REGISTRATION NO. 33-71562
REGISTRATION NO. 811-8148
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. 7 X
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Post-Effective Amendment No. 7
PAUZE FUNDS
(Exact Name of Registrant as Specified in Charter)
14340 Torrey Chase Blvd., Ste. 170
Houston, Texas 77014
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code (713) 444-6012
Philip C. Pauze President
Pauze Funds
14340 Torrey Chase Blvd. Ste. 170
Houston, Texas 77014
(Name and Address of Agent for Service)
Exhibit Index for exhibits filed herewith is at page of .
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Approximate date of proposed public offering: August 1, 1996
It is proposed that this filing will become effective (check
appropriate box):
immediately upon filing pursuant to paragraph (b)
(X) on August 1, 1996 pursuant to paragrph (b)
60 days after filing purusant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a) (2)
on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Registrant hereby declares, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, that an indefinite number of shares of beneficial interest,
no par value, is being registered by this Registration Statement, with respect
to three sub-trusts of Registrant -- Pauze U.S. Government Total Return Bond
Fund, Pauze U.S. Government Short Term Bond Fund and Pauze U.S. Government
Intermediate Term Bond Fund, each with four classes of shares (no-load, Class A,
Class B and Class C). The Rule 24f-2 Notice for the most recent fiscal year,
April 30, 1996, was filed on or about June 20, 1996, in respect to the Pauze
U.S. Government Total Return Bond Fund (the no-load class, prior to creation of
the other series and classes).
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PAUZE FUNDS
FORM N-1A
CROSS REFERENCE SHEET
FORM N-1A
PART A CAPTION OR
ITEM NO. LOCATION IN PROSPECTUS
1 Cover Page
2 Summary of Fees and
Expenses
3 Financial Highlights
(also covered under Item
23 in Part B)
4 Cover Page; The Trust;
Investment Objectives
and Considerations;
Special Considerations
5 Management of the Fund
6 Cover Page; The Trust;
Dividends and Taxes
7 How to Purchase Shares;
How Shares Are Valued;
Special Considerations -
Servicing Fee
8 How to Redeem Shares
9 Not Applicable
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FORM N-1A CAPTION OR LOCATION IN
PART B STATEMENT OF
ITEM NO. ADDITIONAL INFORMATION
10 Cover Page
11 Table of Contents
12 General Information
13 Investment Objectives
and Policies
14 Management of
the Trust
15 Principal Holders of
Securities
16 Investment Advisory
Services
17 Portfolio Transactions
18 General Information
19 Not Covered in Statement of
Additional Information
(Covered under Item 7 in
Part A)
20 Tax Status
21 Distribution Plan (also
covered under Item 5 in Part
A)
22 Calculation of
Performance Data
23 Financial Statements
(also covered under Item 3
in Part A)
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PART A -- THE PROSPECTUS
Included herein is the Prospectus for the
Pauze U.S. Government Total Return Bond Fund
Pauze U.S. Government Short Term Bond Fund
Pauze U.S. Government Intermediate Term Bond Fund
(No-Load Class of Shares)
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PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
PAUZE U.S. GOVERNMENT
INTERMEDIATE TERM BOND FUND
PAUZE U.S. GOVERNMENT SHORT TERM BOND FUND
P.O. Box 844
Conshohocken, PA 19428-0844
1-800-327-7170
(Information, Shareholder Services and Requests)
PROSPECTUS
August 1, 1996
This prospectus presents information that a prospective investor should know
about the Pauze U.S. Government Total Return Bond Fund, the Pauze U.S.
Government Intermediate Term Bond Fund and the Pauze U.S. Government Short Term
Bond Fund, three series, mutual funds (the "Funds"), of Pauze Funds (the
"Trust") which seek to provide investors with a high total return consistent
with preservation of capital and liquidity within stated maturity ranges. Each
Fund is designed to satisfy different needs, with its own separate and distinct
portfolio of U.S. Government and/or government agency securities. Read and
retain this prospectus for future reference.
A Statement of Additional Information dated August 1, 1996, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. The Statement is available free from Pauze Funds upon written request
at the address set forth above or by calling 1-800-327-7170.
This prospectus covers shares of the Funds offered on a no-load basis.
Information on other classes of shares of the Funds offered on a different basis
is available from Pauze Funds upon written request at the address set forth
above or by calling 1-800-327-7170.
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.
<PAGE>
TABLE OF CONTENTS
SUMMARY OF FEES AND EXPENSES..................3
FINANCIAL HIGHLIGHTS..............................6
INVESTMENT OBJECTIVES AND CONSIDERATIONS..........8
SPECIAL CONSIDERATIONS...........................13
12b-1 Fee........................................15
MANAGEMENT OF THE FUNDS..........................16
HOW TO PURCHASE SHARES...........................19
HOW TO EXCHANGE SHARES...........................23
HOW TO REDEEM SHARES.............................24
HOW SHARES ARE VALUED............................30
DIVIDENDS AND TAXES..............................31
THE TRUST........................................33
PERFORMANCE INFORMATION..........................34
2
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SUMMARY OF FEES AND EXPENSES
The following summary is provided to assist you in understanding the
various costs and expenses a shareholder in a Fund could bear directly and
indirectly. Pauze U.S. Government Total Return Bond Fund's ("Total Return Fund")
annual operating expenses are shown as a percentage of average daily net assets
for the fiscal period ended April 30, 1996. Because Pauze U.S. Government
Intermediate Term Bond Fund ("Intermediate Term Fund") and Pauze U.S. Government
Short Term Bond Fund ("Short Term Fund") shares were not offered prior to the
date of this prospectus, annual operating expenses of said Funds are based on
estimated expenses. Shareholder transaction expenses for all Funds are expressed
as a percentage of the public offering price, cost per transaction or as
otherwise noted.
Total Intermediate Short
Return Term Term
Fund Fund Fund
Shareholder Transaction Expenses
Maximum Sales Load.............. None None None
Redemption Fee.................. None None None
Account Closing Fee (does not apply
to exchanges).................. $10 $10 $10
Exchange Fee.................... None None None
Annual Fund Operating Expenses
Management and Administrative Services
Fees .............................. .60% (2) .50%(2) .50%(2)
12b-1 Fees ........................ .25% (1) .25%(1) .25%(1)
Other Expenses, including Transfer Agency
and Accounting Services Fees...... .49% (1) .98%(1) .98%(1)
Total Fund Operating Expenses ..... 1.34% (1) 1.73%(1)1.73%(1)
3
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Except for active automatic investment, UGMA/UTMA and retirement accounts,
if an account falls, for any reason other than market fluctuations, below $1,000
at any time during a month, that account will be subject to a small account
charge of $5 for that month. See "Small Accounts" on page 28.
A shareholder who requests delivery of redemption proceeds by wire will be
subject to a $10 charge. International wires will be higher.
Hypothetical Example of Effect on Fund Expenses
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and redemption at the end of each period:
Total Intermediate Short
Return Term Term
Fund Fund Fund
1 year...$23 27 27
3 years...51 63 63
5 years...79 100 100
10 years..153 199 199
Included in these estimates is the account closing fee of $10 for each
period. This is a flat charge which does not vary with the size of your
investment. Accordingly, for investments larger than $1,000, your total expenses
will be substantially lower in percentage terms than this illustration. The
examples should not be considered a representation of past or future expenses.
Actual expenses may be more or less than those shown.
- --------------------------------------------------------------------------------
(1) Annual fund operating expenses are based on the Total Return Fund's
historical expenses and estimated expenses for the Intermediate Term Fund and
the Short Term Fund. Management fees are paid to Pauze, Swanson & Associates
Investment Advisors, Inc. d/b/a Pauze Swanson Capital Management Co. (the
"Advisor") for managing the Fund's investments. Administrative services fees are
paid to Declaration Service Company ("DSC" or "Administrator") for administering
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the affairs of the Trust. The Fund incurs other expenses for maintaining
shareholder records, furnishing shareholder statements and reports, and for
other services. Transfer agency and accounting services fees are also paid to
DSC, and are not charged directly to individual shareholder accounts. The
Transfer Agent charges the Fund $18.00 per shareholder account per year with a
minimum monthly fee of $1,500 which increases to $2,000 over a two year period.
Prior to February 13, 1996, United Shareholder Services Inc. ("USSI") provided
such services and charged the Fund $25.00 per shareholder account per year, with
a minimum monthly fee of $2,500. The account closing fee and small account
charge will be paid by the shareholder directly to the Transfer Agent which
will, in turn, reduce its charges to the Fund by a like amount. Please refer to
the section entitled "Management of the Fund"at page 16 for further information.
(2) The Management and Administrative Services Fees were increased upon
approval of the Shareholders, effective June 1, 1996; which fees are reflected
in the Table.
5
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FINANCIAL HIGHLIGHTS
Pauze U.S. Government Total Return Bond Fund
The following per share data and ratios for a share of beneficial interest
outstanding throughout the period from January 10, 1994 (initial public
offering) through June 30, 1994, the period from July 1, 1994 through April 30,
1995 and the year ended April 30,1996 have been audited by Price Waterhouse LLP,
the Fund's Independent Accountants whose unqualified report on the financial
statements including this information is included in the Fund's 1996 Annual
Report to Shareholders, which is incorporated by reference into the Statement of
Additional Information ("SAI"). The Financial Highlights should be read in
conjunction with the financial statements and notes thereto included in the
Annual Report. In addition to the data set forth below, further information
about the performance of the Fund is contained in the SAI and Annual Report
which may be obtained without charge.
Selected data for a capital share outstanding throughout the periods
indicated is as follows:
PERIOD ENDED
Operating Performance: (a) (b) (c)
------- -------- --------
Net Asset Value, beginning of period $ 9.37 $ 9.25 $ 10.00
------- -------- --------
Net investment income . . . . . . .44 .35(d) .14(d)
Net realized and unrealized
gain (loss) on investments (e) . . . . .31 .12 (.75)
------- -------- --------
Total from investment operations . . . . .75 .47 (.61)
------- -------- --------
Distributions:
Dividends from net investment income (.44) (.35) (.14)
Distributions from capital gains (.14)
------- -------- --------
Net asset value, end of period . . . . . $ 9.54 $ 9.37 $ 9.25
======== ======== ========
Total Investment Return (f) . . . . . . 8.08% 5.21% (6.11%)
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Ratio/Supplemental Data:
Net assets, end of period (in
thousands) . . . . . . . . . . . . . . . $71,294 $31,994 $13,661
Ratio of expenses to average net
assets . . . . . . . . . . . . . . . . . 1.23% 1.50%(g)(h) 1.50%(g)(h)
Ratio of net income to average net
assets . . . . . . . . . . . . . . . . . 4.74% 4.87%(g)(h) 4.06%(g)(h)
Portfolio turnover rate . . . . . . . . 228.03% 168.90% 0.00%
(a) For the year ended April 30, 1996
(b) For the ten month period ended April 30, 1995.
(c) For the period from January 10, 1994
(date of commencement of operations) to June 30, 1994.
(d) Net of expense reimbursements and fee waivers of
$.02(1995) and $.05(1994) per share respectively.
(e) Includes the effect of capital share transactions
throughout the period.
(f) Total return is not annualized and does not reflect
the effect of account fees.
(g) Annualized; the ratios are not necessarily indicative
of twelve months of operations.
(h) Expense ratio is net of fee waivers. Had such
reimbursements not been made, the annualized expense
ratio would have been 1.66% (1995) and 3.14% (1994) and
the net annualized investment income ratio would
have been 4.70% (1995) and 2.42% (1994).
7
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INVESTMENT OBJECTIVES AND CONSIDERATIONS
Pauze Funds (the"Trust") offers investors three fixed income funds which
seek to provide investors with a high total return (interest income plus or
minus realized and unrealized capital appreciation and depreciation) consistent
with preservation of capital and liquidity: the Pauze U.S. Government Total
Return Bond Fund (the "Total Return Fund"); the Pauze U.S. Government Short Term
Bond Fund (the "Short Term Fund"); and the Pauze U.S. Government Intermediate
Term Bond Fund (the "Intermediate Term Fund"). Each Fund is designed to satisfy
different needs, with its own separate and distinct portfolio of U.S. Government
and/or government agency securities within prescribed maturity ranges. There is
no assurance that the Funds will be able to achieve their investment objectives.
Pauze U.S. Government Total Return Bond Fund
The Total Return Fund's investment objective is to achieve a rate of total
return (interest income plus or minus realized and unrealized capital
appreciation and depreciation) above the rate of other funds by investing
exclusively in securities backed by the full faith and credit of the United
States Government.
It is the investment policy of the Fund to invest exclusively in debt
securities that are backed by the full faith and credit of the United States
Government. Eligible securities may be issued by the United States Government or
by an agency of the United States Government provided they are backed by the
full faith and credit of the United States Government. The Fund may also invest
in repurchase agreements collateralized by such securities. Eligible securities
may be of varying maturities, based upon the investment adviser's perception of
market conditions, with no stipulated average maturity or duration.
The United States Government's guarantee of ultimate payment of principal
and timely payment of interest of the United States Government securities owned
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by the Fund does not imply that the Fund's shares are guaranteed or that the
price of the Fund's shares will not fluctuate.
Portfolio Securities
United States Treasury securities are backed by the full faith and credit
of the United States Government. These securities differ only in their interest
rates, maturities, timing of interest payments, and times of issuance. Treasury
bills have initial maturities of one year or less, do not make semi-annual
interest payments, and are purchased or sold at a discount from their face
value; Treasury notes have initial maturities of one to ten years and pay
interest semiannually; and Treasury bonds generally have initial maturities of
greater than ten years and pay interest semi-annually.
Among the bonds that may be purchased are GNMA Certificates (popularly
called "Ginnie Maes"). Ginnie Maes are backed by the full faith and credit of
the United States Government. Ginnie Maes are mortgage-backed securities
representing part ownership of a pool of mortgage loans which are insured by the
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Federal Housing Administration or Farmers' Home Administration or
guaranteed by the Veterans' Administration. The Fund may invest in Ginnie Maes
of the "fully modified pass-through" type which are guaranteed as to the timely
payment of principal and interest by the Government National Mortgage
Association, a United States Government corporation. Interest and principal
payments (including prepayments) on the mortgages underlying mortgage-backed
securities are passed through to the holders of the mortgage-backed security.
Prepayments occur when a holder of the mortgage prepays the remaining principal
before the mortgage's scheduled maturity date. As a result of the pass-through
of prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayments of principal than their
stated maturity would indicate. Because the prepayment characteristics of the
underlying securities vary, it is not possible to predict accurately the
realized yield or average life of a particular issue of pass-through
certificates. Prepayments are important because of their effect on the yield and
price of the securities. During periods of declining interest rates, such
prepayments can be expected to accelerate and the Fund would be required to
reinvest the proceeds at the lower interest rates then available. In addition,
prepayments of mortgages which underlie securities purchased at a premium may
not have been fully amortized at the time the obligation is repaid and may
result in a loss. As a result of these principal payment features,
mortgage-backed securities are generally more volatile investments than other
United States Government securities.
The Funds may also invest up to 5% of its assets in bonds that are "zero
coupon" United States Government securities (which have been stripped of their
unmatured interest coupons and receipts) or in certificates representing
undivided interests in stripped United States Government securities and coupons.
The Funds will only invest in "zeros" which are issued by the United States
Treasury and not those issued by broker-dealers or banks. The Funds will not
invest in Interest Only or Principal Only ("IOs" or "POs") mortgage-backed
securities or derivative products. Zero coupon securities tend to be more
sensitive to changes in interest rates than other types of United States
10
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Government securities. As a result, a rise or fall in interest rates will have a
more significant impact on the market value of these securities. Although zero
coupon securities pay no interest to holders prior to maturity, interest on
these securities is accrued as income to the Funds and distributed to their
shareholders. These distributions must be made from the Funds' cash assets, or,
if necessary, from the proceeds of sales of portfolio securities.
Portfolio Management
The investment adviser will seek above average total return by
restructuring the average duration of the Fund's portfolio securities to take
advantage of anticipated changes in interest rates. When the investment adviser
believes that interest rates will fall, it will lengthen the average duration of
the Fund's portfolio securities to earn greater capital appreciation. When the
investment adviser believes that interest rates will rise, it will shorten the
average duration of the Fund's portfolio securities to reduce capital
depreciation and preserve capital.
Duration is the weighted average life of a Fund's debt instruments measured
on a present-value basis. It is generally superior to average weighted maturity
as a measure of a Fund's potential volatility due to interest rate changes.
Unlike a Fund's average weighted maturity, which takes into account only
the stated maturity date of the Fund's debt instruments, duration represents a
weighted average of both interest and principal payments, discounted by the
current yield-to-maturity of the securities held. For example, a four year,
zero-coupon bond, which pays interest only upon maturity (along with principal),
has both a maturity and duration of 4 years. However, a four-year bond priced at
par with an 8% coupon has a maturity of 4 years but a duration of 3.6 years (at
an 8% yield), reflecting the bond's earlier payment of interest.
In general, a bond with a longer duration will fluctuate more in price than
a bond with a shorter duration. Also, for small changes in interest rates,
duration serves to approximate the resulting change in a bond's price. For
example, a 1% change in interest rates will cause roughly a 4% move in the price
of a zero-coupon bond with a 4 year duration, while an 8% coupon bond (with a
3.6 year duration) will change by approximately 3.6%.
The Fund's success at achieving its investment objective is dependent upon
the investment adviser correctly forecasting future changes in interest rates.
The investment adviser uses extensive fundamental and technical analysis to
formulate interest rate forecasts. However, there is no assurance that the
investment adviser will successfully forecast interest rates and, if its
forecasts are wrong, the Fund may suffer a loss of principal or fail to fully
participate in capital appreciation and the Fund may not have a yield as high as
it might have otherwise.
Pauze U.S. Government Intermediate Term Bond Fund
The Intermediate Term Fund has the same objectives and policies as set
forth above except (i) that, in addition to restructuring the average duration
of the Fund's portfolio, it will maintain an average weighted portfolio maturity
between three and ten years; (ii) that it may invest in securities issued by
U.S. Government agencies that are not backed by the full faith and credit of the
U.S. Treasury; and (iii) that it may invest in financial futures and related
options to hedge the portfolio assets in the Fund.
Pauze U.S. Government Short Term Bond Fund
The Short Term Fund has the same objectives and policies as set forth above
except (i) that, in addition to restructuring the average duration of the Fund's
portfolio, it will maintain an average weighted portfolio maturity between one
and three years; (ii) that it may invest in securities issued by U.S. Government
agencies that are not backed by the full faith and credit of the U.S. Treasury;
and (iii) that it may invest in financial futures and related options to hedge
the portfolio assets in the Fund.
Futures Contracts and Options
The Short Term Fund and the Intermediate Term Fund may invest in futures
contracts and option contracts provided that not more than 2.5% of their assets
are required as initial margin and premiums required to establish such
positions. A Fund may also enter into futures contracts and options transactions
only to the extent that obligations under such contracts or transactions
represent not more than 100% of a Fund's assets.
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Futures contracts and options may be used for several reasons: to hedge
securities held to effectively reduce the average weighted maturity; to maintain
cash reserves while remaining fully invested; to facilitate trading; to reduce
transaction costs; or to seek higher investment returns when a futures contract
is priced more attractively than the underlying security or index. No Fund may
use futures contracts or options transactions to leverage assets.
Futures Contracts and Options Pose Certain Risks
The primary risks associated with the use of futures contracts and options
are: (i) imperfect correlation between the change in market value of the U.S.
Government securities held by a Fund and the prices of futures contracts and
options; and (ii) possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be minimized by investing
only in those contracts whose price fluctuations are expected to resemble those
of a Fund's underlying securities. The risk that a Fund will be unable to close
out a futures position will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary market.
Objective and Policy Not Fundamental
Neither the investment objective nor the investment policy are fundamental
policies of the Funds and may be changed by the Board of Trustees without
shareholder approval. However, shareholders will be notified in writing at least
30 days prior to any material change to either the Fund's investment objective
or its investment policy.
Repurchase Agreements
The Funds may invest a portion of their assets in repurchase agreements
with domestic broker-dealers, banks and other financial institutions, provided
the Funds' custodian always has possession of securities serving as collateral
or has evidence of book entry receipt of such securities. In a repurchase
agreement, a fund purchases securities subject to the seller's agreement to
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repurchase such securities at a specified time (normally one day) and price. The
repurchase price reflects an agreed-upon interest rate during the time of
investment. All repurchase agreements must be collateralized by United States
Government or government agency securities, the market values of which equal or
exceed 102% of the principal amount of the repurchase obligation. If an
institution enters insolvency proceedings, the resulting delay in liquidation of
securities serving as collateral could cause the fund some loss if the value of
the securities declined prior to liquidation. To minimize the risk of loss, the
Fund will enter into repurchase agreements only with institutions and dealers
which are considered creditworthy.
Lending of Portfolio Securities
The Funds may lend securities to broker-dealers or institutional investors
for their use in connection with short sales, arbitrages and other securities
transactions. The Funds will not lend portfolio securities unless the loan is
secured by collateral (consisting of any combination of cash and United States
Government securities) in an amount at least equal (on a daily mark-to-market
basis) to the current market value of the securities loaned. In the event of a
bankruptcy or breach of agreement by the borrower of the securities, the Fund
could experience delays and costs in recovering the securities loaned. A Fund
will not enter into securities lending agreements unless its custodian
bank/lending agent will fully indemnify a Fund against loss due to borrower
default. A Fund may not lend securities with an aggregate market value of more
than one-third of the Fund's total net assets.
SPECIAL CONSIDERATIONS
Interest Rate Sensitivity
The investment income of the Funds is based on the income earned on the
securities it holds, less expenses incurred; thus, a Fund's investment income
may be expected to fluctuate in response to changes in such expenses or income.
For example, the investment income of the Fund may be affected if it experiences
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a net inflow of new money that is then invested in securities whose yield is
higher or lower than that earned on the then current investments.
Generally, the value of the securities held by the Fund, and thus the net
asset value ("NAV") of the Fund, will rise when interest rates decline.
Conversely, when interest rates rise, the value of fixed income securities, and
thus the NAV per share of the Fund, may be expected to decline. If the Fund
incorrectly forecasts interest rates, both the rate of return and the NAV of the
Fund may be adversely affected. As an example, if the Advisor forecasts that
interest rates are generally to go up, and accordingly shortens the maturities
of the instruments within the Fund and interest rates in fact go down, then the
interest income gained by the Fund will be less than if the Fund had not
shortened its maturities. Additionally, any capital gain that might have been
achieved because of the longer maturities would be less with the shorter
maturities. Additionally, should the Advisor incorrectly forecast that interest
rates are generally going down, lengthen its maturities of the instruments
within the Fund and interest rates in fact go up, then the value of the longer
maturities would decline more than those of the shorter maturities. Thus, the
NAV would also decline more. There is no assurance that the Fund will be correct
in its forecast of changes in interest rates nor that the strategies employed by
the Fund to take advantage of changes in the interest rate environment will be
successful in achieving its investment objectives.
Borrowing
The Funds may borrow from a bank up to a limit of 5% of its total assets
for temporary or emergency purposes; and, it may borrow up to 33 1/3% of its
total assets (reduced by the amount of all liabilities and indebtedness other
than such borrowings) when deemed desirable or appropriate to meet redemption
requests. To the extent that a Fund borrows money prior to selling securities,
the Fund may be leveraged; at such times, the Fund may appreciate or depreciate
in value more rapidly than its benchmark index. The Funds will repay any money
borrowed in excess of 5% of the value of its total assets prior to purchasing
additional portfolio securities.
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When-Issued and Delayed Delivery Securities
The Funds may purchase debt obligations on a "when-issued" basis or may
purchase or sell securities for delayed delivery. In when-issued or delayed
delivery transactions, delivery of the securities occurs beyond normal
settlement period, but the Fund would not pay for such securities or start
earning interest on them until they are delivered. However, when a Fund
purchases securities on a when-issued or delayed delivery basis, it immediately
assumes the risks of ownership, including the risk of price fluctuation. Failure
to deliver a security purchased on a when-issued basis or delayed delivery basis
may result in a loss or missed opportunity to make an alternative investment.
Depending on market conditions, a Fund's when-issued and delayed delivery
purchase commitments could cause its net asset value per share to be more
volatile, because such securities may increase the amount by which the Fund's
total assets, including the value of when-issued and delayed delivery securities
held by the Fund, exceed its net assets.
12b-1 Fee
A separate plan of distribution has been adopted under Rule 12b-1 of the
Investment Company Act of 1940, for each Fund, with separate provisions for each
class of shares. With respect to the shares offered by this prospectus, each
plan provides that a Fund may pay a servicing or Rule 12b-1 fee of up to 0.25%
of the Fund's average net assets (1/12 of 0.25% monthly) to persons or
institutions for performing certain servicing functions for Fund shareholders.
These fees will be paid periodically and will generally be based on a percentage
of the value of Fund shares held by the institution's clients. The distribution
plans allow the Funds to pay for or reimburse expenditures in connection with
sales and promotional services related to the distribution of Fund shares,
including personal services provided to prospective and existing Fund
shareholders. See "Distribution Plan" in the Statement of Additional
Information.
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MANAGEMENT OF THE FUNDS
Trustees
The business and affairs of the Funds are managed by the Trust's Board of
Trustees. The Trustees establish policies, as well as review and approve
contracts and their continuance. The Trustees also elect the officers and select
the Trustees to serve as executive and audit committee members.
The Investment Advisor
Pauze, Swanson & Associates Investment Advisors, Inc. d/b/a Pauze Swanson
Capital Management Co. (the "Advisor"), 14340 Torrey Chase Blvd., Suite 170,
Houston, Texas 77014, under an investment advisory agreement with the Trust
dated November 1, 1993, furnishes investment advisory and management services to
the Funds. The Advisor is a Texas corporation which was registered with the
Securities and Exchange Commission as an investment adviser in December 1993.
Mr. Philip C. Pauze, the Funds' portfolio manager, owns and controls the
Advisor. He has managed the Total Return Fund since commencement of operations
in January 1994. Mr. Pauze has specialized in managing portfolios of United
States Government securities for trusts, small institutions, and retirement
plans since 1985. Mr. Pauze assisted the California Funeral Directors
Association in establishing the California Master Trust (the "CMT") and has been
its financial consultant since inception. CMT's investment performance has been
highly rated by independent evaluators. In addition to the CMT, Mr. Pauze serves
as the financial consultant to the government bond portfolio of the Pennsylvania
Funeral Trust, to the American Funeral Trust, a nationwide funeral trust, and to
the California and Pennsylvania Funeral Directors Association's Retirement
Plans.
The Advisor furnishes an investment program for the Funds, determines,
subject to the overall supervision and review of the Board of Trustees of the
Trust, what investments should be purchased, sold and held, and makes changes on
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behalf of the Trust in the investments of the Funds.
The Advisory Agreement with the Trust provides for the Funds to pay the
Advisor an annual management fee equal to a percentage of the Fund's average net
assets (1/12 of the applicable percentage monthly) as follows: Total Return Fund
0.60% on the the first $100 million, 0.50% on the next $150 million, 0.45% on
the next $250 million and 0.40% on the net assets in excess of $500 million;
Intermediate Term Fund, 0.50%; and Short Term Fund, 0.50%. Prior to June1, 1996
the management fee payable to the advisor was as follows; 0.40% on the first $50
million and 0.24% on net assets in excess of $50 million.
The Administrator
Declaration Service Company, ("DSC" or "Administrator") P.O. Box 844,
Conshohocken, PA 19428-0844 under an Administration Agreement with the Trust
dated February 13, 1996, generally administers the affairs of the Trust. Terence
P. Smith, President of DSC, has been a Trustee of the Trust since February 13,
1996.
Under the Administration Agreement, the Administrator, subject to the
overall supervision and review of the Board of Trustees of the Trust, supervises
parties (other than the Advisor) providing services to the Trust, provides the
Trust with office space, facilities and business equipment, and provides the
services of executive and clerical personnel for administering the affairs of
the Trust.
The Administration Agreement provides for the Trust to pay the
Administrator an annual fee of $24,000 for the first class of shares, per
portfolio; $16,000 for the second class of shares, per portfolio; and, $12,000
for each additional class, per portfolio.
DSC also provides transfer agency, dividend disbursing and accounting
services to the Funds for which it receives separate compensation.
The Transfer Agency and Shareholder Services Agreement with the Trust
provides for the Trust to pay DSC an annual fee of $18.00 per account with a
minimum annual fee of $18,000 for the first year, $21,000 for the second year
and $24,000 thereafter. Prior to February 13, 1996, the Transfer Agency
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Agreement between USSI and the Trust provided for the Trust to pay USSI an
annual fee of $25.00 per account with a minimum annual fee of $30,000; and, in
connection with obtaining/providing administrative services to the beneficial
owners of Trust shares through broker-dealers which provide such services and
maintain an omnibus account with USSI, the Trust paid to USSI a monthly fee
equal to one-twelfth (1/12) of 12.5 basis points (.00125) of the value of the
shares of the Trust held in accounts at the broker-dealer, which payment would
not exceed $2.08 multiplied by the average daily number of accounts holding
Trust shares at the broker-dealer.
These fees cover the usual transfer agency functions. In addition, the
Funds bear certain other transfer agent expenses such as the costs of record
retention and postage, plus the telephone and line charges (including the
toll-free 800 service) used by shareholders to contact the transfer agent.
Transfer agent fees and expenses, including reimbursed expenses, are reduced by
the amount of small account charges and account closing fees the transfer agent
is paid.
DSC performs bookkeeping and accounting services, and determines the daily
net asset value for the Funds. The Accounting Services Agreement with the Trust
provides for the Trust to pay DSC an annual fee of $22,000 for the first class
of shares, per portfolio; $15,000 for the second class of shares, per portfolio;
and $10,000 for each additional class of shares, per portfolio. Prior to
February 13, 1996, pursuant to the agreement between the Trust and USSI,
bookkeeping and accounting services were provided to the Fund, with one class of
shares, at a fixed annual fee of $37,500.
On February 13, 1996, pursuant to the Fund's Distribution Plan, the Trust
entered into a Distribution Agreement with Declaration Distributors, Inc.
("DDI"), an affiliate of DSC, pursuant to which DDI has agreed to act as the
Trust's agent in connection with the distribution of Fund shares - - including
acting as agent in states where designated agents are required, reviewing and
filing all advertising and promotional materials and monitoring and reporting to
the Board of Trustees on Trust distribution plans. For such services, DDI will
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be paid a fixed annual fee of $20,000 and will be reimbursed for expenses
incurred on behalf of the Trust. The Advisor is committed to pay all sums, if
any, that exceed the amount allowed under the Fund's 12b-1 Plan.
The Trust pays all other expenses for its operations and activities. As the
Trust adds other series in the future, then the Fund will pay its allocable
portion of these expenses. The expenses borne by the Trust include the charges
and expenses of any shareholder servicing agents, custodian fees, legal and
auditors' expenses, brokerage commissions for portfolio transactions, the
advisory fee, extraordinary expenses, expenses of shareholder and trustee
meetings, expenses for preparing, printing and mailing proxy statements, reports
and other communications to shareholders, and expenses of registering and
qualifying shares for sale, among others.
HOW TO PURCHASE SHARES
This prospectus covers shares of the Funds offered on a no-load basis.
Effective July 1, 1996, the minimum initial investment is $25,000. The
minimum subsequent investment is $50. The minimum initial investment for persons
enrolled in an automatic investment plan is $25,000 and the minimum subsequent
investment pursuant to such a plan is $30 per month per account. Accounts opened
prior to that date are subject to the prior minimum initial investment
limitations.
Information on shares of the Funds offered on a different basis is
available from the Trust upon written request at the address set forth below or
by calling 1-800-327-7170.
You may invest in the following ways:
BY MAIL
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Send your application and check or money order, made payable to the Fund,
to Declaration Service Company, P.O. Box 844, Conshohocken, Pennsylvania
19428-0844.
When making subsequent investments, enclose your check with the return
remittance portion of the confirmation of your previous investment or indicate
on your check or a separate piece of paper your name, address and account number
and mail to the address set forth above. Third party checks will not be
accepted, and the Trust reserves the right to refuse to accept second party
checks.
BY TELEPHONE
Once your account is open, you may make investments by telephone by calling
1-800-327-7170. The maximum telephone purchase is ten times the value of the
shares owned, calculated at the last available net asset value. Payment for
shares purchased by telephone is due within seven business days after the date
of the transaction. Investments by telephone are not available in any Fund
retirement account administered by the Administrator or its agents.
BY WIRE
You may make your initial or subsequent investments in the Funds by wire
transfer. To do so, call the Investor Information Department at 1- 800-327-7170
for a confirmation number and wiring instructions.
To assure proper receipt, please be sure your bank included the Fund name
and the account number that has been assigned to you. If you are opening a new
account, please complete the Account Registration Form and mail it to the "New
Account" address above after completing your wire arrangement. Note: Federal
Funds wire purchase orders will be accepted only when the Fund and Custodian
Bank are open for business.
Funds must be credited to the Fund's account by 11:00 a.m. (Eastern time)
in order to be applied to purchase shares on that day. There are no
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wire fees charged by the Trust for purchases of $1,000 or more. A $10 wire fee
will be charged by the Trust on wire purchases of less than $1,000. Your bank
also may charge wire fees for this service.
BY AUTOMATIC INVESTMENT PLAN
Once your account is open, you may make investments automatically by
completing the automatic investment plan form authorizing Pauze Funds to draw on
your bank account regularly by check for as little as $30 a month, beginning
within thirty (30) days after the account is opened. You should inquire at your
bank whether it will honor debits through the Automated Clearing House ("ACH")
or, if necessary, preauthorized checks. You may change the date or amount of
your investment any time by written instruction received by Pauze Funds at least
five business days before the change is to become effective.
Additional Information About Purchases
All purchases of shares are subject to acceptance by the Trust and are not
binding until accepted. Pauze Funds reserves the right to reject any application
or investment. Orders become effective as of 4:00 p.m., Eastern time, Monday
through Friday, exclusive of business holidays.
Fees and charges associated with purchasing shares of the Funds are set
forth in the Trust's prospectuses. However, investors may purchase and sell
shares through registered broker-dealers who may charge additional fees for
their services.
If your telephone order to purchase shares is cancelled due to nonpayment
(whether or not your check has been processed by the Fund), you will be
responsible for any loss incurred by the Trust by reason of such cancellation.
If checks are returned unpaid due to nonsufficient funds, stop payment or
other reasons, the Trust will charge $20 and you will be responsible for any
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loss incurred by the Trust with respect to cancelling the purchase. To recover
any such loss or charge, the Trust reserves the right, without further notice,
to redeem shares already owned by any purchaser whose order is cancelled and
such a purchaser may be prohibited from placing further orders unless
investments are accompanied by full payment by wire or cashier's check.
Investments paid for by checks drawn on foreign banks may be deferred until
such checks have cleared the normal collection process. In such instances, any
amounts charged to the Trust for collection procedures will be deducted from the
amount invested.
If the Trust incurs a charge for locating a shareholder without a current
address, such charge will be passed through to the shareholder.
Tax Identification Number
The Trust is required by Federal law to withhold and remit to the United
States Treasury a portion of the dividends, capital gains distributions and
proceeds of redemptions paid to any shareholder who fails to furnish the Trust
with a correct taxpayer identification number, who underreports dividend or
interest income or who fails to provide certification of tax identification
number. In order to avoid this withholding requirement, you must certify on your
application, or on a separate W-9 Form supplied by the Transfer Agent, that your
taxpayer identification number is correct and that you are not currently subject
to backup withholding or you are exempt from backup withholding. For
individuals, your taxpayer identification number is your social security number.
Instructions to exchange or transfer shares held in established accounts
will be refused until the certification has been provided. In addition, the Fund
assesses a $50 administrative fee if the taxpayer identification number is not
provided by year end.
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Certificates
When you open your account, Pauze Funds will send you a confirmation
statement, which will be your evidence that you have opened an account with
Pauze Funds. The confirmation statement is non-negotiable, so if it is lost or
destroyed, you will not be required to buy a lost instrument bond or be subject
to other expense or trouble, as you would with a negotiable stock certificate.
Pauze Funds has determined that it will not issue negotiable stock certificates.
HOW TO EXCHANGE SHARES
You have the privilege of exchanging into any of the Pauze Funds which are
properly registered for sale in your state. An exchange involves the
simultaneous redemption (sale) of shares of one fund and purchase of shares of
another fund at their respective closing net asset values and is a taxable
transaction.
BY TELEPHONE
You will automatically have the privilege to direct Pauze Funds to exchange
your shares by calling toll free 1-800-327-7170. In connection with such
exchanges, neither the Fund nor the Transfer Agent will be responsible for
acting upon any instructions reasonably believed by them to be genuine. The
shareholder, as a result of this policy, will bear the risk of loss. The Fund
and/or its Transfer Agent will, however, employ reasonable procedures to confirm
that instructions communicated by telephone are genuine (including requiring
some form of personal identification, providing written confirmation, and tape
recording conversations); and if the Fund and/or its Transfer Agent do not
employ reasonable procedures, they may be liable for losses due to unauthorized
or fraudulent transactions.
BY MAIL
You may direct Pauze Funds in writing to exchange your shares. The request
must be signed exactly as the name appears on the registration. (Before writing,
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read "Additional Information About Exchanges.")
Additional Information about Exchanges
(1) There is no charge for exchanges. However, the Trust reserves the right
to impose a $5 charge, which would be paid to the Transfer Agent, for each
exchange transaction out of any fund account, to cover administrative costs
associated with handling these exchanges.
(2) As with any other redemption, the Fund reserves the right to hold
redemption proceeds for up to seven days. In such event, the purchase side of
the exchange transaction will also be delayed. You will be notified immediately
if a Fund is exercising said right.
(3) Shares may not be exchanged unless you have furnished Pauze Funds with
your tax identification number, certified as prescribed by the Internal Revenue
Code and Regulations, and the exchange is to an account with like registration
and tax identification number. (See "Tax Identification Number" page ___.)
(4) The exchange privilege may be modified or terminated at any time. The
exchange fee and other terms of the privilege are subject to change.
HOW TO REDEEM SHARES
You may redeem any or all of your shares at will. The Trust redeems shares
at the net asset value next determined after it has received and accepted a
redemption request in proper order. Redemption requests must be received prior
to the time the next determined net asset value per share is computed --
generally 4:00 p.m. Eastern time, Monday through Friday, to be effective that
day.
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BY MAIL
You may mail a written request for redemption in proper form to Declaration
Service Company, P.O. Box 844, Conshohocken, Pennsylvania 19428- 0844. For
express or registered mail, send your request to Declaration Service Company,
Suite 6160, 555 North Lane, Conshohocken, Pennsylvania 19428. To be in "proper
order", your request requires delivery to the Transfer Agent of:
(1) a written request for redemption signed by each registered owner
exactly as the shares are registered, the account number and the number of
shares or the dollar amount to be redeemed;
(2) signature guarantees when required (see "Signature Guarantee" page );
and
(3) such additional documents as are customarily required to evidence the
authority of persons effecting redemptions on behalf of corporations, executors,
trustees and other fiduciaries. Redemptions will not become effective until all
documents in the form required have been received by the Transfer Agent. (Before
writing, read "Additional Information About Redemptions.")
BY TELEPHONE
Redemptions may be made by telephone, provided you have completed the
Telephone Redemption Authorization section of the purchase application. Upon
proper authority and instruction, redemptions will be wired (for a separate bank
wire charge) to the bank account identified on the account registration or, for
amounts of $15,000 or less, redemptions will be mailed to the address on the
account registration. In connection with telephone redemptions, neither the Fund
nor the Transfer Agent will be responsible for acting upon any instructions
reasonably believed by them to be genuine. The Fund and/or its Transfer Agent
will, however, employ reasonable procedures to confirm that instructions
communicated by telephone are genuine (including requiring some form of personal
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identification, providing written confirmations, and tape recording
conversations); and if the Fund or its Transfer Agent do not employ reasonable
procedures, they may be liable for losses due to unauthorized or fraudulent
transactions.
Special Redemption Arrangements
Special arrangements may be made by institutional investors, or on behalf
of accounts established by brokers, advisers, banks or similar institutions, to
have redemption proceeds transferred by wire to pre-established accounts upon
telephone instructions. For further information call the Trust at
1-800-327-7170.
Signature Guarantee
Redemptions in excess of $15,000 currently require a signature guarantee. A
signature guarantee is required for all redemptions, regardless of the amount
involved, when proceeds are to be paid to someone other than the registered
owner of the shares to be redeemed, or if proceeds are to be mailed to an
address other than the registered address of record. A signature guarantee
verifies the authenticity of your signature and the guarantor must be an
eligible guarantor. In order to be eligible, the guarantor must be a participant
in a STAMP program (a Securities Transfer Agents Medallion Program). You may
call the Transfer Agent at 1-800-327-7170 to determine whether the entity that
will guarantee the signature is an eligible guarantor.
Redemption proceeds may be sent to you:
BY MAIL
If your redemption check is mailed, it is usually mailed within 48 hours of
receipt of the redemption request; however, the Fund reserves the right to hold
redemption proceeds for up to seven days. If the shares to be redeemed were
purchased by check, the redemption proceeds will not be mailed until the
purchase check has cleared. You may avoid this requirement by investing by bank
wire (Federal funds). Redemption checks may be delayed if you have changed your
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address in the last 30 days. Please notify the Fund promptly in writing of any
change of address.
BY WIRE
You may authorize the Trust to transmit redemption proceeds by wire
provided you send written instructions with a signature guarantee at the time of
redemption or have completed the banking information portion of the Telephone
Redemption Authorization on the purchase application. Proceeds from your
redemption will usually be transmitted on the first business day following the
redemption. However, the Trust reserves the right to hold redemptions for up to
seven days. If the shares to be redeemed were purchased by check, the redemption
proceeds will not be wired until the purchase check has cleared, which may take
up to seven days. There is a $10 charge to cover the wire, which is deducted
from redemption proceeds.
Additional Information About Redemptions
The redemption price may be more or less than your cost, depending on the
net asset value of the Fund's portfolio next determined after your request is
received.
A request to redeem shares in an IRA or similar retirement account must be
accompanied by an IRS Form W4-P and must state a reason for withdrawal as
specified by the IRS. Proceeds from the redemption of shares from a retirement
account may be subject to withholding tax.
The Trust has the authority to redeem existing accounts and to refuse a
potential account the privilege of having an account in the Trust if the Trust
reasonably determines that the failure to so redeem, or to so prohibit, would
have a material adverse consequence to the Trust and its shareholders.
Excessive short-term trading has an adverse impact on effective portfolio
management as well as upon Fund expenses. The Trust has reserved the right to
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refuse investments from shareholders who engage in short-term trading.
Account Closing Fee
In order to reduce Fund expenses, an account closing fee of $10 will be
assessed to shareholders who redeem all shares in their Fund account and direct
that redemption proceeds be directed to them by mail or wire. The charge is
payable directly to the Fund's Transfer Agent which, in turn, will reduce its
charges to the Fund by an equal amount. The account closing fee does not apply
to exchanges between the Funds.
The purpose of the charge is to allocate to redeeming shareholders a more
equitable portion of the Transfer Agent's fee, including the cost of tax
reporting, which is based upon the number of shareholder accounts. When a
shareholder closes an account, the Fund must continue to carry the account on
its books, maintain the account records and complete year-end tax reporting.
With no assets, the account cannot pay its own expenses and imposes an unfair
burden on remaining shareholders.
Small Accounts
Fund accounts which fall, for any reason other than market fluctuations,
below $1,000 at any time during a month will be subject to a small account
charge of $5 for that month which is deducted the next business day. The charge
is payable directly to the Fund's Transfer Agent which, in turn, will reduce its
charges to the Fund by an equal amount. The purpose of the charge is to allocate
the cost of maintaining shareholder accounts more equitably among shareholders.
Active automatic investment plan, UGMA/UTMA, and retirement plan accounts
administered by the Administrator or its agents or its affiliates will not be
subject to the small account charge.
In order to reduce expenses of a Fund, the Trust may redeem all of the
shares in any shareholder account, other than an active automatic investment
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plan, UGMA/UTMA and retirement plan accounts, if, for a period of more than
three months, the account has a net asset value of $500 or less and the
reduction in value is not due to market fluctuation. If the Fund elects to close
such accounts, it will notify shareholders whose accounts are below the minimum
of its intention to do so, and will provide those shareholders with an
opportunity to increase their accounts by investing a sufficient amount to bring
their accounts up to the minimum amount within ninety (90) days of the notice.
No account closing fee will be charged to investors whose accounts are closed
under the mandatory redemption provision.
Confirmation Statements
Shareholders normally will receive a yearly confirmation statement and
after each transaction showing the activity in the account. However, when
account activity is produced solely from dividend reinvestment, confirmation
statements will be mailed only on a monthly basis.
Other Services
The Trust has available a number of plans and services to meet the special
needs of certain investors. Plans available include, but are not limited to:
(1) payroll deduction plans, including military allotments;
(2) custodial accounts for minors;
(3) a flexible, systematic withdrawal plan; and
(4) various retirement plans such as IRA, 403(b)(7), 401(k) and
employer-adopted defined benefit and defined contribution plans.
There is an annual charge for each retirement plan fund account with
respect to which a service provider acts as custodian. If this charge is not
paid separately prior to the last business day of a calendar year or prior to a
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total redemption, it will be deducted from the shareholder's account.
Application forms and brochures describing these plans and services can be
obtained from the Transfer Agent by calling 1-800-327-7170.
Shareholder Services
DSC acts as transfer and dividend paying agent for all Fund accounts.
Simply write or call the Investor Information Department at 1-800-327-7170 for
prompt service on any questions about your account.
HOW SHARES ARE VALUED
Shares of a Fund are purchased or redeemed on a continuing basis at their
next determined net asset value per share. The net asset value per share of each
class of a Fund is calculated separately by DSC. Net asset value per share is
determined and orders become effective as of 4:00 p.m., Eastern time, Monday
through Friday, exclusive of business holidays on which the NYSE is closed, by
dividing the aggregate fair value of the class of share's proportionate share of
a Fund's assets, less the class of share's proportional share of common expenses
of the Fund and the other expenses specifically allocable to the class of
shares, by the total number of shares outstanding. In the event that the NYSE
and other financial markets close earlier, as on the eve of a holiday, the net
asset value per share will be determined earlier in the day at the close of
trading on the NYSE.
The value of the Fund's assets is determined in accordance with certain
procedures and policies established by the Board of Trustees. All securities
(except securities with less than 60 days to maturity and repurchase agreements)
held by the Fund are valued based on an independent pricing service; and, in the
event such service is not available, at the mean between the most recent bid and
ask prices as obtained from one or more dealers that make markets in the
securities. Short-term investments with maturities of 60 days or less at the
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time of purchase ordinarily are valued on the basis of the amortized cost. This
involves valuing an instrument at its cost initially and, thereafter, assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. If
the Advisor determines that amortized cost does not reflect fair value of a
security, the Board may select an alternative method of valuing the security.
DIVIDENDS AND TAXES
The Trust/each Fund intends to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By complying with the applicable provisions of the Code, the Fund will
not be subject to Federal income tax on its net investment income and capital
gain net income that are distributed to shareholders.
Dividends and capital gains will be calculated and distributed in the same
manner for all classes of shares of the Funds. The per share amount of any
income dividends will generally differ only to the extent that each class is
subject to different Rule 12b-1 fees.
All income dividends and capital gains distributions are normally
reinvested, without charge, in additional full and fractional no-load shares of
the Fund. Alternatively, investors may choose: (1) automatic reinvestment of
capital gains distributions in Fund shares and payment of income dividends in
cash; (2) payment of capital gains distributions in Fund shares and automatic
reinvestment of dividends in Fund shares; or (3) all income dividend and capital
gains distributions paid in cash. The share price of the reinvestment will be
the net asset value of the Fund shares computed at the close of business on the
date the dividend or distribution is paid. Dividend checks returned to the Fund
as being undeliverable and dividend checks not cashed after 180 days will
automatically be reinvested at the price of the Fund on the day returned or on
the 181st day, and the distribution option will be changed to "reinvest."
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At the time of purchase, the share price of the Fund may reflect
undistributed net investment income, capital gains or unrealized appreciation of
securities. Any dividend or capital gains distribution paid to a shareholder
shortly after a purchase of shares will reduce the per share net asset value by
the amount of the distribution. Although in effect a return of capital to the
shareholder, these capital gains distributions are fully taxable.
The Fund is subject to a non-deductible 4% excise tax calculated as a
percentage of certain undistributed amounts of taxable ordinary income and
capital gains net of capital losses. The Fund intends to make such distributions
as may be necessary to avoid this excise tax.
Dividends consisting of substantially all of the net income are declared
and paid monthly. Investors may request automatic redemption of dividend income
at each month or quarter end.
Dividends from taxable net investment income and distributions of net
short-term capital gains paid by the Fund are taxable to shareholders as
ordinary income, whether received in cash or reinvested in additional shares of
the Fund. None of the dividends paid by the Fund are expected to qualify for the
70% dividends received deduction available to corporations. Distributions of net
capital gains will be taxable to shareholders as long-term capital gains,
whether paid in cash or reinvested in additional shares, regardless of the
length of time the investor has held his shares.
Under Federal law, the income derived from obligations issued by the United
States Government and certain of its agencies and instrumentalities is exempt
from state income taxes. All states that tax personal income permit mutual funds
to pass through this tax exemption to shareholders provided applicable
diversification/threshold limits and reporting requirements are satisfied.
Each January, the Fund will report to its shareholders as to the Federal
tax status of dividends and distributions paid or declared by the Fund during
the preceding calendar year.
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The foregoing discussion relates only to generally applicable Federal
income tax provisions in effect as of the date of this Prospectus. Shareholders
should consult their tax advisers about the status of distributions from the
Fund in their own states and localities. To assist in this regard, each January
the Fund will provide shareholders with a breakdown of Fund assets and income
for the year.
THE TRUST
The Pauze Funds (the "Trust") is an open-end management investment company,
which may consist of numerous separate, diversified, portfolios each of which
has its own investment objectives and policies.
The Trust was formed October 15, 1993, as a "business trust" under the laws
of the Commonwealth of Massachusetts. It is a "series" company which is
authorized to issue series of shares without par value, each series representing
interests in a separate portfolio, or to divide the shares of any series into
classes. Shares of three series have been authorized; and, each series is
authorized to issue four classes of shares. The Board of Trustees of the Trust
has the power to create additional series, or divide existing series into two or
more classes, at any time, without a vote of shareholders of the Trust.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required; however, the Trustees may call meetings to take action
on matters which require shareholder vote and other matters which Trustees
determine shareholder vote is necessary or desirable.
Shareholders elect the Trustees of the Trust. Subject to Section 16(a) of
the 1940 Act, the Trustees may elect their own successors and may appoint
Trustees to fill vacancies, including vacancies caused by an increase in the
number of Trustees by action of the Board of Trustees.
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Whether appointed or elected, a Trustee serves as Trustee of the Trust for
a period of six years. Notwithstanding the foregoing, the Trustees' terms are
staggered so that the terms of at least 25% of the Board of Trustees will expire
every three years. A Trustee whose term is expiring may be re-elected.
On any matter submitted to shareholders, shares of the portfolio entitle
their holder to one vote per share, irrespective of the relative net asset
values of each portfolio's shares. On matters affecting an individual portfolio,
a separate vote of shareholders of the portfolio is required. On matters
affecting an individual class of shares, a separate vote of shareholders of the
class is required. The portfolio's shares are fully paid and non-assessable by
the Trust, have no preemptive or subscription rights, and are fully
transferable, with no conversion rights.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders or
prospective shareholders, the Fund may compare its performance, either in terms
of its yield, total return or its yield and total return, to that of other
mutual funds with similar investment objectives and to stock or other indices.
For example, the Fund may compare its performance to rankings prepared by Lipper
Analytical Services, Inc. ("Lipper"), a widely recognized independent service
which monitors the performance of mutual funds, to Morningstar's Mutual Fund
Values, to Moody's Bond Survey Bond Index, or to the Consumer Price Index.
Performance information and rankings as reported in Changing Times, Business
Week, Institutional Investor, the Wall Street Journal, Mutual Fund Forecaster,
No-Load Investor, Money Magazine, Forbes, Fortune and Barrons magazine may also
be used in comparing performance of the Fund. Performance comparisons shall not
be considered as representative of the future performance of the Fund.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period that, if applied
to a hypothetical $1,000 initial investment, would produce the redeemable value
of that investment at the end of the period, assuming reinvestment of all
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dividends and distributions and with recognition of all recurring charges. The
Fund may also utilize a total return for differing periods computed in the same
manner but without annualizing the total return.
The Fund's "yield" refers to the income generated by an investment in the
Fund over a 30-day (or one month) period (which period will be stated in the
advertisement). Yield is computed by dividing the net investment income per
share earned during the most recent calendar month by the maximum offering price
per share on the last day of such month. This income is then "annualized." That
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each month over a 12-month period and is shown as a
percentage of the investment.
For purposes of the yield calculation, interest income is computed based on
the yield to maturity of each debt obligation and dividend income is computed
based upon the stated dividend rate of each security in the Fund's portfolio and
all recurring charges are recognized.
The standard total return and yield results do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees such as a fee for exchanges.
These fees have the effect of reducing the actual return realized by
shareholders.
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PAUZE FUNDS
SHARES OFFERED BY THIS PROSPECTUS ARE SOLD
AT NET ASSET VALUE WITHOUT SALES COMMISSIONS
OR REDEMPTION FEES
Pauze U.S. Government Total Return Bond Fund
Pauze U.S. Government Intermediate Term Bond Fund
Pauze U.S. Government Short Term Bond Fund
INVESTMENT ADVISOR
Pauze Swanson Capital Management Co.
14340 Torrey Chase Boulevard, Suite 170
Houston, Texas 77014
ADMINISTRATOR & TRANSFER AGENT
Declaration Service Company
P.O. Box 844
Conshohocken, PA 19428-0844
DISTRIBUTOR
Declaration Distributors, Inc.
P.O. Box 844
Conshohocken, PA 19428
CUSTODIAN
Star Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
30 South Seventeenth Street
Philadelphia, PA 19103
Be Sure to Retain This Prospectus.
It Contains Valuable Information.
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<PAGE>
PART A -- THE PROSPECTUS
Included herein is the Prospectus for the
Pauze U.S. Government Total Return Bond Fund
Pauze U.S. Government Short Term Bond Fund
Pauze U.S. Government Intermediate Term Bond Fund
(Class B and C Shares)
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
PAUZE U.S. GOVERNMENT
INTERMEDIATE TERM BOND FUND
PAUZE U.S. GOVERNMENT SHORT TERM BOND FUND
P.O. Box 844
Conshohocken, PA 19428-0844
1-800-327-7170
(Information, Shareholder Services and Requests)
PROSPECTUS
August 1, 1996
This prospectus presents information that a prospective investor should know
about the Pauze U.S. Government Total Return Bond Fund, the Pauze U.S.
Government Intermediate Term Bond Fund and the Pauze U.S. Government Short Term
Bond Fund, three series, mutual funds (the "Funds"), of Pauze Funds (the
"Trust") which seek to provide investors with a high total return consistent
with preservation of capital and liquidity within stated maturity ranges. Each
Fund is designed to satisfy different needs, with its own separate and distinct
portfolio of U.S. Government and/or government agency securities. Read and
retain this prospectus for future reference.
A Statement of Additional Information dated August 1, 1996, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. The Statement is available free from Pauze Funds upon written request
at the address set forth above or by calling 1-800-327-7170.
This prospectus covers the offering of Class B (sold subject to a
contingent deferred sales charge) and Class C (sold subject to an on-going trail
commission) shares of the Funds. Information on other classes of shares of the
Funds offered on a different basis is available from Pauze Funds upon written
request at the address set forth above or by calling 1-800-327-7170.
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.
<PAGE>
TABLE OF CONTENTS
SUMMARY OF FEES AND EXPENSES......................3
FINANCIAL HIGHLIGHTS.................................9
INVESTMENT OBJECTIVES AND CONSIDERATIONS............11
SPECIAL CONSIDERATIONS..............................16
12b-1 Fee...........................................18
MANAGEMENT OF THE FUNDS.............................19
HOW TO PURCHASE SHARES..............................22
ALTERNATIVE PURCHASE PLANS..........................26
HOW TO EXCHANGE SHARES..............................23
HOW TO REDEEM SHARES................................33
HOW SHARES ARE VALUED...............................39
DIVIDENDS AND TAXES.................................39
THE TRUST...........................................41
PERFORMANCE INFORMATION.............................43
<PAGE>
SUMMARY OF FEES AND EXPENSES
The following summary is provided to assist you in understanding the
various costs and expenses a shareholder in a Fund could bear directly and
indirectly. Pauze U.S. Government Total Return Bond Fund's ("Total Return Fund")
annual operating expenses are shown as a percentage of average daily net assets
for the fiscal period ended April 30, 1996. Because Pauze U.S. Government
Intermediate Term Bond Fund ("Intermediate Term Fund") and Pauze U.S. Government
Short Term Bond Fund ("Short-Term Fund") shares were not offered prior to the
date of this prospectus, annual operating expenses of said Funds are based on
estimated expenses. Class B and Class C shares of the Total Return Fund were not
offered prior to the date of this prospectus. Shareholder transaction expenses
for all Funds are expressed as a percentage of the public offering price, cost
per transaction or as otherwise noted.
Total Return Fund
Class Class
B C
Shareholder Transaction Expenses
Maximum Sales Load....................... None None
Maximum Contingent deferred
sales charge (as a percentage
of original purchase price
or redemption proceeds,
as applicable)(1)....................... 3.75% None
Account Closing Fee
(does not apply to
exchanges).............................. $ 10 $ 10
Exchange fee............................ None None
Annual Fund Operating Expenses
(as a percentage of average net assets)(2)
Management and Administrative Services (3) .60% .60%
12b-1 Fees(4)......................... 1.00% 1.00%
Other Expenses, including
3
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Transfer Agency and
Accounting Services Fees ............. .49% .49%
Total Fund Operating Expenses ......... 2.09% 2.09%
4
<PAGE>
Intermediate Term Fund
Class Class
B C
Shareholder Transaction Expenses
Maximum Sales Load(1)................... None None
Maximum Contingent deferred
sales charge (as a percentage
of original purchase price
or redemption proceeds,
as applicable)(2)
........................................ 3.75% None
Account Closing Fee
(does not apply to
exchanges).............................. $ 10 $ 10
Exchange fee............................. None None
Annual Fund Operating Expenses
Management and Administratives Services (3) .50% .50%
12b-1 Fees (5)........................... 1.00% 1.00%
Other Expenses, including
Transfer Agency and
Accounting Services Fees ............... .98% .98%
Total Fund Operating Expenses ........... 2.48% 2.48%
5
<PAGE>
Short-Term Fund
Class Class
B C
Shareholder Transaction Expenses
Maximum Sales Load(1)................... None None
Maximum Contingent deferred
sales charge (as a percentage
of original purchase price
or redemption proceeds,
as applicable)(2)....................... 3.75% None
Account Closing Fee (does not apply to
exchanges)............................. $ 10 $ 10
Exchange fee............................. None None
Annual Fund Operating Expenses
Management and Administrative Services . .50% .50%
12b-1 Fees (5).......................... 1.00% 1.00%
Other Expenses, including
Transfer Agency and Accounting Services Fees .98% .98%
Total Fund Operating Expenses .......... 2.48% 2.48%
A shareholder who requests delivery of redemption proceeds by wire will be
subject to a $10 charge. International wires will be higher.
Hypothetical Example of Effect on Fund Expenses
You would pay the following expenses on a $1,000 investment, assuming 5%
annual return and redemption at the end of each period:
6
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CLASS B
Total Intermediate Short
Return Term Term
Fund Fund Fund
1 year....... $ 69 $ 74 $ 74
3 years...... 109 122 122
5 years...... 145 167 167
10 years..... 205 241 241
CLASS C
Total Intermediate Short
Return Term Term
Fund Fund Fund
1 year....... $ 31 $ 35 $ 35
3 years...... 75 87 87
5 years...... 120 142 142
10 years..... 242 291 291
Included in these estimates is the account closing fee of $10 for each
period. This is a flat charge which does not vary with the size of your
investment. Accordingly, for investments larger than $1,000, your total expenses
will be substantially lower in percentage terms than this illustration. The
examples should not be considered a representation of past or future expenses.
Actual expenses may be more or less than those shown.
________________________________________________________________________________
(1) The maximum contingent deferred sales charge (CDSC) as set forth in the
table applies to redemptions of shares within one year of purchase. The CDSC
decreases over time, to zero, and the Class B shares become no-load class
shares. See "Alternative Purchase Plans" at page ____ .
(2) Annual fund operating expenses are based on the Total Return Fund's
historical expenses. Management fees are paid to Pauze, Swanson & Associates
Investment Advisors, Inc. d/b/a Pauze Swanson Capital Management Co. (the
"Advisor") for managing the Fund's investments. Administrative services fees are
paid to Declaration Service Company ("DSC" or "Administrator") for administering
the affairs of the Trust. The Fund incurs other expenses for maintaining
shareholder records, furnishing shareholder statements and reports, and for
7
<PAGE>
other services. Transfer agency and accounting services fees are also paid to
DSC, and are not charged directly to individual shareholder accounts. The
Transfer Agent charges the Fund $18.00 per shareholder account per year with a
minimum monthly fee of $1,500 which increases to $2,000 over a two year period.
Prior to February 13, 1996, United Shareholder Services Inc. ("USSI") provided
such services and charged the Fund $25.00 per shareholder account per year, with
a minimum monthly fee of $2,500. The account closing fee and small account
charge will be paid by the shareholder directly to the Transfer Agent which
will, in turn, reduce its charges to the Fund by a like amount. Please refer to
the section entitled "Management of the Fund" at page for further information.
(3) The Management and Administrative Services Fees were increased, upon
aproval of Shareholders, effective June 1, 1996, which fees are reflected in the
Table.
(4) Annual Rule 12b-1 fees for the respective classes of shares may not
exceed the percentage set forth in the table under guidlines adopted by the
National Association of Securities Dealers, Inc.. Further, Rule 12b-1 fees
applicable to Class B Shares which are in addition to a 0.25% base dropped to
zero in relation to the CDSC. See "Alternative Purchase Plans" at page ___ .
8
<PAGE>
INVESTMENT OBJECTIVES AND CONSIDERATIONS
Pauze Funds (the"Trust") offers investors three fixed income funds which
seek to provide investors with a high total return (interest income plus or
minus realized and unrealized capital appreciation and depreciation) consistent
with preservation of capital and liquidity: the Pauze U.S. Government Total
Return Bond Fund (the "Total Return Fund"); the Pauze U.S. Government Short Term
Bond Fund (the "Short-Term Fund"); and the Pauze U.S. Government Intermediate
Term Bond Fund (the "Intermediate Term Fund"). Each Fund is designed to satisfy
different needs, with its own separate and distinct portfolio of U.S. Government
and/or government agency securities within prescribed maturity ranges. There is
no assurance that the Funds will be able to achieve their investment objectives.
Pauze U.S. Government Total Return Bond Fund
The Total Return Fund's investment objective is to achieve a rate of total
return (interest income plus or minus realized and unrealized capital
appreciation and depreciation) above the rate of other funds by investing
exclusively in securities backed by the full faith and credit of the United
States Government.
It is the investment policy of the Fund to invest exclusively in debt
securities that are backed by the full faith and credit of the United States
Government. Eligible securities may be issued by the United States Government or
by an agency of the United States Government provided they are backed by the
full faith and credit of the United States Government. The Fund may also invest
in repurchase agreements collateralized by such securities. Eligible securities
may be of varying maturities, based upon the investment adviser's perception of
market conditions, with no stipulated average maturity or duration.
The United States Government's guarantee of ultimate payment of principal
and timely payment of interest of the United States Government securities owned
by the Fund does not imply that the Fund's shares are guaranteed or that the
price of the Fund's shares will not fluctuate.
9
<PAGE>
Portfolio Securities
United States Treasury securities are backed by the full faith and credit
of the United States Government. These securities differ only in their interest
rates, maturities, timing of interest payments, and times of issuance. Treasury
bills have initial maturities of one year or less, do not make semi-annual
interest payments, and are purchased or sold at a discount from their face
value; Treasury notes have initial maturities of one to ten years and pay
interest semiannually; and Treasury bonds generally have initial maturities of
greater than ten years and pay interest semi-annually.
Among the bonds that may be purchased are GNMA Certificates (popularly
called "Ginnie Maes"). Ginnie Maes are backed by the full faith and credit of
the United States Government. Ginnie Maes are mortgage-backed securities
10
<PAGE>
representing part ownership of a pool of mortgage loans which are insured
by the Federal Housing Administration or Farmers' Home Administration or
guaranteed by the Veterans' Administration. The Fund may invest in Ginnie Maes
of the "fully modified pass-through" type which are guaranteed as to the timely
payment of principal and interest by the Government National Mortgage
Association, a United States Government corporation. Interest and principal
payments (including prepayments) on the mortgages underlying mortgage-backed
securities are passed through to the holders of the mortgage-backed security.
Prepayments occur when a holder of the mortgage prepays the remaining principal
before the mortgage's scheduled maturity date. As a result of the pass-through
of prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayments of principal than their
stated maturity would indicate. Because the prepayment characteristics of the
underlying securities vary, it is not possible to predict accurately the
realized yield or average life of a particular issue of pass-through
certificates. Prepayments are important because of their effect on the yield and
price of the securities. During periods of declining interest rates, such
prepayments can be expected to accelerate and the Fund would be required to
reinvest the proceeds at the lower interest rates then available. In addition,
prepayments of mortgages which underlie securities purchased at a premium may
not have been fully amortized at the time the obligation is repaid and may
result in a loss. As a result of these principal payment features,
mortgage-backed securities are generally more volatile investments than other
United States Government securities.
The Funds may also invest up to 5% of its assets in bonds that are "zero
coupon" United States Government securities (which have been stripped of their
unmatured interest coupons and receipts) or in certificates representing
undivided interests in stripped United States Government securities and coupons.
The Funds will only invest in "zeros" which are issued by the United States
Treasury and not those issued by broker-dealers or banks. The Funds will not
invest in Interest Only or Principal Only ("IOs" or "POs") mortgage-backed
securities or derivative products. Zero coupon securities tend to be more
11
<PAGE>
sensitive to changes in interest rates than other types of United States
Government securities. As a result, a rise or fall in interest rates will have a
more significant impact on the market value of these securities. Although zero
coupon securities pay no interest to holders prior to maturity, interest on
these securities is accrued as income to the Funds and distributed to their
shareholders. These distributions must be made from the Funds' cash assets, or,
if necessary, from the proceeds of sales of portfolio securities.
Portfolio Management
The investment adviser will seek above average total return by
restructuring the average duration of the Fund's portfolio securities to take
advantage of anticipated changes in interest rates. When the investment adviser
believes that interest rates will fall, it will lengthen the average duration of
the Fund's portfolio securities to earn greater capital appreciation. When the
investment adviser believes that interest rates will rise, it will shorten the
average duration of the Fund's portfolio securities to reduce capital
depreciation and preserve capital.
Duration is the weighted average life of a Fund's debt instruments measured
on a present-value basis. It is generally superior to average weighted maturity
as a measure of a Fund's potential volatility due to interest rate changes.
Unlike a Fund's average weighted maturity, which takes into account only
the stated maturity date of the Fund's debt instruments, duration represents a
weighted average of both interest and principal payments, discounted by the
current yield-to-maturity of the securities held. For example, a four year,
zero-coupon bond, which pays interest only upon maturity (along with principal),
has both a maturity and duration of 4 years. However, a four-year bond priced at
par with an 8% coupon has a maturity of 4 years but a duration of 3.6 years (at
an 8% yield), reflecting the bond's earlier payment of interest.
In general, a bond with a longer duration will fluctuate more in price than
a bond with a shorter duration. Also, for small changes in interest rates,
duration serves to approximate the resulting change in a bond's price. For
example, a 1% change in interest rates will cause roughly a 4% move in the price
of a zero-coupon bond with a 4 year duration, while an 8% coupon bond (with a
3.6 year duration) will change by approximately 3.6%.
The Fund's success at achieving its investment objective is dependent upon
the investment adviser correctly forecasting future changes in interest rates.
The investment adviser uses extensive fundamental and technical analysis to
formulate interest rate forecasts. However, there is no assurance that the
investment adviser will successfully forecast interest rates and, if its
forecasts are wrong, the Fund may suffer a loss of principal or fail to fully
participate in capital appreciation and the Fund may not have a yield as high as
it moght have otherwise.
Pauze U.S. Government Intermediate Term Bond Fund
The Intermediate Term Fund has the same objectives and policies as set
forth above except (i) that, in addition to restructuring the average duration
of the Fund's portfolio, it will maintain an average weighted portfolio maturity
between three and ten years; (ii) that it may invest in securities issued by
U.S. Government agencies that are not backed by the full faith and credit of the
U.S. Treasury; and (iii) that it may invest in financial futures and related
options to hedge the portfolio assets in the Fund.
Pauze U.S. Government Short Term Bond Fund
The Short-Term Fund has the same objectives and policies as set forth above
except (i) that, in addition tp restructuring the average duration of the Fund's
portfolio, it will maintain an average weighted portfolio maturity between one
and three years; (ii) that it may invest in securities issued by U.S. Government
agencies that are not backed by the full faith and credit of the U.S. Treasury;
and (iii) that it may invest in financial futures and related options to hedge
the portfolio assets in the Fund.
Futures Contracts and Options
For purposes of investment the Short-Term Fund and the Intermediate Term
Fund may invest in futures contracts and option contracts; provided, that not
more than 2.5% of their assets are required as initial margin and premiums
required to establish such positions. A Fund may also enter into futures
contracts and options transactions only to the extent that obligations under
such contracts or transactions represent not more than 100% of a Fund's assets.
12
<PAGE>
Futures contracts and options may be used for several reasons to hedge
securities held to effectively reduce the average weighted maturity to maintain
cash reserves while remaining fully invested; to facilitate trading; to reduce
transaction costs; or to seek higher investment returns when a futures contract
is priced more attractively than the underlying security or index. No Fund may
use futures contracts or options transactions to leverage assets.
Futures Contracts and Options Pose Certain Risks
The primary risks associated with the use of futures contracts and options
are: (i) imperfect correlation between the change in market value of the U.S.
Government securities held by a Fund and the prices of futures contracts and
options; and (ii) possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be minimized by investing
only in those contracts whose price fluctuations are expected to resemble those
of a Fund's underlying securities. The risk that a Fund will be unable to close
out a futures position will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary market.
Objective and Policy Not Fundamental
Neither the investment objective nor the investment policy are fundamental
policies of the Funds and may be changed by the Board of Trustees without
shareholder approval. However, shareholders will be notified in writing at least
30 days prior to any material change to either the Fund's investment objective
or its investment policy.
Repurchase Agreements
The Funds may invest a portion of its assets in repurchase agreements with
domestic broker-dealers, banks and other financial institutions, provided the
Funds' custodian always has possession of securities serving as collateral or
has evidence of book entry receipt of such securities. In a repurchase
13
<PAGE>
agreement, a fund purchases securities subject to the seller's agreement to
repurchase such securities at a specified time (normally one day) and price. The
repurchase price reflects an agreed-upon interest rate during the time of
investment. All repurchase agreements must be collateralized by United States
Government or government agency securities, the market values of which equal or
exceed 102% of the principal amount of the repurchase obligation. If an
institution enters insolvency proceedings, the resulting delay in liquidation of
securities serving as collateral could cause the fund some loss if the value of
the securities declined prior to liquidation. To minimize the risk of loss, the
Fund will enter into repurchase agreements only with institutions and dealers
which are considered creditworthy.
Lending of Portfolio Securities
The Funds may lend securities to broker-dealers or institutional investors
for their use in connection with short sales, arbitrages and other securities
transactions. The Funds will not lend portfolio securities unless the loan is
secured by collateral (consisting of any combination of cash and United States
Government securities) in an amount at least equal (on a daily mark-to-market
basis) to the current market value of the securities loaned. In the event of a
bankruptcy or breach of agreement by the borrower of the securities, the Fund
could experience delays and costs in recovering the securities loaned. A Fund
will not enter into securities lending agreements unless its custodian
bank/lending agent will fully indemnify a Fund against loss due to borrower
default. A Fund may not lend securities with an aggregate market value of more
than one-third of the Fund's total net assets.
SPECIAL CONSIDERATIONS
Interest Rate Sensitivity
The investment income of the Funds is based on the income earned on the
securities it holds, less expenses incurred; thus, a Fund's investment income
may be expected to fluctuate in response to changes in such expenses or income.
14
<PAGE>
For example, the investment income of the Fund may be affected if it experiences
a net inflow of new money that is then invested in securities whose yield is
higher or lower than that earned on the then current investments.
Generally, the value of the securities held by the Fund, and thus the net
asset value ("NAV") of the Fund, will rise when interest rates decline.
Conversely, when interest rates rise, the value of fixed income securities, and
thus the NAV per share of the Fund, may be expected to decline. If the Advisor
incorrectly forecasts interest rates, both the rate of return and the NAV of the
Fund may be adversely affected. As an example, if the Advisor forecasts that
interest rates are generally to go up, and accordingly shortens the maturities
of the instruments within the Fund and interest rates in fact go down, then the
interest income gained by the Fund will be less than if the Fund had not
shortened its maturities. Additionally, any capital gain that might have been
achieved because of the longer maturities would be less with the shorter
maturities. Additionally, should the Advisor incorrectly forecast that interest
rates are generally going down, lengthen its maturities of the instruments
within the Fund and interest rates in fact go up, then the value of the longer
maturities would decline more than those of the shorter maturities. Thus, the
NAV would also decline more. There is no assurance that the Fund will be correct
in its forecast of changes in interest rates nor that the strategies employed by
the Fund to take advantage of changes in the interest rate environment will be
successful in achieving its investment objectives.
Borrowing
The Funds may borrow from a bank up to a limit of 5% of its total assets
for temporary or emergency purposes; and, it may borrow up to 33 1/3% of its
total assets (reduced by the amount of all liabilities and indebtedness other
than such borrowings) when deemed desirable or appropriate to meet redemption
requests. To the extent that a Fund borrows money prior to selling securities,
the Fund may be leveraged; at such times, the Fund may appreciate or depreciate
in value more rapidly than its benchmark index. The Funds will repay any money
borrowed in excess of 5% of the value of its total assets prior to purchasing
additional portfolio securities.
15
<PAGE>
When-Issued and Delayed Delivery Securities
The Funds may purchase debt obligations on a "when-issued" basis or may
purchase or sell securities for delayed delivery. In when-issued or delayed
delivery transactions, delivery of the securities occurs beyond normal
settlement period, but the Fund would not pay for such securities or start
earning interest on them until they are delivered. However, when a Fund
purchases securities on a when-issued or delayed delivery basis, it immediately
assumes the risks of ownership, including the risk of price fluctuation. Failure
to deliver a security purchased on a when-issued basis or delayed delivery basis
may result in a loss or missed opportunity to make an alternative investment.
Depending on market conditions, a Fund's when-issued and delayed delivery
purchase commitments could cause its net asset value per share to be more
volatile, because such securities may increase the amount by which the Fund's
total assets, including the value of when-issued and delayed delivery securities
held by the Fund, exceed its net assets.
12b-1 Fee
A separate plan of distribution has been adopted under Rule 12b-1 of the
Investment Company Act of 1940 for each Fund, with separate provisions for each
class of shares. With respect to the shares offered by this prospectus, each
plan provides that a Fund may pay a servicing or Rule 12b-1 fee of up to 0.25%
of the Fund's average net assets (1/12 of 0.25% monthly) to persons or
institutions for performing certain servicing functions for Fund shareholders.
These fees will be paid periodically and will generally be based on a percentage
of the value of Fund shares held by the institution's clients. The distribution
plans allow the Funds to pay for or reimburse expenditures in connection with
sales and promotional services related to the distribution of Fund shares,
including personal services provided to prospective and existing Fund
shareholders. With respect to Class B shares and Class C shares the distribution
plans allow the use of Fund assets allocable to those shares to be used to pay
additional Rule 12b-1 fees of up to 0.75% of said assets (1/12 of 0.75% monthly)
to cover fees paid to broker-dealers for sales and promotional services. See
16
<PAGE>
"Alternative Purchase Plans" at page and "12b-1 Plan of Distribution" in the
Statement of Additional Information.
MANAGEMENT OF THE FUNDS
Trustees
The business and affairs of the Funds are managed by the Trust's Board of
Trustees. The Trustees establish policies, as well as review and approve
contracts and their continuance. The Trustees also elect the officers and select
the Trustees to serve as executive and audit committee members.
The Investment Advisor
Pauze, Swanson & Associates Investment Advisors Inc. d/b/a Pauze Swanson
Capital Management Co. (the "Advisor"), 14340 Torrey Chase Blvd., Suite 170,
Houston, Texas 77014, under an investment advisory agreement with the Trust
dated November 1, 1993, furnishes investment advisory and management services to
the Funds. The Advisor is a Texas corporation which was registered with the
Securities and Exchange Commission as an investment adviser in December 1993.
Mr. Philip C. Pauze, the Funds' portfolio manager, owns and controls the
Advisor. He has managed the Total Return Fund since commencement of operations
in January 1994. Mr. Pauze has specialized in managing portfolios of United
States Government securities for trusts, small institutions, and retirement
plans since 1985. Mr. Pauze assisted the California Funeral Directors
Association in establishing the California Master Trust (the "CMT") and has been
its financial consultant since inception. CMT's investment performance has been
highly rated by independent evaluators. In addition to the CMT, Mr. Pauze serves
as the financial consultant to the government bond portfolio of the Pennsylvania
Funeral Trust, to the American Funeral Trust, a nationwide funeral trust, and to
the California and Pennsylvania Funeral Directors Association's Retirement
Plans.
The Advisor furnishes an investment program for the Funds, determines,
17
<PAGE>
subject to the overall supervision and review of the Board of Trustees of the
Trust, what investments should be purchased, sold and held, and makes changes on
behalf of the Trust in the investments of the Funds.
The Advisory Agreement with the Trust provides for the Funds to pay the
Advisor an annual management fee equal to a percentage of the Fund's average net
assets (1/12 of the applicable percentage monthly) as follows: Total Return Fund
0.60% on the first $100 million, 0.50% on the next $150 million, 0.45% on the
next $ 250 million and 0.40% on net assets in excess of $500 million;
Intermediate Term Fund, 0.50%; and Short-Term Fund, 0.50%. Prior to June 1,1996
the management fee payable to the Advisor for the Total Return Fund was as
follows: 0.40% on the first $50 million and 0.24% on net assets in excess of $50
million.
The Administrator
Declaration Service Company, ("DSC" or "Administrator") P.O. Box 844,
Conshohocken, PA 19428-0844 under an Administration Agreement with the Trust
dated February 13, 1996, generally administers the affairs of the Trust. Terence
P. Smith, President of DSC, has been a Trustee of the Trust since February 13,
1996.
Under the Administration Agreement, the Administrator, subject to the
overall supervision and review of the Board of Trustees of the Trust, supervises
parties (other than the Advisor) providing services to the Trust, provides the
Trust with office space, facilities and business equipment, and provides the
services of executive and clerical personnel for administering the affairs of
the Trust.
The Administration Agreement provides for the Trust to pay the
Administrator an annual fee of $24,000 for the first class of shares, per
portfolio; $16,000 for the second class of shares, per portfolio; and, $12,000
for each additional class, per portfolio.
DSC also provides transfer agency, dividend disbursing and accounting
services to the Funds for which it receives separate compensation.
The Transfer Agency and Shareholder Services Agreement with the Trust
provides for the Trust to pay DSC an annual fee of $18.00 per account, with a
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minimum annual fee of $18,000 for the first year, $21,000 for the second
year and $24,000 thereafter. Prior to February 13, 1996, the Transfer Agency
Agreement between USSI and the Trust provided for the Trust to pay USSI an
annual fee of $25.00 per account with a minimum annual fee of $30,000; and, in
connection with obtaining/providing administrative services to the beneficial
owners of Trust shares through broker-dealers which provide such services and
maintain an omnibus account with USSI, the Trust paid to USSI a monthly fee
equal to one-twelfth (1/12) of 12.5 basis points (.00125) of the value of the
shares of the Trust held in accounts at the broker-dealer, which payment would
not exceed $2.08 multiplied by the average daily number of accounts holding
Trust shares at the broker-dealer.
These fees cover the usual transfer agency functions. In addition, the
Funds bear certain other transfer agent expenses such as the costs of record
retention and postage, plus the telephone and line charges (including the
toll-free 800 service) used by shareholders to contact the transfer agent.
Transfer agent fees and expenses, including reimbursed expenses, are reduced by
the amount of small account charges and account closing fees the transfer agent
is paid.
DSC performs bookkeeping and accounting services, and determines the daily
net asset value for the funds. The Accounting Services Agreement with the Trust
provides for the Trust to pay DSC an annual fee of $22,000 for the first class
of shares, per portfolio; $15,000 for the second class of shares, per portfolio;
and $10,000 for each additional class of shares, per portfolio. Prior to
February 13, 1996, pursuant to the agreement between the Trust and USSI,
bookkeeping and accounting services were provided to the Fund, with one class of
shares, at a fixed annual fee of $37,500.
On February 13, 1996, pursuant to the Fund's Distribution Plan, the Trust
entered into a Distribution Agreement with Declaration Distributors, Inc.
("DDI"), an affiliate of DSC, pursuant to which DDI has agreed to act as the
Trust's agent in connection with the distribution of Fund shares - - including
acting as agent in states where designated agents are required, reviewing and
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filing all advertising and promotional materials and monitoring and reporting to
the Board of Trustees on Trust distribution plans. For such services, DDI will
be paid a fixed annual fee of $20,000 and will be reimbursed for expenses
incurred on behalf of the Trust. The Advisor is committed to pay all sums, if
any, that exceed the amount allowed under the Fund's 12b-1 Plan.
The Trust pays all other expenses for its operations and activities. As the
Trust adds other series in the future, then the Fund will pay its allocable
portion of these expenses. The expenses borne by the Trust include the charges
and expenses of any shareholder servicing agents, custodian fees, legal and
auditors' expenses, brokerage commissions for portfolio transactions, the
advisory fee, extraordinary expenses, expenses of shareholder and trustee
meetings, expenses for preparing, printing and mailing proxy statements, reports
and other communications to shareholders, and expenses of registering and
qualifying shares for sale, among others.
HOW TO PURCHASE SHARES
This prospectus covers shares of the Funds offered subject to a contingent
deferred sales charge (Class B) and subject to an ongoing trail commission
(Class C).
The minimum initial investment is $1,000. The minimum subsequent investment
is $50. The minimum initial investment for persons enrolled in an automatic
investment plan is $100 and the minimum subsequent investment pursuant to such a
plan is $30 per month per account.
Shares of the Funds are offered continuously through the Trust's principal
underwriter, Declaration Distributors, Inc. (the "Distributor") and through
other participating broker-dealers or banks that have dealer agreements with the
Distributor. The participating broker-dealers receive commissions consisting of
that portion of the sales load remaining after the dealer concession is paid to
the representative. Such broker-dealers may be deemed to be underwriters
pursuant to the Securities Act of 1933.
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Shares of the Trust may be purchased through a registered representative of
a participating dealer or a participating bank ("Representative") by placing an
order for Fund shares with your Representative, completing and signing the
Account Application found in the back of this prospectus, and mailing it, along
with your payment.
Shares of the Funds may be purchased at a price equal to their net asset
value per share next determined after receipt of an order. When you place an
order for a Fund's shares, you must specify which class of shares you wish to
purchase. See "Alternative Purchase Plans."
All purchase orders received by the Distributor prior to the close of
regular trading on the Exchange -- generally 4:00 p.m., Eastern time -- will be
executed at that day's offering price. All purchase orders accepted after the
offering price is determined will be executed at the offering price determined
as of the close of regular trading on the Exchange on the next trading day.
You may also invest in the following ways:
By Mail: Send your application and check or money order, made payable to
the Fund, to Declaration Service Company, P.O. Box 844, Conshohocken,
Pennsylvania 19428-0844.
When making subsequent investments, enclose your check with the return
remittance portion of the confirmation of your previous investment or indicate
on your check or a separate piece of paper your name, address and account number
and mail to the address set forth above. Third party checks will not be
accepted; and the Trust reserves the right to refuse to accept second party
checks.
By telephone: Once your account is open, you may make investments by
telephone by calling 1-800-327-7170. The maximum telephone purchase is ten times
the value of the shares owned, calculated at the last available net asset value.
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Payment for shares purchased by telephone is due within three business days
after the date of the transaction. Investments by telephone are not available in
any Fund retirement account administered by the Administrator or its agents.
By wire: You may make your initial or subsequent investments in Funds by
wiring funds. To do so, call the Investor Information Department at
1-800-327-7170 for a confirmation number and wiring instructions.
To assure proper receipt, please be sure your bank included the Fund name
and the account number that has been assigned to you. If you are opening a new
account, please complete the Account Registration Form and mail it to the "New
Account" address above after completing your wire arrangement. Note: Federal
Funds wire purchase orders will be accepted only when the Fund and Custodian
Bank are open for business.
Funds must be credited to the Fund's account by 11:00 a.m. (Eastern time)
in order to be applied to purchase shares on that day. There are no wire fees
charged by the Trust for purchases of $1,000 or more. A $10 wire fee will be
charged by the Trust on wire purchases of less than $1,000. Your bank may charge
wire fees for this service.
By Automatic Investment Plan: Once your account is open, you may make
investments automatically by completing the automatic investment plan form
authorizing Pauze Funds to draw on your bank account regularly by check for as
little as $30 a month beginning within thirty (30) days after the account is
opened. You should inquire at your bank whether it will honor debits through the
Automated Clearing House ("ACH") or, if necessary, preauthorized checks. You may
change the date or amount of your investment any time by written instruction
received by Pauze Funds at least five business days before the change is to
become effective.
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Additional Information About Purchases
All purchases of shares are subject to acceptance by the Trust and are not
binding until accepted. Pauze Funds reserves the right to reject any application
or investment. Orders become effective as of 4:00 p.m., Eastern time, Monday
through Friday, exclusive of business holidays.
Information on shares of the Funds offered on a different basis is
available from the Trust upon written request at the address set forth below or
by calling 1-800-327-7170.
Fees and charges associated with purchasing shares of the Funds are set
forth in the Trust's prospectuses. However, investors may purchase and sell
shares through registered broker-dealers who may charge additional fees for
their services.
If your telephone order to purchase shares is cancelled due to nonpayment
(whether or not your check has been processed by the Fund), you will be
responsible for any loss incurred by the Trust by reason of such cancellation.
If checks are returned unpaid due to nonsufficient funds, stop payment or
other reasons, the Trust will charge $20 and you will be responsible for any
loss incurred by the Trust with respect to cancelling the purchase. To recover
any such loss or charge, the Trust reserves the right, without further notice,
to redeem shares already owned by any purchaser whose order is cancelled and
such a purchaser may be prohibited from placing further orders unless
investments are accompanied by full payment by wire or cashier's check.
Investments paid for by checks drawn on foreign banks may be deferred until
such checks have cleared the normal collection process. In such instances, any
amounts charged to the Trust for collection procedures will be deducted from the
amount invested.
If the Trust incurs a charge for locating a shareholder without a current
address, such charge will be passed through to the shareholder.
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Tax Identification Number
The Trust is required by Federal law to withhold and remit to the United
States Treasury a portion of the dividends, capital gains distributions and
proceeds of redemptions paid to any shareholder who fails to furnish the Trust
with a correct taxpayer identification number, who underreports dividend or
interest income or who fails to provide certification of tax identification
number. In order to avoid this withholding requirement, you must certify on your
application, or on a separate W-9 Form supplied by the Transfer Agent, that your
taxpayer identification number is correct and that you are not currently subject
to backup withholding or you are exempt from backup withholding. For
individuals, your taxpayer identification number is your social security number.
Instructions to exchange or transfer shares held in established accounts
will be refused until the certification has been provided. In addition, the Fund
assesses a $50 administrative fee if the taxpayer identification number is not
provided by year end.
Certificates
When you open your account, Pauze Funds will send you a confirmation
statement, which will be your evidence that you have opened an account with
Pauze Funds. The confirmation statement is non-negotiable, so if it is lost or
destroyed, you will not be required to buy a lost instrument bond or be subject
to other expense or trouble, as you would with a negotiable stock certificate.
Pauze Funds has determined that it will not issue negotiable stock certificates.
ALTERNATIVE PURCHASE PLANS
The Trust offers two purchase plans by this prospectus.
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The first plan offers Class B shares with a contingent deferred sales
charge ("CDSC"). Under this plan all of the purchase payment for Class B shares
is immediately invested in the Fund. The Advisor pays the participating
broker-dealer's fee or commission of 3.75% and is reimbursed by the Fund over
time by charging an additional Rule 12b-1 fee of .75% to the Class B shares. In
order to assure that the Advisor is reimbursed for funding the broker-dealer's
fee, purchases of Class B shares are subject to a declining CDSC as follows:
year 1 3.75%
year 2 3.75%
year 3 3.25%
year 4 2.75%
year 5 2.25%
year 6 1.75%
year 7 1.25%
Thereafter -0-
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NOTES: B Shares convert to No Load Shares when CDSC expires; and any B
Shares purchased with reinvested dividends will also convert at the time of the
CDSC expiration. Each investment would be considered a new investment.
A CDSC is imposed on Class B shares if, within the time frames set forth,
you redeem an amount that causes the current value of your account to fall below
the total dollar amount of Class B shares purchased subject to the CDSC. The
CDSC will not be imposed on the redemption of Class B shares acquired as
dividends or other distributions, or on any increase in the net asset value of
the redeemed Class B shares above the original purchase price. Thus, the CDSC
will be imposed on the lower of net asset value or purchase price. Redemptions
will be processed in a manner intended to minimize the amount of redemption that
will be subject to the CDSC. When calculating the CDSC, it will be assumed that
the redemption is made first of Class B shares acquired as dividends, second of
shares that have been held for over the prescribed time and finally of shares
held for less than the prescribed time. When the CDSC fees become zero, the
Class B shares convert to no-load shares and are not subject to Rule 12b-1 fees
in addition to the base fee of 0.25%.
The second plan offers Class C shares where all of the purchase payment for
Class C shares is immediately invested in the Fund. To compensate the
broker-dealer for its sales and promotional efforts, plus its continuing service
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to the Fund's shareholder the Fund pays the broker-dealer a continuing
annual fee of 0.75% (a trail commission) which is a percentage of Fund assets
attributable to Class C shares; and, if the Broker/ Dealer provides additional
Shareholder services, it may receive a servicing fee of up to 0.25% of fund
assets attributed to Class C Shares. These Fees are paid pursuant to the Fund's
Rule 12b-1 Plan.
The alternative purchase plans offered by the Trust enable you to choose
the class of shares that you believe will be most beneficial given the amount of
your intended purchase, the length of time you expect to hold the shares and
other circumstances. You should consider whether, during the anticipated length
of your intended investment in the Trust, the accumulated continuing
distribution and services fees on Class C shares would exceed the accumulated
Rule 12b-1 fees plus the CDSC on B shares purchased at the same time.
Representatives may receive different compensation for sales of Class A and B
shares than sales of Class C shares.
Class B shares are subject to lower Rule 12b-1 fees after they convert to
No Load Shares and, accordingly, are expected to receive correspondingly higher
dividends on a per share basis. You may wish to purchase Class B shares if you
expect to hold your shares for an extended period of time because, depending on
the number of years you hold the investment, the continuing distribution and
services fees on Class C shares eventually would exceed the initial sales load
plus the continuing services fee on Class B shares during the life of your
investment.
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HOW TO EXCHANGE SHARES
You have the privilege of exchanging some or all of your shares for shares
of the same class of any other of the Pauze Funds which are properly registered
for sale in your state. An exchange involves the simultaneous redemption (sale)
of shares of one fund and purchase of shares of another fund at the respective
closing net asset value and is a taxable transaction.
By telephone: You will automatically have the privilege to direct Pauze
Funds to exchange your shares by calling toll free 1- 800-327-7170. In
connection with such exchanges, neither the Fund nor the Transfer Agent will be
responsible for acting upon any instructions reasonably believed by them to be
genuine. The shareholder, as a result of this policy, will bear the risk of
loss. The Fund and/or its Transfer Agent will, however, employ reasonable
procedures to confirm that instructions communicated by telephone are genuine
(including requiring some form of personal identification, providing written
confirmation, and tape recording conversations); and if the Fund and/or its
Transfer Agent do not employ reasonable procedures, they may be liable for
losses due to unauthorized or fraudulent transactions.
By mail: You may direct Pauze Funds in writing to exchange your shares. The
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request must be signed exactly as the name appears on the registration. (Before
writing, read "Additional Information About Exchanges.")
Additional Information about Exchanges
(1) All exchanges are subject to the minimum investment requirements and
any other applicable terms set forth in the prospectus for the Fund whose shares
are being acquired.
(2) There is no charge for exchanges. However, the Trust reserves the right
to impose a $5 charge, which would be paid to the Transfer Agent, for each
exchange transaction out of any fund account, to cover administrative costs
associated with handling these exchanges
(3) As with any other redemption, the Fund reserves the right to hold
redemption proceeds for up to seven days. In such event, the purchase side of
the exchange transaction will also be delayed. You will be notified immediately
if a Fund is exercising said right.
(4) Shares may not be exchanged unless you have furnished Pauze Funds with
your tax identification number, certified as prescribed by the Internal Revenue
Code and Regulations, and the exchange is to an account with like registration
and tax identification number. (See "Tax Identification Number" page ____. )
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(5) The exchange privilege may be modified or terminated at any time. The
exchange fee and other terms of the privilege are subject to change.
HOW TO REDEEM SHARES
You may redeem any or all of your shares at will. The Trust redeems shares
at the net asset value next determined after it has received and accepted a
redemption request in proper order. Redemption requests must be received prior
to the time the next determined net asset value per share is computed --
generally 4:00 p.m. Eastern time, Monday through Friday, to be effective that
day.
By mail: Your written request for redemption in proper form to Declaration
Service Company, P.O. Box 844, Conshohocken, Pennsylvania 19428-0844. For
express or registered mail, send your request to Declaration Service Company,
Suite 6160, 555 North Lane, Conshohocken, Pennsylvania 19428. To be in "proper
order" requires delivery to the Transfer Agent of:
(1) a written request for redemption signed by each registered owner
exactly as the shares are registered, the account number and the number of
shares or the dollar amount to be redeemed;
(2) signature guarantees when required (see "Signature Guarantee" page );
and
(3) such additional documents as are customarily required to evidence the
authority of persons effecting redemptions on behalf of corporations, executors,
trustees and other fiduciaries. Redemptions will not become effective until all
documents in the form required have been received by the Transfer Agent. (Before
writing, read "Additional Information About Redemptions.")
By telephone: Redemptions may be made by telephone, provided you have
completed the Telephone Redemption Authorization section of the purchase
application. Upon proper authority and instruction,
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redemptions will be wired (for a separate bank wire charge) to the bank
account identified on the account registration or, for amounts of $15,000 or
less, redemptions will be mailed to the address on the account registration. In
connection with telephone redemptions, neither the Fund nor the Transfer Agent
will be responsible for acting upon any instructions reasonably believed by them
to be genuine. The Fund and/or its Transfer Agent will, however, employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including requiring some form of personal identification, providing
written confirmations, and tape recording conversations); and if the Fund or its
Transfer Agent do not employ reasonable procedures, they may be liable for
losses due to unauthorized or fraudulent transactions.
Special Redemption Arrangements
Special arrangements may be made by institutional investors, or on behalf
of accounts established by brokers, advisers, banks or similar institutions, to
have redemption proceeds transferred by wire to pre-established accounts upon
telephone instructions. For further information call the Trust at
1-800-327-7170.
Signature Guarantee
Redemptions in excess of $15,000 currently require a signature guarantee. A
signature guarantee is required for all redemptions, regardless of the amount
involved, when proceeds are to be paid to someone other than the registered
owner of the shares to be redeemed, or if proceeds are to be mailed to an
address other than the registered address of record. A signature guarantee
verifies the authenticity of your signature and the guarantor must be an
eligible guarantor. In order to be eligible, the guarantor must be a participant
in a STAMP program (a Securities Transfer Agents Medallion Program). You may
call the Transfer Agent at 1-800-327-7170 to determine whether the entity that
will guarantee the signature is an eligible guarantor.
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Redemption proceeds may be sent to you:
By mail: If your redemption check is mailed, it is usually mailed within 48
hours of receipt of the redemption request; however, the Fund reserves the right
to hold redemption proceeds for up to seven days. If the shares to be redeemed
were purchased by check, the redemption proceeds will not be mailed until the
purchase check has cleared. You may avoid this requirement by investing by bank
wire (Federal funds). Redemption checks may be delayed if you have changed your
address in the last 30 days. Please notify the Fund promptly in writing of any
change of address.
By wire: You may authorize the Trust to transmit redemption proceeds by
wire provided you send written instructions with a signature guarantee at the
time of redemption or have completed the banking information portion of the
Telephone Redemption Authorization on the purchase application. Proceeds from
your redemption will usually be transmitted on the first business day following
the redemption. However, the Trust reserves the right to hold redemptions for up
to seven days. If the shares to be redeemed were purchased by check, the
redemption proceeds will not be wired until the purchase check has cleared,
which may take up to seven days. There is a $10 charge to cover the wire, which
is deducted from redemption proceeds.
Additional Information About Redemptions
(1) Redemptions of Class B shares of the Funds may be subject to a CDSC if
the shares are redeemed within the holding period prescribed in the applicable
Distribution Plan. See "Alternative Purchase Plans" at page ____ for the
applicable holding period.
(2) The redemption price may be more or less than your cost, depending on
the net asset value of the Fund's portfolio next determined after your request
is received.
(3) A request to redeem shares in an IRA or similar retirement account must
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be accompanied by an IRS Form W4-P and must state a reason for withdrawal as
specified by the IRS. Proceeds from the redemption of shares from a retirement
account may be subject to withholding tax.
(4) The Trust has the authority to redeem existing accounts and to refuse a
potential account the privilege of having an account in the Trust if the Trust
reasonably determines that the failure to so redeem, or to so prohibit, would
have a material adverse consequence to the Trust and its shareholders.
(5) Excessive short-term trading has an adverse impact on effective
portfolio management as well as upon Fund expenses. The Trust has reserved the
right to refuse investments from shareholders who engage in short-term trading.
Account Closing Fee
In order to reduce Fund expenses, an account closing fee of $10 will be
assessed to shareholders who redeem all shares in their Fund account and direct
that redemption proceeds be directed to them by mail or wire. The charge is
payable directly to the Fund's Transfer Agent which, in turn, will reduce its
charges to the Fund by an equal amount. The account closing fee does not apply
to exchanges between the Funds.
The purpose of the charge is to allocate to redeeming shareholders a more
equitable portion of the Transfer Agent's fee, including the cost of tax
reporting, which is based upon the number of shareholder accounts. When a
shareholder closes an account, the Fund must continue to carry the account on
its books, maintain the account records and complete year-end tax reporting.
With no assets, the account cannot pay its own expenses and imposes an unfair
burden on remaining shareholders.
Small Accounts
Fund accounts which fall, for any reason other than market fluctuations,
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below $1,000 at any time during a month will be subject to a small account
charge of $5 for that month which is deducted the next business day. The charge
is payable directly to the Fund's Transfer Agent which, in turn, will reduce its
charges to the Fund by an equal amount. The purpose of the charge is to allocate
the cost of maintaining shareholder accounts more equitably among shareholders.
Active automatic investment plan, UGMA/UTMA, and retirement plan accounts
administered by the Administrator or its agents or its affiliates will not be
subject to the small account charge.
In order to reduce expenses of a Fund, the Trust may redeem all of the
shares in any shareholder account, other than an active automatic investment
plan, UGMA/UTMA and retirement plan accounts, if, for a period of more than
three months, the account has a net value of $500 or less and the reduction in
value is not due to market action. If the Fund elects to close such accounts, it
will notify shareholders whose accounts are below the minimum of its intention
to do so, and will provide those shareholders with an opportunity to increase
their accounts by investing a sufficient amount to bring their accounts up to
the minimum amount within ninety (90) days of the notice. No account closing fee
will be charged to investors whose accounts are closed under the mandatory
redemption provision.
Confirmation Statements
Shareholders normally will receive a yearly confirmation statement and
after each transaction showing the activity in the account. However, when
account activity is produced solely from dividend reinvestment, confirmation
statements will be mailed only on a monthly basis.
Other Services
The Trust has available a number of plans and services to meet the special
needs of certain investors. Plans available include, but are not limited to:
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(1) payroll deduction plans, including military allotments;
(2) custodial accounts for minors;
(3) a flexible, systematic withdrawal plan; and
(4) various retirement plans such as IRA, 403(b)(7), 401(k) and
employer-adopted defined benefit and defined contribution plans.
There is an annual charge for each retirement plan fund account with
respect to which a service provider acts as custodian. If this charge is not
paid separately prior to the last business day of a calendar year or prior to a
total redemption, it will be deducted from the shareholder's account.
Application forms and brochures describing these plans and services can be
obtained from the Transfer Agent by calling 1-800-327-7170.
Shareholder Services
DSC acts as transfer and dividend paying agent for all Fund accounts.
Simply write or call the Investor Information Department at 1-800-327-7170 for
prompt service on any questions about your account.
HOW SHARES ARE VALUED
Shares of a Fund are purchased or redeemed on a continuing basis at their
next determined net asset value per share. The net asset value per share of each
class of a Fund is calculated separately by DSC. Net asset value per share is
determined and orders become effective as of 4:00 p.m., Eastern time, Monday
through Friday, exclusive of business holidays on which the NYSE are
closed, by dividing the aggregate fair value of the class of share's
proportionate share of a Fund's assets, less the class of share's proportional
share of common expenses of the Fund and the separate Rule 12b-1 fees and other
expenses specifically allocable to the class of shares , by the total number of
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shares outstanding. In the event that the NYSE and other financial markets
close earlier, as on the eve of a holiday, the net asset value per share will be
determined earlier in the day at the close of trading on the NYSE.
The value of the Fund's assets is determined in accordance with certain
procedures and policies established by the Board of Trustees. All securities
(except securities with less than 60 days to maturity and repurchase agreements)
held by the Fund are valued based on an independent pricing service; and, in the
event such service is not available, at the mean between the most recent bid and
ask prices as obtained from one or more dealers that make markets in the
securities. Short-term investments with maturities of 60 days or less at the
time of purchase ordinarily are valued on the basis of the amortized cost. This
involves valuing an instrument at its cost initially and, thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument. If
the Advisor determines that amortized cost does not reflect fair value of a
security, the Board may select an alternative method of valuing the security.
DIVIDENDS AND TAXES
The Trust/each Fund intends to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By complying with the applicable provisions of the Code, the Fund will
not be subject to Federal income tax on its net investment income and capital
gain net income that are distributed to shareholders.
Dividends and capital gains will be calculated and distributed in the same
manner for all classes of shares of the Funds. The per share amount of any
income dividends will generally differ only to the extent that each class is
subject to different Rule 12b-1 fees.
All income dividends and capital gains distributions are normally
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reinvested, without charge, in additional full and fractional no-load shares of
the Fund. Alternatively, investors may choose: (1) automatic reinvestment of
capital gains distributions in Fund shares and payment of income dividends in
cash; (2) payment of capital gains distributions in Fund shares and automatic
reinvestment of dividends in Fund shares; or (3) all income dividend and capital
gains distributions paid in cash. The share price of the reinvestment will be
the net asset value of the Fund shares computed at the close of business on the
date the dividend or distribution is paid. Dividend checks returned to the Fund
as being undeliverable and dividend checks not cashed after 180 days will
automatically be reinvested at the price of the Fund on the day returned or on
the 181st day, and the distribution option will be changed to "reinvest."
At the time of purchase, the share price of the Fund may reflect
undistributed net investment income, capital gains or unrealized appreciation of
securities. Any dividend or capital gains distribution paid to a shareholder
shortly after a purchase of shares will reduce the per share net asset value by
the amount of the distribution. Although in effect a return of capital to the
shareholder, these capital gains distributions are fully taxable.
The Fund is subject to a non-deductible 4% excise tax calculated as a
percentage of certain undistributed amounts of taxable ordinary income and
capital gains net of capital losses. The Fund intends to make such distributions
as may be necessary to avoid this excise tax.
Dividends consisting of substantially all of the net income are declared
and paid monthly. Investors may request automatic redemption of dividend income
at each month or quarter end.
Dividends from taxable net investment income and distributions of net
short-term capital gains paid by the Fund are taxable to shareholders as
ordinary income, whether received in cash or reinvested in additional shares of
the Fund. None of the dividends paid by the Fund are expected to qualify for the
70% dividends received deduction available to corporations. Distributions of net
capital gains will be taxable to shareholders as long-term capital gains,
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whether paid in cash or reinvested in additional shares, regardless of the
length of time the investor has held his shares.
Under Federal law, the income derived from obligations issued by the United
States Government and certain of its agencies and instrumentalities is exempt
from state income taxes. All states that tax personal income permit mutual funds
to pass through this tax exemption to shareholders provided applicable
diversification/threshold limits and reporting requirements are satisfied.
Each January, the Fund will report to its shareholders as to the Federal
tax status of dividends and distributions paid or declared by the Fund during
the preceding calendar year.
In connection with the conversion of B Shares to No Load Shares when the
CDSC expires, the Fund believes the conversion is tax-exempt. Shareholders may
wish to consult with their own tax advisors. If in the future the Fund believes
the conversion may be taxable, it will advise the Shareholders accordingly.
The foregoing discussion relates only to generally applicable Federal
income tax provisions in effect as of the date of this Prospectus. Shareholders
should consult their tax advisers about the status of distributions from the
Fund in their own states and localities. To assist in this regard, each January
the Fund will provide shareholders with a breakdown of Fund assets and income
for the year.
THE TRUST
The Pauze Funds (the "Trust") is an open-end management investment company,
which may consist of numerous separate, diversified portfolios each of which has
its own investment objectives and policies.
The Trust was formed October 15, 1993, as a "business trust" under the laws
of the Commonwealth of Massachusetts. It is a "series" company which is
authorized to issue series of shares without par value, each series representing
interests in a separate portfolio, or to divide the shares of any series into
classes. Shares of three series have been authorized; and, each series is
authorized to issue four classes of shares. The Board of Trustees of the Trust
has the power to create additional series, or divide existing series into two or
more classes, at any time, without a vote of shareholders of the Trust.
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<PAGE>
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required; however, the Trustees may call meetings to take action
on matters which require shareholder vote and other matters which Trustees
determine shareholder vote is necessary or desirable.
Shareholders elect the Trustees of the Trust. Subject to Section 16(a) of
the 1940 Act, the Trustees may elect their own successors and may appoint
Trustees to fill vacancies, including vacancies caused by an increase in the
number of Trustees by action of the Board of Trustees.
Whether appointed or elected, a Trustee serves as Trustee of the Trust for
a period of six years. Notwithstanding the foregoing, the Trustees' terms are
staggered so that the terms of at least 25% of the Board of Trustees will expire
every three years. A Trustee whose term is expiring may be re-elected.
On any matter submitted to shareholders, shares of the portfolio entitle
their holder to one vote per share, irrespective of the relative net asset
values of each portfolio's shares. On matters affecting an individual portfolio,
a separate vote of shareholders of the portfolio is required. On matters
affecting an individual class of shares, a separate vote of shareholders of the
class is required. The portfolio's shares are fully paid and non-assessable by
the Trust, have no preemptive or subscription rights, and are fully
transferable, with no conversion rights.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders or
prospective shareholders, the Fund may compare its performance, either in terms
of its yield, total return or its yield and total return, to that of other
mutual funds with similar investment objectives and to stock or other indices.
For example, the Fund may compare its performance to rankings prepared by Lipper
Analytical Services, Inc. ("Lipper"), a widely recognized independent service
which monitors the performance of mutual funds, to Morningstar's Mutual Fund
39
<PAGE>
Values, to Moody's Bond Survey Bond Index, or to the Consumer Price Index.
Performance information and rankings as reported in Changing Times, Business
Week, Institutional Investor, the Wall Street Journal, Mutual Fund Forecaster,
No-Load Investor, Money Magazine, Forbes, Fortune and Barrons magazine may also
be used in comparing performance of the Fund. Performance comparisons shall not
be considered as representative of the future performance of the Fund.
The Fund's average annual total return is computed by determining the
average annual compounded rate of return for a specified period that, if applied
to a hypothetical $1,000 initial investment, would produce the redeemable value
of that investment at the end of the period, assuming reinvestment of all
dividends and distributions and with recognition of all recurring charges. The
Fund may also utilize a total return for differing periods computed in the same
manner but without annualizing the total return.
The Fund's "yield" refers to the income generated by an investment in the
Fund over a 30-day (or one month) period (which period will be stated in the
advertisement). Yield is computed by dividing the net investment income per
share earned during the most recent calendar month by the maximum offering price
per share on the last day of such month. This income is then "annualized." That
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each month over a 12-month period and is shown as a
percentage of the investment.
For purposes of the yield calculation, interest income is computed based on
the yield to maturity of each debt obligation and dividend income is computed
based upon the stated dividend rate of each security in the Fund's portfolio and
all recurring charges are recognized.
The standard total return and yield results may not take into account the
additional Rule 12b-1 fees for Class B and Class C shares. The performance of
said shares will be lower than that of other classes of shares. Similarly, the
results do not take into account recurring and nonrecurring charges for optional
40
<PAGE>
services which only certain shareholders elect and which involve nominal
fees such as a fee for exchanges. Further, the results may not take into account
the CDSC for the Class B shares. These fees have the effect of reducing the
actual return realized by shareholders.
41
<PAGE>
PAUZE FUNDS
PAUZE U.S. GOVERNMENT TOTAL RETURN BOND FUND
PAUZE U.S. GOVERNMENT INTERMEDIATE TERM BOND
FUND
PAUZE U.S. GOVERNMENT SHORT TERM BOND FUND
14340 Torrey Chase Boulevard, Suite 170
Houston, Texas 77014
INVESTMENT ADVISOR
Pauze Swanson Capital Management Co.
14340 Torrey Chase Boulevard, Suite 170
Houston, Texas 77014
ADMINISTRATOR & TRANSFER AGENT
Declaration Service Company
P.O. Box 844
Conshohocken, PA 19428-0844
DISTRIBUTOR
Declaration Distributors, Inc.
P.O. Box 844
Conshohocken, PA 19428
CUSTODIAN
Star Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
30 South Seventeenth Street
Philadelphia, PA 19103
Be Sure to Retain This Prospectus.
It Contains Valuable Information.
<PAGE>
PART B -- STATEMENT OF ADDITIONAL INFORMATION
Included herein is the Statement of Additional Information for the
Pauze U.S. Government Total Return Bond Fund
Pauze U.S. Government Intermediate Term Bond Fund
Pauze U.S. Government Short Term Bond Fund
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
PAUZE FUNDS
PAUZE U. S. GOVERNMENT TOTAL RETURN BOND FUND
("TOTAL RETURN FUND")
PAUZE U.S. GOVERNMENT INTERMEDIATE TERM BOND FUND
("INTERMEDIATE TERM FUND")
PAUZE U.S. GOVERNMENT SHORT-TERM BOND FUND
("SHORT-TERM FUND")
(COLLECTIVELY THE "FUNDS")
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Funds' prospectus dated August 1, 1996 (the
"prospectus") which may be obtained from Declaration Service Company ("DSC" or
the "Administrator"), P.O. Box 844, Conshohocken, Pennsylvania 19428-0844.
The date of this Statement of Additional Information is August 1, 1996.
2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION...........................................................4
INVESTMENT OBJECTIVES AND POLICIES............................................5
Investment Restrictions..............................................5
PORTFOLIO TURNOVER............................................................9
PORTFOLIO TRANSACTIONS........................................................9
MANAGEMENT OF THE FUND.......................................................10
PRINCIPAL HOLDERS OF SECURITIES..............................................11
INVESTMENT ADVISORY SERVICES.................................................12
ADMINISTRATOR SERVICES.......................................................12
TRANSFER AGENCY AND OTHER SERVICES...........................................13
12b-1 PLAN OF DISTRIBUTION...................................................13
ADDITIONAL INFORMATION ON REDEMPTIONS........................................15
Suspension of Redemption Privileges.................................15
CALCULATION OF PERFORMANCE DATA..............................................15
TAX STATUS...................................................................16
CUSTODIAN....................................................................18
INDEPENDENT ACCOUNTANTS......................................................18
FINANCIAL STATEMENTS.........................................................18
3
<PAGE>
GENERAL INFORMATION
Pauze Funds (the "Trust") is an open-end management investment company and is
a voluntary association of the type known as a "business trust" organized under
the laws of the Commonwealth of Massachusetts. There are three series within the
Trust, each of which represents a separate diversified portfolio of securities
(collectively referred to herein as the "Portfolios" or "Funds" and individually
as a "Portfolio" or "Fund").
The assets received by the Trust from the issue or sale of shares of each
Portfolio, and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are allocated to the Portfolio. They constitute the
underlying assets of the Portfolio, are required to be segregated on the books
of accounts, and are to be charged with the expenses with respect to the
Portfolio. In the event additional portfolios are created, any general expenses
of the Trust, not readily identifiable as belonging to the Portfolio, shall be
allocated by or under the direction of the Board of Trustees (the "Trustees") in
such manner as the Trustees determine to be fair and equitable.
Shares represent a proportionate interest in the Portfolio. Shares of each
Portfolio have been divided into classes with respect to which the Trustees have
adopted allocation plans regarding expenses specifically attributable to a
particular class of shares. Subject to such an allocation, all shares are
entitled to such dividends and distributions, out of the income belonging to the
Portfolio, as are declared by the Trustees. Upon liquidation of the Trust,
shareholders of the Portfolio are entitled to share pro rata, adjusted for
expenses attributable to a particular class of shares, in the net assets
belonging to the Portfolio available for distribution.
As more fully described under "The Trust" in the prospectus under the Trust's
Master Trust Agreement, no annual or regular meeting of shareholders is
required; however, the Trustees may call meetings to take action on matters
which require shareholder vote and other matters which Trustees determine
shareholder vote is necessary or desirable. Whether appointed by prior Trustees
or elected by shareholders, an "Independent" Trustee serves as Trustee of the
Trust for a period of six years. However, the Trustees' terms are staggered so
that the terms of at least 25% of the Board of Trustees will expire every three
years. Trustees who are not "interested persons" will stand for election in
1996. A Trustee whose term is expiring may be re-elected. Thus, shareholder
meetings will ordinarily be held only once every three years unless otherwise
required by the Investment Company Act of 1940 (the "1940 Act").
On any matter submitted to shareholders, the holder of each share is entitled
to one vote per share (with proportionate voting for fractional shares).
Shares do not have cumulative voting rights, which means that in situations in
which shareholders elect Trustees, holders of more than 50% of the shares voting
for the election of Trustees can elect 100% of the Trust's Trustees, and the
holders of less than 50% of the shares voting for the election of Trustees will
not be able to elect any person as a Trustee.
Shares have no preemptive or subscription rights and are fully transferable.
There are no conversion rights.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
4
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INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Funds' investment
objectives and policies in the Funds' Prospectus.
Investment Restrictions
A Fund will not change any of the following investment restrictions, without,
in either case, the affirmative vote of a majority of the outstanding voting
securities of the Fund, which, as used herein, means the lesser of (1) 67% of
the Fund's outstanding shares present at a meeting at which more than 50% of the
outstanding shares of the Fund are represented either in person or by proxy, or
(2) more than 50% of the Fund's outstanding shares.
The Funds may not:
( 1) Issue senior securities.
( 2) Borrow money, except that the Fund may borrow not in excess of 33 1/3%
of the total assets of the Fund from banks as a temporary measure for
extraordinary purposes.
( 3) Underwrite the securities of other issuers.
( 4) Purchase or sell real property (including limited partnership
interests, but excluding readily marketable interests in real estate
investment trusts or readily marketable securities or companies which
invest in real estate).
( 5) Engage in the purchase or sale of commodities or commodity contracts;
except that each of the Intermediate Term Fund and the Short Term Fund
may invest in bond futures contracts and options on bond futures
contracts for bona fide hedging purposes.
( 6) Lend its assets,except that purchases of debt securities in furtherance
of the Fund's investment objectives will not constitute l ending of
assets and except that the Fund may lend portfolio securities with an
aggregate market value of not more than one-third of the Fund's total
net assets.(Accounts receivable for shares purchased by telephone shall
not be deemed loans.)
( 7) Purchase any security on margin , except that it may obtain such
short-term credits as are necessary for clearance of securities
transactions. This restriction does not apply to bona fide hedging
activity in the Intermediate Term Fund and Short Term Fund utilizing
financial futures and related options.
( 8) Make short sales.
( 9) Invest more than 25% of its total assets in securities of companies
principally engaged in any one industry, except that this restriction
does not apply to debt obligations of the United States Government
which are protected by the full faith and credit of the United States
Government.
(10) (a) Invest more than 5% of the value of its total assets in securities
of any one issuer, except such limitation shall not apply to
obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities, or (b) acquire more than 10% of the
voting securities of any one issuer.
The following investment restrictions may be changed by the Board of Trustees
without a shareholder vote.
The Fund may not:
(11) Invest in warrants to purchase common stock.
(12) Invest in companies for the purpose of exercising control or management
(13) Hypothecate, pledge, or mortgage any of its assets, except to secure
loans as a temporary measure for extraordinary purposes and except as
may be required to collateralize letters of credit to secure state
surety bonds.
(14) Participate on a joint or joint and several basis in any trading
account.
(15) Invest in any foreign securities.
(16) Invest more than 15% of its total net assets in illiquid securities.
(17) Invest in oil, gas or other mineral leases.
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<PAGE>
(18) In connection with bona fide hedging activities, invest more than 2.5%
of their assets as initial margin deposits or premiums for futures contracts and
provided that said Funds may enter into futures contracts and option
transactions only to the extent that obligations under such contracts or
transactions represent not more than 100% of a Fund's assets.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage, resulting from a change in values of
portfolio securities or amount of net assets, will not be considered a violation
of any of the foregoing restrictions.
The following discussion of the investment objectives, policies and risks
associated with the Fund supplements the discussion in the prospectus.
INTERMEDIATE TERM FUND AND SHORT TERM FUND USE OF
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Futures contracts and options may be used for several reasons: to hedge
securities held to effectively reduce the average weighted maturity; to maintain
cash reserves while remaining fully invested; to facilitate trading; to reduce
transaction costs; or to seek higher investment returns when a futures contract
is priced more attractively than the underlying security or index. No Fund may
use futures contracts or options transactions to leverage assets.
The Intermediate Term and Short Term Funds may purchase or sell options on
individual securities, and may enter into trading in options on futures
contracts, may purchase put or call options on futures contracts, and may sell
such options in closing transactions.
An option will not be purchased for a Fund if, as a result, the aggregate
initial margins and the premiums paid for all options and futures contracts that
a Fund owns would exceed 2.5% of its net assets at the time of such purchase.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified future
time and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a U.S.
Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin
deposits which may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes, then to the
extent that the margin on deposit does not satisfy margin requirements, payment
of additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to
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<PAGE>
and from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on their margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators". Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
prices of underlying securities. The Funds intend to use futures contracts only
for bona fide hedging purposes.
Regulations of the CFTC, as applicable to a Fund, require that all of its
futures transactions constitute bona fide hedging transactions. A Fund will only
sell futures contracts to protect securities it owns against price declines or
purchase contracts to protect against an increase in the price of securities it
intends to purchase. As evidence of this hedging interest, it is expected that
approximately 75% of its futures contract purchases will be "completed", that
is, equivalent amounts of related securities will have been purchased or are
being purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
a Fund will incur commission expenses in both opening and closing out futures
positions, these costs usually are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
Restrictions on the Use of Futures Contracts
A Fund will not enter into futures contract transaction to the extent that,
immediately thereafter, the sum of its initial margin deposits on open contracts
and premiums paid for all options and futures contracts exceed 2.5% of its net
assets at the time of the transaction. In addition, a Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 100% of the Fund's total assets.
Risk Factors in Futures Transactions
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, the Fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations, if
the Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, the Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge it.
A Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. 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 contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, Pauze Swanson
Capital Management Co., the Funds' Investment Advisor, does not believe that the
Funds are subject to the risks of loss frequently associated with leveraged
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<PAGE>
futures transactions. 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.
Utilization of futures transactions by a Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related option.
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 a futures contract 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 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 future positions and subjecting some futures
traders to substantial losses.
Federal Tax Treatment of Futures Contracts
Except for transactions a Fund has identified as hedging transactions, the
Fund is required for Federal income tax purposes to recognize as income for each
taxable year its net unrealized gains and losses on certain futures contracts
held as of the end of the year as well as those actually realized during the
year. In most cases, any gain or loss recognized with respect to a futures
contract is considered to 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. Furthermore, sales of futures contracts which are intended to hedge
against a change in the value of securities held by the Fund may affect the
holding period of such securities and, consequently, the nature of the gain or
loss on such securities upon disposition.
In order for a 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 qualifying income; i.e., dividends, interest, income
derived from loans of securities, gains from the sale of securities or other
income derived with respect to the Fund's business of investment in securities
or currencies. In addition, gains realized on the sale or other disposition of
securities held for less than three months must be limited to less than 30% of
the Fund's annual gross income, provided, however, that for purposes of the 30%
test, the Internal Revenue Code of 1986, as amended, provides that losses on
securities underlying an option or a futures contract may be offset against any
gains realized on the disposition of the option or futures contract. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. It is anticipated that unrealized
gains on futures contracts which have been open for less than three months as of
the end of a Fund's fiscal year and which are recognized for tax purposes will
not be considered gains on sales of securities held less than three months for
the purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains which
have been recognized for Federal income tax purposes (including unrealized gains
at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the transactions.
Segregated Assets and Covered Positions
When purchasing futures contracts, selling an uncovered call option, or
purchasing securities on a when-issued or delayed delivery basis, the Funds will
restrict cash, which may be invested in repurchase obligations or liquid
securities. When purchasing a stock index futures contract, the amount of
restricted cash or liquid securities, when added to the amount deposited with
the broker as margin, will be at least equal to the market value of the futures
8
<PAGE>
contract and not less than the market price at which the futures contract was
established. When selling an uncovered call option, the amount of restricted
cash or liquid securities, when added to the amount deposited with the broker as
margin, will be at least equal to the value of securities underlying the call
option and not less than the strike price of the call option. When purchasing
securities on a when-issued or delayed delivery basis, the amount of restricted
cash or liquid securities will be at least equal to the Fund's when-issued or
delayed delivery commitments.
The restricted cash or liquid securities will either be identified as being
restricted in the Fund's accounting records or physically segregated in a
separate account at the Trust's custodian. For the purpose of determining the
adequacy of the liquid securities which have been restricted, the securities
will be valued at market or fair value. If the market or fair value of such
securities declines, additional cash or liquid securities will be restricted on
a daily basis so that the value of the restricted cash or liquid securities,
when added to the amount deposited with the broker as margin, equals the amount
of such commitments by a Fund.
Fund assets need not be segregated if the Fund "covers" the futures contract
or call option sold. For example, the Fund could cover a futures or forward
contract which it has sold short by owning the securities or currency underlying
the contract. The Fund may also cover this position by holding a call option
permitting the Fund to purchase the same futures or forward contract at a price
no higher than the price at which the sell position was established.
A Fund could cover a call option which it has sold by holding the same
security underlying the call option. A Fund may also cover by holding a separate
call option of the same security or stock index with a strike price no higher
than the strike price of the call option sold by the Fund. The Fund could cover
a call option which it has sold on a futures contract by entering into a long
position in the same futures contract at a price no higher than the strike price
of the call option or by owning the securities or currency underlying the
futures contract. The Fund could also cover a call option which it has sold by
holding a separate call option permitting it to purchase the same futures
contract at a price no higher than the strike price of the call option sold by
the Fund.
PORTFOLIO TURNOVER
Pauze Funds' Investment Advisor buys and sells securities for the Fund to
accomplish its investment objectives. The Funds' investment policies may lead to
frequent changes in investments, particularly in periods of rapidly fluctuating
interest rates. The Funds' investments may also be traded to take advantage of
perceived short-term disparities in market values or yields among securities of
comparable quality and maturity.
A change in the securities held by a Fund is known as "portfolio turnover."
For the period from July 1, 1995 through April 30, 1995, and for the fiscal year
ended April 30, 1996, the Total Return Fund's portfolio turnover ratio was
168.90% and 228.03% respectively. It is anticipated that portfolio turnover for
the Intermediate Term Fund and the Short Term Fund will be comparable. High
portfolio turnover in any given year indicates a substantial amount of
short-term trading, which will result in payment by the Fund from capital of
above-average amounts of markups to dealers and could result in the payment by
shareholders of above-average amounts of taxes on realized investment gain. Any
short-term gain realized on securities will be taxed to shareholders as ordinary
income. See "Tax Status."
PORTFOLIO TRANSACTIONS
The Advisory Agreement between the Trust and the Advisor requires that the
Advisor, in executing portfolio transactions and selecting brokers or dealers,
seek the best overall terms available. In assessing the terms of a transaction,
consideration may be given to various factors, including the breadth of the
market in the security, the price of the security and the financial condition
and execution capability of the broker or dealer (for a specified transaction
and on a continuing basis). When transactions are executed in the
over-the-counter market, it is intended generally to seek first to deal with the
primary market makers. However, the services of brokers will be utilized if it
is anticipated that the best overall terms can thereby be obtained. Purchases of
newly issued securities for the Fund usually are placed with those dealers from
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which it appears that the best price or execution will be obtained. Those
dealers may be acting as either agents or principals.
As all portfolio securities transactions were executed with principals, the
Fund paid no brokerage fees for the period from May 1, 1995 through April 30,
1996.
MANAGEMENT OF THE FUND
The Trustees and Officers of the Trust, and their principal occupations during
the past five years are set forth below, along with their business address,
Suite 6160, 555 North Lane, Conshohocken, Pennsylvania 19428.
Name and Address Trust position Principal Occupation
- ---------------- -------------- --------------------
Philip C. Pauze ** President and President of Pauze, Swanson &
14340 Torrey Chase Blvd Trustee Associates Investment
Suite 170 Advisors, Inc., d/b/a Pauze
Houston, Texas 77014 Swanson Capital Management
Co., an asset management firm
specializing in management of
fixed income portfolios since
April 1993. Owner of Philip C.
Pauze & Associates, a
management consulting firm
since April 1993. Vice
President/ Registered
Representative with Shearson
Lehman Brothers from 1988 to
1993. Financial Consultant to
California Master Trust since
1986. Financial consultant to
the American Funeral Trust
(Series) since 1993.
.
Terence P. Smith** Secretary and President and Chief Operating
Suite 6160, 555 North Lane Trustee Officer of the companies of
Conshohocken, PA 19428 the Declaration Group
(including Declaration Service
Company, which provides the
Trust's transfer agency,
accounting and administrative
services and Declaration
Distributors, Inc., a
registered broker-dealer,
which provides distribution
service to the Trust) since
1988. Vice
President-Operations of
Declaration Holdings, Inc.
from September 1987 to
September 1988. Executive Vice
President of Review Management
(an investment manager and
distributor) from 1984 to
1987. CPA, served on tax and
audit staff of Peat Marwick
Main & Co., Philadelphia, from
1981 to 1984.
** This Trustee may be deemed an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
10
<PAGE>
Paul Hilbert Trustee Attorney with the firm of Paul
2301 FM 1960 West J. Hilbert & Associates.
Houston, TX 77068 Legislator, Texas House of
Representatives since 1982:
House Ways and Means
Committee, House
Appropriations Committee,
House Committee on Business
and Commerce. Affiliate of
First American Title, Title
USA and Stewart Title.
Economic development
consultant to Houston Lighting
and Power. Associate of the
business consulting firm of
Louie Welch & Associates.
Board of Directors of the
Houston Northwest Chamber of
Commerce.
Gordon Anderson Trustee Superintendent of Schools,
1806 Elk River Rd. Spring Independent School
Houston, Texas 77090 District, Houston, Texas since
May 1, 1981. Board of
Directors, Houston Northwest
Chamber of Commerce.
Wayne F. Collins Trustee Retired. From September 1991
32 Autumn Crescent to February 1994 was Vice
The Woodlands, TX 77381 President of Worldwide
Business Planning of the
Compaq Computer Corporation.
Served Compaq Computer
Corporation as Vice President
of Materials Operations from
September 1988 to September
1991; Vice President,
Materials and Resources from
April 1985 to September 1991;
Vice President, Corporate
Resources from June 1983 to
September 1988.
Robert J. Pierce Trustee President, Richard Pierce
1660 Silverado Trail Funeral Service. President
Napa, CA 94559 Funeral Directors Service
Corp.
Paul L. Giorgio Chief Accounting Chief Financial Officer of the
Suite 6160, 555 North Lane Officer, Treasurer companies of the Declaration
Conshohocken, PA 19428 Group (including DSC) since
1994. CPA, served on staff of
Sanville & Company, Abington,
PA from 1986 to 1993.
PRINCIPAL HOLDERS OF SECURITIES
Other than indicated below, as of July 29, 1996, the Officers and Trustees of
the Trust, as a group, owned less than 1% of the outstanding shares of the Total
Return Fund. The Trust is aware of the following persons who owned of record, or
beneficially, more than 5% of the outstanding shares of the Total Return Fund at
July 29, 1996:
Name & Address Type of
Fund of Owner % Owned Ownership
Pauze The Mechanics Bank of Richmond TTEE 80.60% Record
Total Return Richmond, CA 94806-1921
Fund
Donaldson Lufkin & Jenrette Sec. Corp. 6.42% Record
Jersey City, NJ 07303-2052
11
<PAGE>
Intermediate Pauze Swanson Capital Management Co. 100% Record
Term Fund
Short Term Fund Pauze Swanson Capital Management Co. 100% Record
INVESTMENT ADVISORY SERVICES
Pauze, Swanson & Associates Investment Advisors, Inc., dba Pauze Swanson
Capital Management Co., an investment management firm (the "Advisor"), pursuant
to an Advisory Agreement provides investment advisory and management services to
the Trust. It will compensate all personnel, officers and trustees of the Trust
if such persons are employees of the Advisor or its affiliates. The Trust pays
the expense of printing and mailing prospectuses and sales materials used for
promotional purposes.
The Advisory Agreement was approved by the Board of Trustees of the Trust
(including a majority of the "disinterested Trustees") and by vote of a majority
of the outstanding voting securities of the Total Return Fund in December 1995.
The terms of the votes approving the Advisory Agreement provide that it will
continue until October 17, 1996, and from year to year thereafter as long as it
is approved at least annually both (i) by a vote of a majority of the
outstanding voting securities of the Fund (as defined in the Investment Company
Act of 1940 [the "Act"]) or by the Board of Trustees of the Trust, and (ii) by a
vote of a majority of the Trustees who are not parties to the Advisory Agreement
or "interested persons" of any party thereto, cast in person at a meeting called
for the purpose of voting on such approval. The Advisory Agreement may be
terminated on 60 days' written notice by either party and will terminate
automatically if it is assigned. The Advisory Agreement was approved with
respect to the Intermediate Term Fund and the Short Term Fund during March 1996.
The securities laws of certain states in which shares of the Trust may,
from time to time, be qualified for sale require that the Advisor reimburse the
Trust for any excess of a Fund's expenses over prescribed percentages of the
Fund's average net assets. Thus, the Advisor's compensation under the Agreements
are subject to reduction in any fiscal year to the extent that total expenses of
the Fund for such year (including the Advisor's compensation but exclusive of
taxes, brokerage commission, extraordinary expenses, and other permissible
expenses) exceed the most restrictive applicable expense limitation prescribed
by any state in which the Trust's shares are qualified for sale. The Advisor may
obtain waivers of these state expense limitations from time to time. Such
limitation is currently 2.5% of the first $30 million of average net assets, 2%
of the next $70 million of average net assets and 1.5% of the remaining average
net assets. For the periods from January 10, 1994 (initial public offering)
through June 30, 1994, July 1, 1994 through April 30, 1995, and May 1, 1995
through April 30, 1996 the Trust paid the Advisor fees (net of expenses paid by
the Advisor or fee waivers) of $0.00, $37,029 and $238,478 respectively.
For a more complete description, see "Management of the Funds" in the
prospectus.
ADMINISTRATOR SERVICES
Declaration Service Company ("DSC" or "Administrator") provides day-to-day
administrative services to the Trust. As described in the Fund's Prospectus, the
Administrator will provide the Trust with office space, facilities and simple
business equipment, and will generally administer the Trust's business affairs
and provide the services of executive and clerical personnel for administering
the affairs of the Trust. It will compensate all personnel, officers and
Trustees of the Trust if such persons are employees of the Administrator or its
affiliates. The Trust pays the expense of printing and mailing prospectuses and
sales materials used for promotional purposes.
The Board of Trustees of the Trust (including a majority of the "disinterested
Trustees") approved the Administration Agreement, dated February 13, 1996 with
DSC. The terms of the Administration Agreement provide that it will continue
initially for two years, and from year to year thereafter as long as it is
approved at least annually (i) by a vote of a majority of the Board of Trustees
of the Trust, and (ii) by a vote of a majority of the Trustees who are not
parties to the Administration Agreement or "interested persons" of any party
12
<PAGE>
thereto, cast in person at a meeting called for the purpose of voting on
such approval. The Administration Agreement may be terminated on 90 days'
written notice by either party prior to commencement of a renewal date and will
terminate automatically if it is assigned. For the period from February 13 to
April 30, 1996 the Trust paid DSC administrative fees of $5,103 .
Prior to February 13, 1996, administrative services were provided by United
Services Advisors Inc. ("USAI"). For the periods from January 10, 1994 (initial
public offering) through June 30, 1994, and from July 1, 1994 through April 30,
1995, the Trust paid USAI administrative fees of $0.00 and $15,400,
respectively, net of expenses paid by USAI or fee waivers.
For a more complete description, see "Management" in the prospectus.
The Trust shall pay all other expenses for its operations and activities. As
additional Portfolios are added in the future, each Portfolio of the Trust will
pay its allocable portion of the expenses. The expenses borne by the Trust
include the charges and expenses of any transfer agents and dividend disbursing
agents, custodian fees, legal and auditors' expenses, bookkeeping and accounting
expenses, brokerage commissions for portfolio transactions, taxes, if any, the
administrative fee, extraordinary expenses, expenses of issuing and redeeming
shares, expenses of shareholder and trustee meetings, expenses for preparing,
printing and mailing proxy statements, reports and other communications to
shareholders, expenses of registering and qualifying shares for sale, fees of
Trustees who are not "interested persons" of the Advisor and Administrator,
expenses of attendance by officers and Trustees at professional meetings of the
Investment Company Institute, the No-Load Mutual Fund Association or similar
organizations, and membership or organization dues of such organizations,
expenses of preparing and setting in type prospectuses and periodic reports and
expenses of mailing them to current shareholders, fidelity bond premiums, cost
of maintaining the books and records of the Trust, and any other charges and
fees not specifically enumerated.
TRANSFER AGENCY AND OTHER SERVICES
In addition to the services performed for the Trust under the
Administration Agreement, the Administrator provides transfer agent and dividend
disbursement agent services pursuant to the Transfer Agency and Shareholder
Services Agreement as described in the Fund's prospectus under "Management of
the Fund -- The Administrator." In addition, bookkeeping and accounting services
are also provided. The Board of Trustees approved the Transfer Agency and
Accounting Services Agreement, effective February 13, 1996, with the same
duration and termination provisions as the Administration Agreement.For the
period from February 13 to April 30,1996 the Trust paid DSC Transfer agent fee
of $ 3,828 and accounting fees of $ 4,678.
Prior to February 13, 1996, the transfer agency and accounting services were
provided by United Shareholder Services Inc. ("USSI"), as subsidiary of USAI.
For the periods from January 10, 1994 (initial public offering) through June 30,
1994, and from July 1, 1994 through April 30, 1995, the Trust paid USSI transfer
agent fees of $0.00 and $26,349, respectively, and bookkeeping and accounting
fees of $0.00 and $31,250, respectively, net of expenses paid by USSI or fee
waivers.
12b-1 PLAN OF DISTRIBUTION
As described under "12b-1 Fee" in the Funds' prospectuses, in March 1996 the
Trustees approved adoption and/or continuation of Distribution Plans pursuant to
Rule 12b-1 under the 1940 Act (the "Distribution Plans"). The Distribution Plan
allows the Fund to pay for or reimburse expenditures in connection with sales
and promotional services related to the distribution of Fund shares, including
personal services provided to prospective and existing Fund shareholders, which
includes the cost of: printing and distribution of prospectuses and promotional
materials; making slides and charts for presentations; assisting shareholders
and prospective investors in understanding and dealing with the Fund; and travel
and out-of-pocket expenses (e.g., copy and long distance telephone charges)
related thereto.
13
<PAGE>
Each Fund's Distribution Plan(s) provides for a "Base Amount for all
Classes of Shares" reciting that Fund assets may be utilized to pay for or
reimburse expenditures in connection with personal and administrative services
provided to prospective and exiting Fund shareholders, provided the total amount
expended pursuant to this Plan does not exceed 0.25% of net assets on an annual
basis. Subject to the 0.25% limit the Rule 12b-1 Plans also provide expenditures
may be made for sales and promotional services on No Load Shares.
Each Fund's Distribution Plan(s) also provides for an "Additional Amount for
Class B shares" reciting that Fund assets attributable to Class B Shares in
specific shareholder accounts will be utilized, to the extent not covered by the
Contingent Deferred Sales Charge ("CDSC"), to cover fees paid to broker-dealers
for sales and promotional services related to distribution of said shares as
follows:
The following Table applies to the Short Term Fund, the Intermediate Term
Fund, and the Total Return Fund.
Gross Commission 3.75%
Annual Rule 12b-1 Fee 0.75%
(paid for 7 years)
Contingent Deferred Sale Charge by Year:
year 1 3.75%
year 2 3.75%
year 3 3.25%
year 4 2.75%
year 5 2.25%
year 6 1.75%
year 7 1.25%
Thereafter -0-
NOTES:
B Shares convert to No Load Shares when CDSC expires. Each Investment would
be considered a new investment.
Each Fund's Distribution Plan(s) also provides for an "Additional Amount for
Class C Shares" reciting that Fund assets attributable to Class C Shares in
specific shareholder accounts will be utilized to pay ongoing annual fees to
broker-dealers for sales and promotional services related to distribution of
said shares in the amount of 0.75% of average Fund assets.
14
<PAGE>
Expenses which the Fund incurs pursuant to the Distribution Plans are
reviewed quarterly by the Board of Trustees. On an annual basis the Distribution
Plans are reviewed by the Board of Trustees as a whole, and the Trustees who are
not "interested persons" as that term is defined in the 1940 Act, and who have
no direct or indirect financial interest in the operation of the Distribution
Plans ("Qualified Trustees"). In their review of the Distribution Plans, the
Board of Trustees, as a whole, and the Qualified Trustees determine whether, in
their reasonable business judgment and in light of their fiduciary duties under
state law and under Section 36(a) and (b) of the 1940 Act, there is a reasonable
likelihood that a Distribution Plan will benefit the Fund and its shareholders.
A Distribution Plan may be terminated at any time by vote of a majority of the
Qualified Trustees, or by vote of a majority of the outstanding voting
securities of the Fund.
On February 13, 1996, in light of and subject to the Distribution Plan, the
Trust entered into a Distribution Agreement with Declaration Distributors, Inc.
("DDI"), an affiliate of DSC as described in the Fund's prospectus under
"Management of the Fund--The Administrator". Terence P. Smith, a Trustee of the
Trust, is the President and Chief Executive Officer of DDI. The terms of the
Distribution Agreement provide that it will continue for an initial period of
two years and from year to year thereafter as long as it is approved at least
annually both (i) by a vote of a majority of the Board of Trustees of the Trust,
and (ii) by a vote of a majority of the Trustees who are not parties to the
Distribution Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement may be terminated on 60 days' written notice by either
party and will terminate automatically if it is assigned. For the period from
February 13 to April 30, 1996 the Trust paid DDI $4,253 pursuant to the
Distribution Agreement.
Except for Mr. Smith, the Trust is unaware of any Trustee or any interested
person of a Fund who has a direct or indirect financial interest in the
operations of the Distribution Plans.
The Trust expects that the Distribution Plans will be used to pay a "service
fee" to persons who provide personal services to prospective and existing Fund
shareholders and to compensate broker-dealers for sales and promotional
services. Shareholders of the Funds will benefit from these services and the
Trust expects to benefit from economies of scale as more shareholders are
attracted to the Fund.
ADDITIONAL INFORMATION ON REDEMPTIONS
Suspension of Redemption Privileges: the Trust may suspend redemption
privileges or postpone the date of payment for up to seven days, but cannot do
so for more than seven days after the redemption order is received except during
any period (1) when the bond markets are closed, other than customary weekend
and holiday closings, or trading on the Exchange is restricted as determined by
the Securities and Exchange Commission ("SEC"), (2) when an emergency exists, as
defined by the SEC, which makes it not reasonably practicable for the Trust to
dispose of securities owned by it or not reasonably practicable to fairly
determine the value of its assets, or (3) as the SEC may otherwise permit.
15
<PAGE>
CALCULATION OF PERFORMANCE DATA
Total Return
A Fund may advertise performance in terms of average annual total return for
1, 5 and 10 year periods, or for such lesser periods as the Fund has been in
existence. Average annual total return is computed by finding the average annual
compounded rates of return over the periods that would equate the initial amount
invested to the ending redeemable value according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (exponential number)
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods at the end of the year or period;
The calculation assumes all charges are deducted from the initial $1,000
payment and assumes all dividends and distributions by the Fund are reinvested
at the price stated in the prospectus on the reinvestment dates during the
period, and includes all recurring fees that are charged to all shareholder
accounts.
The total return for the Total Return Fund for the Fiscal year ended April
30, 1996 was 8.08%.
Yield
A Fund may also advertise performance in terms of a 30 day yield quotation.
The 30 day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period according to the following formula:
YIELD = 2 [ (A - B + 1)6 - 1]
-----
CD
Where: A = dividends and interest earned during the period
B = expenses accrued for the period (net of reimbursement)
C = the average daily number of shares outstanding during
the period that were entitled to receive dividends
D = the maximum offering price per share on the last day
of the period
The Total Return Fund's 30-day yield for the 30 days ending April 30, 1996 was
4.46%.
Nonstandardized Total Return
A Fund may provide the above described standard total return results for a
period which ends as of not earlier than the most recent calendar quarter end
and which begins either twelve months before or at the time of commencement of
the Fund's operations. In addition, the Fund may provide nonstandardized total
return results for differing periods, such as for the most recent six months.
Such nonstandardized total return is computed as otherwise described under
"Total Return" except that no annualization is made.
16
<PAGE>
TAX STATUS
Taxation of the Funds -- In General
As stated in its prospectus, each Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, each Fund will not be liable for federal
income taxes on its taxable net investment income and capital gain net income
that are distributed to shareholders, provided that the Fund distributes at
least 90% of its net investment income and net short-term capital gain for the
taxable year.
To qualify as a regulated investment company, each Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive in each taxable year less
than 30% of its gross income from the sale or other disposition of stock or
securities held less than three months (the "30% test"), and (c) satisfy certain
diversification requirements at the close of each quarter of the Fund's taxable
year.
The Code imposes a non-deductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount equal to
the sum of (1) at least 98% of its ordinary income for the calendar year, (2) at
least 98% of its net capital gains for the twelve-month period ending on October
31 of the calendar year and (3) any portion (not taxable to the Fund) of the
respective balance from the preceding calendar year. The Funds intend to make
such distributions as are necessary to avoid imposition of this excise tax.
Taxation of the Funds' Investments
For federal income tax purposes, debt securities purchased by the Funds may be
treated as having original issue discount. Original issue discount represents
interest for federal income tax purposes and can generally be defined as the
excess of the stated redemption price at maturity of a debt obligation over the
issue price. Original issue discount is treated for federal income tax purposes
as earned by the Fund, whether or not any income is actually received, and
therefore, is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount is determined on the basis of a constant
yield to maturity which takes into account the compounding of accrued interest.
Under Section 1286 of the Code, an investment in a stripped bond or stripped
coupon will result in original issue discount.
Debt securities may be purchased by a Fund at a discount which exceeds the
original issue price plus previously accrued original issue discount remaining
on the securities, if any, at the time the Fund purchases the securities. This
additional discount represents market discount for income tax purposes. In the
case of any debt security issued after July 18, 1984, having a fixed maturity
date of more than one year from the date of issue and having market discount,
the gain realized on disposition will be treated as interest income for purposes
of the 90% test to the extent it does not exceed the accrued market discount on
the security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis.
A Fund may be required to capitalize, rather than deduct currently, part or
all of any direct interest expense incurred to purchase or carry any debt
security having market discount unless the Fund makes the election to include
market discount currently. Because a Fund must take into account the original
issue discount for purposes of satisfying various requirements for qualifying as
a regulated investment company under Subchapter M of the Code, it will be more
difficult for the Fund to make the distributions to maintain such status and to
avoid the 4% excise tax described above. To the extent that a Fund holds
zero-coupon or deferred interest bonds in its portfolio or bonds paying interest
in the form of additional debt obligations, the Fund would recognize income
currently even though the Fund received no cash payment of interest, and would
need to raise cash to satisfy the obligations to distribute such income to
shareholders from sales of portfolio securities.
17
<PAGE>
A Fund may purchase debt securities at a premium (i.e., at a purchase price in
excess of face amount). The premium may be amortized if the Fund so elects. The
amortized premium on taxable securities is allowed as a deduction, and, for
securities issued after September 27, 1985, must be amortized under an economic
accrual method.
All Shareholders will be notified annually regarding the tax status of
distributions received from a Fund.
Taxation of the Shareholder
Taxable distributions generally are included in a shareholder's gross income
for the taxable year in which they are received. However, dividends declared in
October, November or December and made payable to shareholders of record in such
a month will be deemed to have been received on December 31, if a Fund pays the
dividends during the following January. Since none of the net investment income
of the Fund is expected to arise from dividends on domestic common or preferred
stock, none of the Funds' distributions will qualify for the 70% corporate
dividends-received deduction.
Distributions by a Fund will result in a reduction in the fair market value of
the Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution nevertheless would be taxable to the
shareholder as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares of a Fund just prior to a distribution. The price of such shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing the Fund's shares just prior to a distribution may
receive a return of investment upon distribution which will nevertheless be
taxable to them.
A shareholder of a Fund should be aware that a redemption of shares (including
any exchange into another Portfolio) is a taxable event and, accordingly, a
capital gain or loss may be recognized. If a shareholder of a Fund receives a
distribution taxable as long-term capital gain with respect to shares of the
Fund and redeems or exchanges shares before he has held them for more than six
months, any loss on the redemption or exchange (not otherwise disallowed as
attributable to an exempt-interest dividend) will be treated as long-term
capital loss to the extent of the long term capital gain recognized.
Other Tax Considerations
Distributions to shareholders may be subject to additional state, local and
non-U.S. taxes, depending on each shareholder's particular tax situation.
Shareholders subject to tax in certain states may be exempt from state income
tax on distributions made by the Fund to the extent such distributions are
derived from interest on direct obligations of the United States Government.
Shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in shares of a Fund.
CUSTODIAN
Bankers Trust Company, New York, New York has acted as custodian for the
Fund. Star Bank NA, Cincinnati, Ohio has agreed to act as custodian for the
Fund. It is anticipated Fund assets will be transferred to Star Bank NA during
August 1996.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 30 South Seventeenth Street, Philadelphia, PA 19103 are
the independent accountants for the Trust.
FINANCIAL STATEMENTS
The Trust was established on October 15, 1993. The financial statements for the
18
<PAGE>
fiscal year ended April 30, 1996 are hereby incorporated by reference from
the Annual Report to Shareholders of that date which has been delivered with
this Statement of Additional Information [unless previously provided, in which
event the Trust will promptly provide another copy, free of charge, upon request
to: Declaration Service Company, P.O. Box 844, Conshohocken, Pennsylvania
19428-0844, 1-800-327-7170.
19
<PAGE>
PART C -- OTHER INFORMATION
Included herein is Part C for
Pauze U.S. Government Total Return Bond Fund
Pauze U.S. Government Short Term Bond Fund
Pauze U.S. Government Intermediate Term Bond Fund
<PAGE>
PAUZE FUNDS
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(1) The audited financial highlights for the twelve
months ended through April 30, 1996, are found in
part A.
(2) The audited financial statements for the twelve
months ended April 30, 1996, are incorporated by
reference to the Trust's Annual Report to
Shareholders in part B.
(b) EXHIBITS
Exhibit No. Description of Exhibit
( 1) (a) Declaration of Trust, Amended and Restated
Master Trust Agreement, dated February 9,
1996, (incorporated by reference to Post-
Effective Amendment #5 filed February 15,
1996).
(b) Amendment No. 1 to Amended and Restated
Master Trust Agreement, dated April 9, 1996,
(incorporated by reference to Post-Effective
Amendment #6 filed May 2,1996).
( 2) By-laws of Registrant ( incorporated by
reference to Initial Registration Statement
filed November 10, 1993).
( 3) Not Applicable
( 4) Not Applicable
( 5) (a) Advisory Agreement between Registrant and
Pauze', Swanson & Associates Investment
Advisors, Inc., dated November 1, 1993,
(incorporated by reference to Pre-Effective
Amendment #1 filed January 6, 1994).
(b)* Amendment to Advisory agreement Between
Registrant and Pauze Swanson & Associates
Investment Advisors, Inc. dated June 1,1996,
reflecting change infees and addition of two
new fund, filed herewith.
( 6) Distribution Agreement among Registrant,
Declaration Distributors, Inc. and Pauze
Swanson Capital Management Co., dated
February 13, 1996,(incorporated by reference
to Post-Effective Amendment#5 filed February
15, 1996).
( 7) Not Applicable
( 8) (a) Custodian Agreement between Registrant and Bankers Trust Company
dated January 4, 1994 (incorporated by reference to Pre- Effective Amendment #!
filed January 6, 1994).
( 8) (b)* Custodian Agreement between Registrant and
Star bank N.A. dated August 1,1996 filed
herewith.
( 9) (a) Transfer Agency and Shareholder Services
Agreement between Registrant and Declaration
Service Company, dated February 13, 1996,
(incorporated by reference to Post-Effective
Amendment #5 filed February 15, 1996).
2
<PAGE>
(b) Accounting Services Agreement between
Registrant and Declaration Service Company,
dated February 13, 1996, (incorporated by
reference to Post- Effective Amendment #5
filed February 15, 1996).
(c) Administration Agreement between Registrant
and Declaration Service Company dated
February 13, 1996, (incorporated by
reference to Post-Effective Amendment #5
filed February 15, 1996).
(10) Opinion and Consent of Counsel(incorporated
by refernece to Post-Effective Amendment #6
filed May 2, 1996).
(11) (a)* Consent of Independent Accountants
(b) Power of Attorney (incorporated by reference
to Initial Registration Statement filed
November 10, 1993).
(12) Not Applicable
(13) Not Applicable
(14) Not Applicable
(15) (a) Copy of 12b-1 Plan for Pauze U.S. Government
Total Return Bond Fund (incorporated by
reference to Initial Registration Statement
filed November 10, 1993).
(b) * Copy of 12b-1 Plan for Class A, B and C
shares of the Pauze U.S. Government Total
Return Bond Fund as amended June 21, 1996,
filed herewith.
(c) * Copy of 12b-1 Plan for Pauze U.S. Government
Intermediate Term Bond Fund as amended June
21, 1996, filed herewith.
(d) * Copy of 12b-1 Plan for Pauze U.S. Government
Short Term Bond Fund as amended June 21,
1996, filed herewith.
(16) Schedule for computation of performance
quotation provided in the Registration
Statement in response to Item 22
(incorporated by reference to Post-Effective
Amendment #1 filed July 10, 1994).
(17) * Financial Data Schedule, filed herewith.
(18) Copy of plan entered into by Registrant
pursuant to Rule 18f-3, ( incorporated by
reference to Post-effective Amendment #6
filed May 2, 1996).
* Filed Herewith
ITEM 25. Persons Controlled by or under Common Control with Registrant
Information pertaining to persons controlled by or under common control
with Registrant is incorporated by reference to the Statement of
Additional Information contained in Part B of this Registration
Statement at the section entitled "Principal Holders of Securities."
3
<PAGE>
ITEM 26. Number of Holders of Securities
The number of record holders, as of July 23, 1996, of each class of
securities of the Registrant.
Title of Class &
Number of Record
Holders
Pauze' U.S. Government Total Return Bond Fund No-Load 51
Class A One
Class B One
Class C One
Pauze U.S. Government Short Term Bond Fund No-Load One
Class A One
Class B One
Class C One
Pauze U.S. Government Intermediate Term No-Load One
Bond Fund Class A One
Class B One
Class C One
ITEM 27. Indemnification
Under Article VI of the Registrant's Master Trust Agreement, each of
its Trustees and officers or person serving in such capacity with
another entity at the request of the Registrant (a "Covered Person")
shall be indemnified (from the assets of the Sub-Trust or Sub-Trusts in
question) against all liabilities, including, but not limited to,
amounts paid in satisfaction of judgments, in compromises or as fines
or penalties, and expenses, including reasonable legal and accounting
fees, incurred by the Covered Person in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
criminal before any court or administrative or legislative body, in
which such Covered Person may be or may have been involved as a party
or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of being or having
been such a Trustee or officer, director or trustee, except with
respect to any matter as to which it has been determined that such
Covered Person (i) did not act in good faith in the reasonable belief
that such Covered Person's action was in or not opposed to the best
interests of the Trust or (ii) had acted with wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in
the conduct of such Covered Person's office (either and both of the
conduct described in (i) and (ii) being referred to hereafter as
"Disabling Conduct"). A determination that the Covered Person is not
entitled to indemnification may be made by (i) a final decision on the
merits by a court or other body before whom the proceeding was brought
that the person to be indemnified was not liable by reason of Disabling
Conduct, (ii) dismissal of a court action or an administrative
proceeding against a Covered Person for insufficiency of evidence of
Disabling Conduct, or (iii) a reasonable determination, based upon a
review of the facts, that the indemnitee was not liable by reason of
Disabling Conduct by (a) a vote of the majority of a quorum of Trustees
who are neither "interested persons" of the Trust as defined in Section
1(a)(19) of the 1940 Act nor parties to the proceeding, or (b) as
independent legal counsel in a written opinion.
ITEM 28. Business and Other Connections of Investment Advisor
and Investment Administrator
Information pertaining to business and other connections of
Registrant's investment advisor and investment administrator is
incorporated by reference to the Prospectus and Statement of Additional
Information contained in Parts A and B of this Registration Statement
at the sections entitled "Management of the Fund" in the Prospectus and
"Investment Advisory Services" and "Administrator Services" in the
Statement of Additional Information.
4
<PAGE>
ITEM 29. Principal Underwriters
Effective February 13, 1996, Registrant entered into a Distribution
Agreement with Declaration Distributors, Inc., ("DDI"). Terence P.
Smith, Secretary and a member of Registrant's Board of Trustees, is
President of DDI.
ITEM 30. Location of Accounts and Records
All accounts and records maintained by the Registrant are kept at the
Administrator's office located at Suite 6160, 555 North Lane,
Conshohocken, Pennsylvania 19428-0844. All accounts and records
maintained by Star Bank N.A. custodian for Registrant are maintained
in Cincinnati, Ohio.
ITEM 31. Not Applicable
ITEM 32. Undertakings
Registrant undertakes to call a meeting of shareholders for purposes of
voting upon the question of removal of one or more Trustees when
requested in writing to do so by the holders of at least 10% of the
Trust's outstanding shares, and in connection with such meeting to
comply with the provisions of Section 16(c) of the Investment Company
Act of 1940 relating to shareholder communications.
Registrant undertakes to file a post-effective amendment using
financial statements with respect to the new series/funds of
Registrant, which financial statements need not be certified, within
four to six months from the effective date of this post-effective
amendment to Registrant's 1933 Act Registration Statement.
5
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
5 (b) Amendment to Advisory Agreement dated
June 1,1996
8 Custodian Agreement between Registrant
and Star Bank N.A.
11 (a) Consent of Independent Accountants
15 (b) Copy of 12b-1 Plan for Class A, B and C shares of
the Pauze U.S. Government Total Return Bond Fund
as amended June 21, 1996
(c) Copy of 12b-1 Plan for Pauze U.S. Government
Intermediate Term Bond Fund as amended June 21, 1996
(d) Copy of 12b-1 Plan for Pauze U.S. Government
Short Term Bond Fund as amended June 21,1996
27 Financial Data Schedule
6
<PAGE>
EXHIBIT 5(b)
June 1, 1996
Mr. Philip C. Pauze', President
Pauze' Swanson Capital Management Co.
14340 Torrey Chase Boulevard, Ste 170
Houston, Texas 77014
Dear Mr. Pauze'
Pursuant to the action by the Board of Trustees of the Pauze' Funds
("Funds"), we hereby offer to amend the Investment Advisory Agreement dated
November 1, 1993, between the Funds and Pauze' Swanson Capital Management Co. to
include additional fund series as follows:
Fund Series Investment Advisor Compensation
Pauze' U.S. Government Intermediate Term Bond Fund 50 basis points (0.50%)
of the average annual
asset value
Pauze' U.S. Government Short Term Bond Fund 50 basis points (0.50%)
of the average annual
asset value
If this is acceptable, please acknowledge by signing at the bottom of this page.
Regards,
/S/ Rosie Conley
Ms. Rosie Conley, Assistant Secretary
________________________________________________________________________________
Accepted /S/ Philip C. Pauze' Date: June 1, 1996
Philip C. Pauze', President
Pauze' Swanson Capital Management Co.
<PAGE>
EXHIBIT 8 (a)
<PAGE>
EXHIBIT 8 (b)
CUSTODY AGREEMENT
This agreement (the "Agreement") is entered into as of the 1st day of
August, 1996, by and between Pauze Funds (the "Trust"), an open-end management
investment company, a business trust organized under the laws of Massachusetts
and having its office at 14340 Torrey Chase Blvd., Suite 170, Houston, Texas
77014 for the benefit of the sub-trusts named in Appendix A (the "Series"), and
Star Bank, National Association (the "Custodian"), a national banking
association having its principal office at 425 Walnut Street, Cincinnati, Ohio
45202.
WHEREAS, the Trust and the Custodian desire to enter into this Agreement
to provide for the custody and safekeeping of the assets of the Series as
required by the Investment Company Act of 1940, as amended (the "Act").
WHEREAS, the Trust hereby appoints the Custodian as custodian of all the
Series' Securities and moneys at any time owned by the Series during the term of
this Agreement (the "Series Assets").
WHEREAS, the Custodian hereby accepts such appointment as Custodian and
agrees to perform the duties thereof as hereinafter set forth. THEREFORE, in
consideration of the mutual promises hereinafter set forth, the Trust and the
Custodian agree as follows:
ARTICLE I
Definitions
The following words and phrases, when used in this Agreement, unless the
context otherwise requires, shall have the following meanings:
Authorized Person - the Chairman, President, Secretary, Treasurer,
Controller, or Senior Vice President of the Trust, or any other person, whether
or not any such person is an officer or employee of the Trust, duly authorized
by the Board of Trustees of the Trust to give Oral Instructions and Written
Instructions on behalf of the Trust, and listed in the Certificate annexed
hereto as Appendix B, or such other Certificate as may be received by the
Custodian from time to time.
<PAGE>
Book-Entry System - the Federal Reserve Bank book-entry system for United
States Treasury securities and federal agency securities.
Depository - The Depository Trust Company ("DTC"), a limited purpose trust
company its successor(s) and its nominee(s) or any other person or clearing
agent.
Dividend and Transfer Agent - the dividend and transfer agent appointed,
from time to time, pursuant to a written agreement between the dividend and
transfer agent and the Trust
Foreign Securities - a) securities issued and sold primarily outside of the
United States by a foreign government, a national of any foreign country, or a
corporation or other organization incorporated or organized under the laws of
any foreign country or; b) securities issued or guaranteed by the government of
the United States, by any state, by any political subdivision or agency thereof,
or by any entity organized under the laws of the United States or of any state
thereof, which have been issued and sold primarily outside of the United States.
Money Market Security - debt obligations issued or guaranteed as to
principal and/or interest by the government of the United States or agencies or
instrumentalities thereof, commercial paper, obligations (including certificates
of deposit, bankers' acceptances, repurchase agreements and reverse repurchase
agreements with respect to the same), and time deposits of domestic banks and
thrift institutions whose deposits are insured by the Federal Deposit Insurance
Corporation, and short-term corporate obligations where the purchase and sale of
such securities normally require settlement in federal funds or their equivalent
on the same day as such purchase and sale, all of which mature in not more than
thirteen (13) months.
Officers - the Chairman, President, Secretary, Treasurer, Controller, and
Senior Vice President of the Trust listed in the Certificate annexed hereto as
Appendix A, or such other Certificate as may be received by the Custodian from
time to time.
Oral Instructions - verbal instructions received by the Custodian from an
Authorized Person (or from a person that the Custodian reasonably believes in
good faith to be an Authorized Person) and confirmed by Written Instructions in
such a manner that such Written Instructions are received by the Custodian not
later than the business day immediately following receipt of such Oral
Instructions.
<PAGE>
Prospectus - the Trust's then currently effective prospectuses and
Statements of Additional Information, as filed with and declared effective from
time to time by the Securities and Exchange Commission.
Security or Securities - Money Market Securities, common stock, preferred
stock, options, financial futures, bonds, notes, debentures, corporate debt
securities, mortgages, and any certificates, receipts, warrants, or other
instruments representing rights to receive, purchase, or subscribe for the same
or evidencing or representing any other rights or interest therein, or any
property or assets.
Written Instructions - communication received in writing by the Custodian
from an Authorized Person.
ARTICLE II
Documents and Notices to be Furnished by the Trust
A The following documents, including any amendments thereto, will
be provided contemporaneously with the execution of the
Agreement, to the Custodian by the Trust:
1. A copy of the Master Trust Agreement certified by the Secretary.
2. A copy of the By-Laws of the Trust certified by the Secretary.
3. A copy of the resolution of the Board of Trustees of the Trust
appointing the Custodian, certified by the Secretary.
4. A copy of the then current Prospectuses of the Series.
5. A Certificate of the President and Secretary of the Trust
setting forth the names and signatures of the Officers of the
Trust.
B. The Trust agrees to notify the Custodian in writing of the
appointment of any Dividend and Transfer Agent.
<PAGE>
ARTICLE III
Receipt of Trust Assets
A. During the term of this Agreement, the Trust will deliver or cause to be
delivered to the Custodian all moneys constituting Series Assets. The Custodian
shall be entitled to reverse any deposits made on the Trust's behalf where such
deposits have been entered and moneys are not finally collected within 30 days
of the making of such entry.
B. During the term of this Agreement, the Trust will deliver or cause to be
delivered to the Custodian all Securities constituting Series Assets. The
Custodian will not have any duties or responsibilities with respect to such
Securities until actually received by the Custodian.
C. As and when received, the Custodian shall deposit to the account(s) of
the Series any and all payments for shares of the Series issued or sold from
time to time as they are received from the Trust's distributor or Dividend and
Transfer Agent or from the Trust itself.
ARTICLE IV
Disbursement of Trust Assets
A. The Trust shall furnish to the Custodian a copy of the resolution of the
Board of Trustees of the Trust, certified by the Trust's Secretary, either (i)
setting forth the date of the declaration of any dividend or distribution in
respect of shares of the Series, the date of payment thereof, the record date as
of which Trust shareholders entitled to payment shall be determined, the amount
payable per share to Series shareholders of record as of that date, and the
total amount to be paid by the Dividend and Transfer Agent on the payment date,
or (ii) authorizing the declaration of dividends and distributions in respect of
shares of the Trust on a daily basis and authorizing the Custodian to rely on a
Certificate setting forth the date of the declaration of any such dividend or
distribution, the date of payment thereof, the record date as of which Series
shareholders entitled to payment shall be determined, the amount payable per
share to Series shareholders of record as of that date, and the total amount to
be paid by the Dividend and Transfer Agent on the payment date.
<PAGE>
On the payment date specified in such resolution or Certificate described
above, the Custodian shall segregate such amounts from moneys held for the
account of the Series so that they are available for such payment.
B. Upon receipt of Written Instructions so directing it, the Custodian
shall segregate amounts necessary for the payment of redemption proceeds to be
made by the Dividend and Transfer Agent from moneys held for the account of the
Series so that they are available for such payment.
C. Upon receipt of a Certificate directing payment and setting forth the
name and address of the person to whom such payment is to be made, the amount of
such payment, and the purpose for which payment is to be made, the Custodian
shall disburse amounts as and when directed from the Series Assets. The
Custodian is authorized to rely on such directions and shall be under no
obligation to inquire as to the propriety of such directions.
D. Upon receipt of a Certificate directing payment, the Custodian shall
disburse moneys from the Series Assets in payment of the Custodian's fees and
expenses as provided in Article VIII hereof.
E. Upon receipt of a Certificate directing payment and setting forth the
amount of such payment, and the purpose for which payment is to be made (e.g.,
to pay Trust expenses), the Custodian shall disburse amounts to any imprest
account maintained for the Trust or a Series as and when directed from the
Series Assets. The Custodian is authorized to rely on such directions and shall
be under no obligation to inquire as to the propriety of such directions.
<PAGE>
ARTICLE V
Custody of Trust Assets
A. The Custodian shall open and maintain a separate bank account or
accounts in the United States in the name of the Trust for the assets of each of
the Series, subject only to draft or order by the Custodian acting pursuant to
the terms of this Agreement, and shall hold all cash received by it from or for
the account of the Series, other than cash maintained by the Trust in a bank
account established and used by the Series in accordance with Rule 17f-3 under
the Act. Moneys held by the Custodian on behalf of the Series may be deposited
by the Custodian to its credit as Custodian in the banking department of the
Custodian. Such moneys shall be deposited by the Custodian in its capacity as
such, and shall be withdrawable by the Custodian only in such capacity.
B. The Custodian shall hold all Securities delivered to it in safekeeping
in a separate account or accounts maintained at Star Bank, N.A. for the benefit
of the Series; and shall not comingle assets of one Series with those of another
Series.
C. All Securities held which are issued or issuable only in bearer form,
shall be held by the Custodian in that form; all other Securities held for the
Series shall be registered in the name of the Custodian or its nominee. The
Trust agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold, or deliver in proper form for transfer, any Securities that
it may hold for the account of the Trust and which may, from time to time, be
registered in the name of the Series.
D. With respect to all Securities held for the Series, the Custodian shall
on a timely basis (concerning items 1 and 2 below, as defined in the Custodian's
Standards of Service Guide, as amended from time to time, annexed hereto as
Appendix D):
1. Collect all income due and payable with respect to such Securities;
2. Present for payment and collect amounts payable upon all Securities
which may mature or be called, redeemed, or retired, or otherwise
become payable;
3. Surrender Securities in temporary form for definitive Securities; and
<PAGE>
4. Execute, as agent, any necessary declarations or certificates of
ownership under the Federal income tax laws or the laws or regulations
of any other taxing authority, including any foreign taxing authority,
now or hereafter in effect.
E. Upon receipt of a Certificate and not otherwise, the Custodian shall:
1. Execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other instruments whereby
the authority of the Trust as beneficial owner of any Securities may be
exercised;
2. Deliver any Securities in exchange for other Securities or cash issued
or paid in connection with the liquidation, reorganization, refinancing, merger,
consolidation, or recapitalization of any corporation, or the exercise of any
conversion privilege;
3. Deliver any Securities to any protective committee, reorganization
committee, or other person in connection with the reorganization, refinancing,
merger, consolidation, recapitalization, or sale of assets of any corporation,
and receive and hold under the terms of this Agreement such certificates of
deposit, interim receipts or other instruments or documents as may be issued to
it to evidence such delivery;
4. Make such transfers or exchanges of the assets of the Trust and take
such other steps as shall be stated in said Certificate to be for the purpose of
effectuating any duly authorized plan of liquidation, reorganization, merger,
consolidation or recapitalization of the Trust; and
5. Deliver any Securities held for the Series to the depository agent for
tender or other similar offers.
<PAGE>
F. The Custodian shall promptly deliver to the Trust all notices, proxy
material and executed but unvoted proxies pertaining to shareholder meetings of
Securities held by the Trust. The Custodian shall not vote or authorize the
voting of any Securities or give any consent, waiver or approval with respect
thereto unless so directed by a Certificate or Written Instruction.
G. The Custodian shall promptly deliver to the Trust all information
received by the Custodian and pertaining to Securities held by the Trust with
respect to tender or exchange offers, calls for redemption or purchase, or
expiration of rights.
ARTICLE VI
Purchase and Sale of Securities
A. Promptly after each purchase of Securities by the Trust for a Series,
the Trust shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, Written Instructions, and (ii)
with respect to each purchase of Money Market Securities, Written Instructions
or Oral Instructions, specifying with respect to each such purchase the;
1. name of the issuer and the title of the Securities,
2. principal amount purchased and accrued interest, if any,
3. date of purchase and settlement,
4. purchase price per unit,
5. total amount payable, and
6. name of the person from whom, or the broker through which,
the purchase was made.
The Custodian shall, against receipt of Securities purchased by or for the
Series, pay out of the Series Assets, the total amount payable to the person
from whom or the broker through which the purchase was made, provided that the
same conforms to the total amount payable as set forth in such Written
Instructions or Oral Instructions, as the case may be.
<PAGE>
B. Promptly after each sale of Securities by the Trust for a Series, the
Trust shall deliver to the Custodian (i) with respect to each sale of Securities
which are not Money Market Securities, Written Instructions, and (ii) with
respect to each sale of Money Market Securities, Written Instructions or Oral
Instructions, specifying with respect to each such sale the;
1. name of the issuer and the title of the Securities,
2. principal amount sold and accrued interest, if any,
3. date of sale and settlement,
4. sale price per unit,
5. total amount receivable, and
6. name of the person to whom, or the broker through which,
the sale was made.
The Custodian shall deliver the Securities against receipt of the total amount
receivable, provided that the same conforms to the total amount receivable as
set forth in such Written Instructions or Oral Instructions, as the case may be.
C. On contractual settlement date, the account of the Series will be
charged for all purchased Securities settling on that day, regardless of whether
or not delivery is made. Likewise, on contractual settlement date, proceeds from
the sale of Securities settling that day will be credited to the account of the
Series, irrespective of delivery.
D. Purchases and sales of Securities effected by the Custodian will be made
on a delivery versus payment basis. The Custodian may, in its sole discretion,
upon receipt of a Certificate, elect to settle a purchase or sale transaction in
some other manner, but only upon receipt of acceptable indemnification from the
Trust.
E. The Custodian shall, upon receipt of a Written Instructions so directing
it, establish and maintain a segregated account or accounts for and on behalf of
a Series. Cash and/or Securities may be transferred into such account or
accounts for specific purposes, to-wit:
1. in accordance with the provision of any agreement among the Trust, the
Custodian, and a broker-dealer registered under the Securities and Exchange Act
of 1934, as amended, and also a member of the National Association of Securities
Dealers (NASD) (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of the Options
Clearing Corporation and of any registered national securities exchange, the
Commodity Futures Trading Commission, any registered contract market, or any
similar organization or organizations requiring escrow or other similar
arrangements in connection with transactions by the Trust for the Series;
<PAGE>
2. for purposes of segregating cash or government securities in
connection with options purchased, sold, or written by the Trust or commodity
futures contracts or options thereon purchased or sold by the Trust for the
Series;
3. for the purpose of compliance by the Series with the procedures
required for reverse repurchase agreements, firm commitment agreements, standby
commitment agreements, and short sales by Act Release No. 10666, or any
subsequent release or releases or rule of the Securities and Exchange Commission
relating to the maintenance of segregated accounts by registered investment
companies; and
4. for other corporate purposes, only in the case of this clause 4 upon
receipt of a copy of a resolution of the Board of Trustees of the Trust,
certified by the Secretary of the Trust, setting forth the purposes of such
segregated account.
F. Except as otherwise may be agreed upon by the parties hereto, the
Custodian shall not be required to comply with any Written Instructions to
settle the purchase of any Securities on behalf of the Series unless there is
sufficient cash in the account(s) at the time or to settle the sale of any
Securities from an account(s) unless such Securities are in deliverable form.
Notwithstanding the foregoing, if the purchase price of such Securities exceeds
the amount of cash in the account(s) at the time of such purchase, the Custodian
may, in its sole discretion, advance the amount of the difference in order to
settle the purchase of such Securities. The amount of any such advance shall be
deemed a loan from the Custodian to the Trust for the respective Series payable
on demand and bearing interest accruing from the date such loan is made up to
but not including the date such loan is repaid at a rate per annum customarily
charged by the Custodian on similar loans.
<PAGE>
ARTICLE VII
Trust Indebtedness
In connection with any borrowings by the Trust for a Series, the Trust will
cause to be delivered to the Custodian by a bank or broker requiring Securities
as collateral for such borrowings (including the Custodian if the borrowing is
from the Custodian), a notice or undertaking in the form currently employed by
such bank or broker setting forth the amount of collateral. The Trust shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such borrowing: (a) the name of the bank or broker, (b) the amount and terms of
the borrowing, which may be set forth by incorporating by reference an attached
promissory note duly endorsed by the Trust, or a loan agreement, (c) the date,
and time if known, on which the loan is to be entered into, (d) the date on
which the loan becomes due and payable, (e) the total amount payable to the
Series on the borrowing date, and (f) the description of the Securities securing
the loan, including the name of the issuer, the title and the number of shares
or the principal amount. The Custodian shall deliver on the borrowing date
specified in the Certificate the required collateral against the lender's
delivery of the total loan amount then payable, provided that the same conforms
to that which is described in the Certificate. The Custodian shall deliver, in
the manner directed by the Trust, such Securities as additional collateral, as
may be specified in a Certificate, to secure further any transaction described
in this Article VII. The Trust shall cause all Securities released from
collateral status to be returned directly to the Custodian and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it.
The Custodian may, at the option of the lender, keep such collateral in its
possession, subject to all rights therein given to the lender because of the
loan. The Custodian may require such reasonable conditions regarding such
collateral and its dealings with third-party lenders as it may deem appropriate.
<PAGE>
ARTICLE VIII
Concerning the Custodian
A. Except as otherwise provided herein, the Custodian shall not be liable
for any loss or damage resulting from its action or omission to act or
otherwise, except for any such loss or damage arising out of its own negligence
or willful misconduct. The Trust shall defend, indemnify and hold harmless the
Custodian and its trustees, officers, employees and agents with respect to any
loss, claim, liability or cost (including reasonable attorneys' fees) arising or
alleged to arise from or relating to the Trust's duties hereunder or any other
action or inaction of the Trust or its Trustees, officers, employees or agents,
except such as may arise from the negligent action, omission, willful misconduct
or breach of this Agreement by the Custodian. The Custodian may, with respect to
questions of law, apply for and obtain the advice and opinion of counsel, at the
expense of the Trust, and shall be fully protected with respect to anything done
or omitted by it in good faith in conformity with the advice or opinion of
counsel. The provisions under this paragraph shall survive the termination of
this Agreement.
B. Without limiting the generality of the foregoing, the Custodian, acting
in the capacity of Custodian hereunder, shall be under no obligation to inquire
into, and shall not be liable for:
1. The validity of the issue of any Securities purchased by or for the
account of the Trust, the legality of the purchase thereof, or the
propriety of the amount paid therefor;
2. The legality of the sale of any Securities by or for the account of
the Series, or the propriety of the amount for which the same are
sold;
3. The legality of the issue or sale of any shares of the Series, or
the sufficiency of the amount to be received therefor;
4. The legality of the redemption of any shares of the Series, or the
propriety of the amount to be paid therefor;
<PAGE>
5. The legality of the declaration or payment of any dividend by the
Trust in respect of shares of the Series;
6. The legality of any borrowing by the Series on behalf of the Trust,
using Securities as collateral;
C. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount due to the Series from any Dividend and
Transfer Agent of the Trust nor to take any action to effect payment or
distribution by any Dividend and Transfer Agent of the Trust of any amount paid
by the Custodian to any Dividend and Transfer Agent of the Trust in accordance
with this Agreement.
D. Notwithstanding Section D of Article V, the Custodian shall not be under
any duty or obligation to take action to effect collection of any amount, if the
Securities upon which such amount is payable are in default, or if payment is
refused after due demand or presentation, unless and until (i) it shall be
directed to take such action by a Certificate and (ii) it shall be assured to
its satisfaction (including prepayment thereof) of reimbursement of its costs
and expenses in connection with any such action.
E. The Trust acknowledges and hereby authorizes the Custodian to hold
Securities through its various agents described in Appendix B annexed hereto.
The Trust hereby represents that such authorization has been duly approved by
the Board of Trustees of the Trust as required by the Act. The Custodian
acknowledges that although certain Series Assets are held by its agents, the
Custodian remains primarily liable for the safekeeping of the Series Assets.
In addition, the Trust acknowledges that the Custodian may appoint one or
more financial institutions, as agent or agents or as sub-custodian or
sub-custodians, including, but not limited to, banking institutions located in
foreign countries, for the purpose of holding Securities and moneys at any time
owned by the Series. The Custodian shall not be relieved of any obligation or
liability under this Agreement in connection with the appointment or activities
of such agents or sub-custodians. Any such agent or sub-custodian shall be
qualified to serve as such for assets of investment companies registered under
the Act. Upon request, the Custodian shall promptly forward to the Trust any
documents it receives from any agent or sub-custodian appointed hereunder which
may assist trustees of registered investment companies fulfill their
responsibilities under Rule 17f-5 under the Act.
<PAGE>
F. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to or held by it for the account of
the Trust are such as properly may be held by the Series under the provisions of
the Master Trust Agreement and the Trust's By- Laws.
G. The Custodian shall treat all records and other information relating to
the Trust and the Series Assets as confidential and shall not disclose any such
records or information to any other person unless (i) the Trust shall have
consented thereto in writing or (ii) such disclosure is required by law.
H. The Custodian shall be entitled to receive and the Trust agrees to pay
to the Custodian from the assets of the Series such compensation as shall be
determined pursuant to Appendix E attached hereto, or as shall be determined
pursuant to amendments to such Appendix E. The Custodian shall be entitled to
charge against any money held by it for the account of the Series, the amount of
any of its fees, any loss, damage, liability or expense, including counsel fees
relating to such Series. The expenses which the Custodian may charge against the
account of the Series include, but are not limited to, the expenses of agents or
sub-custodians incurred in settling transactions involving the purchase and sale
of Securities of such Series.
I. The Custodian shall be entitled to rely upon any Oral Instructions and
any Written Instructions. The Trust agrees to forward to the Custodian Written
Instructions confirming Oral Instructions in such a manner so that such Written
Instructions are received by the Custodian, whether by hand delivery, facsimile
or otherwise, not later than the following business day on which such Oral
Instructions were given. The Trust agrees that the failure of the Custodian to
receive such confirming instructions shall in no way affect the validity of the
transactions or enforceability of the transactions hereby authorized by the
Trust. The Trust agrees that the Custodian shall incur no greater liability to
the Trust for acting upon Oral Instructions given to the Custodian hereunder
concerning such transactions than would arise as to a similar transaction
pursuant to a Written Instruction.
<PAGE>
J. The Custodian will (i) set up and maintain proper books of account and
complete records of all transactions in the accounts maintained by the Custodian
hereunder in such manner as will meet the obligations of the Trust under the
Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder and those records are the property of the Trust, and (ii) preserve
for the periods prescribed by applicable Federal statute or regulation all
records required to be so preserved. All such books and records shall be the
property of the Trust, and shall be open to inspection and audit at reasonable
times and with prior notice by Officers and auditors employed by the Trust.
K. The Custodian shall send to the Trust any report received on the systems
of internal accounting control of the Custodian, or its agents or
sub-custodians, as the Trust may reasonably request from time to time.
L. The Custodian performs only the services of a custodian and shall have
no responsibility for the management, investment or reinvestment of the
Securities from time to time owned by the Trust. The Custodian is not a selling
agent for shares of the Series and performance of its duties as custodian shall
not be deemed to be a recommendation to the Trust's depositors or others of
shares of the Series as an investment.
M. The Custodian shall take all reasonable action, that the Trust may from
time to time request, to assist the Trust in obtaining favorable opinions from
the Trust's independent accountants, with respect to the Custodian's activities
hereunder, in connection with the preparation of the Trust's Form N-1A, Form
N-SAR, or other annual reports to the Securities and Exchange Commission.
N. The Trust hereby pledges to and grants the Custodian a security interest
in any Series Assets of the applicable Series to secure the payment of any
liabilities of such Series to the Custodian, whether acting in its capacity as
Custodian or otherwise, or on account of money borrowed from the Custodian. This
pledge is in addition to any other pledge of collateral by the Trust to the
Custodian. It is understood that the assets of one Series may not be used to
secure a distinct obligation of another Series.
<PAGE>
ARTICLE X
Termination
A. Either of the parties hereto may terminate this Agreement for any reason
by giving to the other party a notice in writing specifying the date of such
termination, which shall be not less than ninety (90) days after the date of
giving of such notice. If such notice is given by the Trust, it shall be
accompanied by a copy of a resolution of the Board of Trustees of the Trust,
certified by the Secretary of the Trust, electing to terminate this Agreement
and designating a successor custodian or custodians. In the event such notice is
given by the Custodian, the Trust shall, on or before the termination date,
deliver to the Custodian a copy of a resolution of the Board of Trustees of the
Trust, certified by the Secretary, designating a successor custodian or
custodians to act on behalf of the Trust. In the absence of such designation by
the Trust, the Custodian may designate a successor custodian which shall be a
bank or trust company having not less than $100,000,000 aggregate capital,
surplus, and undivided profits. Upon the date set forth in such notice this
Agreement shall terminate, and the Custodian, provided that it has received a
notice of acceptance by the successor custodian, shall deliver, on that date,
directly to the successor custodian all Securities and moneys then owned by the
Trust and held by it as Custodian. Upon termination of this Agreement, the Trust
shall pay to the Custodian on behalf of the Trust such compensation as may be
due as of the date of such termination. The Trust agrees on behalf of the Trust
that the Custodian shall be reimbursed for its reasonable costs in connection
with the termination of this Agreement.
B. If a successor custodian is not designated by the Trust, or by the
Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Trust shall, upon the delivery by the
Custodian to the Trust of all Securities (other than Securities held in the
<PAGE>
Book-Entry System which cannot be delivered to the Trust) and moneys then owned
by the Trust, be deemed to be the custodian for the Trust, and the Custodian
shall thereby be relieved of all duties and responsibilities pursuant to this
Agreement, other than the duty with respect to Securities held in the Book-Entry
System, which cannot be delivered to the Trust, which shall be held by the
Custodian in accordance with this Agreement.
ARTICLE XI
MISCELLANEOUS
A. Appendix B sets forth the names and the signatures of all Authorized
Persons, as certified by the Secretary of the Trust. The Trust agrees to furnish
to the Custodian a new Appendix B in form similar to the attached Appendix B, if
any present Authorized Person ceases to be an Authorized Person or if any other
or additional Authorized Persons are elected or appointed. Until such new
Appendix B shall be received, the Custodian shall be fully protected in acting
under the provisions of this Agreement upon Oral Instructions or signatures of
the then current Authorized Persons as set forth in the last delivered Appendix
B.
B. No recourse under any obligation of this Agreement or for any claim
based thereon shall be had against any organizer, shareholder, Officer, Trustee,
past, present or future as such, of the Trust or of any predecessor or
successor, either directly or through the Trust or any such predecessor or
successor, whether by virtue of any constitution, statute or rule of law or
equity, or be the enforcement of any assessment or penalty or otherwise; it
being expressly agreed and understood that this Agreement and the obligations
thereunder are enforceable solely against the Trust, and that no such personal
liability whatever shall attach to, or is or shall be incurred by, the
organizers, shareholders, Officers, Trustees of the Trust or of any predecessor
or successor, or any of them as such. To the extent that any such liability
exists, it is hereby expressly waived and released by the Custodian as a
condition of, and as a consideration for, the execution of this Agreement.
<PAGE>
C. The obligations set forth in this Agreement as having been made by the
Trust have been made by the Board of Trustees, acting as such Trustees for and
on behalf of the Trust, pursuant to the authority vested in them under the laws
of the State of Massachusetts, the Master Trust Agreement and the By-Laws of the
Trust. This Agreement has been executed by Officers of the Trust as officers,
and not individually, and the obligations contained herein are not binding upon
any of the Trustees, Officers, agents or holders of shares, personally, but bind
only the Trust.
D. Provisions of the Prospectus and any other documents (including
advertising material) specifically mentioning the Custodian (other than merely
by name and address) shall be reviewed with the Custodian by the Trust prior to
publication and/or dissemination or distribution, and shall be subject to the
consent of the Custodian.
E. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at Star
Bank Center, 425 Walnut Street, M. L. 6118, Cincinnati, Ohio 45202, attention
Mutual Trust Custody Department, or at such other place as the Custodian may
from time to time designate in writing.
F. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Trust shall be sufficiently given when
delivered to the Trust or on the second business day following the time such
notice is deposited in the U.S. mail postage prepaid and addressed to the Trust
at its office at 14340 Torrey Chase Boulevard, Suite 170; Houston, TX 77014 or
at such other place as the Trust may from time to time designate in writing.
G. This Agreement, with the exception of the Appendices, may not be amended
or modified in any manner except by a written agreement executed by both parties
with the same formality as this Agreement, and authorized and approved by a
resolution of the Board of Trustees of the Trust.
<PAGE>
H. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Trust or by the Custodian, and no
attempted assignment by the Trust or the Custodian shall be effective without
the written consent of the other party hereto.
I. This Agreement shall be construed in accordance with the laws of the
State of Ohio.
J. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
xecuted by their respective Officers, thereunto duly authorized as of the day
and year first above written.
Pauze Funds
ATTEST: By: _________________________
Philip C. Pauze
________________________ Title: President
Star Bank, N.A.
ATTEST: By: _________________________
Marsha A. Croxton
_________________________ Title: Vice President
<PAGE>
APPENDIX A
Sub-trusts/Series of Pauze Funds - July, 1996
Pauze U.S. Government Total Return Bond Fund
Pauze U.S. Government Intermediate Term Bond Fund
Pauze U.S. Government Short Term Bond Fund
<PAGE>
APPENDIX B
Pauze Funds - July, 1996
Authorized Persons Specimen Signatures
President: Philip C. Pauze
Secretary: Terence P. Smith
Chief Accounting: Paul L. Giorgio
Officer, Treasurer
Transfer Agent/Trust Accountant
Employees:
David Ganley
Linda K. Coyne
<PAGE>
APPENDIX C
The following agents are employed currently by Star Bank, N.A. for
securities processing and control . . .
The Depository Trust Company (New York)
7 Hanover Square
New York, NY 10004
The Federal Reserve Bank
Cincinnati and Cleveland Branches
Bankers Trust Company
16 Wall Street
New York, NY 10005
(For Foreign Securities and certain non-DTC eligible Securities)
<PAGE>
APPENDIX D
Standards of Service Guide
<PAGE>
APPENDIX E
Schedule of Compensation
<PAGE>
EXHIBIT 11 (a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A (the "Registration
Statement") of our report dated June 13, 1996 relating to the financial
statements and financial highlights appearing in the April 30, 1996 Annual
Report of Pauze' U.S. Government Total Return Bond Fund, which is also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights" in the
Prospectuses and under the heading "Independent Accountants" in the Statement of
Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
July 26, 1996
<PAGE>
EXHIBIT 15 (b)
PLAN PURSUANT TO RULE 12b-1
FOR CLASS A, B AND C SHARES OF THE PAUZE
U.S. GOVERNMENT TOTAL RETURN BOND FUND
Adopted by Trustees June 21, 1996
RECITALS
1. PAUZE FUNDS, an unincorporated business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust") is engaged in business
as an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act").
2. The Trust operates as a "series company" within the meaning of Rule
18f-2 under the Act and is authorized to issue shares of beneficial interest in
various series or sub-trusts (collectively the "Funds"). The shares of each Fund
have been divided into four classes (no-load and Class A , Class B, and Class C)
offered pursuant to a plan adopted pursuant to Rule 18f-3 under the Act.
3. Funds of the Trust may utilize Fund assets to pay for, or reimburse
payment for, sales or promotional services or activities that have been or will
be provided in connection with distribution of shares of the Funds if such
payments are made pursuant to a Plan adopted and continued in accordance with
Rule 12b-1 under the Act.
4. Pauze U. S. Government Total Return Bond Fund, a series of the Trust
(the "Fund") by virtue of such arrangement may be deemed to act as a distributor
of its shares as provided in Rule 12b-1 under the Act and desires to adopt a
Plan pursuant to such Rule (the "Plan").
5. The Trustees as a whole, and the Trustees who are not interested
persons of the Trust (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan and any agreements relating to
it (the "Qualified Trustees"), having determined, in the exercise of reasonable
business judgment and in light of their fiduciary duties under state law and
under Section 36(a) and (b) of the Act, that there is a reasonable likelihood
that this Plan will benefit the Fund and its shareholders, have approved the
Plan by votes cast in person at a meeting called for the purpose of voting on
this Plan and agreements related thereto.
6. Pauze Swanson Capital Management Co., as the sole shareholder of the
Class A, B and C shares of the Fund, has approved the Plan.
PLAN PROVISIONS
SECTION 1. EXPENDITURES
(a) Purposes. Fund assets may be utilized to pay for or reimburse
expenditures in connection with sales and promotional services related to the
distribution of Fund shares, including personal services provided to prospective
and existing Fund shareholders, which include, but are not limited to the costs
of: printing and distribution of prospectuses and promotional materials; making
slides and charts for presentations; assisting shareholders and prospective
investors in understanding and dealing with the Fund; and travel and
out-of-pocket expenses (e.g. copy and long distance telephone charges) related
thereto.
(b) Service Plan for Class A, B and C Shares. Fund assets may be utilized
to pay for or reimburse expenditures in connection with personal services and
<PAGE>
administrative services provided to existing Fund shareholders, provided
the total amount expended pursuant to this Plan does not exceed 0.25% of net
assets on an annual basis.
(c) Additional Amount for Class B Shares. Fund assets attributable to Class
B Shares in specific shareholder accounts will be utilized, to the extent not
covered by the Contingent Deferred Sales Charge ("CDSC"), to cover fees paid to
the Distributor and broker-dealers for sales and promotional services related to
distribution of said shares.
The plan offers Class B shares with a contingent deferred sales charge
("CDSC"). Under this plan all of the purchase payment for Class B shares is
immediately invested in the Fund. The Advisor pays the Distributor's and the
participating broker-dealer's fee or commission and is reimbursed by the Fund
over time by charging an additional Rule 12b-1 fee to the Class B shares. In
order to assure that the Advisor is reimbursed for funding the Distributor's and
the broker-dealer's fee, purchases of Class B shares are subject to a declining
CDSC. The additional Rule 12b-1 fee attributable to the shares purchased also
declines to zero as follows.
Gross Commission 3.75%
Annual Rule 12b-1 Fee 0.75%
(paid for 7 years)
Contingent Deferred Sale Charge by Year:
year 1 3.75%
year 2 3.75%
year 3 3.25%
year 4 2.75%
year 5 2.25%
year 6 1.75%
year 7 1.25%
Thereafter -0-
NOTES:
B Shares convert to No Load Shares when CDSC expires. Each Investment would
be considered a new investment.
(d) Additional Amount for Class C Shares. Fund assets attributable to
Class C Shares in specific shareholder accounts will be utilized to pay an
annual ongoing fees of 0.75% to broker-dealers for sales and promotional
services related to distribution of said shares.
SECTION 2. TERM AND TERMINATION
(a) Initial Term. This Plan shall become effective when the public
offering of shares commences and shall continue in effect for a period of one
year thereafter unless terminated or otherwise continued or discontinued as
provided in this Plan.
(b) Continuation of the Plan. The Plan and any related agreements shall
continue in effect for periods of one year thereafter for so long as such
continuance is specifically approved at least annually by votes of a majority of
both (a) the Trustees of the Trust and (b) the Qualified Trustees, cast in
person at a meeting called for the purpose of voting on this Plan and such
related agreements.
(c) Termination of the Plan. This Plan may be terminated at any time by
vote of a majority of the Qualified Trustees, or by vote of a majority of the
outstanding voting securities of the Fund or applicable class of shares.
<PAGE>
SECTION 3. AMENDMENTS
This Plan may not be amended to increase materially the amount of
distribution expenditures provided for in Section 1 hereof unless such amendment
is approved by a vote of the majority of the outstanding voting securities of
the Fund or applicable class of shares, and no material amendment to the Plan
shall be made unless approved in the manner provided for annual renewal in
Section 2(b) hereof.
SECTION 4. INDEPENDENT TRUSTEES
While this Plan is in effect with respect to the Fund, the selection
and nomination of Trustees who are not interested persons of the Trust (as
defined in the Act) shall be committed to the discretion of the Trustees who are
not interested persons.
SECTION 5. QUARTERLY REPORTS
The Treasurer of the Trust shall provide to the Trustees and the
Trustees shall review, at least quarterly, a written report of the amounts
accrued and the amounts expended under this Plan for distribution, along with
the purposes for which such expenditures were made.
SECTION 6. RECORDKEEPING
The Trust shall preserve copies of this Plan and any related agreements
and all reports made pursuant to Section 5 hereof, for a period of not less than
six years from the date of this Plan, the agreements or such report, as the case
may be, the first two years in an easily accessible place.
SECTION 7. AGREEMENTS RELATED TO THIS PLAN
Agreements with persons providing distribution services to be paid for
or reimbursed under this Plan shall provide that:
(a) the agreement will continue in effect for a period of one year and
will continue thereafter only if specifically approved by vote of a
majority of the Trustees of the Trust;
(b) the agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of (i) the Qualified Trustees or (ii)
the outstanding voting securities of the Fund, on not more than sixty
(60) days' written notice to any other party to the agreement;
(c) the agreement will terminate automatically in the event of an
assignment;
(d) in the event the agreement is terminated or otherwise discontinued,
no further payments or reimbursements will be made by the Fund with
regard to obligations incurred after the effective date of such action;
and
(e) payments and/or reimbursements may only be made for the specific
sales or promotional services or activities identified in Section 1 of
this Plan.
<PAGE>
EXHIBIT 15 (c)
PLAN PURSUANT TO RULE 12b-1
PAUZE U.S. GOVERNMENT INTERMEDIATE TERM BOND FUND
Adopted by Trustees June 21, 1996
RECITALS
1. PAUZE FUNDS, an unincorporated business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust") is engaged in business
as an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act").
2. The Trust operates as a "series company" within the meaning of Rule
18f-2 under the Act and is authorized to issue shares of beneficial interest in
various series or sub-trusts (collectively the "Funds"). The shares of each Fund
have been divided into four classes (no-load and Class A , Class B, and Class C)
offered pursuant to a plan adopted pursuant to Rule 18f-3 under the Act.
3. Funds of the Trust may utilize Fund assets to pay for, or reimburse
payment for, sales or promotional services or activities that have been or will
be provided in connection with distribution of shares of the Funds if such
payments are made pursuant to a Plan adopted and continued in accordance with
Rule 12b-1 under the Act.
4. Pauze U. S. Government Intermediate Term Bond Fund, a series of the
Trust (the "Fund") by virtue of such arrangement may be deemed to act as a
distributor of its shares as provided in Rule 12b-1 under the Act and desires to
adopt a Plan pursuant to such Rule (the "Plan").
5. The Trustees as a whole, and the Trustees who are not interested
persons of the Trust (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan and any agreements relating to
it (the "Qualified Trustees"), having determined, in the exercise of reasonable
business judgment and in light of their fiduciary duties under state law and
under Section 36(a) and (b) of the Act, that there is a reasonable likelihood
that this Plan will benefit the Fund and its shareholders, have approved the
Plan by votes cast in person at a meeting called for the purpose of voting on
this Plan and agreements related thereto.
6. Pauze Swanson Capital Management Co., as the sole shareholder of the
Fund and of each class of shares of the Fund, has approved the Plan.
PLAN PROVISIONS
SECTION 1. EXPENDITURES
(a) Purposes. Fund assets may be utilized to pay for or reimburse
expenditures in connection with sales and promotional services related to the
distribution of Fund shares, including personal services provided to prospective
and existing Fund shareholders, which include, but are not limited to the costs
of: printing and distribution of prospectuses and promotional materials; making
slides and charts for presentations; assisting shareholders and prospective
investors in understanding and dealing with the Fund; and travel and
out-of-pocket expenses (e.g. copy and long distance telephone charges) related
thereto.
(b) Service Plan for the A, B and C Classes of Shares. Fund assets may be
utilized to pay for or reimburse expenditures in connection with personal and
administrative services provided to existing Fund shareholders, provided the
total amount expended pursuant to this Plan does not exceed 0.25% of net assets
on an annual basis.
(c) Additional Amount for Class B Shares. Fund assets attributable to
Class B Shares in specific shareholder accounts will be utilized, to the extent
not covered by the Contingent Deferred Sales Charge ("CDSC"), to cover fees paid
to the Distributor and broker-dealers for sales and promotional services related
to distribution of said shares.
1
<PAGE>
The plan offers Class B shares with a contingent deferred sales charge
("CDSC"). Under this plan all of the purchase payment for Class B shares is
immediately invested in the Fund. The Advisor pays the Distributor's and the
participating broker-dealer's fee or commission and is reimbursed by the Fund
over time by charging an additional Rule 12b-1 fee to the Class B shares. In
order to assure that the Advisor is reimbursed for funding the Distributor's and
the broker-dealer's fee, purchases of Class B shares are subject to a declining
CDSC. The additional Rule 12b-1 fee attributable to the shares purchased also
declines to zero as follows.
Gross Commission 3.75%
Annual Rule 12b-1 Fee 0.75%
(paid for 7 years)
Contingent Deferred Sale Charge by Year:
year 1 3.75%
year 2 3.75%
year 3 3.25%
year 4 2.75%
year 5 2.25%
year 6 1.75%
year 7 1.25%
Thereafter -0-
NOTES:
B Shares convert to No Load Shares when CDSC expires. Each Investment would
be considered a new investment.
(d) Additonal Amount for Class C Shares. Fund assets attributable to
Class C Shares in specific shareholder accounts will be utilized to pay an
annual ongoing fees of 0.75% to broker-dealers for sales and promotional
services related to distribution of said shares.
(e) No Load Shares. Fund assets may be utilized to pay for or reimburse
expenditures in connection with sales and promotional services related to the
distribution of Fund shares, and personal and administrative services provided
to prospective and existing Fund Shareholders, provided the total amount
expended pursuant to this Plan does not exceed 0.25% of net assets on an annual
basis.
SECTION 2. TERM AND TERMINATION
(a) Initial Term. This Plan shall become effective when the public
offering of shares commences and shall continue in effect for a period of one
year thereafter unless terminated or otherwise continued or discontinued as
provided in this Plan.
(b) Continuation of the Plan. The Plan and any related agreements shall
continue in effect for periods of one year thereafter for so long as such
continuance is specifically approved at least annually by votes of a majority of
both (a) the Trustees of the Trust and (b) the Qualified Trustees, cast in
person at a meeting called for the purpose of voting on this Plan and such
related agreements.
(c) Termination of the Plan. This Plan may be terminated at any time by
vote of a majority of the Qualified Trustees, or by vote of a majority of the
outstanding voting securities of the Fund or applicable class of shares.
SECTION 3. AMENDMENTS
This Plan may not be amended to increase materially the amount of
distribution expenditures provided for in Section 1 hereof unless such amendment
is approved by a vote of the majority of the outstanding voting securities of
the Fund or applicable class of shares, and no material amendment to the Plan
shall be made unless approved in the manner provided for annual renewal in
Section 2(b) hereof.
SECTION 4. INDEPENDENT TRUSTEES
2
<PAGE>
While this Plan is in effect with respect to the Fund, the selection
and nomination of Trustees who are not interested persons of the Trust (as
defined in the Act) shall be committed to the discretion of the Trustees who are
not interested persons.
SECTION 5. QUARTERLY REPORTS
The Treasurer of the Trust shall provide to the Trustees and the
Trustees shall review, at least quarterly, a written report of the amounts
accrued and the amounts expended under this Plan for distribution, along with
the purposes for which such expenditures were made.
SECTION 6. RECORDKEEPING
The Trust shall preserve copies of this Plan and any related agreements
and all reports made pursuant to Section 5 hereof, for a period of not less than
six years from the date of this Plan, the agreements or such report, as the case
may be, the first two years in an easily accessible place.
SECTION 7. AGREEMENTS RELATED TO THIS PLAN
Agreements with persons providing distribution services to be paid for
or reimbursed under this Plan shall provide that:
(a) the agreement will continue in effect for a period of one year and
will continue thereafter only if specifically approved by vote of a
majority of the Trustees of the Trust;
(b) the agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of (i) the Qualified Trustees or (ii)
the outstanding voting securities of the Fund, on not more than sixty
(60) days' written notice to any other party to the agreement;
(c) the agreement will terminate automatically in the event of an
assignment;
(d) in the event the agreement is terminated or otherwise discontinued,
no further payments or reimbursements will be made by the Fund with
regard to obligations incurred after the effective date of such action;
and
(e) payments and/or reimbursements may only be made for the specific
sales or promotional services or activities identified in Section 1 of
this Plan.
3
<PAGE>
EXHIBIT 15 (d)
PLAN PURSUANT TO RULE 12b-1
PAUZE U.S. GOVERNMENT SHORT TERM BOND FUND
Adopted by Trustees June 21, 1996
RECITALS
1. PAUZE FUNDS, an unincorporated business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust") is engaged in business
as an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act").
2. The Trust operates as a "series company" within the meaning of Rule
18f-2 under the Act and is authorized to issue shares of beneficial interest in
various series or sub-trusts (collectively the "Funds"). The shares of each Fund
have been divided into four classes (no-load and Class A , Class B, and Class C)
offered pursuant to a plan adopted pursuant to Rule 18f-3 under the Act.
3. Funds of the Trust may utilize Fund assets to pay for, or reimburse
payment for, sales or promotional services or activities that have been or will
be provided in connection with distribution of shares of the Funds if such
payments are made pursuant to a Plan adopted and continued in accordance with
Rule 12b-1 under the Act.
4. Pauze U. S. Government Short Term Bond Fund, a series of the Trust
(the "Fund") by virtue of such arrangement may be deemed to act as a distributor
of its shares as provided in Rule 12b-1 under the Act and desires to adopt a
Plan pursuant to such Rule (the "Plan").
5. The Trustees as a whole, and the Trustees who are not interested
persons of the Trust (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan and any agreements relating to
it (the "Qualified Trustees"), having determined, in the exercise of reasonable
business judgment and in light of their fiduciary duties under state law and
under Section 36(a) and (b) of the Act, that there is a reasonable likelihood
that this Plan will benefit the Fund and its shareholders, have approved the
Plan by votes cast in person at a meeting called for the purpose of voting on
this Plan and agreements related thereto.
6. Pauze Swanson Capital Management Co., as the sole shareholder of the
Fund and of each class of shares of the Fund, has approved the Plan.
PLAN PROVISIONS
SECTION 1. EXPENDITURES
(a) Purposes. Fund assets may be utilized to pay for or reimburse
expenditures in connection with sales and promotional services related to the
distribution of Fund shares, including personal services provided to prospective
and existing Fund shareholders, which include, but are not limited to the costs
of: printing and distribution of prospectuses and promotional materials; making
slides and charts for presentations; assisting shareholders and prospective
investors in understanding and dealing with the Fund; and travel and
out-of-pocket expenses (e.g. copy and long distance telephone charges) related
thereto.
(b) Service Plan for the A, B and C Classes of Shares. Fund assets may be
utilized to pay for or reimburse expenditures in connection with personal and
administrative services provided to existing Fund shareholders, provided the
total amount expended pursuant to this Plan does not exceed 0.25% of net assets
on an annual basis.
(c) Additional Amount for Class B Shares. Fund assets attributable to
Class B Shares in specific shareholder accounts will be utilized, to the extent
not covered by the Contingent Deferred Sales Charge ("CDSC"), to cover fees paid
to the Distributor and broker-dealers for sales and promotional services related
to distribution of said shares.
1
<PAGE>
The plan offers Class B shares with a contingent deferred sales charge
("CDSC"). Under this plan all of the purchase payment for Class B shares is
immediately invested in the Fund. The Advisor pays the Distributor's and the
participating broker-dealer's fee or commission and is reimbursed by the Fund
over time by charging an additional Rule 12b-1 fee to the Class B shares. In
order to assure that the Advisor is reimbursed for funding the Distributor's and
the broker-dealer's fee, purchases of Class B shares are subject to a declining
CDSC. The additional Rule 12b-1 fee attributable to the shares purchased also
declines to zero as follows.
Gross Commission 3.75%
Annual Rule 12b-1 Fee 0.75%
(paid for 7 years)
Contingent Deferred Sale Charge by Year:
year 1 3.75%
year 2 3.75%
year 3 3.25%
year 4 2.75%
year 5 2.25%
year 6 1.75%
year 7 1.25%
Thereafter -0-
NOTES: B Shares convert to No Load Shares when CDSC expires. Each
Investment would be considered a new investment.
(d) Additonal Amount for Class C Shares. Fund assets attributable to
Class C Shares in specific shareholder accounts will be utilized to pay an
annual ongoing fees of 0.75% to broker-dealers for sales and promotional
services related to distribution of said shares.
(e) No Load Shares. Fund assets may be utilized to pay for or reimburse
expenditures in connection with sales and promotional services related to the
distribution of Fund shares, and personal and administrative services provided
to prospective and existing Fund Shareholders, provided the total amount
expended pursuant to this Plan does not exceed 0.25% of net assets on an annual
basis.
SECTION 2. TERM AND TERMINATION
(a) Initial Term. This Plan shall become effective when the public
offering of shares commences and shall continue in effect for a period of one
year thereafter unless terminated or otherwise continued or discontinued as
provided in this Plan.
(b) Continuation of the Plan. The Plan and any related agreements shall
continue in effect for periods of one year thereafter for so long as such
continuance is specifically approved at least annually by votes of a majority of
both (a) the Trustees of the Trust and (b) the Qualified Trustees, cast in
person at a meeting called for the purpose of voting on this Plan and such
related agreements.
(c) Termination of the Plan. This Plan may be terminated at any time by
vote of a majority of the Qualified Trustees, or by vote of a majority of the
outstanding voting securities of the Fund or applicable class of shares.
SECTION 3. AMENDMENTS
This Plan may not be amended to increase materially the amount of
distribution expenditures provided for in Section 1 hereof unless such amendment
is approved by a vote of the majority of the outstanding voting securities of
the Fund or applicable class of shares, and no material amendment to the Plan
shall be made unless approved in the manner provided for annual renewal in
Section 2(b) hereof.
SECTION 4. INDEPENDENT TRUSTEES
2
<PAGE>
While this Plan is in effect with respect to the Fund, the selection
and nomination of Trustees who are not interested persons of the Trust (as
defined in the Act) shall be committed to the discretion of the Trustees who are
not interested persons.
SECTION 5. QUARTERLY REPORTS
The Treasurer of the Trust shall provide to the Trustees and the
Trustees shall review, at least quarterly, a written report of the amounts
accrued and the amounts expended under this Plan for distribution, along with
the purposes for which such expenditures were made.
SECTION 6. RECORDKEEPING
The Trust shall preserve copies of this Plan and any related agreements
and all reports made pursuant to Section 5 hereof, for a period of not less than
six years from the date of this Plan, the agreements or such report, as the case
may be, the first two years in an easily accessible place.
SECTION 7. AGREEMENTS RELATED TO THIS PLAN
Agreements with persons providing distribution services to be paid for
or reimbursed under this Plan shall provide that:
(a) the agreement will continue in effect for a period of one year and
will continue thereafter only if specifically approved by vote of a
majority of the Trustees of the Trust;
(b) the agreement may be terminated at any time, without payment of any
penalty, by vote of a majority of (i) the Qualified Trustees or (ii)
the outstanding voting securities of the Fund, on not more than sixty
(60) days' written notice to any other party to the agreement;
(c) the agreement will terminate automatically in the event of an
assignment;
(d) in the event the agreement is terminated or otherwise discontinued,
no further payments or reimbursements will be made by the Fund with
regard to obligations incurred after the effective date of such action;
and
(e) payments and/or reimbursements may only be made for the specific
sales or promotional services or activities identified in Section 1 of
this Plan.
3
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The Financial data schedule contains summary financial information extracted
from annual report and is qualified in its entirely by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<MULTIPLIER> 1000
<FISCAL-YEAR-END> Apr-30-1996
<PERIOD-END> Apr-30-1996
<INVESTMENTS-AT-COST> 71418
<INVESTMENTS-AT-VALUE> 70948
<RECEIVABLES> 532
<ASSETS-OTHER> 11
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 71494
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 200
<TOTAL-LIABILITIES> 200
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 71677
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 44
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 45
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (471)
<NET-ASSETS> 71294
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3865
<OTHER-INCOME> 0
<EXPENSES-NET> 796
<NET-INVESTMENT-INCOME> 3069
<REALIZED-GAINS-CURRENT> 919
<APPREC-INCREASE-CURRENT> (138)
<NET-CHANGE-FROM-OPS> 3850
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3025
<DISTRIBUTIONS-OF-GAINS> 1056
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 40065
<NUMBER-OF-SHARES-REDEEMED> 36382
<SHARES-REINVESTED> 379
<NET-CHANGE-IN-ASSETS> 39299
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 181
<OVERDISTRIB-NII-PRIOR> 3
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 238
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 558
<AVERAGE-NET-ASSETS> 64777
<PER-SHARE-NAV-BEGIN> 9.37
<PER-SHARE-NII> .44
<PER-SHARE-GAIN-APPREC> .31
<PER-SHARE-DIVIDEND> .58
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.54
<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
