As filed with the Securities and Exchange Commission
on September 12, 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. 22 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 24 [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:
John C. Miles
Cline, Williams, Wright, Johnson & Oldfather
1900 First Bank Building
Lincoln, Nebraska 68508
It is proposed that this filing will become effective on October 1, 1996
pursuant to paragraph (b) of Rule 485.
This Post-Effective Amendment designates October 1, 1996 as the effective date
of the Registrant's prior Post-Effective Amendment No. 21.
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, 1996 was filed on or about August 23, 1996.
<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
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
Institutional Money Market Fund
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
(402) 476-3000
1-800-279-7437
The Institutional Money Market 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.
The investment objective of the Fund is to provide maximum current income
consistent with the preservation of capital and maintenance of liquidity. The
Fund will attempt to achieve this objective by investing solely in debt
obligations with maturities of less than one year, including United States
government and Federal agency obligations, and federally insured student loans
(subject to unconditional obligations from banks to purchase such loans on five
days notice) purchased through a trust established to purchase and hold such
student loans. THE SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
INSURED OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NEITHER INSURED BY THE
FDIC NOR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE, OR ANY OTHER AGENCY OR PERSON WHILE THE FUND
INTENDS TO MAINTAIN A NET ASSET VALUE OF $1.00 PER SHARE, THERE CAN BE NO
ASSURANCE THAT THIS WILL OCCUR.
This Prospectus concisely describes information about the Fund 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 SMITH HAYES Financial Services Corporation, 200 Centre Terrace, 1225
L Street, Lincoln, Nebraska 68508, or telephone (402) 476-3000 or (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 October 1, 1996.
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
INTRODUCTION
The Fund is a diversified, open-end management investment company organized
as series of the Company. The Company is a Minnesota corporation, commonly
called a series mutual fund. The Company, which was organized in 1988, has its
capital stock issued in series, each series referred to as a Fund and each
operated as a separate open-end management investment company. This Prospectus
only relates to the series designated Institutional Money Market Fund (the
"Fund"). 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
Company'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 Company's shares, not to exceed .20%
annually of the Fund's average net assets. See "Distribution of Fund Shares."
Purchase of Shares
Shares of the Fund are offered to the public at $1.00 per share, except in
extraordinary circumstances. See "Valuation of Shares." The minimum aggregate
initial investment in the Fund is $1,000 unless waived by the Company.
Subsequent investments can be made in any amount.
Certain Risk Factors to Consider
An investment in the Fund is subject to certain risks, as set forth in
detail under "Investment Objective and Policies." As with other mutual funds,
there can be no assurance that the Fund will achieve its objective.
Redemptions
Shares of the Fund may be redeemed at any time at their net asset value next
determined after receipt of a redemption request by the Distributor. The
redemption price will be $1.00 per share, except in extraordinary circumstances.
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."
Dividends
Dividends are declared and accrued once daily and either automatically
reinvested or paid monthly (see "Dividends and Taxes").
Shareholder Inquiries
Any questions or communications regarding a shareholder account should be
directed to your SMITH HAYES investment executive or other broker-dealer.
General inquiries regarding the should be directed to the Company at one of the
telephone numbers set forth on the cover page of this Prospectus.
EXPENSES
The Company offers shares of the Fund without any sales load or contingent
sales loads on purchases, reinvestments of dividends or redemptions of Fund
shares and does not charge any exchange or account maintenance fees. 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".
Annual Operating Expenses
The table below provides information regarding expenses for the Fund
expressed as annual percentages of average net assets.
Management Fees .22%
12b-1 Fees .20%
Other Expenses .15%
----
Total Fund Operating Expenses .57%
Example: You would pay these expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption at the end of each time period.
1 year 3 years 5 years 10 years
$6 $18 $32 $72
The example should not be considered a representation of past or future
expenses or yield. Actual expenses and yield may be greater or lower than those
shown.
<PAGE>
FINANCIAL HIGHLIGHTS
The following audited financial information, provides selected data for a
share of the Fund outstanding throughout the periods indicated. The Annual
Financial Report is contained in the Statement of Additional Information and is
available upon request without charge as set forth on the cover page of this
Prospectus.
<TABLE>
<CAPTION>
Financial Highlights
Years Ended June 30, 1996, 1995 and 1994 and the Period from
November 12, 1992 (commencement of operations) to June 30, 1993
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period: $1.00 $1.00 $1.00 $1.00
Income from investment operations,
Net investment income 0.052 0.054 0.040 0.009
Less distributions,
Dividends from net investment income (0.052) (0.054) (0.040) (0.009)
------- ----- ----- -------
End of period $1.00 $1.00 $1.00 $1.00
===== ======= ======= =====
Current yield * * 5.02% 5.63% 4.52% 4.28% *
===== ======= ======= =======
Effective yield * * 5.14% 5.79% 4.62% 4.37% *
===== ======= ======= =======
Ratios/Supplemental data:
Net assets, end of period (in millions) $66,763 $24,337 $28,009 $14,855
Ratio of expenses to average net assets 0.57% 0.54% 0.61% 0.68% *
Ratio of net income to average net assets 5.17% 5.42% 4.05% 4.40% *
* Annualized for those periods less than twelve months in duration.
* * Current yield refers to the income by an investment over a seven-day
period ending June 30, 1996. Effective yield assumes compounding. Yields are
computed in accordance with a standardized formula described in the
Statement of Additional Information.
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide maximum current income
consistent with preservation of capital and maintenance of liquidity.
The investment objective of the Fund cannot be changed without shareholder
approval in the manner described on page 6. In view of the risks inherent in all
investments in securities, there is no assurance that this objective will be
achieved. The investment policies and techniques employed in pursuit of the
Fund's objectives may be changed without shareholder approval, unless otherwise
noted.
Investment Policies
Pursuant to Rule 2a-7 adopted under the Investment Company Act, the Fund may
invest only in "eligible securities" as defined in that Rule. Generally, an
eligible security is a security that (i) is denominated in U.S. Dollars and has
a remaining maturity of 397 days or less; (ii) is rated, or is issued by an
issuer with short-term debt outstanding that is rated, in one of the two highest
rating categories by two nationally recognized statistical rating organizations
("NRSROs") or, if only one NRSRO has issued a rating, by that NRSRO; and (iii)
has been determined by the Adviser to present minimal credit risk pursuant to
procedures approved by the Board of Directors. A security that originally had a
maturity of greater than 397 days is an eligible security if the issuer has
outstanding short-term debt that would be an eligible security. Unrated
securities may also be eligible securities if the Adviser determines that they
are of comparable quality to a rated eligible security pursuant to guidelines
approved by the Board of Directors.
Under Rule 2a-7, a fund may not invest more than five percent of its assets
in the securities of any one issuer other than the United States Government, its
agencies and instrumentalities. In addition, a fund may not invest in a security
that has received, or is deemed comparable in quality to a security that has
received, the second highest rating by the requisite number of NRSROs (a "second
tier security") if immediately after the acquisition thereof the fund would have
invested more than (A) the greater of one percent of its total assets or one
million dollars in securities issued by that issuer which are second tier
securities, or (B) five percent of its total assets in second tier securities.
In order to accomplish this objective, assets of the Fund will be invested
in the following types of money market instruments maturing in 364 days or less
from the time of investment, as defined herein:
(1) Securities issued or guaranteed by the United States Government. These
include, for example, Treasury Bills, Bonds and Notes which are direct
obligations of the United States Government.
(2) Obligations issued or guaranteed by agencies or instrumentalities of the
United States Government. Such agencies and instrumentalities include,
for example, Federal Intermediate Credit Banks, Federal Home Loan Banks,
Federal National Mortgage Association and Farmers Home Administration.
Such securities will include those supported by the full faith and
credit of the United States Treasury or the right of the agency or
instrumentality to borrow from the Treasury as well as those supported
only by the credit of the issuing agency or instrumentality.
(3) Federally insured student loans held in trust by the Mid-America Student
Finance Trust, (the "MASFT"), for which Union Bank & Trust Co., Lincoln,
Nebraska, is Trustee, created for the purpose of facilitating the
funding and purchase of federally insured student loans. Insured student
loans are made by various banks to students attending trade schools,
colleges and universities under the Federal Guaranteed Student Loan
Program ("GSL Program"). The loans are insured by guarantee and interest
subsidy agreements made by the Secretary of Education with various
agencies pursuant to the Higher Education Act. Under the GSL Program,
banks making the loans and/or the holders of the loans are reimbursed
for defaults and subsidized on the interest paid on the loans. The
Company will purchase GSL Program loans for the Fund from various
institutions, trusts and banks through MASFT, which will, as part of
their agreement to sell loans to MASFT, also agree to purchase on not
less than five days' written notice, the lesser of 5% of the GSL Program
loans held by MASFT or the amount of GSL Program loans sold by them to
MASFT. MASFT will evidence the Fund's purchase of student loans by
issuing redeemable Trust Certificates, which will be issuable only to
the Fund (except in extraordinary circumstances) and will represent
equitable ownership in a group of individual student loans. All interest
accruing on the student loans attributable to the Trust Certificates is
payable to the Fund net of fees and expenses. The Certificates will have
original maturities of 364 days but will be redeemable by the Fund at
their face amount upon not more than five days' written notice. The
Company's decision to purchase student loans through MASFT for the Fund
will be based upon the amount of funds available for investment, the
investment yield of the GSL Program loans compared with yields available
on the other short-term liquid investments and upon the aggregate amount
of student loans owned by the Company, which may not exceed 90% of the
Company's assets. The yield to the Fund on the Trust Certificates will
be commensurate with current net yields on GSL Program loans. Presently,
such loans gross yield approximately the 91-day U.S. Treasury Bill rate,
plus 3.10%. The yield from the student loans owned by the Fund through
MASFT is anticipated to be approximately 2.65% less, in the aggregate,
than the student loans purchased as a result of various fees, which are
deducted for origination take-out, servicing and Trustee fees. Further
details concerning the Company and the Fund's investment in Trust
Certificates are found in the Statement of Additional Information.
Assets of the Fund will consist of securities with maturities of 364 days or
less at date of purchase. The dollar-weighted average maturity of the Fund's
investments will be 90 days or less.
As a general policy, it is the Fund's intention to hold investments until
they mature. However, in an effort to increase Fund yields, the Fund may
periodically trade securities to take advantage of perceived disparities between
markets for various short-term money market instruments. It is also possible
that redemptions of Fund shares could necessitate the sale of Fund investments
prior to maturity and at times when such sale would be undesirable because of
unfavorable market conditions.
While investments by the Fund will be confined to high-quality government
instruments and insured student loans, the complete elimination of risk is not
possible. Under certain circumstances described in more detail in the Statement
of Additional Information, the net asset value of Fund shares could decrease as
a result of events which affect the value of securities. With respect to the
Fund's student loans, it is also possible, although unlikely, that banks which
are obligated to repurchase student loans from the Company to meet redemption
requests of the Fund could default on such commitments, which could also cause
the net asset value per share to decrease. In light of these various
contingencies, there can be no assurance the Fund will achieve its investment
objectives.
The Fund has adopted a number of investment policies and restrictions, some
of which can be changed by the Board of Directors. Others may be changed only by
holders of a majority of the outstanding shares and include the following.
Without shareholder approval the Fund may not: (1) purchase any securities
other than those described under "Investment Policies;" and (2) invest in
securities with legal or contractual restrictions on resale (except for Trust
Certificates) or for which no ready market exists.
The foregoing investment restrictions, which are considered fundamental
policies, cannot be changed without the approval of a "majority" of the Fund's
outstanding voting securities, that is, by (a) 67% or more of the securities
voting at a special or annual meeting if more than 50% of the outstanding shares
are represented at such meeting in person or by proxy; or (b) more than 50% of
the outstanding shares, whichever is less. The Statement of Additional
Information includes discussion of certain other investment policies and
restrictions, some of which are also considered fundamental and may not be
changed without shareholder approval.
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 is an officer and director of
the Company. John H. Conley, the Fund's Portfolio Manager, owns 10% 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 .10% of the daily 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 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. The address of the Administrator is 200 Centre Terrace, 1225 L Street,
Lincoln, Nebraska 68508.
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, distribution expenses pursuant to the
Rule 12b-1 Plan, custodial charges, registration and blue sky fees incurred in
registering and qualifying the Fund under state and federal securities laws,
association fees, directors 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.
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. Portfolio
transactions for the Fund 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 portfolio
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 Company's shares. These
expenses include, but are not limited to, compensation paid to investment
executives of SMITH HAYES and to broker-dealers which have entered into sales
agreements with SMITH HAYES, expenses incurred in the printing of reports used
for sales purposes, preparation and printing of sales literature, advertising,
promotion, marketing and sales expenses, payments to banks for shareholder
services and accounting services and other distribution-related expenses.
Reimbursement to SMITH HAYES is computed separately for each of the Company's
Funds and, in the case of this Fund, may not exceed .20% per annum of the
average daily net assets of the Fund. Compensation will be paid out of such
amounts to SMITH HAYES investment executives, to broker-dealers which have
entered into sales agreements with SMITH HAYES and to banks who 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 a Fund in
any one year exceed the maximum reimbursable under the Plan, such expenses may
not be carried forward to the following year. Further information regarding the
Plan is contained in the Statement of Additional Information.
PURCHASE OF SHARES
General
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. 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 (which
usually will be $1.00 per share) next determined following receipt of an order
by SMITH HAYES. See "Valuation of Shares."
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.
Federal funds transmitted by wire transfer and received before 11:00 a.m.
will be invested at the net asset value computed at the close of business that
day, funds received after 11:00 a.m. will be invested the following day.
1. Telephone the Company at (402) 476-3000 and furnish the name, the
account number and the telephone number of the investor, as well as
the amount being wired and the name of the wiring bank. If a new
account is being opened, additional account information will be
requested and an account number will be provided.
2. Instruct the bank to wire the specific amount of immediately
available funds to the Custodian. The 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
Institutional Money Market 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 Company shares will be
accepted.) Banks may impose a charge for a wire transfer of funds.
Minimum Investments
A minimum initial net investment of $1,000 is required, unless waived by the
Company.
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. Because of the nature of the Fund, the redemption price
will usually be $1.00 per share. 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, trust, 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
Federal bank wire to a bank account designated on the shareholder's account
application form provided 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 once each day, as of the close of
the New York Stock Exchange (currently 3:00 p.m., Lincoln, Nebraska time) on
each day the New York Stock Exchange is open for business. The calculation is
made 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) less all liabilities by the number of Fund shares
outstanding. The Fund will value its assets pursuant to the amortized cost
method of valuation as permitted by Rule 2a-7 under the 1940 Act. Under this
method of valuation, a security is initially valued at cost on the date of
purchase and, thereafter, any discount or premium is amortized on a
straight-line basis to maturity, regardless of the extent of fluctuating
interest rates or the market value of the security. Utilization of the amortized
cost method of valuation under Rule 2a-7 results in the stabilization of the
Fund's net asset value at $1.00 per share. The procedures adopted by the Board
of Directors pursuant to Rule 2a-7 are described in more detail in the Statement
of Additional Information. 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 income with respect to the shares of the Fund is declared and
accrued as a dividend each business day to shareholders of record immediately
before 3:00 p.m., Lincoln, Nebraska time. Dividends are accrued and credited to
shareholders' accounts each business day and are automatically reinvested in
additional Fund shares on the last day of each month at the net asset value of
shares on such day, unless the shareholder notifies his or her SMITH HAYES
investment executive or other broker-dealer of an election to receive cash. Cash
payment, if requested, is also accrued through the last day of each month and
checks for such cash payment will be mailed within five days thereof. The
taxable status of income dividends and/or net capital gains distribution is not
affected by whether they are reinvested or paid in cash.
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 at a 31% rate, 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 request
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 advisors.
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 one hundred million shares in a series
designated Institutional Money Market 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 five 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 shares 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 a
Fund's Investment Advisory Agreement, (ii) change a fundamental investment
restriction pertaining to only one Fund or (iii) change a Fund's Distribution
Plan. In voting on the Investment Advisory Agreement or proposals affecting only
one Fund, approval of such 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 Meetings
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
Fund are allocated among all Funds based upon the relative net assets of each
Fund 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 Fund 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.
Reports 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 auditors.
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>
TABLE OF CONTENTS
Introduction............................ 1
Financial Highlights.................... 3
Investment Objective and Policies....... 3
Management.............................. 6
Distribution of Fund Shares............. 7
Purchase of Shares...................... 8
Redemption of Shares.................... 9
Valuation of Shares..................... 10
Dividends and Taxes..................... 10
General Information..................... 12
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 SMITH HAYES
Trust, Inc. 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>
<TABLE>
<CAPTION>
APPLICATION
<S> <C>
Lancaster Funds Institutional Money Market Fund Date ____________________
200 Centre Terrace, 1225 L Street, Lincoln, NE 68508 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:
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>
Lancaster Funds
INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
October 1, 1996
Table of Contents
Page
General Information................................................. 2
Investment Objectives, Policies and Restrictions.................... 2
Directors and Executive Officers.................................... 6
Investment Advisory and Other Services.............................. 7
Distribution Plan................................................... 8
Portfolio Transactions and Brokerage
Allocations................................................. 10
Capital Stock and Control........................................... 11
Net Asset Value and Public Offering Price........................... 12
Redemption.......................................................... 12
Tax Status.......................................................... 13
Calculation of Performance Data..................................... 13
Auditors............................................................ 15
Financial Statements................................................ 15
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus dated October 1, 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. The SMITH HAYES Trust, Inc. adopted the trade name
"Lancaster Funds" and will hence forth do business under this name.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The shares of Lancaster Funds (the "Company") are offered in series.
This Statement of Additional Information only relates to the series designated:
Institutional Money Market Fund (sometimes referred to herein as a "Fund" ). The
investment objective and policies of the Fund are set forth in the Prospectus.
Certain additional investment information is set forth below.
Institutional Money Market Fund
The investment objective of the Institutional Money Market Fund is to
provide maximum current income consistent with preservation of capital and
maintenance of liquidity. In order to accomplish this goal, assets of the
Institutional Money Market Fund will be invested in the following types of money
market instruments maturing in one year or less from time of investment, as
defined herein:
1. Securities issued or guaranteed by the United States Government.
These include, for example, Treasury Bills, Bonds and Notes which are direct
obligations of the United States Government.
2. Obligations issued or guaranteed by agencies or instrumentalities of
the United States Government, such as Federal Intermediate Credit Banks, Federal
Home Loan Banks, Federal National Mortgage Association and Farmers Home
Administration. Such Securities will include, for example, those supported by
the full faith and credit of the United States Treasury or the right of the
agency or instrumentality to borrow from the Treasury as well as those supported
only by the credit of the issuing agency or instrumentality.
3. Redeemable interest-bearing Trust Certificates (the "Trust
Certificates") issued by the Mid-America Student Finance Trust (the "MASFT"),
for which Union Bank & Trust Company of Lincoln, Nebraska is trustee, created
for the sole purpose of facilitating the funding and purchase of federally
insured student loans originated by banks. The Trust Certificates, which will be
issuable only to the Company (except as noted below), will have original
maturities of 364 days but will be redeemable by the Company at their face
amount upon not more than five days written notice to the Company. Funds will be
made available to the MASFT to meet early redemptions of Trust Certificates
under agreements between the MASFT and various banks and other institutions
requiring the banks to purchase, on not less than five days written notice, the
lesser of 5% of the federally insured student loans held in the MASFT or the
dollar amount of the student loans sold to the MASFT by a bank. There will not
be a public market for the Trust Certificates and the Trust Certificates do not
provide any voting rights.
The Mid-America Student Finance Trust
The MASFT is a revocable grantor trust and agency formed for the purpose
of purchasing federally insured student loans originated and sold by banks. The
student loans will be subject to repurchase, at the option of the Company, on no
more than five days written notice. The Trustee is Union Bank & Trust Company of
Lincoln, Nebraska. The Fund's investment in student loans will be evidenced by
Trust Certificates, which will have original maturities of not more than 364
days and which may be redeemed by the Company, upon not more than five days
written notice to the MASFT. The Company is under no obligation to purchase
investments in student loans through the MASFT.
The decision to purchase student loans for the Fund will be based upon
the amount of funds available for investment, the investment yield borne by the
student loans compared with yields available on other short-term liquid
investments and upon the aggregate of student loans owned by the Company, which
may not exceed 90% of the Fund's assets. The yield to the Fund on student loans
held by the MASFT will vary with current gross yields on federally insured
student loans. Presently, student loans' gross yield is approximately the 91-day
U.S. Treasury Bill rate, plus 3.10%. The Fund's yield on the student loans will
be approximately 2.65% less as a result of various fees, which are deducted for
origination, take-out servicing and trustee fees. Such fees will be paid out of
the MASFT assets and no fees will be paid directly by the Company. Yields on
student loans fluctuate as a result of the special allowance payment feature of
the student loans under the Federal GSL Program described below.
The Higher Education Act (the "Act") sets forth provisions establishing
a program of (i) direct federal insurance to holders of student loans, and (ii)
reimbursement to state agencies or private nonprofit corporations administering
student loan insurance programs for losses sustained in the operation of their
programs (the "Federal GSL Program"). Under the Federal GSL Program, the
Secretary of Education (the "Secretary") is authorized to enter into guarantees
and interest subsidy agreements with various agencies (collectively the
"Agencies"). The Federal GSL Program provides for reimbursements to the Agencies
for default claims paid by them, the payment of administrative cost allowances
to the Agencies, advances for the Agencies' reserve funds and interest subsidy
payments and Special Allowance Payments to the holders of qualifying student
loans made pursuant to the Federal GSL Program.
Pursuant to Section 428(c)(1)(A) of the Act, the Agencies have entered
into guarantee agreements with the Secretary under which the respective Agencies
operate a Guarantee Program, whereby the Secretary agrees to reimburse the
Agencies in an amount equal to 80% of the amount expended by them in the
discharge of their insurance obligations on the unpaid balance of principal and
accrued interest with respect to loans guaranteed by the Agencies. The Act also
authorizes the Secretary to enter into supplemental guarantee agreements whereby
such federal reimbursement will be increased to a maximum of 100% of the amount
expended by the Agencies in the discharge of their insurance obligations. The
supplemental guarantee agreements are subject to annual renegotiation and the
Secretary is not authorized to renew them unless the Agencies' Guarantee
Programs comply with all the terms of the supplemental guarantee agreements and
all the provisions of the applicable federal regulations.
The Secretary and the Agencies have entered into subsidy agreements
under Section 428(b) of the Act whereby the Secretary agrees to pay interest
subsidy payments to the holders of qualifying student loans for the benefit of
students meeting certain requirements. To be eligible for federal reimbursement
programs, such loans must be made by an "eligible lender" under the Agencies'
Guarantee Program, which must meet requirements prescribed by the rules and
regulations promulgated under the Act. The Trustee is an eligible lender and
will only purchase loans originated by eligible lenders.
The Act provides for Special Allowance Payments by the Secretary to
holders of qualifying student loans such as MASFT. Special Allowance Payments
are computed on the basis of the average of the bond equivalent rates of the
91-day U.S. Treasury Bills auctioned during the preceding quarter, and are
provided as an inducement to lenders or holders of loans to compensate them for
the difference between the interest rate carried by the student loans and the
current commercial interest rate.
The Student Loan Reform Act of 1993 made various changes to the Federal
Guaranteed Student Loan Program. Effective October 1, 1993, Agencies are only
required to guarantee student loans at 98% of the unpaid balance of principal
and accrued interest on loans made after October 1, 1993. In addition to other
changes relating to origination fees, borrower interest rates, technical
revisions on how consolidated loans are treated and a limitation on the amount
of guarantee fee that can be charged by Agencies, commencing July 1, 1995, the
lender yield for Guaranteed Student Loans disbursed after July 1, 1995 is
reduced to the 90 day Treasury Bill rate plus 2.65%.
All student loans acquired by the Company for the Fund will be 100%
insured either directly by the Secretary or under the Federal GSL program and
will qualify for interest subsidy payments and Special Allowance Payments. Loans
typically will be in amounts of $25,000 or less, repayable over a term of 15
years or less.
Investment Policies Applicable to the Fund
Assets of the Fund will consist of securities with maturities of one
year or less at date of purchase or, if maturing beyond one year, which have
variable interest rates adjustable at least semiannually. In determining whether
particular variable rate investments may be made, the period remaining until
maturity will be deemed to be the longer of the demand notice period required
before the Fund is entitled to receive payment of the principal amount or the
period remaining until the next interest rate adjustment. The dollar-weighted
average maturity of the Fund's investments will be 90 days or less, determined
in the same manner. The underlying securities will be issued or guaranteed by
the United States Government, its agencies or instrumentalities. In attempting
to provide its shareholders with the highest income consistent with safety of
principal, the Fund may not necessarily purchase investments bearing the highest
interest rates available as such investments may also involve a higher degree of
risk.
As a general policy, it is the Company's intention to hold the Fund's
investments until they mature. However, in an effort to increase portfolio
yields, the Company may periodically trade securities to take advantage of
perceived disparities between the markets for various short-term money market
instruments. It is also possible that redemptions of Fund shares could
necessitate the sale of a portfolio investment prior to maturity and at time
when such sale would be undesirable.
While investments by the Company for the Fund will be confined to
high-quality financial instruments, the complete elimination of risk is not
possible Under certain circumstances, the net asset value of Fund shares could
decrease. It is also possible banks will default on their student loan purchase
agreements with MASFT, which could cause the net asset value per share to
decrease. In light of these various contingencies, there cannot be any
assurances that the Fund will achieve its investment objective or maintain a
consistent net asset value.
The Prospectus identifies a number of important policies and
restrictions which are considered fundamental and cannot be changed without the
approval of shareholders. Additional investment policies and restrictions which
cannot be changed without shareholder approval are described under Investment
Restrictions below. Shareholder approval requires the approval of a "majority"
of the Fund's outstanding voting securities, that is, by (a) 67% or more of the
securities voting at a special or annual meeting if more than 50% of the
outstanding shares of the Fund's Common Stock are represented at such meeting in
person or by proxy; or (2) more than 50% of the Fund's outstanding Common Stock,
whichever is less.
The Company intends to invest at least 25% and perhaps as much as 90% of
the Fund's total assets in student loans through MASFT, except when such
investments are either not available in sufficient quantity or do not carry
yields competitive with alternative investments.
Investment Restrictions
In addition to the investment objectives and policies set forth in the
Prospectus, the Company and the Fund are 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 the Fund's outstanding shares voting at a meeting
of shareholders at which more than 50% of the outstanding shares are represented
in person or by proxy or (b) a majority of the Company's or the Fund's
outstanding shares.
Unless otherwise specified below, the Fund will not:
1. Purchase any securities other than those described under
"Investment Objectives, Policies and Restrictions;"
2. Invest more than 90% of its total assets in Trust Certificates;
3. Invest with a view to exercising control or influencing management;
4. Purchase or sell real estate commodities or commodity contracts,
interests in oil, gas or other mineral exploration or development program;
5. Purchase any securities on margin, except for the clearing
of occasional purchases or sales of portfolio securities;
6. Make short sales of securities or maintain a short position or
write, purchase or sell puts, calls, straddles, spreads or combinations thereof;
7. Make loans to other persons; provided, the Fund may invest up to 90%
of its total assets in Trust Certificates, as described in (2) above, and may
make the investments, and enter into repurchase agreements, as described under
"Investment Objective, Policies and Restrictions;"
8. Borrow money, except to meet extraordinary or emergency needs for
funds, and then only from banks in amounts not exceeding 10% of its total
assets, nor purchase securities at any time borrowings exceed 5% of the Fund's
total assets;
9. Mortgage, pledge, hypothecate, or in any manner transfer, as security
for indebtedness, any securities owned by the Fund, except as may be necessary
in connection with borrowings outlined in (8) above and then securities
mortgaged, hypothecated, or pledged may not exceed 5% of the Fund's total assets
taken at market value;
10. Invest in securities with legal or contractual restrictions on
resale (except for repurchase agreements, loans, and Trust Certificates) or
for which no ready market exists;
11. Act as an underwriter of securities;
12. Enter into repurchase agreements if, as a result thereof, more than
5% of the Fund's total assets (taken at market value at the time of such
investment) would be subject to repurchase agreements maturing in more than
seven days; and
13. Purchase the securities of other investment companies except as
provided by Section 12(d)(1)(F) 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.
<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>
Name, Position with Fund and Address Principal Occupation Last Five Years
*Thomas C. Smith, Chairman, President, age 51; Chief Chairman, CONLEY SMITH, Inc., Omaha,
Executive Officer and Treasurer; 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,
Concorde Management
and Development, Inc.,
Lincoln, Nebraska
Thomas D. Potter, Director; age 56; President and Chief Executive Officer, Lincoln
1800 Memorial Drive, Mutual Life Insurance Company, Lincoln,
Lincoln, Nebraska 68502 Nebraska; December, 1987 - Current
Dale C. Tinstman, Director; age 77; Financial and Investment Consultant;
Suite 200, Chairman of University of Nebraska
1201 "O" Street, Foundation; Director and Consultant of
Lincoln, Nebraska 68508 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, President Larsen Bryant & Porter
Lincoln, Nebraska 68510 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.
<PAGE>
The following table represents the compensation amounts received for
services as a director of the Fund for the fiscal year ended June 30, 1996::
Compensation Table
Aggregate Total Compensation
Compensation From the Fund
Name and Position From Fund Paid to Directors
- ----------------- ------------- -----------------
Thomas D. Potter, Director $1,200 $1,200
Dale C. Tinstman, Director $1,200 $1,200
Thomas R. Larsen, Director $1,200 $1,200
Thomas C. Smith, Chairman $0 $0
John H. Conley, Director $0 $0
INVESTMENT ADVISORY AND OTHER SERVICES
General
The investment adviser for the Fund is CONLEY SMITH, Inc. (the
"Adviser"). The administrator and transfer agent for the Fund is Lancaster
Administrative Services, Inc., (the "Administrator"). The Adviser's address is
444 Regency Parkway, Suite 202 Lake Regency Building, Omaha, Nebraska 68114. The
Administrator's address is 200 Centre Terrace, 1225 L Street, Lincoln, Nebraska
68508. The Adviser and Administrator will act as such pursuant to written
agreements which will be periodically approved by the directors or the
shareholders of the Fund.
Control of the Adviser, Administrator and the Distributor
The Adviser, Administrator and 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.
Investment Advisory Agreements and Administration Agreement
The Advisory Agreement and Administration Agreement have been approved
by the Board of Directors (including a majority of the directors who are not
parties to the Advisory and Administration Agreements, or interested persons of
any such party, other than as directors of the Company). The Advisory Agreement
and Administration Agreement for the Fund were first approved by the Board of
Directors on April 20, 1992, and were approved by the shareholders on December
18, 1993. The Board of Directors last approved the Advisory Agreement and
Administration Agreement on July 16, 1996.
The Advisory Agreement and Administration Agreement terminate
automatically in the event of their assignment. In addition, the Advisory
Agreement and Administration Agreement 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 not more than 60 days' written
notice to the Adviser and the Administrator, as the case may be, and by the
Adviser and Administrator, as the case may be, on 60 days' written notice to the
Company. The Advisory Agreement may be terminated at any time by a vote of the
holders of a majority of the outstanding voting securities of such Portfolio,
upon 60 days' written notice to the 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 and Administration
Agreement shall continue in effect for more than two years after their execution
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.
Pursuant to the Advisory Agreement, the Fund will pay the Adviser a
monthly advisory fee equal on an annual basis to .10% of the Fund's average
daily net assets.
Pursuant to the Administration Agreement, the Administrator acts as
transfer agent and provides, or contracts with others to provide, 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 the Fund
and paid monthly, at an annual rate of .12% of the daily average net assets of
the Company.
For the fiscal years ended June 30, 1994, 1995 and 1996 the Company paid
the Adviser the sums of $59,888, $43,815 and $59,935 respectively, for advising
and administering the Institutional Money Market Portfolio.
Under the Advisory Agreement, the Adviser provides the Fund with advice
and assistance in the selection and disposition of the Fund's investments. All
investment decisions are subject to review by the Board of Directors of the
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.
The laws of certain states require that if a mutual fund's expenses
(including advisory fees but excluding interest, taxes, brokerage commissions
and extraordinary expenses) exceed certain percentages of average net assets,
the fund must be reimbursed for such excess expenses. The Fund should not ever
exceed such limits.
Custodian
The Custodian for the Company and the Fund is Union Bank and Trust
Company ("Union"), 3648 South 48th, Lincoln, Nebraska 68506. Union, as
custodian, holds all cash and securities owned by the Fund.
DISTRIBUTION PLAN
Rule 12b-1(b) under the Investment Company Act of 1940 provides that any
payments made by the Fund in connection with financing the distribution of their
shares may only be made pursuant to a written plan describing all aspects of the
proposed financing of distribution, and also requires that all Agreements with
any person relating to the implementation of the plan must be in writing.
Because some of the payments described below to be made by the Fund are
distribution expenses within the meaning of Rule 12b-1, the Fund has entered
into an Underwriting and Distribution Agreement with the Distributor pursuant to
a Distribution Plan adopted in accordance with such Rule. Under the Underwriting
and Distribution Agreement, the Distributor, on a best efforts basis,
continuously distributes the Fund's shares.
In addition, Rule 12b-1(b)(1) requires that such plan be approved by a
majority of the 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
members 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 the Fund.
Rule 12b-1(b)(4) requires that such a plan may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments to the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the 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, the
Fund pays a fee to the Distributor computed and paid monthly at the annual rates
of up to .20% for the Institutional Money Market Fund's average daily net assets
in order to reimburse the Distributor for its actual expenses incurred in the
distribution and promotion of the Fund's shares.
Expenses for which the Distributor will be reimbursed under the
Distribution Plan include, but are not limited to, compensation paid to
registered representatives of the Distributor and to broker-dealers which have
entered into sales agreements with the Distributor; expenses incurred in the
printing of prospectuses, statements of additional information and reports used
for sales purposes; expenses of preparation and printing of sales literature;
advertisement, promotion, marketing and sales expenses; shareholder account
servicing fees; and other distribution-related expenses. Compensation may be
paid out of such amounts to investment executives of the Distributor and to
broker-dealers which have entered into sales agreements with the Distributor as
follows. If shares of the Fund are sold by a representative of a broker-dealer
other than the Distributor, that portion of the reimbursement which is
attributable to shares sold by such representative is paid to such
broker-dealer. If shares of the Fund are sold by an investment executive of the
Distributor, compensation will be paid to the investment executive by the
Distributor in an amount not to exceed .20% of the average daily net assets of
the Fund which is attributable to shares sold by such investment executive.
For the fiscal years ended June 30, 1994, 1995 and 1996, the
Institutional Money Market Portfolio paid to the Distributor $54,441, $39,836
and $54,439, respectively, under the Distribution Plan.
Of the total amount the paid to the Distributor pursuant to the
Distribution Plan in these periods, the Distributor retained or paid to its
agents $139,341. The Distributor paid the balance to various other
broker-dealers pursuant to selling agreements between the Distributor and such
persons for distribution services. 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
The Adviser is responsible for decisions to buy and sell securities for
the Fund, the selection of broker-dealers to effect the transactions and the
negotiation of brokerage commissions, if any. In placing orders for securities
transactions, the primary criterion for the selection of a broker-dealer is the
ability of the broker-dealer, in the opinion of the Adviser, to secure prompt
execution of the transactions on favorable terms, including the reasonableness
of the commission (if any) and considering the state of the market at the time.
When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research and/or services to the Adviser.
Such research or services include advice, both directly and in writing, as to
the value of securities; the advisability of investing in, purchasing or selling
securities; and the availability of securities, or purchasers or sellers of
securities; as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. This allows the Adviser to supplement their own investment research
activities and enables the Adviser to obtain the views and information of
individuals and research staffs of many different securities firms prior to
making investment decisions for the Fund. To the extent portfolio transactions
are effected with broker-dealers who furnish research services to the Adviser,
the Adviser receives a benefit, not capable of evaluation in dollar amounts,
without providing any direct monetary benefit to the Fund from these
transactions. The Adviser 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.
The Adviser has not entered into any formal or informal Agreements with
any broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Fund's transactions in exchange for
research services provided the Adviser except as noted below. However, from time
to time, the Adviser may elect to use certain brokers to execute transactions in
order to encourage them to provide the Adviser with research services which the
Adviser anticipates will be useful to it. The Adviser will authorize the Fund to
pay an amount of commission for effecting a securities transaction in excess of
the amount of commission another broker-dealer would have charged only if the
Adviser 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's overall responsibilities with respect to the
accounts as to which it exercises investment discretion.
Portfolio transactions for the Fund may be effected through the
Distributor, as discussed in the Prospectus under "Management-Portfolio
Brokerage." In determining the commissions to be paid to the Distributor, it is
the policy of the Fund that such commissions, will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time,
and (b) at least as favorable as commissions contemporaneously charged by the
Distributor on comparable transactions for its most favored comparable
unaffiliated customers. While the Fund does not deem it practicable and in its
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given to posted commission rates as
well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.
In certain instances, there may be securities which are suitable for the
Fund as well as for one or more of the advisory clients of the Adviser.
Investment decisions for the Fund and for such advisory clients are made by the
Adviser with a view to achieving their respective investment objectives. It may
develop that a particular security is bought or sold for only one client of the
Adviser even though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients of the
Adviser when one or more other clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two or more
clients of the Adviser are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
by the Adviser to be equitable to each (and may result, in the case of
purchases, in allocation of that security only to some of those clients and the
purchase of another security for other clients regarded by the Adviser as a
satisfactory substitute). It is recognized that in some cases this system could
have a detrimental effect on the price or volume of the security as far as the
portfolio 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.
For the fiscal years ended June 30, 1994, 1995 and 1996, the
Institutional Money Market Fund incurred $1,558, $1,025 and $638 for brokerage
commissions for securities purchased. All of the brokerage commissions incurred
were paid to SMITH HAYES Financial Services Corporation, the Fund's Distributor,
which is an affiliate of the Fund's Adviser. All the brokerage transactions
executed through SMITH HAYES were 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 noninterested directors pursuant
to Rule 17(e)-1 under the Investment Company Act of 1940.
CAPITAL STOCK AND CONTROL
A complete description of the rights and characteristics of the Fund's
capital stock is included in the Prospectus. The following table provides the
name and address of any person who owns of record 5% or more of the outstanding
shares of the Portfolio as of September 6, 1996.
Name and Address Shares Ownership
UBATCO & Company 4,561,960.61 8.46%
Union Bank and Trust Company
Trust Department-nominee name
4732 Calvert Street
Lincoln, NE 68506
Mesirow Financial, Inc. 9,504,694.19 17.62%
Omnibus Account
350 No. Clark Street
Chicago, IL 60610
Western Pathology Consultants 3,392,272.58 6.29%
Pension Plan
211 West 39th Street
Scottsbluff, NE 69361
Virgil Eihusen 24,067,323.01 43.81%
550 B Road
Grand Island, NE 68801
As a group, the officers and directors of the Company owned less than 1%
of the shares of the Institutional Money Market Portfolio. As a group, the
officers and directors owned less than 1% of all outstanding shares of all the
Company's Portfolios.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of the Fund's
shares is summarized in the Prospectus in the text following the headings
"Purchase of Shares--Public Offering Price" and "Valuation of Shares." The net
asset value of the Fund's shares is determined each day that the New York Stock
Exchange is open, provided that the net asset value need not be determined on
days when no shares are tendered for redemption and no order for 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.
The Securities and Exchange Commission adopted Rule 2a-7 under the
Investment Company Act of 1940 which permits the Company to compute the Fund's
net asset values per share using the amortized cost method of valuing portfolio
securities. As a condition for using the amortized cost method of valuation, the
Board of Directors must establish procedures to stabilize the Fund's net asset
value at $1.00 per share. These procedures include a review by the Board of
Directors as to the extent of any deviation of net asset value based on
available market quotations from the Fund's $1.00 amortized cost value per
share. If such deviation exceeds $.005, the Board of Directors will consider
what action, if any, should be initiated to reasonably eliminate or reduce
material dilution or other unfair results to shareholders. Such action may
include redemption of shares in kind, selling portfolio securities prior to
maturity, withholding dividends or utilizing a net asset value per share as
determined by using available market quotations. In addition, the Fund must
maintain a dollar-weighted average portfolio maturity appropriate to its
investment objective, but in any event, not longer than 90 days, must limit
portfolio investments to those instruments which the Board of Directors
determines present minimal credit risks, and must observe certain other
reporting and recordkeeping procedures.
Under the amortized cost method of valuation, a security is initially
valued at cost on the date of purchase and, thereafter, any discount or premium
is amortized on a straight-line basis to maturity, regardless of the effect of
fluctuating interest rates on the market value of the security. Accordingly,
U.S. Government obligations held by the Fund and Trust Certificates will be
valued at their amortized cost, which normally will be their face amount. Other
assets and securities are valued at a fair value determined, in good faith, by
the Board of Directors.
The amortized cost method of valuation may result in some dilution of a
shareholder's interest in the Fund insofar as general market increases and
decreases of interest rates usually have an inverse effect on the value of debt
instruments. However, the significance of the effect of such general market
increases and decreases in interest rates directly corresponds to the maturity
of the debt instruments, that is, the change in the market value of the
underlying debt instruments and the corresponding change in the premium or
discount of such instruments is greater when maturities are larger and less when
maturities are shorter.
REDEMPTION
Redemption of shares, or payment, may be suspended at times (a) when the
New York Stock Exchange is closed for other than customary weekend or holiday
closings, (b) when trading on said exchange is restricted, (c) when an emergency
exists, as a result of which disposal by the Fund of securities owned by them is
not reasonably practicable, or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the Securities and Exchange Commission, by order, so permits, provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist.
TAX STATUS
The Company has qualified and intends to continue to qualify the Fund as
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended, so as to be relieved of federal income tax on its capital
gains and net investment income distributed to shareholders. To qualify as a
regulated investment company, 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 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
Company may be required to withhold federal income tax ("backup withholding")
from all dividend, capital gain and/or redemption payments to such shareholder.
Dividends and capital gain distributions may also be subject to backup
withholding if a shareholder fails to certify under penalties of perjury that
such shareholder is not subject to backup withholding due to the under-reporting
of certain income. These certifications are contained in the purchase
application enclosed with the Prospectus.
CALCULATIONS OF PERFORMANCE DATA
From time to time the Company may quote the yield for the Fund in
advertisements, in reports, and other communications to shareholders.
The Fund's yield (a seven-calendar-day historical yield) is calculated
by first dividing the average daily net investment income per share for that
seven-day period by the average daily net asset value per share for the same
period. This return is then annualized by multiplying the result times 365/7.
Net investment income does not include realized or unrealized gains or losses.
The effective yield calculation is based on the current yield and the
distribution of dividends monthly.
The rate of return, or yield, on the Fund's shares may fluctuate daily
and does not provide a basis of determining future yields. The yield is not
guaranteed nor is the Fund's principal insured. In comparing the Fund's yield
with those of alternative investments (such as savings accounts, various types
of bank deposits and other money market funds), investors should consider
differences between the Fund and the alternate investments, including
differences in the period and methods used in calculating the yields being
compared.
The Fund's current yield and effective (compounded) yield was as follows
as of the seven day period ending June 30, 1996:
Institutional
Money Market
Fund
Assumptions:
Value of a hypothetical preexisting
account with exactly one share at
the beginning of the period: $ 1.00
--------
Value of the same account (excluding
capital changes) at the end of
the seven day period: $ 1.00096
---------
Calculation:
Ending account value $ 1.00096
---------
Less beginning account value $ 1.00
--------
Net change in account value $ .00096
---------
Base period return:
(change account value) .00096
Current yield
(Base period return x (366/7)) 5.02%
Effective yield
[(Base period return + 1)366/7]-1 5.14%
There are no monthly account charges.
From time to time the Fund may quote yield in advertisements or in
reports and other communications to shareholders. The yield changes in response
to fluctuations in interest rates and in the Fund's expenses. Consequently, any
given yield 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 the Fund's performance and
for providing a basis for comparison with other investment alternatives.
However, the yield will fluctuate, unlike other investments which may pay a
fixed yield for a stated period of time.
Investors should recognize that in periods of declining interest rates
the Fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates, the Fund's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the Fund from the continuous sale of its shares will likely be invested
in instruments producing lower yields in the balance of the Fund's holdings,
thereby reducing the current yield of the Fund. In periods of rising interest
rates, the opposite can be expected to occur.
AUDITORS
The Board of Directors, including all disinterested directors,
unanimously approved the appointment of Deloitte & Touche LLP, 1040 NBC Center,
Lincoln, Nebraska 68508-1469 as the Fund's accountants on July 16, 1996.
FINANCIAL STATEMENTS
The Company hereby incorporates by reference the information in the
Company's Financial Report for the Fund dated June 30, 1996, attached hereto.
<PAGE>
PROSPECTUS
Lancaster Funds
Nebraska Tax-Free Fund
200 Centre Terrace
1225 L Street
Lincoln, Nebraska 68508
(402) 476-3000
1-800-279-7437
The Nebraska Tax-Free Fund (the "Fund") is a non-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.
The Nebraska Tax-Free Fund seeks to provide investors with a high level
of income exempt from federal income tax and from Nebraska state income tax
while seeking preservation of capital consistent with prudent investing. Under
normal market conditions, the Fund will attempt to invest 100% and, as a matter
of fundamental policy, will invest at least 80% of the value of its net assets
in "municipal securities", the interest on which is exempt from federal income
taxes and from the income taxes of the State of Nebraska. At least 95% of its
total assets will be invested in securities that are rated "investment grade";
that is, rated Baa or higher by Moody's Investor's Services, Inc. and BBB or
higher by Standard & Poor's Corporation, or of comparable quality as determined
by the Board of Directors. Securities rated Baa/BBB are considered investment
grade by the financial community, but are described by Moody's and Standard &
Poor's as "medium grade obligations" that have speculative characteristics.
While the Fund will attempt to diversify its investments in municipal
securities, because of the likelihood that Nebraska municipal securities from a
sufficient number of issuers may not be consistently available to allow
diversification, the Fund is classified as nondiversified. The shares of the
Fund are not deposits or obligations of, or insured, or guaranteed, or endorsed
by any bank, the Federal Deposit Insurance Corporation, the Federal Reserve or
any other federal or state agency, entity or person. See "Investment Objective
and Policies." The purchase of shares necessarily involves investment risks,
including the possible loss of principal.
This Prospectus concisely describes information about the Fund that you
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 from
SMITH HAYES Financial Services Corporation, 200 Centre Terrace, 1225 L Street,
Lincoln, Nebraska 68508, or telephone (402) 476-3000 or (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 October 1, 1996
<PAGE>
INTRODUCTION
The Company is a Minnesota corporation, commonly called a series
mutual fund. The Company, which was organized in 1988, has capital stock 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 Nebraska Tax-Free Fund (the "Fund"). While the Fund has other
classes of shares authorized, they are not presently offered. 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") formerly, 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 monthly fees for such services. See
"Management - Investment Adviser and Administrator."
The Distributor
SMITH HAYES Financial Services Corporation ("SMITH HAYES"), also a
wholly owned subsidiary of Consolidated Investment Corporation, acts as the
distributor ("Distributor") of the Fund's shares. Pursuant to the Fund'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 .25% annually of the Fund's average net assets. See
"Distribution of Fund Shares."
Purchase of Shares
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, as follows:
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-
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 your SMITH HAYES investment executive or other broker-dealer.
General inquiries regarding the Fund should be directed to the Company at one of
the telephone numbers set forth on the cover page of this Prospectus.
Redemptions
Shares of the Fund may be redeemed at any time at their net asset value
next determined after receipt of a redemption request by the Distributor. The
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 $5,000 as a result of redemptions or transfers.
See "Redemption of Shares-Involuntary Redemption."
Dividends
Dividends are declared and accrued monthly and either automatically
reinvested or paid monthly (see "Dividends and Taxes").
EXPENSES
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 fees and expenses, see "Management-Investment Adviser and
Administrator," "Management-Expenses" and "Distribution of Fund Shares."
Annual Operating Expenses
The table below provides information regarding expenses for the Fund
expressed as annual percentages of average net assets for the period ended June
30, 1996.
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a % of offering price) 3.90%
Annual Fund Operating Expenses
Management Fees .275%
12b-1 Fees .25%
Other Expenses .235%
----
Total Fund Operating Expenses .76%
The payments made by the Fund under the Company's 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. See "Purchase of Shares" for a discussion of scheduled
variations in the sales load imposed on purchases.
Example:
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each period.
1 year 3 years 5 years 10 years
$46 $62 $79 $129
The example should not be considered a representation of past or future
expenses or yield. Actual expenses and yield may be greater or lower than those
shown.
FINANCIAL HIGHLIGHTS
The following audited financial information, provides selected data for
a share of the Fund outstanding throughout the periods indicated.The Fund's
Annual Financial Report is contained in the Statement of Additional Information
and 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 Annual Financial Report.
Years Ended June 30, 1996, 1995 and the Period July 12,
1993 (commencement of operations) to June 30, 1994
Net asset value: 1996 1995 1994
---- ---- ----
Beginning of period $9.71 $9.42 $10.00
----- ----- ------
Income (loss) from investment operations:
Net investment income 0.49 0.48 0.50
Net realized and unrealized gain
(loss) on investments (0.08) 0.29 (0.63)
---- ---- ------
Total gain (loss) from investment operations 0.41 0.77 (0.13)
---- ---- ------
Less distributions from net investment income: (0.49) (0.48) (0.45)
------ ------ ------
End of period $9.63 $9.71 $9.42
===== ===== =====
Total return 4.3% 8.5% (1.6%)**
Ratios/Supplemental data:
Net assets, end of period
(in millions) $9,704 $10,524 $8,894
Ratio of expenses to average net assets .76% .71% .41%**
Ratio of net income to average net assets 4.96% 5.15% 4.99%**
Portfolio turnover rate 17.53% 34.96% 7.45%**
**Annualized
INVESTMENT OBJECTIVE AND POLICIES
The Nebraska Tax-Free Fund seeks to provide investors with a high level
of income exempt from federal income tax and from Nebraska state income tax
while seeking preservation of capital consistent with prudent investing.
Under normal market conditions, the Fund will attempt to invest 100%
and, as a matter of fundamental policy, will invest at least 80% of the value of
its net assets in "municipal securities", the interest on which is exempt from
federal income and alternative minimum taxes and from the income taxes of the
State of Nebraska. Thus, it is possible, although not anticipated, that up to
20% of the Fund's net assets could be invested in municipal securities from
another state, or could be invested in taxable obligations, including municipal
obligations such as "private activity bonds," the interest on which may be
subject to the alternative minimum tax. At least 95% of its total assets will be
invested in securities that are rated "investment grade"; that is, rated Baa or
higher by Moody's Investor's Services, Inc. and BBB or higher by Standard &
Poor's Corporation ("S&P"), or be of comparable quality as determined by the
Board of Directors. Securities rated Baa/BBB are considered investment grade by
the financial community, but are described by Moody's and S&P as "medium grade
obligations" that have some speculative characteristics. In times of economic
distress the issuers of these bonds may have difficulty in paying principal and
interest thereon. The Fund may invest no more than 5% of its net assets in
securities that are below investment grade. These securities are commonly
referred to as "junk bonds." See the Statement of Additional Information for a
complete discussion of such ratings.
For temporary defensive purposes, when the Adviser believes that market
conditions, such as rising interest rates and other adverse factors, would cause
serious erosion of portfolio value (see "Special Considerations Regarding the
Fund"), (i) the Fund may invest more than 20% of its assets (which could be up
to 100%) in fixed-income obligations, the interest on which is subject to
federal and State of Nebraska income tax and (ii) may invest more than 20% of
the value of its net assets (which could be up to 100%) in securities the
interest on which is exempt from federal income tax but not the income tax of
the State of Nebraska. Such temporary investments in other than municipal
securities will be limited to obligations issued or guaranteed by the full faith
and credit of the United States government, the highest quality commercial paper
rated A-1 or better by S&P and/or P-1 by Moody's, certificates of deposit and
repurchase agreements. Dividends received by a shareholder from the Fund will
only be excludable from the shareholder's gross income to the extent that they
are attributable to interest exempt from federal income tax and/or exempt from
Nebraska income tax.
The investment objective and policies described above are fundamental
and may not be changed without shareholder approval. The Fund has other
investment policies which are also considered to be fundamental (see "Investment
Practices - Other Fundamental Investment Policies" below) which also require
shareholder approval to be changed. All other policies and practices of the Fund
are nonfundamental and do not require shareholder approval to be changed.
MUNICIPAL SECURITIES
General. Tax-exempt municipal securities are debt obligations issued by
or on behalf of the governments of states, territories or possessions of the
United States, the District of Columbia and their political subdivisions,
agencies and instrumentalities thereof, certain interstate agencies and certain
territories of the United States, the interest on which, in the opinion of bond
counsel or other counsel to the issuer of such securities, is excludable from
gross income for federal income tax purposes.
Municipal securities are classified generally by maturity as notes,
bonds or adjustable rate securities. These securities are further classified as
either "general obligation" or "revenue" securities. General obligation
securities are secured by the issuer's pledge of its credit and taxing power for
the payment of principal and interest. Revenue securities are usually payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source. Municipal notes include tax anticipation notes, bond
anticipation notes and tax-exempt commercial paper with maturities of three
years or less which are issued to obtain temporary funds for various public
purposes. Municipal bonds include lease revenue bonds, pre-refunded/escrowed to
maturity bonds, private activity bonds and industrial development bonds.
Adjustable rate securities include variable rate issues and floating rate
issues.
There are, in addition, a variety of hybrid and special types of
municipal securities, including put option bonds, residual interest bonds,
municipal leases and certificates of participation in any of the foregoing. A
more detailed description of the types of municipal securities in which the Fund
may invest is included in the Statement of Additional Information.
The Fund is not a money market mutual fund and, as a result, the net
asset value of the Fund will change with changes in the value of its respective
portfolio securities. The net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities generally can be
expected to rise. Conversely, when interest rates rise, the value of a portfolio
invested in fixed income securities generally can be expected to decline.
Volatility may be greater during periods of general economic uncertainty.
From time to time, proposals have been introduced before Congress that
would have the effect of reducing or eliminating the federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected.
Insured Municipal Securities. Some of the Fund's investment in municipal
securities will be insured by private bond insurers; however, it is likely that
most of the municipal securities purchased by the Fund will be uninsured.
Although each insurer's quality standards may vary from time to time, such
insurers generally insure only those municipal securities that are rated at the
date of purchase (1) in the case of long-term debt, in the four highest ratings
by S&P (AAA, AA, A and BBB) or by Moody's (Aaa, Aa A and Baa); (2) in the case
of short-term notes, SP-1+ through SP-2 by S&P or MIG 1 through MIG 4 by
Moody's; or (3) in the case of tax-exempt commercial paper, A-1+ through A-2 by
S&P or Prime-1 through Prime-2 by Moody's. Such ratings are relative and
subjective and are not absolute standards of quality. The Fund may invest,
without limitation as to rating category, in any securities which are insured.
Unrated Nebraska Municipal Securities. Historically, many of the
municipal securities offered by Nebraska issuers have been unrated. This is in
part due to the relatively small size of many offerings, the cost and conditions
of obtaining a rating and the historical willingness of the capital markets to
purchase municipal securities offered by Nebraska issuers without insurance or
ratings. As a result, it is likely that many of the municipal securities that
the Fund will purchase will be uninsured or unrated. The Fund will only purchase
unrated securities if they are insured or of comparable quality to the rated
municipal securities that the Fund is allowed to purchase. In determining
whether unrated municipal securities are of comparable quality, the Adviser will
perform a credit analysis of each issuer of such unrated securities pursuant to
policies and procedures reviewed and approved by the Board of Directors on an
ongoing basis.
INVESTMENT PRACTICES
Selection of Investments. The Adviser will buy and sell securities for
the Fund with a view to seeking a high level of current income exempt from
federal income tax and will select securities which the Adviser believes entail
reasonable credit risk considered in relation to the particular investment
policies of the Fund. As a result, the Fund will not necessarily invest in the
highest yielding tax-exempt municipal securities permitted by its investment
policies if the Adviser determines that market risks or credit risks associated
with such investments would subject the Fund to excessive risk. The potential
for realization of capital gains resulting from possible changes in interest
rates will not be a major consideration. There is no limitation as to the
maturity of municipal securities in which the Fund may invest. The Adviser may
adjust the average maturity of the Fund's investments from time to time,
depending on its assessment of the relative yields available on securities of
different maturities and its expectations of future changes in interest rates.
However, due to the limited supply of Nebraska municipal securities, the Adviser
may not be able to significantly shorten or lengthen average Fund maturity to
reduce market exposure to actual or expected changes in interest rate levels.
Other than for tax purposes, frequency of portfolio turnover will generally not
be a limiting factor if the Fund considers it advantageous to purchase or sell
securities. The Fund may have annual portfolio turnover rates in excess of 100%.
A high rate of portfolio turnover may also result in the realization of
substantial net short-term capital gains and any distributions resulting from
such gains will be taxable. See "Dividends and Taxes."
Defensive Strategies. At times, conditions in the markets for tax-exempt
municipal securities may, in the Adviser's judgment, make pursuing the Fund's
basic investment strategy inconsistent with the best interests of its
shareholders. At such time, the Adviser may use alternative strategies primarily
designed to reduce fluctuations in the value of the Fund's assets. In
implementing these "defensive" strategies, the Fund may invest to a substantial
degree in high-quality, short-term municipal obligations. If these high-quality,
short-term municipal obligations are not available or, in the Adviser's
judgment, do not afford sufficient protection against adverse market conditions,
the Fund may invest in taxable obligations. Such taxable obligations may
include: obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the four highest grades by either S&P or
Moody's; commercial paper rated in the highest grade by either rating service;
certificates of deposit and repurchase agreements with respect to any of the
foregoing investments.
In connection with the investment policies described above, the Fund
also may engage in hedging transactions and purchase and sell securities on a
"when issued" and "delayed delivery" basis. These investments entail risks.
Hedging transactions generally will not be treated as investments in tax-exempt
municipal securities for purpose of the Fund's 80% investment policy with
respect thereto.
Hedging. Hedging is a means of offsetting, or neutralizing, the price
movement of an investment by making another investment, the price of which
should tend to move in the opposite direction from that of the original
investment. If the Adviser deems it appropriate to hedge partially or fully the
Fund against market value changes, the Fund may buy or sell financial futures
contracts and options thereon, such as municipal bond index futures contracts
and the related put or call options contracts on such index futures. A more
detailed description of municipal bond index futures contracts is set forth in
the Statement of Additional Information.
An option on a financial future gives the holder the right to receive,
upon exercise of the option, a position in the underlying futures contract. When
the Fund purchases an option on a financial futures contract, it receives in
exchange for the payment of a cash premium the right, but not the obligation, to
enter into the underlying futures contract at a price (the "strike price")
determined at the time the option was purchased, regardless of the comparative
market value of such futures position at the time the option is exercised. The
holder of a call option has the right to receive a short (or seller's) position
in the underlying futures.
The Fund does not intend to engage in transactions in futures contracts
or related options for speculative purposes but only as a hedge against changes
in the values of securities in its portfolio resulting from market conditions,
such as fluctuations in interest rates or general economic changes.
Investments in financial futures and related options entail certain
risks. Among these are the possibility that the cost of hedging could have an
adverse effect on the performance of the Fund if the Adviser's predictions as to
economic trends are incorrect or due to the imperfect correlation between
movements in the price of the futures contracts and the price of the Fund's
actual municipal securities investments. Although the contemplated use of these
contracts should tend to minimize the risk of loss due to a decline in the value
of the securities owned by the Fund, at the same time hedging transactions tend
to limit any potential gains which might result from an increase in the value of
such securities. In addition, futures and options markets may not be liquid in
all circumstances due, among other things, to daily price movement limits which
may be imposed under the rules of the contract marketplace, which could limit
the Fund's ability to enter into positions or close out existing positions, at a
favorable price. If the Fund were unable to close out a futures position in
connection with adverse market movement, the Fund would be required to make
daily payments of maintenance margin until such position is closed out. Also,
the daily maintenance margin requirement in futures and option sales
transactions creates greater potential financial exposure than do option
purchase transactions, where the Fund's exposure is limited to the initial cost
of the option.
Income earned or deemed to be earned, if any, by the Fund from its hedging
activities will be distributed to shareholders in taxable distributions. See
"Dividends and Taxes."
"When Issued" and "Delayed Delivery" Transactions. The Fund may also
purchase and sell municipal securities on a "when issued" and "delayed delivery"
basis. No income accrues to the Fund on municipal securities in connection with
such transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher than yields on the municipal securities obtained pursuant
to such transactions. Because the Fund relies on the buyer or seller, as the
case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities consistent with the Fund's investment objectives and policies and not
for the purposes of investment leverage. No specific limitation exists as to the
percentage of the Fund's assets which may be used to acquire securities on a
"when issued" or "delayed delivery" basis.
Other Practices. The Fund has no restrictions on the maturity of
municipal bonds in which it may invest. The Fund will seek to invest in
municipal bonds of such maturities that, in the judgment of the Fund and the
Adviser, will provide a high level of current income consistent with liquidity
requirements and market conditions.
The Fund may borrow amounts up to 15% of its net assets in order to pay
for redemptions, when liquidation of Fund securities is considered
disadvantageous or inconvenient and may pledge up to 15% of its net assets to
secure such borrowings.
Other Fundamental Investment Policies
The Fund is "non-diversified" for securities laws purposes because of
the likelihood that Nebraska municipal securities will not be consistently
available from a sufficient number of issuers to allow diversification.
Nevertheless the Fund will limit its investments so that not more than 25% of
its total assets will be invested in the municipal securities of any one issuer
and, with respect to 50% of its total assets, not more than 5% of such assets
will be invested in the securities of a single issuer. Furthermore, as to
concentration, the Fund will not invest more than 25% of its total assets in any
industry. Governmental issues of municipal securities are not considered part of
any "industry;" however, municipal securities backed only by the assets and
revenues of nongovernmental users may for this purpose be deemed to be issued by
such nongovernmental users, and the 25% limitation would apply to such
obligations. It is nonetheless possible that the Fund may invest more than 25%
of its assets in a broader segment of the municipal securities market, such as
revenue obligations of hospitals and other health care facilities, housing
agency revenue obligations, or airport revenue obligations if the Adviser
determines that the yields available from obligations in a particular segment of
the market justify the additional risks associated with a large investment in
such segment. Although such obligations could be supported by the credit of
governmental users, or by the credit of nongovernmental users engaged in a
number of industries, economic, business, political and other developments
generally affecting the revenues of such users (for example, proposed
legislation or pending court decisions affecting the financing of such projects
and market factors affecting the demand for their services or products) may have
a general adverse effect on all municipal securities in such a market segment.
SPECIAL CONSIDERATIONS
REGARDING THE FUND
The Fund may invest a portion of its assets in securities that pay
interest that is subject to the federal alternative minimum tax. The Fund may
not be a suitable investment for investors who are already subject to the
federal alternative minimum tax or who would become subject to the federal
alternative minimum tax as a result of an investment in the Fund.
The Fund, from time to time, may be unable to purchase municipal
securities, the interest on which is exempt from Nebraska income tax, as a
result of the lack of such securities in the secondary market or because of the
lack of available new issues. In such situations the Fund may be unable to meet
its investment objective of investing at least 80% of its total assets in
municipal securities the interest on which is exempt from Nebraska income tax.
As a result the Fund may invest in other securities which may cause a portion of
the dividends declared by the Fund to be taxable or subject certain shareholders
to the alternative minimum tax.
The likelihood that the Fund will routinely invest in unrated municipal
securities results in the Fund being reliant upon the Adviser's judgment,
analysis and experience in evaluating an issuer's credit risk without the
benefit of a rating agency's third-party evaluation and diligence. The Adviser
has not previously managed a tax-exempt municipal securities fund such as the
Fund. As a result, while the Adviser is subject to policies and procedures that
require a careful credit analysis to determine whether unrated municipal
securities are of comparable quality, an investment in the Fund is exposed to
greater risk than an investment in a mutual fund which invests solely in
investment grade rated municipal securities.
Nonrated municipal securities are frequently traded in markets where the
number of potential purchasers and sellers is limited. Furthermore, there may be
a limited resale market for certain of the municipal securities in which the
Fund will invest. These considerations may have the effect of restricting the
availability of municipal securities for the Fund to purchase, may affect the
choice of municipal securities sold to meet redemption requests and may further
have the effect of limiting the ability of the Fund to sell or dispose of such
municipal securities. Although there may be no daily bid and ask activity for
many of the unrated Nebraska municipal securities in which the Fund will be
invested, there is an active secondary market for such securities as a result of
demand exceeding supply, and for this reason, the Adviser considers many unrated
Nebraska municipal securities to be liquid.
An investment in unrated municipal securities involves additional risks
that are not present for rated municipal securities. Generally, such risks
include, but are not limited to, a higher level of market price volatility, high
sensitivity to interest rate changes, liquidation in the secondary market and
lack of supply. Any one of these risks, or a combination of them, or other
factors, could have an adverse effect on the Fund's net asset value and income.
The Fund's concentration in securities issued by Nebraska municipalities
and political subdivisions involves somewhat greater risks than a fund broadly
invested in securities issued by municipalities and political subdivisions in
many states. The credit quality of the issuers of the Nebraska municipal
securities in which the Fund will invest will depend on the future financial
strength of the Nebraska economy and the financial condition of the Nebraska
municipalities and political subdivisions issuing such securities. While most
Nebraska municipalities and political subdivisions are predominantly reliant on
independent revenue sources, such as property and sales taxes, they are not
immune to budget shortfalls caused by cutbacks in state aid. While many
observers believe the Nebraska economy has been generally immune from national
recessionary forces, the state economy is agriculturally based and can be
significantly impacted by down trends in the commodity markets and cutbacks in
federal agricultural programs. See the Statement of Additional Information for
information about the Nebraska economy.
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. CONLEY SMITH, Inc. was incorporated in October, 1987.
CSI 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 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 0.15% of the daily average net
asset value of the Fund. Thomas C. Smith will have the day-to-day responsibility
of managing the Fund's investments. Mr. Smith has been principally employed by
the Adviser during the last six years. See Statement of Additional Information
for more information about Mr. Smith.
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.
The Administrator provides, or contracts with others to provide, the Company
with all necessary recordkeeping services and share transfer services. Under the
Administration Agreement, the Administrator receives an administration fee,
computed separately for each Fund and paid monthly, at an annual rate of .125%
of the daily average net assets. The address of the Administrator is 200 Centre
Terrace, 1225 L Street, Lincoln, Nebraska 68508.
In its sole discretion, the Adviser and Administrator may waive all or
part of the advisory or administration fees. Any such waiver can be discontinued
without notice at any time.
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, distribution expenses pursuant to Rule
12b-1 Plan, custodial charges, registration and blue sky fees incurred in
registering and qualifying the Fund under state and federal securities laws,
association fees, director 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.
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. Portfolio
transactions for the Fund 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 portfolio
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 Company's
shares. These expenses include, but are not limited to, compensation paid to
investment executives of SMITH HAYES and to broker-dealers which have entered
into sales agreements with SMITH HAYES, expenses incurred in the printing of
reports used for sales purposes, preparation and printing of sales literature,
advertising, promotion, marketing and sales expenses, payments to banks for
shareholder services and accounting services and other distribution-related
expenses. Reimbursement to SMITH HAYES is computed separately for each of the
Company's Funds and, in the case of this Fund, may not exceed 0.25% per annum of
the average daily net assets of the Fund. Compensation will be paid out of such
amounts to SMITH HAYES investment executives, to broker-dealers which have
entered into sales agreements with SMITH HAYES and to banks which provide
services to the 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. See "Valuation of
Shares".
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 at (402) 476-3000 and furnish the name, the account
number and the telephone number of the investor, as well as the amount
being wired and the name of the wiring bank. If a new account is being
opened, additional account information will be requested and an account
number will be provided.
2. Instruct the bank to wire the specific amount of immediately available
funds to the Custodian. The 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
Nebraska Tax-Free 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 Company shares will be accepted.) Banks
may impose a charge for the wire transfer of funds.
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, plus a varying sales charge, depending on the amount invested, see
chart below.
Net Asset Value Purchases
Shares of the Fund may be sold without a sales charge to (1) directors,
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 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
Shares of the Fund may also be purchased at the reduced sales charges as
set forth in the 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 Company of which they are a shareholder, partner, owner, or
beneficiary.
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-
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 Investments
A minimum initial net investment of $5,000 is required.
All investments must be made through your SMITH HAYES investment
executive or other broker-dealer. Other broker-dealers who have entered into
sales agreements with SMITH HAYES will be reallowed a portion of the sales
charge imposed according to the schedule set forth under "General."
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 the 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 $5,000 as the result of a
redemption or transfer request. Shareholders will be notified in writing that
the value of their account is less than $5,000 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 Fund 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) less all liabilities by the number of Fund shares
outstanding. 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 income with respect to the shares of the Fund is distributed
monthly. Dividends declared each month are accrued and credited to shareholders'
accounts and are automatically reinvested in additional Fund shares each month
at the net asset value of shares on the dividend date, unless the shareholder
notifies the SMITH HAYES investment executive or other broker-dealer of an
election to receive cash. Cash payment, if requested, is also made through the
dividend date and checks for such cash payment will be mailed within five days
thereof. The taxable status of income dividends and/or net capital gains
distributions is not affected by whether they are reinvested or paid in cash.
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.
The Fund anticipates that substantially all of its dividends will be
excludable from gross income for federal income and Nebraska state income tax
purposes. Nevertheless, because of the possibility that the Fund may invest in
non-exempt securities, or securities which may be tax-exempt for federal
purposes and not exempt for Nebraska state income tax purposes, or subject
investors to the alternative minimum tax, the Fund will report to all
shareholders in January of each year the amount of all dividends paid which are
taxable or subject to the alternative minimum tax.
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 at a 31% rate, 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 advisors. See "Dividends and Taxes"
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 40,000,000 shares in one class of a
series designated Nebraska Tax-Free 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 five 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.
On an issue affecting only the Fund, the shares of the Fund vote as a
separate series. Examples of such issues would be proposals to (i) change a
Fund's Investment Advisory Agreement, (ii) change a fundamental investment
restriction pertaining to only a Fund or (iii) change a Fund's Distribution
Plan. In voting on the Investment Advisory Agreement or proposals affecting only
one Fund, approval of such an agreement or proposal by the shareholders of one
Fund would make that agreement effective as to that Fund whether or not the
agreement or proposal had been approved by the Company's other Funds.
Shareholders Meetings
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 Fund securities and cash. The Administrator acts as Transfer Agent and
Dividend Disbursing Agent. In its capacity as Transfer Agent and Dividend
Disbursing Agent, the Administrator performs many of the clerical and
administrative functions for the Funds.
Yield 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 shares 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 indices of bond prices
and yields prepared by Lehman Brothers, Inc., and Merrill Lynch & Company.
The Fund may also calculate an annualized yield. Annualized yield is
calculated by dividing the net investment income per share for the period by the
maximum offering price per share on the last day of the period during a period.
For purposes of computing yield, realized and unrealized capital gains and
losses are not included.
Reports 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 auditors.
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, 1040 NBC Center, Lincoln,
Nebraska, independent certified public accountants.
<PAGE>
TABLE OF CONTENTS
Introduction............................ 1
Financial Highlights.................... 3
Investment Objective and Policies....... 4
Municipal Securities.................... 5
Investment Practices.................... 6
Special Considerations Regarding the Fund
9
Management.............................. 10
Distribution of Fund Shares............. 12
Purchase of Shares...................... 12
Redemption of Shares.................... 15
Valuation of Shares..................... 16
Dividends and Taxes..................... 16
General Information..................... 17
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 the Fund or
SMITH HAYES Financial Services Corporation. This Prospectus does not constitute
an offer or solicitation by anyone in any state in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation.
<PAGE>
<TABLE>
APPLICATION
<CAPTION>
<S> <C>
Lancaster Funds Nebraska Tax-Free Fund Date ____________________
200 Centre Terrace, 1225 L Street, Lincoln, NE 68508 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>
Lancaster Funds
NEBRASKA TAX-FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
October 1, , 1996
Table of Contents
Page
General Information........................................................2
Investment Objective, Policies and Restrictions............................2
Municipal Securities.......................................................2
When-Issued Securities.....................................................5
Forwards...................................................................6
Other Investments..........................................................6
Taxable Money Market Securities............................................6
Futures Contracts..........................................................7
Options on Securities.....................................................13
Risk Factors..............................................................13
Investment Restrictions...................................................17
Directors and Executive Officers..........................................19
Investment Advisory and Other Services....................................20
Distribution Plan.........................................................21
Fund Transactions and Brokerage Allocations...............................22
Capital Stock and Control.................................................24
Net Asset Value and Public Offering Price.................................24
Redemption................................................................26
Calculations of Performance Data..........................................26
Auditors..................................................................27
Dividends.................................................................27
Tax Status................................................................27
Custodian.................................................................27
Financial Statements......................................................27
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated October 1,
1996 and should be read in conjunction therewith. A copy of the Prospectus may
be obtained from the Fund 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. The SMITH HAYES Trust, Inc. adopted the trade name
"Lancaster Funds" and will hence forth do business under this name.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The shares of Lancaster Funds (the "Company") are offered in series.
This Statement of Additional Information only relates to the series designated:
Nebraska Tax-Free Fund (referred to herein as the "Fund"). The investment
objective and policies of the Fund are set forth in the Prospectus. Certain
additional investment information is set forth below.
MUNICIPAL SECURITIES
Subject to the investment objective and policies described in the
prospectus and the additional investment restrictions described in this
Statement of Additional Information, the Fund's investments will consist
primarily of any combination of the various types of municipal securities
described below or others that may be developed. See Appendix A for the
descriptions of ratings for the securities in which the Fund may invest. The
amount of each Fund's assets invested in any particular type of municipal
security can be expected to vary.
The term "municipal securities" means obligations issued by or on behalf
of states, territories, and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, as
well as certain other persons and entities, the interest from which is exempt
from federal income tax and depending on the investor's state of residence,
exempt from Nebraska state income tax. In determining the tax-exempt status of a
municipal security, the Fund relies on the opinion of the issuer's bond counsel
at the time of the issuance of the security. However, it is possible this
opinion could be overturned, and as a result, the interest received by the Fund
from such a security might not be exempt from federal and/or Nebraska state and
local income tax.
Municipal securities are classified generally by maturity as notes,
bonds, or adjustable rate securities.
Municipal Notes. Municipal notes generally are used to provide for
short-term operating or capital needs and generally have maturities of one year
or less. Municipal notes include:
Tax Anticipation Notes. Tax anticipation notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenue, such as income, property,
use and business taxes, and are payable from these specific future
taxes.
Bond Anticipation Notes. Bond anticipation notes are issued to provide
interim financing until long-term financing can be arranged. In most
cases, the long-term bonds then provide the money for the repayment of
the notes.
Tax-Exempt Commercial Paper. Tax-exempt commercial paper is a short-term
obligation with a stated maturity of 270 days or less. It is issued by
state and local governments or their agencies to finance anticipation of
longer term financing.
Municipal Bonds. Municipal bonds, which meet longer term capital needs
and generally have maturities of more than one year when issued, have two
principal classifications: general obligation bonds and revenue bonds. Three
additional categories of other municipal bonds include lease revenue bonds,
pre-refunded/escrowed to maturity bonds and industrial development bonds.
General Obligation Bonds. Issuers of general obligation bonds include
counties, cities, towns, school districts and special districts. The
proceeds of these obligations are used to fund a wide range of public
projects, including construction or improvement of schools, public
buildings, highways and roads, and general projects not supported by
user fees or specifically identified revenues. The basic security behind
general obligation bonds is the user's pledge of its full faith and
credit and taxing power for the payment of principal and interest. The
taxes that can be levied for the payment of debt service may be limited
or unlimited as to the rate or amount of special assessments. In many
cases voter approval is required before an issuer may sell this type of
bond.
Revenue Bonds. Generally, the principal security for a revenue bond is
the net revenues derived from a particular facility or enterprise, or in
some cases, the proceeds of a special charge or other pledged revenue
source. Revenue bonds are issued to finance a wide variety of capital
projects including: electric, gas, water and sewer systems; highways,
bridges, and tunnels; port and airport facilities; colleges and
universities; and hospitals. Revenue bonds are sometimes used to finance
various privately operated facilities provided they meet certain tests
established for tax-exempt status.
Although the principal security behind these bonds may vary, many
provide additional security in the form of a mortgage or debt service
reserve fund. Revenue bonds usually do not require prior voter approval
before they may be issued.
Lease Revenue Bonds. Municipal borrowers may finance capital
improvements or purchases with tax-exempt leases. The security for a
lease is generally the borrower's pledge to make annual appropriations
for lease payments. The lease payment is treated as an operating expense
subject to appropriation risk and to a full faith and credit obligation
of the issuer. Lease revenue bonds are generally considered less secure
than a general obligation or revenue bond and often do not include a
debt service reserve fund. To the extent the Board determines such
securities are illiquid, they will be subject to the Fund's 10% limit on
illiquid securities.
Pre-refunded/Escrowed to Maturity Bonds. Certain municipal bonds have
been refunded with a later bond issue from the same issuer. The proceeds
from the later issue are used to defease the original issue. In many
cases the original issue cannot be redeemed or repaid until the first
call date or original maturity date. In these cases, the refunding bond
proceeds typically are used to buy U.S. Treasury securities that are
held in an escrow account until the original call date or maturity date.
The original bonds then become "pre-refunded" or "escrowed to maturity"
and are considered as high quality investments. While still tax-exempt,
the security is the proceeds of the escrow account.
Private Activity Bonds. Under current tax law all municipal debt is
divided broadly into two groups: governmental purpose bonds and private
activity bonds. Governmental purpose bonds are issued to finance
traditional public purpose projects such as public buildings and roads.
Private activity bonds may be issued by a state or local government or
public authority but principally benefit private users and are
considered taxable unless a specific exemption is provided.
The tax code currently provides exemptions for certain private activity
bonds such as not-for-profit hospital bonds, small-issue industrial
development revenue bonds and mortgage subsidy bonds, which may still be
issued as tax-exempt bonds. Some, but not all, private activity bonds
are subject to alternative minimum tax.
Industrial Development Bonds. Industrial development bonds are
considered municipal bonds if the interest paid is exempt from federal
income tax. They are issued by or on behalf of public authorities to
raise money to finance various privately operated facilities for
business and manufacturing, housing, sports, and pollution control.
These bonds are also used to finance public facilities such as airports,
mass transit systems, ports, and parking. The payment of the principal
and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if
any, of real and personal property so financed as security for such
payment.
Adjustable Rate Securities. Municipal securities may be issued with
adjustable interest rates that are reset periodically by pre-determined formulas
or indexes in order to minimize movements in the principal value of the
investment. Such securities may have long-term maturities, but may be treated as
a short-term investment under certain conditions. Generally, as interest rates
decrease or increase, the potential for capital appreciation or depreciation on
these securities is less than for fixed-rate obligations.
These securities may take the following forms:
Variable Rate Securities. Variable rate instruments are those whose
terms provide for the adjustment of their interest rates on set dates
and which, upon such adjustment, can reasonably be expected to have a
market value that approximates its par value. A variable rate
instrument, the principal amount of which is scheduled to be paid in 397
days or less, is deemed to have a maturity equal to the period remaining
until the next readjustment of the interest. A variable rate instrument
which is subject to a demand feature entitles the purchaser to receive
the principal amount of the underlying security or securities either (i)
upon notice of usually 30 days, or (ii) at specified intervals not
exceeding 397 days and upon no more than 30 days' notice is deemed to
have a maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
An instrument that is issued or guaranteed by the U.S. Government or any
agency thereof which has a variable rate of interest readjusted no less
frequently than every 762 days may be deemed to have a maturity equal to
the period remaining until the next readjustment of the interest rate.
Floating Rate Securities. Floating rate instruments are those whose
terms provide for the adjustment of their interest rates whenever a
specified interest rate changes and which, at any time, can reasonably
be expected to have a market value that approximates its par value. The
maturity of a floating rate instrument is deemed to be the period
remaining until the date (noted on the face of the instrument) on which
the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be
made.
Floating rate instruments with demand features are deemed to have a
maturity equal to the period remaining until the principal amount can be
recovered through demand.
Put Option Bonds. Long-term obligations with maturities longer than one
year may provide purchasers an optional or mandatory tender of the
security at par value at predetermined intervals, often ranging from one
month to several years (e.g., a 30-year bond with a five-year tender
period). These instruments are deemed to have a maturity equal to the
period remaining to the put date.
Residual Interest Bonds. The Fund may purchase municipal bond issues
that are structured as two-part, residual interest bond and variable
rate security offerings. The issuer is obligated only to pay a fixed
amount of tax-free income that is to be divided among the holders of the
two securities. The interest rate for the holders of the variable rate
security will be determined by an index or an auction process held
approximately every 35 days, while the bond holders will receive all
interest paid by the issuer minus the amount given to the variable rate
security holders and a nominal auction fee. Therefore, the coupon of the
residual interest bonds, and thus the income received, will move
inversely with respect to short-term, 35 day tax-exempt interest rates.
There is no assurance that the auction will be successful and that the
variable rate security will provide short-term liquidity. The issuer is
not obligated to provide such liquidity. In general, these securities
offer a significant yield advantage over standard municipal securities,
due to the uncertainty of the shape of the yield curve (i.e., short-term
versus longer term rates) and consequent income flows.
Unlike many adjustable rate securities, residual interest bonds are not
necessarily expected to trade at par and in fact present significant
market risks. In certain market environments, residual interest bonds
may carry substantial premiums or be at deep discounts. This is a
relatively new product in the municipal market with limited liquidity to
date.
Participation Interests. The Fund may purchase from third parties
participation interests in all or part of specific holdings of municipal
securities. The purchase may take different forms: in the case of
short-term securities, the participation may be backed by a liquidity
facility that allows the interest to be sold back to the third party
(such as a trust, broker or bank) for a predetermined price of par at
stated intervals that meet the procedures established by the Board of
Directors. The seller may receive a fee from the Fund in connection with
the arrangement.
In the case of longer term bonds, the Fund may purchase interests in a
pool of municipal bonds or a single municipal bond or lease without the
right to sell the interest back to the third party.
The Fund will not purchase participation interests unless a satisfactory
opinion of counsel or ruling of the Internal Revenue Service has been
issued that the interest earned from the municipal securities on which
the Fund holds participation interests is exempt from federal income tax
to the Fund.
There are, of course, other types of municipal securities that are, or
may become, available, and the Fund reserves the right to invest in them.
For the purpose of the Fund's investment restrictions, the
identification of the "issuer" of municipal securities which are not general
obligation bonds is made by the Adviser, on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal and interest on such securities.
WHEN-ISSUED SECURITIES
New issues of municipal securities are often offered on a when-issued
basis; that is, delivery and payment for the securities normally takes place 15
to 45 days or more after the date of the commitment to purchase. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. The Fund will only
make a commitment to purchase such securities with the intention of actually
acquiring the securities. However, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of investment strategy.
The Fund will establish a segregated account with its custodian in which it will
maintain cash or liquid high-grade marketable debt securities equal in value to
commitments for when-issued securities. Such segregated securities will either
mature or, if necessary, be sold on or before the settlement date. Securities
purchased on a when-issued basis and the securities held in each Fund are
subject to changes in market value based upon the public perception of the
creditworthiness of the issuer and changes in the level of interest rates (which
will generally result in similar changes in value; i.e., both experiencing
appreciation when interest rates decline and depreciation when interest rates
rise). Therefore, to the extent the Fund remains substantially fully invested at
the same time that it has purchased securities on a when-issued basis, there
will be greater fluctuations in its net asset value than if it solely set aside
cash to pay for when-issued securities. In addition, there will be a greater
potential for the realization of capital gains, which are not exempt from
federal, Nebraska state or local income taxes. When the time comes to pay for
when-issued securities, the Fund will meet its obligation from then-available
cash flow, sale of securities or, although it would not normally expect to do
so, from sale of the when-issued securities themselves (which may have a value
greater or less than the payment obligation). The policies described in this
paragraph are not fundamental and may be changed by the Fund upon notice to its
shareholders.
FORWARDS
The Fund may also purchase bonds on a when-issued basis with longer than
standard settlement dates, in some cases exceeding one to two years. In such
cases, the Fund must execute a receipt evidencing the obligation to purchase the
bond on the specified issue date, and must segregate cash or liquid high grade
securities internally to meet that forward commitment. Municipal "forwards"
typically carry a substantial yield premium to compensate the buyer for the
risks associated with a long when-issued period, including: shifts in market
interest rates that could materially impact the principal value of the bond,
deterioration in the credit quality of the issuer, loss of alternative
investment options during the when-issued period, changes in tax law or issuer
actions that would affect the exempt interest status of the bonds and prevent
delivery, failure of the issuer to complete various steps required to issue the
bonds and limited liquidity for the buyer to sell the escrow receipts during the
when-issued period.
OTHER INVESTMENTS
The Fund may invest in medium quality securities (rated BBB by Moody's
or Baa by S&P, or unrated securities of equivalent quality). Such securities are
regarded as having an adequate capacity to pay principal and interest, although
adverse economic conditions or changing circumstances are more likely to lead to
a weakening of such capacity than for bonds in the A category. In addition, the
Fund may, from time to time, purchase debt securities that are below investment
grade (i.e., those rated below BBB by Moody's or below Baa by S&P, or unrated
securities of equivalent quality as determined by the Adviser). The purchase of
such lower quality securities will be limited to no more than 5% of the Fund's
total assets. Such bonds are generally referred to as "junk bonds" and 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. (See Appendix A). While lower quality securities generally provide
greater income and increased opportunity for capital appreciation than
investments in medium and high quality securities, such securities also
typically entail greater price volatility and principal and income risk.
TAXABLE MONEY MARKET SECURITIES
Although the Fund expects to be invested solely in municipal securities,
it is anticipated that, when it is deemed to be in the best interests of
shareholders to do so, the Fund may also invest a portion of its assets, on a
temporary basis, in the taxable money market instruments set forth below. As a
matter of fundamental policy, the Fund will not purchase any security if, as a
result, less than 80% of the Fund's income would be exempt from federal and
Nebraska state income taxes; except that the Fund may temporarily invest more
than 20% of total assets in taxable obligations during periods of abnormal
market conditions, when it might be deemed advantageous to shareholders to do so
because market conditions dictate a defensive posture in taxable obligations. In
addition, as a matter of fundamental policy, at least 80% of the Fund's assets
(exclusive of cash) during any fiscal year will be invested in securities whose
income is exempt from federal, Nebraska state and local income taxes.
The taxable money market securities that the Fund may invest in are
limited to those described below. The interest earned on these money market
securities is not exempt from federal, Nebraska state and local income taxes and
may be taxable to shareholders as ordinary income.
U.S. Government Obligations. Direct obligations of the U.S. Government and
its agencies and instrumentalities;
U.S. Government Agency Securities. Obligations issued or guaranteed by
U.S. Government sponsored enterprises, federal agencies and international
institutions. Some of these securities are supported by the full faith and
credit of the U.S. Treasury; others are supported by the credit of the issuer;
and the remainder are supported only by the credit of the instrumentality;
Bank Obligations. Certificates of deposit, bankers' acceptances, and
other short-term obligations of U.S. and Canadian banks and their foreign
branches with total assets of $1 billion or more;
Commercial Paper. Paper rated A-1 or better by S&P, Prime 2 or better by
Moody's or, if not rated, is issued by a corporation having an outstanding debt
issue rated A or better by Moody's or S&P; and
Short-Term Corporate Debt Securities. Short-term corporate debt securities
rated at least AA by S&P or Moody's.
FUTURES CONTRACTS
Transactions in Futures
The Fund may enter into interest rate futures contracts ("futures
contracts") as a hedge against or to minimize adverse principal fluctuations or
as an efficient means of regulating the Fund's exposure to the municipal bond
market. The Fund could sell interest rate futures as an offset against the
effect of expected increases in interest rates and purchase such futures as an
offset against the effect of expected declines in interest rates.
The Fund will only enter into futures contracts which are traded on
national futures exchanges and are standardized as to maturity date and
underlying instrument. A public market exists in futures contracts covering
various taxable fixed income securities as well as municipal bonds. In order to
provide a means of managing price risk and interest rate volatility for
municipal bond portfolios, the municipal bond index futures contract was
developed. Trading in the municipal bond index futures contract commenced on the
Chicago Board of Trade on June 11, 1985. Futures exchanges and trading in the
United States are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"). Although techniques other than the sale and
purchase of futures contracts could be used for the above-referenced purposes,
futures contracts offer an effective and relatively low cost means of
implementing the Fund's objectives in these areas.
Regulatory Limitations
The Fund will engage in futures contracts only for bona fide hedging and
risk management purposes in accordance with rules and regulations of the CFTC,
and not for speculation.
The Fund will not enter into a futures contract or option thereon if, as
a result thereof (i) the then current aggregate futures market prices of
financial instruments required to be delivered under open futures contract sales
plus the then current aggregate purchase prices of financial instruments
required to be purchased under open futures contract purchases would exceed 30%
of the Fund's total assets (taken at market value at the time of entering into
the contract) or (ii) more than 5% of the Fund's assets (taken at market value
at the time of entering into the contract) would be committed to margin deposits
or premiums on options on such futures contracts; provided, however, that in the
case of an option which is in the money at the time of purchase, the
in-the-money amount as defined under certain CFTC regulations may be excluded in
computing such 5%. In instances involving the purchase of futures contracts or
all options thereon or the writing of put options thereon by the Funds, an
amount of cash, U.S. government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts and options
thereon (less any related margin deposits), will be deposited in a segregated
account with the Funds' custodian to cover the position, or alternative cover
will be employed thereby insuring that the use of such futures contracts is
unleveraged.
As an alternative to bona fide hedging as described by the CFTC, the
Fund may comply with a different standard established by the CFTC rules with
respect to futures contracts and options thereon purchased by the Fund
incidental to the Fund's activities in the securities markets, under which the
value of the assets underlying such positions will not exceed the sum of (a)
cash set aside in an identifiable manner or short-term U.S. government or other
U.S. dollar-denominated high-grade short-term debt securities segregated for
this purpose, (b) cash proceeds on existing investments due within thirty (30)
days and (c) accrued profits on the particular futures contract thereon.
In addition, CFTC regulations may impose limitations on the Fund's
ability to engage in certain risk management strategies. If the CFTC or other
regulatory authorities adopt different (including less stringent) or additional
restrictions, the Fund would comply with such new restrictions.
Trading in Futures Contracts
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument for a specified price, date, time and place designated at the time
the contract is made. Brokerage fees are incurred when a futures contract is
bought or sold and margin deposits must be maintained. Entering into a contract
to sell is commonly referred to as selling a contract or holding a short
position.
It is possible that the Fund's hedging activities will occur primarily
through the use of municipal bond index futures contracts since uniqueness of
that index contract should better correlate with the Fund and thereby be more
effective. However, there may be times when it is deemed in the best interest of
shareholders to engage in the use of Treasury Bond futures, and the Fund
reserves the right to use Treasury Bond futures at any time. Use of these
futures could occur, as an example, when both the Treasury Bond contract and
municipal bond index futures contract are correlating well with municipal bond
prices, but the Treasury Bond contract is trading at a more advantageous price
making the hedge less expensive with the Treasury Bond contract than would be
obtained with the municipal bond index futures contract. The Fund's activity in
futures contracts will be limited to municipal bond index futures contracts and
Treasury Bond and Note contracts.
Unlike when the Fund purchases or sells a security, no price would be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open positions
in futures contracts, 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,
U.S. government securities, suitable money market instruments, or liquid,
high-grade debt securities, known as "initial margin." The margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased and
sold on margins that may range upward from less than 5% of the value of the
contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the Fund.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marked to the market." The Fund expects to
earn interest income on its margin deposits.
Although futures contracts, by their terms, typically require actual
future delivery of and payment for financial instruments, (or, in the case of
municipal bond index futures contracts settle, in cash at the spot market value
of the index on the closing day of the contract) in practice most futures
contracts are usually closed out before the delivery date of securities or, in
the case of municipal bond index futures contract purchase or expiration of the
contract. Closing out an open futures contract purchase or sale is effected by
entering into an offsetting futures contract purchase or sale, respectively, for
the same aggregate amount of the identical type of financial instrument and the
same delivery date. If the offsetting purchase price is less than the original
sale price, the Fund realizes a gain; if it is more, the Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be no
assurance, however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If the Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures contract.
As an example of an offsetting transaction in which the financial
instrument is not delivered, the contractual obligations arising from the sale
of one contract of September municipal bonds index futures on an exchange may be
fulfilled at any time before delivery of the contract is required (i.e., on a
specified date in September, the "delivery month") by the purchase of one
contract of September municipal bond index futures on the same exchange. In such
instance, the difference between the price at which the futures contract was
sold and the price paid for the offsetting purchase, after allowance for
transaction costs, represents the profit or loss to the Fund.
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are volatile
and are influenced, among other things, by actual and anticipated changes in
interest rates, which in turn are affected by fiscal and monetary policies and
national and international political and economic events.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of futures contracts may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of futures contract,
no trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase 10% of
the value of the futures contract is deposited as margin, a subsequent 10%
decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, the Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.
Furthermore, in the case of a futures contract purchase, in order to be certain
that the Fund has sufficient assets to satisfy its obligations under a futures
contract, the Fund earmarks to the futures contract money market instruments
equal in value to the current value of the underlying instrument less the margin
deposit.
Liquidity. The Fund may elect to close some or all of its futures
positions at any time prior to their expiration. The Fund would do so to reduce
exposure represented by long futures positions or increase exposure represented
by short futures positions. The Fund may close its positions by taking opposite
positions which would operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin would then be made,
additional cash would be required to be paid by or released to the Funds, and
the Funds would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract at any
particular time. In such event, it might not be possible to close a futures
contract, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. However, in the
event futures contracts have been used to hedge portfolio securities, the Fund
would continue to hold securities subject to the hedge until the futures
contracts could be terminated. In such circumstances, an increase in the price
of the securities, if any, might partially or completely offset losses on the
futures contract. However, as described below, there is no guarantee that the
price of the securities will, in fact, correlate with the price movements in the
futures contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when and how to hedge involves
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the Fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of securities which are the subject of the hedge. The
Adviser will, however, attempt to reduce this risk by entering into futures
contracts whose movements, in its judgment, will have a significant correlation
with movements in the prices of the Fund's securities sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to the Adviser's ability to correctly predict movements in the
direction of the market. It is possible that, when the Fund has sold futures to
hedge its portfolio against a decline in the market, the securities on which the
futures are written might advance and the value of securities held by the Fund
might decline. If this were to occur, the Fund would lose money on the futures
and also would experience a decline in value in its portfolio securities.
However, while this might occur to a certain degree, the Adviser believes that
over time the value of the Fund will tend to move in the same direction as the
securities underlying the futures, which are intended to correlate to the price
movements of the portfolio securities sought to be hedged. It is also possible
that if the Fund were to hedge against the possibility of a decline in the
market (adversely affecting securities held in its portfolio) and prices instead
increased, the Fund would lose part or all of the benefit of increased value of
those securities that it has hedged, because it would have offsetting losses in
its futures positions. In addition, in such situations, if the Fund had
insufficient cash, it might have to sell securities to meet daily variation
margin requirements. Such sales of securities might be, but would not
necessarily be, at increased prices (which would reflect the rising market). The
Fund might have to sell securities at a time when it would be disadvantageous to
do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with the price movements in the
underlying security due to certain market distortions. First, all participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors might close futures contracts through offsetting transactions which
could distort the normal relationship between the underlying instruments and
futures markets. Second, the margin requirements in the futures market are less
onerous than margin requirements in the securities markets, and as a result the
futures market might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market might also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market and also because of the imperfect correlation between price
movements in the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by the Adviser might
not result in a successful hedging transaction over a very short time period.
Options on Interest Rate Futures Contracts
The Fund might trade in municipal bond index option futures or similar
options on futures developed in the future. In addition, the Fund may also trade
in options on futures contracts in U.S. Government securities and any U.S.
government securities futures index contract which might be developed. The
Adviser believes that there is a high degree of correlation in the interest
rate, and price movements of U.S. government securities and municipal
securities. However, the U.S. government securities market and municipal
securities markets are independent and may not move in tandem at any point in
time.
The Fund will purchase put options on interest rate futures contracts to
hedge its portfolio of municipal securities against the risk of rising interest
rates, and the consequent decline in the prices of the municipal securities it
owns. The Fund will also write call options on futures contracts as a hedge
against a modest decline in prices of the municipal securities held in the Fund.
If the futures price at expiration of a written call option is below the
exercise price, the Fund will retain the full amount of the option premium,
thereby partially hedging against any decline that may have occurred in the
Fund's holdings of debt securities. If the futures price when the option is
exercised is above the exercise price, however, the Fund will incur a loss,
which may be wholly or partially offset by the increase of the value of the
securities in the Fund which were being hedged.
Writing a put option on a futures contract serves as a partial hedge
against an increase in the value of securities the Fund intends to acquire. If
the futures price at expiration of the option is above the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase that may have occurred in the price of the debt
securities the Fund intends to acquire. If the futures price when the option is
exercised is below the exercise price, however, the Fund will incur a loss,
which may be wholly or partially offset by the decrease in the price of the
securities the Fund intends to acquire.
Options on futures are similar to options on securities except that
options on futures give the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), rather than purchase or sell
the futures contract, at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds (in the case of a call) or is less than
(in the case of a put) the exercise price of the option on the futures contract.
Alternatively, settlement may be made totally in cash. Purchasers of options who
fail to exercise their options prior to the exercise date suffer a loss of the
premium paid.
From time to time, a single order to purchase or sell futures contracts
(or options thereon) may be made on behalf of the Fund and other accounts. Such
aggregated orders would be allocated among the Fund and the accounts in a fair
and non-discriminatory manner.
Special Risks of Transactions in Options on Futures Contracts
The Fund may seek to close out an option position by writing or buying
an offsetting option covering the same security and having the same exercise
price and expiration date. The ability to establish and close out positions on
such options will be subject to the maintenance of a liquid secondary market.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options, or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders. In the event no such market exists for a particular contract in which
the Fund maintains a position, in the case of a written option, the Fund would
have to wait to sell the underlying securities or futures position until the
option expires or is exercised. The Fund would be required to maintain margin
deposits on payments until the contract is closed. Options on futures are
treated for accounting purposes in the same way as the analogous options on
securities are treated.
In addition, the correlation between movements in the price of options
on futures contracts and movements in the price of the securities hedged can
only be approximate. This risk is significantly increased when an option on a
U.S. government securities future or an option on a municipal securities index
future is used to hedge a municipal bond portfolio. Another risk is that the
movements in the price of options on futures contracts may not move inversely
with changes in interest rates. If the Fund has written a call option on a
futures contract and the value of the call increases by more than the increase
in the value of the securities held as cover, the Fund may realize a loss on the
call which is not completely offset by the appreciation in the price of the
securities held as cover and the premium received for writing the call.
The successful use of options on futures contracts requires special
expertise and techniques different from those involved in portfolio securities
transactions. A decision of whether, when and how to hedge involves skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or interest rate trends. During periods
when municipal securities market prices are appreciating, the Fund may
experience poorer overall performance than if it had not entered into any
options on futures contracts.
General Considerations
Transactions by the Fund in options on futures will be subject to
limitations established by each of the exchanges, boards of trade or other
trading facilities governing the maximum number of options in each class which
may be written or purchased by a single investor or group of investors acting in
concert, regardless of whether the options are written on the same or different
exchanges, boards of trade or other trading facilities or are held or written in
one or more accounts or through one or more brokers. Thus, the number of
contracts which the Funds may write or purchase may be affected by contracts
written or purchased by other investment advisory clients of the Adviser. An
exchange, board of trade or other trading facility may order the liquidations of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
Federal Tax Treatment of Futures Contracts
Although the Fund invests almost exclusively in securities which
generate income which is exempt from federal and Nebraska state income taxes,
the instruments described above are not exempt from such taxes. Therefore, use
of investment techniques described above could result in taxable income to
shareholders of the Fund.
Generally, the Fund is required, for federal income tax purposes, to
recognize as income for each taxable year its net unrealized gains and losses on
futures contracts as of the end of the year as well as those actually realized
during the year. Gain or loss recognized with respect to a futures contract will
generally be 60% long-term capital gain or loss and 40% short-term capital gain
or loss, without regard to the holding period of the contract.
Futures contracts which are intended to hedge against a change in the
value of securities may be classified as "mixed straddles," in which case the
recognition of losses may be deferred to a later year. In addition, sales of
such futures contracts on securities may affect the holding period of the hedged
security and, consequently, the nature of the gain or loss on such security on
disposition.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from dividends, interest, certain other types
of income, including income from loans of securities, and gains from the sale of
securities. Gains realized on the sale or other disposition of securities,
including futures contracts on securities, held for less than three months, must
be limited to less than 30% of the Fund's annual gross income. In order to avoid
realizing excessive gains on securities held less than three months, the Fund
may be required to defer the closing out of futures contracts beyond the time
when it would otherwise be advantageous to do so. It is anticipated that
unrealized gains on futures contracts, which have been open for less than three
months as of the end of the Fund's fiscal year and which are recognized for tax
purposes, will not be considered gains on securities held less than three months
for purposes of the 30% test.
The Fund will distribute to shareholders annually any net gains which
have been recognized for federal income tax purposes from futures transactions
(including unrealized gains at the end of the Fund's fiscal year). Such
distributions will be combined with distributions of ordinary income or capital
gains realized on the Fund's other investments. Shareholders will be advised of
the nature of the payments. The Fund's ability to enter into transactions in
options on futures contracts may be limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company.
OPTIONS ON SECURITIES
The Fund has no current intention of investing in options on securities,
although it reserves the right to do so. Appropriate disclosure would be added
to the Fund's prospectus and Statement of Additional Information when and if the
Fund decides to invest in options.
Repurchase Agreements.
The Fund may invest in repurchase agreements on U. S. Government
securities. The Fund's Custodian will hold the securities underlying any
repurchase agreement or such securities will be part of the Federal Reserve Book
Entry System. The market value of the collateral underlying the repurchase
agreement will be determined on each business day. If at any time the market
value of the collateral falls below the repurchase price of the repurchase
agreement (including any accrued interest), the Fund will promptly receive
additional collateral so that the total collateral is an amount at least equal
to the repurchase price plus accrued interest.
RISK FACTORS
The Fund's concentration in the debt obligations of the State of
Nebraska carries a higher risk than a portfolio that is geographically
diversified. There are 93 counties and 535 incorporated municipalities in
Nebraska, many of which may have outstanding debt. A number of other public
authorities and private, nonprofit organizations, including utilities, also
issue tax exempt debt within the State of Nebraska.
Economy. The economy of the State of Nebraska continues to demonstrate
relatively strong performance, with estimated personal income for 1995 at
$21,703. Total State employment was 869,000 in 1995, with the majority of jobs
in trade, services and government. Unemployment was 2.6% in 1995, compared to a
national average of 5.6%. The State's population in 1990 was 1,578,385, with
1,637,112 estimated for 1995. Two-fifths of the population is concentrated in
the three metropolitan areas of Lincoln, Omaha and South Sioux City.
Debt. The State of Nebraska does not issue debt. Local governments issue
three basic types of debt, with varying degrees of credit risk: general
obligation bonds backed by the unlimited, and in some cases limited, taxing
power of the issuer, revenue bonds secured by specific pledged fees or charges
for a related project, and tax-exempt lease obligations, secured by annual
appropriations by the issuer, usually with no implied tax or specific revenue
appropriations by the issuer. In 1995, $849 million in municipal debt was issued
in Nebraska, with approximately 25% representing general obligation debt and 75%
revenue bonds, compared to 38% general obligation and 62% revenue backed bonds
nationally.
Many agencies and other instrumentalities of the State government are
authorized to borrow money under legislation which expressly provides that the
loan obligations shall not be deemed to constitute a debt or a pledge of the
faith and credit of the State of Nebraska. Representative issuers of this kind
of debt include the Nebraska Educational Facilities Authority and Nebraska
Investment Finance Authority. The principal of and interest on bonds issued by
these bodies are payable solely from various sources, principally fees generated
from use of the facilities, enterprises financed by the bonds, or other
dedicated fees.
Financial. To a large degree, the risk of the Fund is dependent upon the
financial strength of the State of Nebraska and its political subdivisions.
Agriculture traditionally has been the backbone of Nebraska's economy, although
its strength has diminished in the last two decades compared to other sectors.
Its continued importance to the State's economy was clearly demonstrated in
recent years, when increasing farm credit problems and adverse weather
conditions affected other sectors interacting with agriculture. These sectors
include manufacturers of farm equipment and supplies; feed, seed, and other farm
supply retailers; truckers transporting farm products; and banks providing loans
for farm operating capital. While Nebraska has not experienced severe symptoms
of past national recessions, the State has faced budget crises in the recent
past (see Property Tax System below).
Property Tax System. The passage of certain legislation relating to
personal property taxes by the Nebraska Legislature and a recent challenge of
the current taxation system make it difficult to predict what the effect will be
on the ability of political subdivisions in the State to levy and collect ad
valorem taxes to support their governmental operations. These concerns were
initiated by litigation involving railroad rolling stock, the taxation of which
is governed by the provisions of the Federal Railroad Revitalization and
Regulatory Reform Act (the "4-R Act"). As a result of the successful challenge
by the railroad of personal property taxes levied on railroad rolling stock,
further challenges to personal property taxes levied on pipelines and other
interstate businesses with personal property in Nebraska were filed and
ultimately raised the issue of the validity of Nebraska's system of personal
property taxation under the provisions of Article VIII, Section 1 of the
Nebraska Constitution requiring that taxes be "levied uniformly and
proportionately upon all tangible property and franchises."
In order to resolve the constitutional issues raised by a number of
lawsuits, the 1992 Nebraska Legislature submitted an amendment to Article VIII,
Section 1 of the Nebraska Constitution ("Amendment 1") allowing the exemption of
certain classes of personal property from taxation and the taxation of
nonexempted personal property at depreciated cost to the electors of the State
of Nebraska at the May 12, 1992 primary election. The Constitutional amendment
was approved by the required number of voters and has been effective since June
8, 1992. As a result of the adoption of Amendment 1, the Legislature has
exempted certain classes of tangible personal property from taxation and concern
over the validity of the State's property taxation system has been reduced. The
1992 Nebraska Legislature also passed, during a special session following the
approval of Amendment 1, Legislative Bill 1 containing revisions to the Nebraska
statutes concerning the levy and collection of property taxes and taxing all
depreciable income-producing personal property at its net book value beginning
in tax year 1992.
Both Amendment 1 and Legislative Bill 1, as enacted, were recently
challenged in Lancaster County District Court as unconstitutional because they
create ad valorem taxes that are not uniform nor proportionate. Boettcher v.
State, 494-102. The case was dismissed on May 30, 1995 based upon lack of
jurisdiction, but the plaintiffs have appealed such dismissal. The Nebraska
Supreme Court removed the case from the docket of the Nebraska Court of Appeals
and assumed jurisdiction. Briefs in the case were filed in December, 1995 and
argument before the Supreme Court is not expected earlier than June, 1997.
Puerto Rico. From time to time the Fund may invest in obligations of the
Commonwealth of Puerto Rico and its public corporations exempt from federal and
Nebraska state and local income taxes. The majority of the Commonwealth's debt
is issued by ten of the major public agencies that are responsible for many of
the islands' public functions, such as water, wastewater, highways,
telecommunications, education, and public construction.
Since the 1980's, Puerto Rico's economy and financial operations have
paralleled the economic cycles of the United States. The island's economy,
particularly the manufacturing sector, has experienced substantial gains in
employment. Unemployment, while reaching its lowest level in ten years, still
remains high. Much of these economic gains are attributable in part to favorable
treatment under Section 936 of the U.S. Federal Tax Code for U.S. corporations
doing business in Puerto Rico.
Debt ratios for the Commonwealth are high as it assumes much of the
responsibility for local infrastructure. Sizable infrastructure improvements are
anticipated to upgrade the island's water, sewer, and road system. The
Commonwealth's general obligation debt is secured by a first lien on all
available revenues.
The Commonwealth's economy remains vulnerable to changes in oil prices,
American trade, foreign policy, and levels of federal assistance. Per capita
income levels, while the highest in the Caribbean, lag far behind the United
States.
Other Risk Factors. Because of its investment policies, the Fund may not
be suitable or appropriate for all investors. The Fund is designed for investors
who want a high level of current income that is exempt from federal and Nebraska
state income taxes. Investors in the Fund should not rely on the Fund for their
short-term financial needs. The principal values of longer term securities
fluctuate more widely in response to changes in interest rates than those of
shorter term securities, providing greater opportunity for capital gain or risk
of capital loss.
In addition, because the Fund may invest up to 5% of assets in
noninvestment-grade ("junk bond") securities and since investors generally
perceive that there are greater risks associated with investment in lower
quality securities, the yields from such securities normally exceed those
obtainable from higher quality securities. On the other hand, short-term market
developments generally have a greater effect on the value of lower rated
securities--causing their principal value to fluctuate more widely relative to
higher quality securities.
There can be no assurance that the Fund will achieve its investment
objective. Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the money market and the municipal bond
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. Municipal securities with longer maturities tend to
produce higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities and lower
yields. The market prices of municipal securities usually vary, depending upon
available yields. An increase in interest rates will generally reduce the value
of Fund investments, and a decline in interest rates will generally increase the
value of Fund investments. The ability of the Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of
municipal securities in which the Fund invests to meet their obligations for the
payment of interest and principal when due. The ratings of Moody's and S&P
represent their opinions as to the quality of municipal securities which they
undertake to rate. Ratings are not absolute standards of quality; consequently,
municipal securities with the same maturity, coupon, and rating may have
different yields. There are variations in municipal securities, both within a
particular classification and between classifications, depending on numerous
factors. It should also be pointed out that, unlike other types of investments,
municipal securities have traditionally not been subject to regulation by, or
registration with, the Securities and Exchange Commission, although there have
been proposals which would provide for regulation in the future.
The federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be authorized to
initiate bankruptcy proceedings without prior notice to or consent of creditors,
which proceedings could result in material and adverse changes in the rights of
holders of their obligations.
Proposals have been introduced in Congress to restrict or eliminate the
federal income tax exemption for interest on municipal securities, and similar
proposals may be introduced in the future. Some of the past proposals would have
applied to interest on municipal securities issued before the date of enactment,
which would have adversely affected their value to a degree. If such a proposal
were enacted, the availability of municipal securities for investment by the
Fund and the value of each Fund's investments would be affected and, in such an
event, the Fund would reevaluate its investment objectives and policies.
Although the banks and securities dealers from which the Fund will
acquire repurchase agreements, puts, or purchase participation interests on
municipal securities, will be banks and securities dealers that the Adviser
believes to be financially sound, there can be no assurance that they will be
able to honor their obligations to the Fund with respect to such securities.
The Fund's concentration in securities issued by municipalities and
political subdivisions of the State of Nebraska involves greater risk than
investing in municipal securities issued by a diversified group of entities from
various geographical areas in the United States. Specifically, the credit
quality of the Fund will depend upon the continued financial strength of the
public bodies and municipalities in Nebraska. The State of Nebraska does not
issue debt and, as a result, the financial condition of each municipality or
political subdivision for each issue must be analyzed separately.
Municipal securities issued by Nebraska municipalities and political
subdivisions generally have been highly regarded. Defaults on Nebraska municipal
securities have been confined to issues made by sanitary improvement districts
primarily occurring in the early 1980's and a few of the industrial development
bond issues also occurring in the early 1980's.
The Fund expects to invest a substantial portion of its assets in the
debt obligations of local governments and public authorities in the State of
Nebraska. While local governments in Nebraska are predominantly reliant on
independent revenue sources, such as property taxes, they are not immune to
budget shortfalls caused by cut-backs in state aid. None of the obligations
issued by public authorities in Nebraska are backed by the full faith and credit
of the State of Nebraska. In addition, property tax increases and general
increases in governmental spending may be subject to voter approval.
The Fund may also invest in certain sectors of the municipal securities
market which have unique risks. The sectors include, but are not limited to,
investments in issuances of health care providers, electric revenue issues with
exposure to nuclear power plants, and private activity bonds without
governmental backing. Each of these sectors is impacted by its own unique set of
circumstances, including significant regulatory impacts, which may adversely
affect an issuer's financial performance.
Investment in Puerto Rico obligations requires a careful assessment of
certain risk factors. These include reliance on substantial federal assistance
and favorable tax programs, above average levels of employment and low wealth
levels, and an economy vulnerable to adverse shifts in energy prices in U.S.
foreign trade/monetary policies. These risks are countered by strong security
provisions, a long history of timely debt repayment and improved financial
practices.
INVESTMENT RESTRICTIONS
The Prospectus identifies a number of important policies and
restrictions which are considered fundamental and cannot be changed without the
approval of shareholders. Additional investment policies and restrictions which
cannot be changed without shareholder approval are described below. Shareholder
approval requires the approval of a "majority" of the Fund's outstanding voting
securities, that is, by (a) 67% or more of the securities voting at a special or
annual meeting if more than 50% of the outstanding shares of the Fund's Common
Stock are represented at such meeting in person or by proxy; or (b) more than
50% of the Fund's outstanding Common Stock, whichever is less.
Unless otherwise specified below, the Fund will not:
1. Borrow money, except (i) the Fund may borrow from banks as a
temporary measure for extraordinary or emergency purposes, and then only in
amounts not exceeding 15% of its total assets valued at market; (ii) the Fund
may enter into reverse repurchase agreements; and (iii) the Fund may also enter
into futures contracts as set forth in 4. below;
2. Purchase or sell commodities or commodity contracts; except that
the Fund may enter into futures contracts or options on futures contracts,
subject to 4. below;
3. Purchase equity securities, or securities convertible into equity
securities;
4. Enter into a futures contract or options thereon if, as a result
thereof, (i) the then current aggregate futures market prices of securities
required to be delivered under open futures contract sales plus the then current
aggregate purchase prices of securities required to be purchased under open
futures contracts purchases would exceed 30% of the Fund's total assets (taken
at market value at the time of entering into the contract) or (ii) more than 5%
of the Fund's total assets (taken at market value at the time of entering into
the contract) would be committed to margin or premiums on options on such
futures contracts; provided, however, that in the case of an option which is
in-the-money at the time of purchase, the in-the-money amount as defined under
certain CFTC regulations may be excluded in computing such 5%;
5. Purchase any security if, as a result, 25% or more of the value of
the Fund's total assets would be invested in the securities of issuers having
their principal business activities in the same industry, except that this
limitation does not apply to : (i) securities issued or guaranteed by the U.S.
Government, or any of its agencies or instrumentalities; and (ii) municipal
securities. For the purpose of this restriction, industrial development bonds
issued by nongovernmental users will not be considered to be municipal
securities;
6. Make loans, although the Fund may (i) purchase issues of debt
securities, acquire privately negotiated loans to tax-exempt borrowers, and
enter into repurchase agreements and (ii) lend portfolio securities provided
that no such loan may be made if, as a result, the aggregate of such loan would
exceed 30% of the value of the Fund's total assets;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Fund as security for indebtedness except (i) as may be
necessary in connection with permissible borrowings and then such mortgaging,
pledging, or hypothecating may not exceed 15% of the Fund's total assets valued
at cost at the time of borrowing; provided, however, that as a matter of
operating policy, which may be changed without shareholder approval, the Fund
will limit any such mortgaging, pledging or hypothecating to 10% of its net
assets, valued at market, in order to comply with certain state investment
restrictions, and (ii) it may enter into futures contracts as set forth in 4.
above;
8. Purchase a security if, as a result, more than 25% of the outstanding
voting securities of any issuer would be held by the Fund, except securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities;
9. Purchase or sell real estate (although it may purchase municipal
securities and other debt securities secured by real estate or interests
therein);
10. Purchase restricted securities or other securities to the extent
such securities are not readily marketable or invest in repurchase agreements
which do not provide for payment within seven days if, as a result of such
investment, more than 10% of the Fund's net assets would be invested in such
securities;
11. Issue senior securities except in compliance with the Investment
Company act of 1940;
12. Make short sales of securities or purchase securities on margin,
except for such short-term credit as may be necessary for the clearance of
purchases of Fund securities; except that it may make margin deposits in
connection with interest rate futures contracts, subject to 4. above;
13. Underwrite any issue of securities, except to the extent that the
purchase of municipal securities, or other permitted investments, directly from
the issuer thereof (or from an underwriter for an issuer) and the later
disposition of such securities in accordance with the Fund's investment program
may be deemed to be an underwriting;
14. Purchase any security if, as a result, more than 5% of the value of
the Fund's total assets would be invested in the securities of issuers which at
the time of purchase had been in operation for less than three years except
obligations issued or guaranteed by the U.S. Government, or its agencies, and
municipal securities (for this purpose, the period of operation of any issuer
shall include the period of operation of any predecessor or unconditional
guarantor of such issuer); provided, however, that for the purpose of this
limitation, industrial development bonds issued by nongovernmental users shall
not be deemed municipal securities;
15. Purchase any securities other than those described under "Investment
Objectives, Policies and Restrictions" in the Prospectus;
16. Invest with a view to exercising control or influencing management;
17. Purchase or sell interests in oil, gas or other mineral exploration or
development program;
18. Make short sales of securities or maintain a short position or purchase
puts, calls, straddles, spreads or combinations thereof;
19. Purchase the securities of other investment companies except as
provided by Section 12(d)(1)(F) 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.
<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>
Name, Position with Fund and Address Principal Occupation Last Five Years
Name, Position with Fund and Address Principal Occupation Last Five Years
*Thomas C. Smith, Chairman, President, age 51; Chief Chairman, CONLEY SMITH, Inc., Omaha,
Executive Officer and Treasurer; 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,
Concorde Management
and Development, Inc.,
Lincoln, Nebraska
Thomas D. Potter, Director; age 56; President and Chief Executive Officer, Lincoln
1800 Memorial Drive, Mutual Life Insurance Company, Lincoln,
Lincoln, Nebraska 68502 Nebraska; December, 1987 - Current
Dale C. Tinstman, Director; age 77; Financial and Investment Consultant;
Suite 200, Chairman of University of Nebraska
1201 "O" Street, Foundation; Director and Consultant of
Lincoln, Nebraska 68508 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, President Larsen Bryant & Porter
Lincoln, Nebraska 68510 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 Trust 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 ended June 30, 1996:
Compensation Table
Aggregate Total Compensation
Compensation From the Fund
Name and Position From Fund Paid to Directors
- ----------------- ------------- -----------------
Thomas D. Potter, Director $1,200 $1,200
Dale C. Tinstman, Director $1,200 $1,200
Thomas R. Larsen, Director $1,200 $1,200
Thomas C. Smith, Chairman $ $
John H. Conley, Director $ $
INVESTMENT ADVISORY AND OTHER SERVICES
General
The investment adviser for the Fund is CONLEY SMITH, Inc. (the
"Adviser") . The administrator and transfer agent for the Fund is Lancaster
Administrative Services, Inc., (the "Administrator"). The Adviser's address is
444 Regency Parkway, Suite 202 Lake Regency Building, Omaha, Nebraska 68114. The
Administrator's address is 200 Centre Terrace, 1225 L Street, Lincoln, Nebraska
68508. The Adviser and Administrator will act as such pursuant to written
agreements which will be periodically approved by the directors or the
shareholders of the Trust.
Control of the Adviser 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.
Investment Advisory Agreements and Administration Agreement
The Advisory Agreement and Administration Agreement have been approved
by the Board of Directors (including a majority of the directors who are not
parties to the Advisory and Administration Agreements, or interested persons of
any such party, other than as directors of the Trust).
The Advisory Agreement and Administration Agreement terminate
automatically in the event of their assignment. In addition, the Advisory
Agreement and Administration Agreement are terminable at any time, without
penalty, by the Board of Directors of the Trust or by vote of a majority of the
Trust's outstanding voting securities on not more than 60 days' written notice
to the Adviser and the Administrator, as the case may be, and by the Adviser and
Administrator, as the case may be, on 60 days' written notice to the Trust.
Unless sooner terminated, the Advisory Agreement and Administration Agreement
shall continue in effect only so long as such continuance is specifically
approved at least annually by either the Board of Directors or by a vote of a
majority of the outstanding voting securities of the Trust, 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.
Pursuant to the Advisory Agreement, the Fund pays the Adviser a monthly
advisory fee equal on an annual basis to .15% of the Fund's average daily net
assets.
Pursuant to the Administration Agreement, the Administrator provides, or
contracts with others to provide, the Trust all necessary bookkeeping and
shareholder record keeping services, share transfer services, and custodial
services. Under the Administration Agreement, the Administrator receives an
administration fee, computed separately for each Fund of the Trust and paid
monthly, at an annual rate of .125% of the daily average net assets of the
Trust. For the period ending June 30, 1994, the Fund paid the Adviser $3,782 for
advisory and administrative services. The Adviser waived $13,650 of the fees it
was entitled to receive for such services for the months of November, 1993
through June, 1994. For the year ended June 30, 1996, and 1995 the Fund paid the
Adviser $28,666 and $24,854 for advisory and administrative services.
Under the Advisory Agreement, the Adviser provides the Fund with advice
and assistance in the selection and disposition of the Fund's investments. All
investment decisions are subject to review by the Board of Directors of the
Trust. The Adviser is obligated to pay the salaries and fees of any affiliates
of the Adviser serving as officers or directors of the Trust.
The laws of certain states require that if a mutual fund's expenses
(including advisory fees but excluding interest, taxes, brokerage commissions
and extraordinary expenses) exceed certain percentages of average net assets,
the fund must be reimbursed for such excess expenses. The Fund should not ever
exceed such limits. In its sole discretion the Adviser and Administrator may
waive all or part of the advisory or administration fees.
Any such waiver may be discontinued at any time.
DISTRIBUTION PLAN
Rule 12b-1(b) under the Investment Company Act of 1940 provides that any
payments made by the Fund in connection with financing the distribution of its
shares may only be made pursuant to a written plan describing all aspects of the
proposed financing of distribution, and also requires that all Agreements with
any person relating to the implementation of the plan must be in writing.
Because some of the payments described below to be made by the Fund are
distribution expenses within the meaning of Rule 12b-1, the Trust has entered
into an Underwriting and Distribution Agreement with the Distributor pursuant to
a Distribution Plan adopted in accordance with such Rule. Under the Underwriting
and Distribution Agreement, the Distributor on a best efforts basis,
continuously distributes the Fund's shares.
In addition, Rule 12b-1(b)(1) requires that such plan be approved by a
majority of the 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
members of the Board of Directors who are not interested persons of the Trust
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
12b-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 Trust pursuant to the plan or any related
agreement shall provide to the Trust'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
Trust who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of the plan or in any
agreements related to the plan or by a vote of a majority of the
outstanding voting securities of the Fund.
Rule 12b-1(b)(4) requires that such a plan may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments to the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Trust may rely upon Rule 12b-1(b) only
if the selection and nomination of the Trust's disinterested directors are
committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the Trust 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 Trust and its shareholders. The Board of
Directors has concluded that there is a reasonable likelihood that the
Distribution Plan will benefit the Trust and its shareholders.
Pursuant to the provisions of the Distribution Plan, as amended, the
Fund pays a fee to the Distributor computed and paid monthly at the annual rate
of up to .25% for the Fund's average daily net assets in order to reimburse the
Distributor for its actual expenses incurred in the distribution and promotion
of the Fund's shares. In its sole discretion the Distributor may waive all or
part of such fee. Any such waiver may be discontinued at any time. Additionally,
the Distributor receives commissions consisting of that portion of the sales
charge remaining after reallowance to dealers.
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; shareholder account
servicing fees; and other distribution-related expenses. Compensation may be
paid out of such amounts to investment executives of the Distributor and to
broker-dealers which have entered into sales agreements with the Distributor as
follows. If shares of the Fund are sold by a representative of a broker-dealer
other than the Distributor, that portion of the reimbursement which is
attributable to shares sold by such representative is paid to such
broker-dealer. If shares of the Fund are sold by an investment executive of the
Distributor, compensation will be paid to the investment executive by the
Distributor in an amount not to exceed that portion of .25% of the average daily
net assets of the Fund which is attributable to shares sold by such investment
executive. For the period ending June 30, 1996, the Fund paid to the Distributor
$26,465 under the Distribution Plan. The Distributor paid to its agents $18,536
and $7,929 to other broker-dealers of such fees. The Distributor also received
$13,851and retained $3,119 (after allowances to dealers) as its portion of the
sales charges paid by purchasers of the Fund shares. Thomas C. Smith, a director
and officer of the Trust, controls the Distributor and as a result has a
financial interest in the Distribution Plan.
FUND TRANSACTIONS AND BROKERAGE ALLOCATIONS
The Adviser is responsible for decisions to buy and sell securities for
the Fund, the selection of broker-dealers to effect the transactions and the
negotiation of brokerage commissions, if any. In placing orders for securities
transactions, the primary criterion for the selection of a broker-dealer is the
ability of the broker-dealer, in the opinion of the Adviser, to secure prompt
execution of the transactions at the most favorable prices. In selecting
broker-dealers the Adviser may consider a number of factors including but not
limited to the reasonableness of the commission (if any), quality of services,
research services and execution.
When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research and/or services to the Adviser.
Such research or services include advice, both directly and in writing, as to
the value of securities; the advisability of investing in, purchasing or selling
securities; and the availability of securities, or purchasers or sellers of
securities, as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. This allows the Adviser to supplement its own investment research
activities and enables the Adviser to obtain the views and information of
individuals and research staffs of many different securities firms prior to
making investment decisions for the Fund. To the extent portfolio transactions
are effected with broker-dealers who furnish research services to the Adviser,
the Adviser receives a benefit, not capable of evaluation in dollar amounts,
without providing any direct monetary benefit to the Fund from these
transactions. The Adviser believes that most research services obtained by it
generally benefit several or all of the accounts which it manages, as opposed to
solely benefiting one specific managed fund or account. Normally, research
services obtained through managed funds or accounts investing in common stocks
would primarily benefit the managed funds or accounts which invest in common
stock; similarly, services obtained from transactions in fixed-income securities
would normally be of greater benefit to the managed funds or accounts which
invest in debt securities.
The Adviser has not entered into any formal or informal agreements with
any broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Fund's transactions in exchange for
research services provided the Adviser except as noted below. However, from time
to time, the Adviser may elect to use certain brokers to execute transactions in
order to encourage them to provide the Adviser with research services which the
Adviser anticipates will be useful to it. The Adviser will authorize the Fund to
pay an amount of commission for effecting a securities transaction in excess of
the amount of commission another broker-dealer would have charged only if the
Adviser determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either that particular transaction or the
Adviser's overall responsibilities with respect to the accounts as to which it
exercises investment discretion.
Securities transactions for the Fund may be effected through the
Distributor, as discussed in the Prospectus under "Management-Portfolio
Brokerage." In determining the commissions to be paid to the Distributor, it is
the policy of the Fund that such commissions will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time,
and (b) at least as favorable as commissions contemporaneously charged by the
Distributor on comparable transactions for its most favored comparable
unaffiliated customers. While the Fund does not deem it practicable and in its
best interest to solicit competitive bids for commission rates on each
transaction, consideration will regularly be given to posted commission rates as
well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.
During the fiscal year ended June 30, 1996, the Fund incurred $18,000 of
brokerage commissions, all of which were paid to the Distributor. This amounted
to 100% of the total brokerage commissions paid by the Fund and represented 100%
of the total number of transactions involving commissions. Most of the Fund's
securities purchases are typically principal transactions involving new issues.
In certain instances, there may be securities which are suitable
investments for the Fund as well as for one or more of the advisory clients of
the Adviser. Investment decisions for the Fund and for such advisory clients are
made by the Adviser with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client of the Adviser even though it might be held by, or bought or sold
for, other clients. Likewise, a particular security may be bought for one or
more clients of the Adviser when one or more other clients are selling that same
security. Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser, particularly when
the same security is suitable for the investment objectives of more than one
client. When two or more clients of the Adviser are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a manner believed by the Adviser to be equitable to each (and may
result, in the case of purchases, in allocation of that security only to some of
those clients and the purchase of another security for other clients regarded by
the Adviser, as a satisfactory substitute). It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned. At the same time, however, it is
believed that the ability of the Fund to participate in volume transactions will
sometimes produce better execution prices.
CAPITAL STOCK AND CONTROL
A complete description of the rights and characteristics of the Fund's
capital stock is included in the Prospectus. As of June 30, 1996, UBATCO & CO.,
4732 Calvert Street, Lincoln, Nebraska, nominee of the Custodian, was the record
owner of 14.29% of the outstanding shares of the Fund. . Officers and directors
of the Trust, in the aggregate, owned less than 1% of the shares of the Fund as
of that date.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of the Fund's
shares is summarized in the Prospectus in the text following the headings
"Purchase of Shares--General" and "Valuation of Shares." The net asset value of
the Fund's shares is determined each day that the New York Stock Exchange is
open, provided that the net asset value need not be determined on days when no
shares are tendered for redemption and no order for 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.
Determination of Net Asset Value, Redemption Price and Maximum Offering
Price per Share as of June 30, 1996
Net asset value and redemption price per share (Net assets divided by
shares outstanding - $9.63)
Maximum offering price per share (100/96.10 of the per share net asset
value, which takes into account the Fund's current maximum sales charge) -
$10.02
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).
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 Fund of securities owned by it is
not reasonably practicable, or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the Securities and Exchange Commission, by order, so permits, provided that
applicable rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (b) or (c) exist.
CALCULATIONS OF PERFORMANCE DATA
From time to time the Trust may quote the yield for the Fund in
advertisements or in reports and other communications to shareholders. For this
purpose, yield is calculated by dividing the Fund's net investment income per
share for the base period which is 30 days or one month, by the Fund's maximum
offering purchase price on the last day of the period and annualizing the
result. The Fund's net investment income changes in response to fluctuations in
interest rates and in the expenses of the Fund. Consequently, any given
quotation should not be considered as representative of what the Fund's yield
may be for any specified period in the future.
Yield information may be useful in reviewing the Fund's performance and
for providing a basis for comparison with 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 the Fund's
total return to shareholders for that period. Other investment companies may
calculate yields on a different basis. In addition, investors should give
consideration to the quality and maturity of the 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 yield of the Fund for the 30-day period ended June 30, 1996 was
4.77%.
In connection with the quotations of yields in advertisements described
above, the Trust may also provide average annual total returns from the date of
inception for one, five and ten-year periods if applicable. Total return is a
calculation which equates an initial amount invested to the ending redeemable
value at a specified time. It assumes the reinvestment of all dividends and
capital gains distributions. Average total return will be the average of the
total returns for each year in the period. The Fund may also provide a total
return figure for the most recent calendar quarter prior to the publication of
the advertisement. The total return for the Fund for year ended June 30, 1996
was 4.25% and from inception (July 12, 1993) through June 30, 1996, annualized,
was 3.68%.
AUDITORS
The Board of Directors, including all disinterested directors,
unanimously approved the appointment of Deloitte & Touche LLP, 1040 NBC Center,
Lincoln, Nebraska 68508 as the Fund's accountants.
DIVIDENDS
All net investment income and capital gains of the portfolio are
distributed to shareholders periodically. Dividends are declared and paid once
each month. Capital gains distributions, if any, will be paid at least once per
year. Dividends are accrued and credited to shareholders' accounts and are
automatically reinvested in additional Fund shares on the dividend date each
month at the net asset value of the shares on such day, unless the shareholder
notifies the SMITH HAYES investment executive or other broker-dealer of an
election to receive cash. Cash payment, if requested, is made through the
dividend date and checks for such payment will be mailed within 5 days thereof.
TAX STATUS
The Fund anticipates that substantially all of the dividends declared
will be exempt from federal income taxes. Additionally, substantially all
dividends are anticipated to be exempt from the state income taxes of the state
of Nebraska. Due to seasonal variations and the supply of municipal securities
and temporary investment strategies, the Fund may generate income which is tax
exempt for federal purposes, nontax-exempt for Nebraska state income tax
purposes, income that may be subject to the alternative minimum tax, and/or
income that is not federal tax-exempt or Nebraska state income tax-exempt.
Annually the Trust or the Fund will mail shareholders Form 1099-DIV and other
information indicating the federal and state tax status of dividends and capital
gain distributions made by the Fund during the calendar year.
As indicated, the Fund may invest in certain "private activity" bonds,
which may result in some shareholders having to include income generated by
these bonds in their alternative minimum tax computation. The amount of
dividends declared by the Fund which are subject to alternative minimum tax will
be reported to shareholders in January.
A redemption or exchange of Fund shares by a shareholder is treated as a
sale for tax purposes which will result in a short or long-term capital gain or
loss to a shareholder, depending upon how long the shareholder has owned the
shares. In January of each year, shareholders will receive a Form 1099-B
indicating the trade date and proceeds from all sales and exchanges of portfolio
shares.
At the time of purchase, the share price of the Fund may reflect
undistributed capital gains or unrealized appreciation of securities. Any
capital gains which the Fund may declare from these amounts or from future
capital gains which are distributed to shareholders, are fully taxable assets.
CUSTODIAN
Union Bank & Trust Company, Lincoln, Nebraska (the "Bank"), under an
agreement with the Trust, is the custodian for the Fund's securities and cash.
The Bank's main office is at 4732 Calvert Street, Lincoln, Nebraska.
FINANCIAL STATEMENTS
The Fund hereby incorporates by reference the information in the Fund's
Financial Report dated June 30, 1996, attached hereto.
<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 October 1, 1996.
<PAGE>
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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
capital stock 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.
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 Company 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 1.00% 1.00%
12b-1 Fees None .50%
Other Expenses .32% .32%
------ ------
Total Fund Operating Expenses 1.32% 1.82%
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 $52 $79 $108 $191
Investor $18 $57 $98 $214
The example should not be considered a representation of past or future
expenses. Actual expenses could be greater or lower than those shown.
FINANCIAL HIGHLIGHTS
The following audited financial information, provides selected data for a
share of the Fund outstanding throughout the period indicated. The Company's
Annual Financial Report, is contained in the Statement of Additional Information
and 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 and Select shares
were first offered as of the date of this Prospectus. The fee structure of the
Fund to which the information below relates, is identical to that of the
Investor Shares.
For the Period from August 24, 1995 (commencement of operations)
to June 30, 1996
1996
Net asset value:
Income from investment operations: $10.00
-----
Net investment loss 0.04
Net realized and unrealized gain on investments 1.98
Total income from investment operations 2.02
-----
Distributions from capital gains (0.04)
-----
End of period $11.98
Total return 24.14% *
Ratios/Supplemental data:
Net assets, end of period (in millions) $8,529
Ratio of expenses to average net assets 1.82% *
Ratio of net income to average net assets 0.42% *
Portfolio turnover rate 31.35%
*Annualized
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").
Securities rated BBB-Baa by S&P and Moody's have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade securities.
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 and Risk Considerations - 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.
SPECIAL INVESTMENT METHODS AND RISK CONSIDERATIONS
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 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 ("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 and Risk Considerations - 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.
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.
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.
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.
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.
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.
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.
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).
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
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 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.
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. Market shares are not currently
offered. 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 five 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.
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.
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 auditors.
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>
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............. 12
Purchase of Shares...................... 13
Redemption of Shares.................... 16
Valuation of Shares..................... 17
Dividends and Taxes..................... 17
General Information..................... 18
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>
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>
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 October 1, 1996.
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
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
capital stock 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.
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 Company 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.
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 1.00% 1.00%
12b-1 Fees None .50%
Other Expenses .43% .43%
------ ------
Total Fund Operating Expenses 1.43% 1.93%
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 $53 $82 $114 $204
Investor $20 $61 $104 $225
The example should not be considered a representation of past or future
expenses. Actual expenses could be greater or lower than those shown.
FINANCIAL HIGHLIGHTS
The following audited financial information, provides selected data for a
share of the Fund outstanding throughout the periods indicated.The Company's
Annual Financial Report, is contained in the Statement of Additional Information
and 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 and Select shares
were first offered as of the date of this Prospectus. The fee structure of the
Fund to which the information below relates, is identical to that of the
Investor Shares.
<TABLE>
<CAPTION>
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 $11.97 11.69 12.58 10.76 9.96 9.86 9.68 9.24 10.00
----- ----- ----- ----- ---- ---- ---- ---- -----
Income (loss) from investment operations:
Net investment income 0.33 0.30 0.29 0.33 0.31 0.40 0.39 0.23 0.22
Net realized and
unrealized gain
(loss) on investments 1.73 1.01 (0.53) 2.16 0.80 (0.06) 0.16 0.43 (0.76)
---- ---- ------ ---- ---- ------ ---- ---- ------
Total income (loss) from
investment operations 2.06 1.31 (0.24) 2.49 1.11 0.34 0.55 0.66 (0.54)
---- ------ ---- ---- ---- ----- ---- ------
Less distributions:
Dividends from net
investment income (0.33)(0.30) (0.29) (0.33) (0.31) (0.21) (0.37) (0.22) (0.22)
Distributions from
capital gains (0.50) (0.73) (0.36) (0.34) - (0.03) - - -
------ ------ ------ ------ ------ ----- ------ ----- -----
Total distributions (0.83) (1.03) (0.65) (0.67) (0.31) (0.24) (0.37) (0.22) (0.22)
------ ------ ------ ------ ------ ------ ------ ------ ------
End of period $13.20 11.97 11.69 12.58 10.76 9.96 9.86 9.68 9.24
====== ===== ===== ===== ===== ==== ==== ==== ====
Total return 17.60% 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) $1,802 1,765 2,708 2,369 1,791 1,189 1,645 1,498 1,544
Ratio of expenses to
average net assets 1.93% 2.25% 2.06% 2.13% 2.48% 2.79% 2.57% 2.57%* 2.52%*
Ratio of net income to
average net assets 2.53% 2.58% 2.27% 2.91% 2.85% 3.48% 3.73% 4.73%* 4.58%*
Portfolio turnover rate 79.30% 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>
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
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."
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.
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 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.
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 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;
(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.
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.
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 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 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.
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-
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.
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.
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 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. Market shares are not currently
offered. 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 five 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.
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.
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 auditors.
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>
TABLE OF CONTENTS
Introduction............................ 1
Expenses................................ 3
Financial Highlights.................... 4
Investment Objective and Policies....... 5
Special Investment Methods.............. 7
Management.............................. 13
Distribution of Fund Shares............. 15
Purchase of Shares...................... 15
Redemption of Shares.................... 18
Valuation of Shares..................... 19
Dividends and Taxes..................... 19
General Information..................... 20
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>
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>
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 October 1, 1996.
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
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
capital stock 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.
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 Companyor 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.
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 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.
FINANCIAL HIGHLIGHTS
The following audited financial information, provides selected data for an
Investor share of the Fund outstanding throughout the periods indicated. The
Company's Annual Financial Report, is contained in the Statement of Additional
Information and 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 and
Select shares were first offered as of the date of this Prospectus. The fee
structure of the Fund to which the information below relates, is identical to
that of the Investor Shares.
Years Ended June 30, 1996, 1995, 1994 and 1993
1996 1995 1994 1993
---- ---- ---- ----
Net asset value:
Beginning of period $13.49 11.59 11.77 10.00
------ ----- ----- -----
Income from investment operations:
Net investment loss (0.10) (0.08) (0.07) (0.05)
Net realized and unrealized
gain on investments 2.91 2.34 0.20 1.83
---- ---- ---- ----
Total income from investment operations 2.81 2.26 0.13 1.78
---- ---- ---- ----
Distributions from capital gains (1.03) (0.36) (0.31) (0.01)
------ ------ ------ ------
End of period $15.27 13.49 11.59 11.77
====== ===== ===== =====
Total return 22.33% 20.33% 1.21% 17.80%
====== ====== ===== ======
Ratios/Supplemental data:
Net assets, end of period (in millions) $16,327 9,590 7,219 3,138
Ratio of expenses to average net assets 1.75% 1.93% 1.91% 2.18%
Ratio of net income to average net assets (0.67%) (0.60%) (0.60%) (0.87%)
Portfolio turnover rate 150.05% 86.50% 75.23% 47.55%
<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.
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.
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.
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 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 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.
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.
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-
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.
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 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. 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.
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. Market shares are not
currently offered. 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 five 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.
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.
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 auditors.
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>
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>
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>
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 October 1, 1996.
<PAGE>
[THIS PAGE LEFT BLANK INTENTIONALLY]
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
capital stock 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.
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 Company 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.
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 .85% .85%
12b-1 Fees None .25%
Other Expenses .32% .32%
------ -----
Total Fund Operating Expenses 1.17% 1.42%
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 $27 $52 $79 $155
Investor $14 $45 $78 $170
The example should not be considered a representation of past or future
expenses. Actual expenses could be greater or lower than those shown.
FINANCIAL HIGHLIGHTS
The following audited financial information, provides selected data for an
Investor share of the Fund outstanding throughout the periods indicated. The
Company's Annual Financial Report, is contained in the Statement of Additional
Information and 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 and
Select shares were first offered as of the date of this Prospectus. The fee
structure of the Fund to which the information below relates, is identical to
that of the Investor Shares.
<TABLE>
<CAPTION>
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 $10.43 10.21 11.17 10.93 10.42 10.31 10.56 10.01 10.00
------ ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from investment operations:
Net investment income 0.55 0.60 0.54 0.64 0.73 0.57 0.57 0.32 0.22
Net realized and
unrealized gain
(loss) on investments (0.28) 0.22 (0.75) 0.43 0.60 0.11 (0.16) 0.49 0.01
------ ---- ------ ---- ---- ---- ----- ---- ----
Total income (loss) from
investment operations 0.27 0.82 (0.21) 1.07 1.33 0.68 0.41 0.81 0.23
---- ---- ------ ---- ---- ---- ----- ---- ----
Less distributions:
Dividends from net
investment income (0.55) (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 (0.55) (0.60) (0.75) (0.83) (0.82) (0.57) (0.66) (0.26) (0.22)
------ ------ ------ ------ ------ ------ ------ ------ ------
End of period $10.15 10.43 10.21 11.17 10.93 10.42 10.31 10.56 10.01
====== ===== ===== ===== ===== ===== ===== ===== =====
Total return 2.83% 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) $3,525 4,694 8,832 9,709 8,112 6,060 4,080 2,555 1,313
Ratio of expenses to
average net assets 1.42% 1.47% 1.37% 1.38% 1.50% 1.58% 1.61% 1.51%* 1.55%*
Ratio of net income to
average net assets 5.21% 5.86% 4.94% 6.25% 6.64% 6.92% 7.11% 7.26%* 6.62%*
Portfolio turnover rate 36.11% 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>
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.
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.
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.
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.
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 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.
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 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.
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.
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.
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. Market shares are not
currently offered. 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 five 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.
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.
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 auditors.
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>
TABLE OF CONTENTS
Introduction............................ 1
Expenses................................ 3
Financial Highlights.................... 4
Investment Objective and Policies....... 5
Special Investment Methods.............. 5
Management.............................. 8
Distribution of Fund Shares............. 10
Purchase of Shares...................... 11
Redemption of Shares.................... 13
Valuation of Shares..................... 14
Dividends and Taxes..................... 15
General Information..................... 15
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>
<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>
Lancaster Funds
CAPITAL BUILDER FUND
CRESTONE SMALL CAP FUND
CONVERTIBLE FUND
GOVERNMENT QUALITY BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
October 1, 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
Distribution Plan...................................................... 8
Portfolio Transactions and Brokerage Allocations....................... 9
Capital Stock and Control.............................................. 11
Net Asset Value and Public Offering Price.............................. 13
Redemption............................................................. 14
Tax Status............................................................. 15
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 October 1,
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. 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.
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>
Name, Position with Fund and Address Principal Occupation Last Five Years
Name, Position with Fund and Address Principal Occupation Last Five Years
*Thomas C. Smith, Chairman, President, age 51; Chief Chairman, CONLEY SMITH, Inc., Omaha,
Executive Officer and Treasurer; 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,
Concorde Management
and Development, Inc.,
Lincoln, Nebraska
Thomas D. Potter, Director; age 56; President and Chief Executive Officer, Lincoln
1800 Memorial Drive, Mutual Life Insurance Company, Lincoln,
Lincoln, Nebraska 68502 Nebraska; December, 1987 - Current
Dale C. Tinstman, Director; age 77; Financial and Investment Consultant;
Suite 200, Chairman of University of Nebraska
1201 "O" Street, Foundation; Director and Consultant of
Lincoln, Nebraska 68508 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, President Larsen Bryant & Porter
Lincoln, Nebraska 68510 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 ended June 30, 1996:
Compensation Table
Aggregate Total Compensation
Compensation From the Fund
Name and Position From Fund Paid to Directors
- ----------------- ------------- -----------------
Thomas D. Potter, Director $1,200 $1,200
Dale C. Tinstman, Director $1,200 $1,200
Thomas R. Larsen, Director $1,200 $1,200
Thomas C. Smith, Chairman $ $
John H. Conley, Director $ $
INVESTMENT ADVISORY AND OTHER SERVICES
General
The investment adviser for the Funds is CONLEY SMITH , 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
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.
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 $193,671 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 * 52,595
Convertible Fund 32,863 26,152 14,669
Government/Quality Bond Fund 74,363 53,741 26,060
Crestone Small Cap Fund 60,199 100,120 100,347
------- ------- -------
$167,425 $180,013 $193,671
Of these amounts, pursuant to the Sub-Advisory Agreements, the Adviser
paid the respective Sub-Adviser for the Funds $76,606, $81,467 and $78,016
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 11,731
Crestone Small Cap Fund 28,084 44,689 66,285
------- -------- ------
$76,606 $81,467 $78,016
*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.
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.
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
$119,886 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 34,924
Convertible Fund 9,198
Government/Quality Bond Fund 11,910
Crestone Small Cap Fund 63,854
-------
$119,886
Of the total amount the Distributor pursuant to the Distribution Plan in
these periods, the Distributor retained or paid to its agents $110,320. 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 $4,182 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.
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.
During the fiscal years ended June 30, 1994, June 30, 1995 and June 30,
1996, the Funds incurred $54,279, $26,567 and $60,170 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 16,490
Convertible Fund 12,987 15,359 9,361
Government/Quality Bond Fund 0 0 5,933
Crestone Small Cap Fund 41,292 11,208 28,386
------ ------- ------
$54,279 $26,567 $60,170
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 ended June 30,
1994, and 1995, and $27,146 or 45% in 1996. The remaining brokerage commissions
were paid to other unaffiliated broker dealers. Of the aggregate dollar amount
of transactions involving payment of commissions, 42% 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.
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 September 6, 1996.
Fund Name & Address Shares % Ownership
---- -------------- ------ -----------
Capital Builder Fund First Bank N.A. Omaha Trustee 41,533.374 5.97%
for Utell International 401K Plan
P.O. Box 64010
St. Paul, MN 55164
Gendler Investments 40,467.056 5.82%
Ltd. Partnership
11222 Davenport Street
Omaha, NE 68154
Small Cap Fund UBATCO & Company 666,352.478 61.04%
Union Bank and Trust Company
Trust Department-nominee name
4732 Calvert Street
Lincoln, NE 68506
Including
Linweld Inc. Profit 60,903.298 5.58%
Sharing/401K Plan
1225 "L" Street
Suite 600
Lincoln, NE 68501
Convertible Fund The Eihusen 16,063.984 1.45%
Chief Foundation, Inc.
Old West Hwy 30
P.O. Box 2078
Grand Island, NE 68802
Thomas L. Williams 8,162.406 5.82%
Susan M. Williams JTWROS
2820 South 99th Avenue
Omaha, NE 68124
Donald Hovendick IRA 7,707.609 5.50%
10 Forsythia Point
Four Seasons, MO 65049
Robert A. Martin 7,121.946 5.08%
Sheri S. Martin Joint JTWROS
14000 North 27th Street
Davey, NE 68336
Government Quality
Bond Fund Madonna Rehabilitation Hospital 32,592.557 10.93%
5401 South Street
Lincoln, NE 68506
Willard W. Folsom 29,166.341 9.78%
3324 South Oneida Way
Denver, CO 80224
Foote and Beck Otolaryngology P.C. 15,604.726 5.23%
Target Benefit Pension Plan
FBO Donovan Foote
1230 Pershing Road
Hastings, NE 68901
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.
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).
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.
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
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
ended June 30, 1996 was 3.02%.
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 24.14% NA 24.14%
Convertible Fund 17.60% 12.53% 9.20%
Government/Quality Bond Fund 2.83% 6.66% 7.18%
Crestone Small Cap Fund 22.33% NA 15.13%
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 July 16, 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.
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.
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.
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 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.
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.
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.
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
(2) Incorporated by reference to the Annual Report filed on
Edgar on August 23, 1996.
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 22, 1996 for the Capital
Builder Fund, Crestone Small Cap Fund, Convertible Fund,
Government/Quality Bond Fund, Institutional Money Market
Fund and Nebraska Tax-Free Fund.
(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)(9) Certificate of Designation - Multiple Class
2. (a)(1) Bylaws of Company
(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. (9) 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)(9) Opinion and Consent of Messrs. Cline, Williams,
Wright, Johnson & Oldfather with respect to
multiple classes of shares to be filed by
amendment
15. (9) Amended Rule 12 B-1 Plan
16. Schedule of Performance Computations
18. (9) 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
(9) Incorporated by reference to Post-Effective Amendment No. 21 to
Form N-1A filed July 8, 1996
Item 25. Persons Controlled by or under Common Control with Registrant
None
Item 26. Number of Holders of Securities
As of September 6, 1996:
Title of Class Number of Record Holders
Common Stock
Capital Builder Fund 217
Small Cap Fund 235
Convertible Fund 79
Government Quality Bond Fund 84
Institutional Money Market Fund 150
Nebraska Tax Free Fund 148
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.
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.
(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
(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.
The Registrant further undertakes to furnish each person to whom the
Prospectus is delivered a copy of the Registrant's latest report to shareholders
upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, 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 12 day of September, 1996. By the execution hereof, the
undersigned hereby certifies that this Post-Effective Amendment meets all the
requirements for effectiveness under Rule 485(b) under the Securities Act of
1933.
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 12, 1996.
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. 22
TO
FORM N-1A REGISTRATION STATEMENT
FOR
SMITH HAYES TRUST, INC.
<PAGE>
EXHIBITS
TO
LANCASTER FUND
POST-EFFECTIVE AMENDMENT NO. 22
FORM N-1A REGISTRATION STATEMENT
Exhibit No. Description
16 Schedule of Computation for
Performance Quotations
<PAGE>
EXHIBIT (16)
SCHEDULE OF COMPUTATIONS OF PERFORMANCE
GOVERNMENT/QUALITY BOND FUND
The Total Return information shown in the Statement of Additional
Information for the Government/Quality Bond Fund was calculated as follows:
TOTAL RETURN:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of a
period, at the end of the period
The computation of average annual return assumes dividends and
distributions are reinvested at net asset value (as stated in the prospectus) on
the reinvestment dates during the period.
The ending redeemable value assumes a complete redemption at the end of
the period.
Total Return for the Year Ended June 30, 1996:
P = $1,000 (initial value)
n = 1 (1 year)
ERV = 1,028 (ending redeemable value)
Solve for T:
$1,000 (1 + T)1 = 1,028
T = .0283 or 2.83%
Total return for the 5 year period ended June 30, 1996:
P = $1,000 (initial value)
n = 5 years
ERV = 1,380 (ending redeemable value)
Solve for T:
$1,000 (1 + T)5 = 1,380
T = .0666 or 6.66%
<PAGE>
Total Return from Inception (June 23, 1988) to June 30, 1996:
P = $1,000 (initial value)
n = 8.0247 years (2,929 days)
ERV = 1,744 (ending redeemable value)
Solve for T:
$1,000 (1 + T)8.0247 = 1,744
T = .0718 or 7.18%
The yield quotation for the Government/Quality Bond Fund described in
the Statement of Additional Information was calculated according to the
following formula for the 30 day period ended June 30, 1996.
YIELD = 2[( a = 1)6 - 1]
cd
a = dividends and interest earned during period net for accrued
expenses (net of reimbursements) or $8,807.
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends or 346,653.091.
d = the maximum offering price per share on the last day of the
period or $10.15.
The yield for the thirty (30) day period was 3.02%.
<PAGE>
SMALL CAP FUND
The Total Return information shown in the Statement of Additional
Information for the Small Cap Fund was calculated as follows:
TOTAL RETURN:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of a
period, at the end of the period
The computation of average annual return assumes dividends and
distributions are reinvested at net asset value (as stated in the prospectus) on
the reinvestment dates during the period.
The ending redeemable value assumes a complete redemption at the end of
the period.
Total Return for the Year Ended June 30, 1996:
P = $1,000 (initial value)
n = 1 (1 year)
ERV = 1,223 (ending redeemable value)
Solve for T:
$1,000 (1 + T)1 = 1,223
T = .2233 or 22.33%
Total Return from Inception (July 1, 1992) to June 30, 1996:
P = $1,000 (initial value)
n = 4 years (1,460 days)
ERV = 1,757 (ending redeemable value)
Solve for T:
$1,000 (1 + T)4 = 1,757
T = .1513 or 15.13%
<PAGE>
CONVERTIBLE FUND
The Total Return information shown in the Statement of Additional
Information for the Convertible Fund was calculated as follows:
TOTAL RETURN:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of a
period, at the end of the period
The computation of average annual return assumes dividends and
distributions are reinvested at net asset value (as stated in the prospectus) on
the reinvestment dates during the period.
The ending redeemable value assumes a complete redemption at the end of
the period.
Total Return for the Year Ended June 30, 1996:
P = $1,000 (initial value)
n = 1 (1 year)
ERV = 1,176 (ending redeemable value)
Solve for T:
$1,000 (1 + T)1 = 1,176
T = .1760 or 17.60%
Total return for the 5 year period ended June 30, 1996:
P = $1,000 (initial value)
n = 5 years
ERV = 1,804 (ending redeemable value)
Solve for T:
$1,000 (1 + T)5 = 1,804
T = .1253 or 12.53%
<PAGE>
Total Return from Inception (June 23, 1988) to June 30, 1996:
P = $1,000 (initial value)
n = 8.0247 years (2,929 days)
ERV = 2,026 (ending redeemable value)
Solve for T:
$1,000 (1 + T)8.0247 = 2,026
T = .0920 or 9.20%
<PAGE>
CAPITAL BUILDER FUND
The Total Return information shown in the Statement of Additional
Information for the Capital Builder Fund was calculated as follows:
TOTAL RETURN:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of a
period, at the end of the period
The computation of average annual return assumes dividends and
distributions are reinvested at net asset value (as stated in the prospectus) on
the reinvestment dates during the period.
The ending redeemable value assumes a complete redemption at the end of
the period.
Total Return from Inception (August 24, 1995) to June 30, 1996:
P = $1,000 (initial value)
n = .8521 years (311 days)
ERV = 1,202 (ending redeemable value)
Solve for T:
$1,000 (1 + T).8521 = 1,202
T = .2414 or 24.14%
<PAGE>
NEBRASKA TAX-FREE FUND
The Total Return information shown in the Statement of Additional
Information for the Nebraska Tax-Free Fund was calculated as follows:
TOTAL RETURN:
P(1 + T)n=ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of a period, at the
end of the period
The computation of average annual return assumes dividends and
distributions are reinvested at net asset value (as stated in the prospectus) on
the reinvestment dates during the period.
The ending redeemable value assumes a complete redemption at the end of
the period.
Total Return for the Year Ended June 30, 1996:
P = $1,000 (initial value)
n = 1 (1 year)
ERV = $1,001 (ending redeemable value)
Solve for T:
$1,000 (1 + T)1 = 1,001
T = .0425 or 4.25% annualized
Total Return from Inception (July 12, 1993) to June 30, 1996:
P = $1,000 (initial value)
n = 2.9699 years (1084 days)
ERV = 1,069 (ending redeemable value)
Solve for T:
$1,000 (1 + T)2.9699 = 1,069
T = .0368 or 3.68% annualized
<PAGE>
The yield quotation for the Nebraska Tax-Free Fund described in the
Statement of Additional Information was calculated according to the following
formula for the 30 day period ended June 30, 1996.
YIELD = 2[( a = 1)6 - 1]
cd
a = dividends and interest earned during period net for accrued
expenses (net of reimbursements) or $40,729
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends or 1,031,836.198
d = the maximum offering price per share on the last day of
the period or $10.02
The yield for the thirty (30) day period was 4.77%.
DELOITTE & TOUCHE LLP
LINCOLN, NEBRASKA
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Post-Effective
Amendment No. 22 to the Registration Statement No. 33-19894 of SMITH HAYES
Trust, Inc. filed on Form N-1A of our reports dated July 22, 1996 appearing in
the Annual Reports dated June 30, 1996, and to the reference to us under the
heading "Auditors" in the Prospectuses and Statement of Additional Information,
which is a part of such Registration Statement.
Deloitte & Touche LLP
Lincoln, Nebraska
September 10, 1996
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