by, Sections 3(a), 3(b) and 8(d) of this Plan.
(c) If a majority of the outstanding shares of any Fund of the Company
votes to amend this Plan, such amendment shall be effective with respect to such
Fund, whether or not the Shareholders of any other Fund vote to adopt such
amendment.
Section 8. Continuation and Termination.
(a) The Plan shall terminate automatically in the event the approval
required pursuant to Section 10 is not received.
(b) The Plan, the Underwriting and Distribution Agreement and any other
agreement related to the Plan shall continue in effect only as long as the
continuance is specifically approved in the manner described in subsection (d)
of this Section 8.
(c) The Plan may be terminated at any time by a majority of the members
of the Board of Directors of the Company who are not Interested Persons or by
vote of a majority of the outstanding shares of the Company.
(d) In determining whether the Plan shall be continued or terminated as
provided in Section 8, the directors of the Company shall make such
determination in the manner provided in, and consistent with the procedures
specified by, Sections 3(a) and 3(b) of this Plan; provided that, in addition to
the factors specified in Section 3(b)(3), the
-6-
<PAGE>
directors of the Company shall also consider and give appropriate weight to the
following factors:
(1) the effect of the Plan on existing shareholders; and
(2) whether the Plan has, in fact, produced the anticipated benefits
for the Trust and its shareholders.
Section 9. Preservation of Information.
(a) The Company shall, for a period of not less than six (6) years,
preserve the following information and documentation:
(1) the Plan;
(2) the Underwriting and Distribution Agreement;
(3) any other agreement related to the Plan;
(4) any report made pursuant to Section 4 of the Plan; and
(5) all minutes which are recorded as a result of the requirements
of Sections 3, 7 or 8 of the Plan and which relate to the
approval, amendment or continuation of the Plan, the
Underwriting and Distribution Agreement or any other agreement
related to the Plan.
(b) With respect to the information and documentation required to be
preserved pursuant to subsection (a) of this Section 9, such information and
documentation shall be preserved in an easily accessible place for a period of
not less than two (2) years.
Section 10. Shareholder Approval and Effective Date. The effective date
of this Plan is December 20, 1994 with respect to the Capital Builder Fund and
for all other Funds of the Company, shall be the later of the date that the
Board of Directors of the Company or the shareholders of a Fund or a class of
shares thereof, if required, (with respect to a Fund) last approved the Plan and
shall continue provided that the Board of Directors and/or the shareholders
annually approve the Plan in accordance with Rule 12b-1. Provided that, if a
majority of the outstanding shares of any Fund approves this Plan, it shall be
effective with respect to such approving Fund, whether or not the Shareholders
of any other Fund of the Company vote to approve this Plan. Wherever referred to
in this Plan, the vote or approval of the holders of a majority of the
outstanding shares of the Company or any Fund of the Company shall mean the vote
of (a) sixty-seven percent (67%) of such outstanding shares present at a meeting
if the holders of more than fifty percent (50%) of such outstanding shares are
present in person or by proxy or (b) more than fifty percent (50%) of such
outstanding shares, whichever is lesser.
-7-
JCM\3504.2
<PAGE>
EXHIBIT 1
Fee Schedule
Fund
Fund Annualized Fee
---- --------------
(Expressed as percentage
of average net assets)
Convertible .50%
Government/Quality Bond .40%
Small Cap .50%
Nebraska Tax-Free .25%
Institutional Money Market .20%
Capital Builder Fund
.50%
-8-
<PAGE>
SMITH HAYES Trust, Inc.
PLAN ADOPTED PURSUANT TO RULE 18F-3
PROVIDING FOR THE ISSUANCE
OF MULTIPLE CLASSES OF SHARES
April 16, 1996
For purposes of this Plan, SMITH HAYES Financial Services Corporation
("SHFSC") is the Distributer of the SMITH HAYES Trust, Inc. ("Trust" or
"Company"), Lancaster Administrative Services,Inc. ("LAS" or "Administrator") is
the Trust's Administrator, Union Bank and Trust Company ("Union") is the Trust's
Custodian and Conley Smith, Inc. ( "CS" or "Adviser") is the Trust's investment
adviser.
1. Proposed Multi-Class Structure.
In order to accommodate the requirements of a variety of groups of
investors in a cost-efficient and equitable manner, the Company may offer an
unlimited number of classes new Shares ("new Classes") in their existing and
future investment portfolios. These might be offered (1) in connection with a
plan or plans adopted pursuant to Rule 12b-1 under the Act (the "12b-1 Plan(s)")
and/or (2) in connection with a non-Rule 12b-1 administrative plan or plans (the
"Shareholder Services Plan(s)"); and/or (3) in connection with the allocation of
certain expenses (referred to herein as "Class Expenses") that are directly
attributable only to certain of such new or existing class(es) and (4) subject
to certain conversion features. The 12b-1 Plan(s) and the Shareholder Services
Plan(s) are sometimes collectively referred to herein as "Plans".1 Any
references herein to "Board of Directors" shall be deemed to include the board
of directors of the Company.
Currently, the Company is authorized to offer Shares in six separate investment
portfolios ("Portfolios"):
Capital Builder
Small Cap
Convertible
Government Quality
Money Market
Nebraska Tax Free
- --------
1 The Company will not implement the multiple class structure with
respect to any Portfolio or allocate Class Expenses until after the
Company amends its Registration Statement as necessary to reflect the
offering of additional classes of Shares in a Portfolio.
-1-
<PAGE>
At present only classes of the Capital Builder, Small Cap, Convertible
and Government Quality Portfolios are intended to be authorized and offer
multiple classes of shares. "Investor" shares are intended to be offered without
a sales load, but will incur a class level 12b-1 Plan fee and perhaps in the
future a shareholder servicing fee or other administration fee. "Select" shares
will be sold with a sales load, with scheduled variations for sales to banks,
pension profit-sharing plans and certain other types of investors authorized by
the Board of Directors and fully disclosed in the Trust's prospectus. Select
shares will not bear a 12b-1 fee and although not currently contemplated Select
shares could bear the expense of shareholder servicing and or administrative
services fees, if approved by the Board of Directors and disclosed in the
Trust's Prospectus and Statement of Additional Information. The exact fee and
load structure of the classes of these Portfolios will be approved by the Board
of Directors and fully disclosed in the Prospectus and Statement of Additional
Information.
While not offering multiple classes of shares, the Institutional Money
Market Portfolio and the Nebraska Tax Free Portfolio are authorized to issue
other classes of shares. At present, however, the Institutional Money Market
Portfolio is only offering "Investor shares" and the Nebraska Tax Free Portfolio
is offering "Market shares".
Each class of Shares in the Portfolios is intended to bear Class
Expenses which are related to the level of services provided to the investors in
such Portfolios. Currently, Investor shares are anticipated to bear the expense
of the 12b-1 Plan fee as currently in effect for the particular Portfolio. In
addition, Investor shares of the Portfolios could bear the expense of a
Shareholder Services Plan, including a service fee as defined in Article III,
Section 2(b)(9) of the National Association of Securities Dealers, Inc.'s
("NASD") Rules of Fair Practice, if the Board of Directors adopt such a plan.
Select shares of the Portfolios will bear no class level 12b-1 expenses
and will not bear any shareholder servicing fees or administrative fees unless
the Board of Directors approves plans to allow such fees. Select shares will,
however, carry a sales charge on share purchases, which for the Capital Builder,
Small Cap and Convertible Portfolios is anticipated to be 4% for purchases less
than $25,000, 2.5% on purchases for $25,000 but less than $100,000 and no sales
charge on purchases over $100,000. For the Government Quality Bond Portfolio the
load is anticipated to be 1.5% on purchases regardless of amount. In all cases
the sales charges will be subject to scheduled variations for certain types of
shareholders.
Market shares of the Funds, if offered, will bear class level 12b-1
fees and a sales load. The Market shares may also bear the expense of a
Shareholder Service Plan if authorized by the Board of Directors. Only the
Nebraska Tax Free Fund is presently authorized to offer Market shares. In the
case of the Nebraska Tax Free Fund, Market shares bear a class level 12b-1 fee
currently in effect for the Portfolio. No Shareholder Services Plan fee is
authorized. The shares will bear a sales charge with scheduled variations
according to the Fund's current prospectus.
-2-
<PAGE>
Each Portfolio is charged with the Portfolio's direct liabilities and
with a portion of the general liabilities of the Trust. Expenses that are not
directly attributable to the operations of a specific Portfolio are allocated
among the Portfolios based upon the relative net assets of each Portfolio or as
otherwise determined under the supervision of the Board of Directors. The
expenses attributed to or allocated to a Portfolio are, in turn, borne on a pro
rata basis by the Portfolio's shareholders.
2. General Description of Classes of Shares Representing Interests in the
Portfolios.
As a result of increased competition for the assets of public
investors, the Board of Directors believe that it is imperative that the Company
be able to tailor its services and expenses, to the extent possible, to the
investment needs of the particular investor. In order to accomplish this, and to
expand its marketing alternatives, the Company has created two classes of Shares
in certain of its Portfolios and is contemplating the creation of other classes
of Shares in existing and future Portfolios.
Except for its class designation, the allocation of certain expenses,
voting rights, differences in exchange privileges, and conversion features as
described below, each class of Shares would be identical in all respects and
would be subject to the same investment objective, policies and limitations that
apply to the existing class of Shares or other class(es) of Shares in the same
Portfolio. The net asset value per share in each Portfolio would be calculated
and would be determined in the same manner and on the same days and at the same
times, regardless of class; the net investment income and capital gains, if any,
of each Portfolio would be declared and paid at the same times to all
shareholders of the Portfolio; and expenses, other than Plan payments and Class
Expenses described below, would be borne on a pro rata basis by each class on
the basis of the relative net asset value of the respective class. While the
manner of determining net asset value of classes within a Portfolio would be
identical, the net asset value of the classes within a Portfolio (excluding any
money market portfolios using the amortized cost method of valuation pursuant to
Rule 2a-7 which maintain a stable net asset value per share) may differ because
of different Plan payments (defined below), if any, and Class Expenses if any,
charged to a particular class. This possible difference in net asset value would
be disclosed in the Portfolio's prospectus, where applicable.
A. Unlimited Number of Classes.
The Company is permitted to offer an unlimited number of classes of
Shares in its existing and future investment Portfolios. These classes might be
offered (1) in connection with a 12b-1 Plan or Plans; and/or (2) in connection
with a Shareholder Services Plan or Plans; and/or (3) in connection with the
allocation of certain Class Expenses attributable directly only to certain of
such classes; and/or (4) subject to certain conversion features.
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B. 12b-1 Plan(s) and Shareholder Services Plan(s).
With respect to each class, the Company could adopt or amend an
existing 12b-1 Plan and/or a Shareholder Services Plan concerning the financing
of marketing programs intended to result in the sale of Shares (for example, the
payment of printing costs for prospectuses and sales literature) and the
provision of various distribution and administrative services. Such services
might be provided directly by SHFSC and/or LAS, or by groups, organizations or
institutions ("Organizations") which have entered into agreements (collectively,
"Plan Agreements") with that Company or its distributor or administrator
concerning the provision of services to the clients, members or customers of
such Organizations who from time to time beneficially own Shares of a particular
class ("Class Shareholders").
The services to be provided by SHFSC or Organizations under a 12b-1
Plan could include: (i) advertising via radio, television, newspapers, magazines
and otherwise; (ii) preparing, printing and distributing sales materials,
brochures and prospectuses (except for prospectuses used for regulatory purposes
or for distribution to existing shareholders); (iii) establishing and
maintaining shareholder accounts and records; (iv) maintaining telephone and
in-house telemarketing activities; and (v) other advertising and marketing
efforts. Payments under a 12b-1 Plan could be used for, but would not be limited
to, the payment of sales commissions and incentive compensation, as well as
payment for advertising and promotional costs. Since the services and expenses
contemplated under a 12b-1 Plan would be distribution-related, such Plan would
be adopted or amended pursuant to Rule 12b-1 under the Act.
The services to be provided by the Administrator or qualified banks and
other financial institutions ("Shareholder Service Organizations") under a
Shareholder Services Plan could include: (i) establishing and maintaining
accounts and records relating to a customer's Shares; (ii) aggregating and
processing purchase, exchange and redemption requests from customers and placing
net purchase, exchange and redemption orders with the distributor; (iii)
providing customers with a service that invests the assets of their accounts in
Shares pursuant to specific or pre-authorized instructions; (iv) providing
periodic statements showing a customer's account balance and integrating such
statements with those of other transactions and balances in the customer's other
accounts serviced by a Shareholder Service Organization; (v) arranging for bank
wires; (vi) processing dividend payments from the Company on behalf of customers
and assisting customers in changing dividend options, account designations and
addresses; (vii) providing and maintaining elective services such as check
writing and wire transfer services; (viii) acting as sole shareholder of record
and nominee for customers; (ix) maintaining account records for customers; (x)
issuing confirmations of transactions; (xi) providing sub-accounting with
respect to Shares beneficially owned by customers or the information to the
Company necessary for sub-accounting; (xii) if required by law, forwarding
shareholder communications from the Company (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to Customers; and (xiii) providing other similar services. Some
of such services will constitute a "service fee" under NASD rules and others
will not be service fees. A
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Shareholder Services Plan will not provide for payments for activities intended
to result in the sale of Shares.
In addition, it is possible that the Company's Administrator would
provide certain services under a Shareholder Services Plan that are not required
for all Share classes offered by a Portfolio. These services could include the
development and monitoring of various programs from time to time for individual
and retail shareholders, such as IRAs, automatic deposit and withdrawal
programs, check writing privileges, audio response services, payment of
dividends through automated clearing house funds, lock box facilities and direct
deposit programs; and the maintenance of dedicated walk-in facilities, staff and
communications systems for investors. The Company's administrator might also
undertake under a Shareholder Services Plan to provide oversight and other
support services that are intended to ensure the delivery of quality service to
individual and retail investors, including review of correspondence from the
Company's transfer agent to shareholders for accuracy and timeliness in handling
inquiries and review of dividend checks, statements and purchase and redemption
orders for proper turn-around; preparation of regular reports for internal use
and for distribution to the Company's Board of Directors concerning shareholder
activity; preparation and mailing of confirmation statements for Share
transactions; development and monitoring of order-taking facilities for public
investors; distribution of written communications to such investors, such as
copies of the Company's annual and semi-annual reports and prospectuses; and
responsibility for responding to shareholder inquiries and problems.
Organizations may charge other fees directly to the Class Shareholders
who are the beneficial owners of Shares in connection with their Class
Shareholder accounts. These fees would be in addition to any amounts received by
the Organization under a Plan Agreement with the Company. Under the terms of
such Plan Agreements, Organizations would be required to provide their Class
Shareholders with a schedule of fees charged to such Class Shareholders which
relate to their investments in Shares.
C. No Duplication of Services.
The provision of services under the Plans would augment or replace (and
not be duplicative of) the services otherwise provided by the Company's
investment adviser, transfer agent and administrator. The services provided by
these service contractors generally relate either to the internal operations of
the Company (for example, investment of assets and maintenance of books and
records) or to the Company's relationships with the shareholders of record (for
example, the transmission of proxy materials and shareholder reports to record
shareholders, and the processing of purchase and redemption orders from record
shareholders), or are otherwise intended to benefit all classes of Shares in a
Portfolio. On the other hand, the support services described above that would be
provided pursuant to the Shareholder Services Plan(s) will relate either to the
indirect relationship between the Company and the beneficial owners of Shares,
or to the services available only to certain Share classes. Similarly, payments
by the Company for distribution activities that are authorized by a 12b-1 Plan
would be for distribution-related expenses and services undertaken in connection
with the sale of
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Shares covered by the Plan. When a class is subject to both a 12b-1 Plan and a
Shareholder Services Plan, the provision of services under one Plan would
augment (and not be duplicative of) the services provided under the other Plan.
Essentially, the Company is unbundling the services that may be
provided to it to permit the Company's distributor, administrator and
Organizations flexibility in providing services under one or both types of Plans
with respect to Class Shareholders, with the precise services to be tailored to
the needs of the Class Shareholders and specified in the particular Plans.
D. Plan Payments.
With respect to each class, the Company could pay its distributor,
administrator or Organizations for expenses, services and assistance in
accordance with the terms of the particular Plan (such payments are herein
referred to as "Plan Payments") and such Plan Payments would be borne entirely
by the beneficial owners of the class of the Portfolio to which the payments
relate. The maximum level of payments made pursuant to a Plan might vary based
upon an independent determination by the Board of Directors and, in the case of
a 12b-1 Plan, subject to shareholder approval of the affected class. In all
cases, however, the Company shall comply with Article III, Section 26 of the
Rules of Fair Practice of the NASD as it relates to the maximum amount of
asset-based sales charges and service fees that may be imposed by an investment
company, when and in the form (as amended from time to time) the provisions of
such Rules relating to such charges become effective, and for as long as they
remain in effect.
E. Efficiencies Resulting From Proposed Class Structure.
The Board of Directors believe that by offering Shares in connection
with Plans as described above, and by also creating and offering Shares
independently of Plans, the Company may be able to achieve added flexibility in
meeting the service and investment needs of shareholders and future investors.
If Shares are created and Plans adopted as described, the Company will be able
to address more precisely the needs of the particular investors and to cause the
associated expenses to be borne by such investors. While this objective might be
achieved through the organization of new investment Portfolios, the Board of
Directors believe that it would be inefficient, and probably economically or
operationally unfeasible, to organize a separate investment Portfolio for each
new Class of Shares to be created. Not only would unnecessary accounting and
bookkeeping costs be incurred in organizing and operating such new Portfolios,
but management of the new Portfolios as well as the existing Portfolios might
also be hampered. For example, unless the new Portfolios grew at a sufficient
rate and to a sufficient size, the new Portfolios could be faced with liquidity
and diversification problems that would prevent them from performing well. The
risk that the new Portfolios would ultimately fail because of such duplicative
costs and management problems would not be insignificant in light of today's
extremely competitive environment where investors may choose from a broad array
of investment alternatives and expect to get services suited to their needs
without sacrificing safety or performance.
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In order to obviate the foregoing risks, the Board of Directors wish to
use a structure under which new Classes could be created without having to
establish corresponding separate Portfolios. Under this arrangement, all Shares
of a particular Portfolio would represent interests in the Portfolio, although
Shares of each class may have a different net asset value (and thus represent a
different proportionate interest in the Portfolio's assets), and, as described
above, would have identical voting, dividend, liquidation and other rights,
preferences, powers, restrictions, limitations, qualifications, designations and
terms and conditions. The only differences between the classes of Shares of the
same Portfolio will relate solely to: (a) the impact of (i) expenses assessed to
a class pursuant to a Plan, (ii) other Class Expenses which would be limited to
(A) transfer agent fees identified by the transfer agent as being attributable
to a specific class of Shares; (B) fees and expenses of the Company's
administrator that are identified and approved by the Company's Board of
Directors as being attributable to a specific class of Shares; (C) printing and
postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders of a
class; (D) blue sky registration fees incurred by a class of Shares; (E) SEC
registration fees incurred by a class of Shares; (F) the expense of
administrative personnel and services as required to support the shareholders of
a specific class; (G) litigation or other legal expenses or audit or other
accounting expenses relating solely to one class of Shares; and (H) directors'
fees incurred as a result of issues relating no one class of Shares; and (iii)
any other incremental expenses subsequently identified that should be properly
allocated to one class and which are approved by the Commission pursuant to an
amended order; and (b) the fact that the classes will vote separately with
respect to a Portfolio's Plans, except as provided below; and (c) the different
exchange privileges of the classes of Shares; and (d) the designation of each
class of Shares of a Portfolio; and (e) certain conversion features offered by
some of the classes.
F. Allocation of Expenses.
Expenses of the Company that can not be attributed directly to any one
Portfolio ("Company Expenses") shall be allocated to each Portfolio based on the
relative net assets of such Portfolio or as otherwise determined under the
supervision of its Board of Directors. Company Expenses could include, for
example, directors' fees and expenses, audit fees and legal fees, insurance
premiums, SEC and state blue sky registration fees, and dues paid to
organizations such as the Investment Company Institute.
Certain expenses may be attributable to a Portfolio but not to a
particular class ("Portfolio Expenses"). All such Portfolio Expenses incurred by
the Portfolio shall be allocated to each class on the basis of the relative net
asset value of the respective classes in the Portfolio. Portfolio Expenses could
include, for example, advisory fees, Portfolio accounting fees, custodian fees,
and fees related to preparation of separate documents of the Portfolio.
Class Expenses consist of the following types of fees or expenses which
the Company identifies and determines are directly attributable to a particular
class and are to be allocated to that class exclusively: (a) transfer agent fees
identified by the transfer
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agent as being attributable to a specific class of Shares; (b) fees and expenses
of the administrator that are identified and approved by the Company's Board of
Directors as being attributable to a specific class of Shares; (c) printing and
postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders of a
class; (d) blue sky registration fees incurred by a class of Shares; (e) SEC
registration fees incurred by a class of Shares; (f) the expense of
administration personnel and services as required to support the shareholders of
a specific class; (g) litigation or other legal expenses or audit or other
accounting expenses relating solely to one class of Shares; and (h) directors'
fees incurred as a result of issues relating to one class of Shares.
Currently, the Company does not intend to allocate any transfer agency
expenses on a class basis, but the Board of Directors of the Company may
determine that such an allocation is appropriate, and may amend this Plan to add
this authority to make such allocations. It is contemplated that certain
transfer agency expenses may be among those allocated on a class rather than
Portfolio basis in the future. For example, it is anticipated that certain
classes which are to be marketed to retail customers may provide investors with
a check-writing feature which will increase the transfer agency expenses for
such classes. Accounts in these retail classes of Shares are also likely to be
smaller, on average, resulting in higher transfer agency expenses on a per Share
and aggregate basis. In contrast, Organizations may serve as the record
shareholder for their customers' investments, thereby decreasing the Company's
transfer agency expenses for a class. These variations and similar factors may
contribute to a significant disparity in the transfer agency portion of the
expense ratios for different classes of Shares, justifying the allocation of
these expenses according to class rather than Portfolio. To the extent that a
class may bear transfer agency or other expenses not being borne by other
classes of the same Portfolio, appropriate disclosure would be included in the
applicable Portfolio's prospectus.
The Company's investment adviser or other service contractor may choose
to reimburse or waive Class Expenses on certain classes on a voluntary,
temporary basis. The amount of Class Expenses waived or reimbursed by the
investment adviser or other service contractor may vary from class to class.
Class Expenses are by their nature specific to a given class and obviously
expected to vary from one class to another. Applicants believe that it is
acceptable and consistent with shareholder expectations to reimburse or waive
Class Expenses at different levels for different classes of the same Portfolio.
In addition, the investment adviser or other service contractor way
waive or reimburse Company Expenses and/or Portfolio Expenses (with or without a
waiver or reimbursement of Class Expenses) but only if the same proportionate
amount of Company Expenses and/or Portfolio Expenses are waived or reimbursed
for each class of a Portfolio. Thus, any Company Expenses that are waived or
reimbursed would be credited to each class of a Portfolio based on the relative
net assets of the classes. Similarly, any Portfolio Expenses that are waived or
reimbursed would be credited to each class of that Portfolio according to the
relative net assets of the classes. Company
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Expenses and Portfolio Expenses apply equally to all classes of a given
Portfolio. Accordingly, it may not be appropriate to waive or reimburse Company
Expenses or Portfolio Expenses at different levels for different classes of the
same portfolio.
Certain expenses shall be allocated differently if their method of
imposition changes. Thus, if a Class Expense can no longer be attributed to a
class or the Company determines that it should not be allocated to a particular
class exclusively, it will be charged as a Portfolio Expense or a Company
Expense, as may be appropriate; similarly, if a Company Expense becomes
attributable to a Portfolio, it will become a Portfolio Expense. However, any
additional Class Expenses (including Plan Payments) not specifically identified
above which are subsequently identified and determined to be properly allocated
to one class of Shares shall not be so allocated until approved by the Board of
Directors.
G. Differences in Net Income Per Share; Net Asset Value.
Because of the Plan Payments and Class Expenses that may be borne by
each class of Shares, the per Share net income of, and dividends to, each class
may be different from the net income of, and dividends to, the other classes of
Shares of the Portfolio. For example, if one class bore the expense of a Plan
Payment that did not apply to another class, the per Share net income and
dividends of the former class would be expected to be lower than the per Share
net income and dividends of the latter class. In addition and apart from the
allocation of Plan Payments, to the extent aggregate Class Expenses (such as
transfer agency fees, administration fees and prospectus printing costs) are
higher with respect to one class of a Portfolio, the per Share net income and
dividends of that class would be lower than the per Share net income and
dividends of the other classes of the Portfolio's Shares. Dividends paid to each
class of Shares in a Portfolio would, however, be declared and paid on the same
days and at the same times, and, except as noted with respect to the expenses of
Plan Payments and Class Expenses, would be determined in the same manner and
paid in the same amounts.
In addition, except for those Portfolios that seek to maintain a stable
net asset value per Share or that declare dividends of net investment income
daily, the net asset value attributable to each class of a Portfolio's Shares
may diverge over time due to the payment of Plan Payments or Class Expenses, if
any. The extent of such divergence would be affected by the accrued per Share
net income to which the holders of a class are entitled, but which has not yet
been declared as a dividend. The net asset value of all outstanding Shares in a
Portfolio would be computed on the same days and at the same times.
3. Conversion Features.
The Board of Directors reserve the right to impose a condition on the
conversion between different classes of Shares which requires management to seek
a determination of the availability of an opinion of counsel or Internal Revenue
Service private letter
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ruling to the effect that the conversion of the Shares does not constitute a
taxable event under federal income tax law. Conversions may be suspended if such
a ruling or opinion is not available. In that event, no further conversions
would occur.
The Board of Directors believe that the issuance and sale of the various classes
of Shares in the Portfolios will better enable the Company to meet the
competitive demands of today's financial services industry. The arrangement will
permit the Company to both facilitate the distribution of its securities and
expand the depth and scope of its services without assuming excessive
operational costs or unnecessary investment risks. Under the proposed
arrangement, the Company could, among other things, compensate financial
intermediaries for providing support services that are tailored to the needs of
their customers. Customers who enjoy such services would, in turn, bear the
associated expenses. Such customers would enjoy not only the benefits of such
services, but also the additional investment safety and stability resulting from
their ability to invest in established, sizeable investment Portfolios.
Moreover, since holders of additional classes of Shares may invest in existing
Portfolios, all shareholders of the applicable Portfolios would benefit from the
economies of scale that result where a portion of the fixed costs normally
associated with open-end management investment companies would, potentially, be
spread over a greater number of Shares than they would be otherwise. In
addition, the Companies would be able, under the proposed arrangement, to match
more precisely their distribution costs, administrative support, and transfer
agency and other expenses with those investors on whose behalf such costs and
expenses are incurred.
The Board of Directors believe that the allocation of expenses and
voting rights relating to the Plans in the manner described is in conformity to
Rule 18f-3 under the Act and is equitable and would not discriminate against any
group of shareholders. Activities financed by Plan Payments or Class Expenses
would be intended for the investors that purchase the Shares bearing these
Payments and Expenses. Moreover, because, with respect to any Portfolio, the
rights and privileges of all classes in the Portfolio is substantially
identical, the possibility that the interests of the respective classes would
ever conflict would be remote.
The multi-class structure will also enable the Company (and its
shareholders) to save the organizational and other continuing costs that would
be incurred if the Company were required to establish a new separate investment
Portfolio for each class of Shares.
The Board of Directors is sensitive, with respect to the proposed
arrangement, of the need for full disclosure of class-related payments. Among
other things, the Board of Directors direct that management shall take all
appropriate steps to ensure that to the extent required by SEC rules, the
respective performance data of all classes of Shares in a Portfolio are fairly
disclosed in the prospectuses and shareholder reports for such Portfolio. In
this regard, to the extent required by applicable SEC rules, the performance
data of all classes in each Portfolio shall be posted separately, and would
reflect the impact of any Plan Payments borne and Class Expenses by the
class(es) involved.
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The issuance of multiple class of shares as described herein shall be
subject to the to the following conditions:
1. Each class of Shares representing interests in the same
Portfolio of the Company will be identical in all respects, except as set forth
below. The only differences between the classes of Shares of the same Portfolio
will relate solely to: (a) the impact of (i) expenses assessed to a class
pursuant to a Plan, (ii) other Class Expenses which would be limited to (A)
transfer agent fees identified by the transfer agent as being attributable to a
specific class of Shares; (B) fees and expenses of the Company's administrator
that are identified and approved by the Company's Board of Directors as being
attributable to a specific class of Shares; (C) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxies to current shareholders of a class; (D) blue sky
registration fees incurred by a class of Shares; (E) SEC registration fees
incurred by a class of Shares; (F) the expense of administrative personnel and
services as required to support the shareholders of a specific class; (G)
litigation or other legal expenses or audit or other accounting expenses
relating solely to one class of Shares; and (H) directors' fees incurred as a
result of issues relating to one class of Shares; and (iii) any other
incremental expenses subsequently identified that should be properly allocated
to one class; and (b) the fact that the classes will vote separately with
respect to a Portfolio's Plans; and (c) the different exchange privileges of the
classes of Shares; and (d) the designation of each class of Shares of a
Portfolio; and (e) certain conversion features offered by some of the classes.
2. On an ongoing basis, the Board of Directors, pursuant to
their fiduciary responsibilities under the Act and otherwise, will monitor each
Portfolio having a multi-class system for the existence of any material
conflicts among the interests of the various classes of each Portfolio. The
directors, including a majority of the independent directors, shall take such
action as is reasonably necessary to eliminate any such conflicts that may
develop. A Portfolio's investment adviser and distributor will be responsible
for reporting any potential or existing conflicts to the directors. If a
conflict arises, a Portfolio's investment adviser and/or distributor at their
own cost will remedy such conflict up to and including establishing a new
registered management investment company.
3. Any Shareholder Services Plan will be adopted and operated
in accordance with the procedures set forth in Rule 12b-1(b) through (f) as if
the expenditures made thereunder were subject to Rule 12b-1, except that
shareholders need not enjoy the voting rights specified in Rule 12b-1.
4. The Board of Directors shall receive quarterly and annual
statements concerning distribution and shareholder servicing expenditures
complying with paragraph (b)(3)(ii) of Rule 12b-1, as it may be amended from
time to time. In the statements, only expenditures properly attributable to the
sale or servicing of a particular class of Shares will be used to justify any
distribution or servicing expenditure charged to that class. Expenditures not
related to the sale or servicing of a particular class will not be
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presented to the directors to justify any fee attributable to that class. The
statements, including the allocations upon which they are based, will be subject
to the review and approval of the independent directors in the exercise of their
fiduciary duties.
5. Dividends paid by a Portfolio with respect to each class of
its Shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day, and will be in the same amount,
except that Plan Payments relating to each respective class of Shares and the
Class Expenses relating to each class of Shares will be borne exclusively by
that class.
6. The methodology and procedures for calculating the net
asset value and dividends and distributions of the various classes in any
Portfolio having a multi-class distribution system and the proper allocation of
expenses among the various classes in each such Portfolio have been reviewed by
an expert ("Expert") who has rendered a report to the Company involving such
methodology and procedures are adequate to ensure that such calculations and
allocations will be made in an appropriate manner.
7. The Administrator shall have adequate facilities in place
to ensure implementation of the methodology and procedures for calculating the
net asset value and dividends and distributions of the various classes of Shares
and the proper allocation of expenses among the classes of Shares and this
representation will be concurred with by the Expert condition 6 above and will
be concurred with by the Expert, or an appropriate substitute Expert, on an
ongoing basis at least annually.
8. The prospectuses of each Portfolio having a multi-class
system will contain a statement to the effect that a salesperson and any other
person entitled to receive compensation for selling or servicing Shares of a
Portfolio may receive different compensation with respect to one particular
class of Shares over another in the same Portfolio.
9. The Distributor of the Company will adopt compliance
standards for any Portfolio which has a multi-class system, which standards will
relate to when each class of Shares may appropriately be sold to particular
investors.
10. Each Portfolio having a multi-class system will disclose
the respective expenses, performance data, distribution arrangements, services,
fees, front-end sales loads, conversion features, and exchange privileges
applicable to each class of Shares in a Portfolio in every prospectus relating
to such Portfolio, regardless of whether all classes of Shares are offered
through each prospectus. Each such Portfolio will disclose the respective
expenses and performance data applicable to all classes of Shares in a Portfolio
in every shareholder report relating to such Portfolio. The shareholder reports
for each such Portfolio will contain, in the statement of assets and liabilities
and statement of operations, information related to the Portfolio as a whole
generally and not on a per class basis (each Portfolio's per Share data,
however, will be prepared on a per class basis with respect to all classes of
Shares of such Portfolio). To the extent any advertisement or sales literature
describes the expenses or performance data applicable to any class of
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Shares, it will also disclose the respective expenses and/or performance data
applicable to all classes of Shares. The information provided by the Applicants
for publication in any newspaper or similar listing of any Portfolio's net asset
value and public offering price will present each class of Shares separately.
11. Any class of Shares with a conversion feature will convert
into another class of Shares on the basis of the relative net asset values of
the two classes, without the imposition of any sales load, fee, or other charge.
After conversion, the converted Shares will be subject to an asset-based sales
charge and/or service fee (as those terms are defined in Article III, Section 26
of the NASD's Rules of Fair Practice), if any, that in the aggregate are lower
than the asset-based sales charge and service fee to which they were subject
prior to conversion.
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