As filed with the Securities and Exchange Commission on March 12,
1998
Registration No. 33-79068
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____
|-|
Post-Effective Amendment No. 3
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Post-Effective Amendment No. 3
(Check appropriate box or boxes)
RUPAY-BARRINGTON TOTAL RETURN FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1000 Ballpark Way
Suite 302
Arlington, Texas 76011
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code (800) 469-7220
Misty S. Gruber, Esq.
Sachnoff & Weaver, Ltd.
30 S. Wacker Drive
Suite 2900
Chicago, Illinois 60606
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
|X| Immediately upon filing pursuant to paragraph (b) |_| on (date) pursuant to
paragraph (b) |_| 60 days after filing pursuant 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.
Pursuant to Section 24f-2 of the Investment Company Act of 1940, the Registrant
has registered on indefinite number of securities under the Securities Act of
1933.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
RUPAY-BARRINGTON TOTAL RETURN FUND, INC.
PROSPECTUS - MARCH 12, 1998
Investment Objective:
Rupay-Barrington Total Return Fund, Inc. (the "Fund") invests in
diversified portfolio of equity securities (typically common stocks and
securities which carry the right to buy common stocks) and fixed income
securities (typically bonds and preferred stock), with equity securities
expected to usually represent approximately 80% of total fund assets. The Fund
is designed for investors primarily seeking the potential for dividend income
from, and capital appreciation of, securities and the income and relative
principal stability of bonds over the long term. See "Investment Program."
Purchase of Shares:
Please complete and return the New Account Form. If you need assistance in
completing this Form, please call our Stockholder Services Department (see
below). The Fund's shares may be purchased at a price equal to their net asset
value plus a sales commission not exceeding 5.75% of the offering price. The
minimum initial investment is $250 ($25 minimum for subsequent investments).
Prospectus Information:
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read and retain this Prospectus for future reference. A Statement of Additional
Information ("SAI") dated March 12, 1998, has been filed with the Securities and
Exchange Commission and is incorporated in its entirety by reference, in and
made a part of, this Prospectus. The SAI is available without charge upon
request from Rupay-Barrington Securities Corporation ("Rupay-Barrington
Securities"), an affiliate of the Fund.
Stockholder Services Department:
1-800-628-4077 (8:30 a.m. to 5:00 p.m. Eastern time)
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.
FOR ARIZONA AND TEXAS RESIDENTS: THE FUND'S INVESTMENT ADVISOR HAS NOT
PREVIOUSLY SERVED AS AN ADVISOR TO AN INVESTMENT COMPANY.
<PAGE>
RUPAY - BARRINGTON TOTAL RETURN FUND, INC.
TABLE OF CONTENTS
INVESTMENT OBJECTIVE......................................................1
INVESTMENT PROGRAM........................................................1
SPECIAL RISK CONSIDERATIONS...............................................2
OFFERING PRICE AND SUMMARY OF FUND EXPENSES...............................3
FINANCIAL HIGHLIGHTS......................................................5
RISK FACTORS..............................................................6
INVESTMENT POLICIES.......................................................7
FUNDAMENTAL AND OTHER INVESTMENT POLICIES................................11
PERFORMANCE INFORMATION..................................................13
HOW TO BUY SHARES........................................................14
OPENING A NEW ACCOUNT AND PURCHASING SHARES..............................17
PURCHASING ADDITIONAL SHARES.............................................17
COMPLETING THE NEW ACCOUNT FORM..........................................18
NET ASSET VALUE, PRICING AND EFFECTIVE DATE..............................18
REDEEMING SHARES.........................................................19
RECEIVING YOUR PROCEEDS..................................................20
DIVIDENDS AND DISTRIBUTIONS..............................................20
CONDITIONS OF YOUR PURCHASE..............................................20
STOCKHOLDER SERVICES.....................................................22
TAXES ................................................................23
MANAGEMENT OF THE FUND...................................................24
FUND EXPENSES AND MANAGEMENT FEES........................................25
THE FUND ................................................................26
<PAGE>
INVESTMENT OBJECTIVE
The Fund invests in both stocks and bonds.
The Fund seeks capital appreciation, current income, and presevation
of capital by investing in a diversified portfolio of equity securities
(typically common stocks and securities which carry the right to buy
common stocks) and fixed-income securities (typically bonds and preferred
stock). Equity securities are generally expected to represent approximately
80% of total assets, with fixed income securities, including cash
reserves, generally representing the remaining assets. See "Investment
Program."
The Fund's share price will fluctuate with changing market conditions.
Therefore, your investment may be worth more or less when redeemed than when
purchased. The Fund should not be relied upon for short-term financial needs,
nor used to play short-term swings in the stock market. The Fund cannot
guarantee it will achieve its investment objective.
INVESTMENT PROGRAM
The Fund is designed for investors primarily seeking the potential for
dividend income from, and capital appreciation of, equity securities and the
income and relative principal stability of bonds over the long term. The Fund's
investment in common stocks is intended to provide sufficient capital growth to
offset the erosive effects of inflation. For an IRA, retirement plan, or other
long-term investment, the Fund offers an investment program which seeks to
combine attractive returns with the benefits of broad diversification.
To achieve its investment objective, the Fund will normally invest
approximately 80% of its assets in equity securities (primarily common stocks)
and the remainder in fixed income securities (primarily bonds). While this
portfolio mix may vary depending on the Investment Advisor's (as hereinafter
defined) short-term and long-term assessments of market conditions, the Fund
will not attempt to time short-term moves in the market. In no event will the
Fund invest less than 50% or more than 80% of its assets in equity securities,
except for the purpose of effecting temporary defensive strategies. The
investment of Fund assets in fixed income securities (primarily bonds) adds
diversification that may serve to lessen the volatility normally associated with
funds dedicated primarily to investment in common stock. However, movements in
interest rates may still affect the overall value of the Fund.
The Fund's investments are managed by Rupay-Barrington Advisors, Inc. (the
"Investment Advisor"). At times the Investment Advisor may judge that conditions
in the securities market make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its stockholders. At such times, the
Fund may temporarily use alternative investment strategies, primarily designed
to reduce fluctuation of the value of the Fund's assets. In implementing these
"temporary defensive strategies," the Fund may in some instances maintain cash
reserves on a temporary basis equal to 100% of its assets.
The Fund will make common stock investments primarily in established
companies which the Investment Advisor believes to exhibit good prospects for
growth.
Consistent with its investment program, the Fund may invest in equity
securities issued by real estate investment trusts ("REITs"). Bond and other
fixed income investments will include U.S. Treasury and agency securities,
investment-grade (rated BBB or Baa or better) corporate debt securities,
mortgage-backed securities (rated BBB or Baa or better) and other types of fixed
income investments. The average maturity of the Fund's fixed income investments
will vary with economic conditions.
Up to 15% of the Fund's assets may be invested in foreign securities,
including American Depository Receipts (ADRs). The international component of
the Fund's investment program is intended to increase diversification of the
Fund's portfolio.
See "Investment Policies" for a more detailed description of the Fund's
investments.
SPECIAL RISK CONSIDERATIONS
The Fund may or may not be a suitable or appropriate investment for all
investors. Although the Fund seeks to reduce risk by investing in a diversified
portfolio, such diversification does not eliminate all risk. Because the Fund
may invest in, among other things, foreign securities, equity securities, a
variety of fixed income securities, and other securities such as futures
contracts, options and foreign currency exchange contracts, investment in the
Fund involves risks that are different in some respects from an investment in a
fund which does not engage in such investment activities. For a more
comprehensive discussion of the risks associated with investing in the Fund, see
"Risk Factors" and "Investment Policies."
OFFERING PRICE AND SUMARY OF FUND EXPENSES
The offering price to the public on purchases of the Fund's shares made at
one time by a single purchaser, by an individual, his spouse and their children
under the age of 21, or by a single trust or fiduciary account other than an
employee plan, is the net asset value per share plus a sales commission not
exceeding 5.75% of the offering price (equivalent to 6.10% of the net asset
value), which is reduced on larger sales as shown below:
<TABLE>
<CAPTION>
Total Sales Commission*
<S> <C> <C> <C> <C> <C> <C>
As a Percentage As a Percentage Portion of
of Offering of net Asset Total
Amount of Single Sale Price of the Value of Shares Offering
at Offering Price Shares Purchased Purchased Price
Retained
by Dealers
----------------- ---------------- --------- -------------------
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 5.00% 5.26% 4.40%
$100,000 but less than $250,000 4.00% 4.17% 3.50%
$250,000 but less than $500,000 3.00% 3.09% 2.50%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 or more none none see below**
- --------------------
</TABLE>
* At the discretion of Rupay-Barrington Securities, the entire sales
commission may at times be reallowed to dealers. Rupay-Barrington
Securities also may, at its expense, provide additional promotional
incentives or payments to dealers that sell the Fund's shares. In some
instances, the full reallowance, incentives or payments may be offered
only to certain dealers who have sold or may sell significant amounts
of Shares. When 90% or more of the sales commission is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
Securities Act of 1933.
** The following commissions will be paid by Rupay-Barrington Securities
to dealers who initiate and are responsible for purchases of $1 million
or more and for purchases made at net asset value by certain retirement
plans of organizations with collective retirement plan assets of $10
million or more: 1.00% on sales of up to $2 million, plus 0.80% on
sales of $2 million to $3 million, plus 0.50% on sales of $3 million to
$10 million, plus 0.25% on sales of $10 million to $25 million, plus
0.15% on sales in excess of $25 million.
A sales commission equal to 4.00% of the offering price (4.17% of the
net asset value) is applicable to all purchases of Shares, regardless
of amount, made for any qualified or non-qualified employee benefit
plan. Of the 4.00% sales commission applicable to such purchases, 3.20%
of the offering price will be reallowed to dealers.
Shown below are all the expenses and fees the Fund is expected to incur.
Such expenses and fees are expressed as a percentage of average Fund net assets.
The table and Example are provided for purposes of assisting current and
prospective stockholders in understanding the various costs and expenses that an
investor in the Fund will bear directly or indirectly.
<TABLE>
<CAPTION>
EXPENSE TABLE
<S>
<C>
Stockholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a
percentage of Offering Price).............................. 5.75%
Maximum Sales Load Imposed on Reinvested Dividends.................None
Deferred Sales Load on Redemptions...............................None
Redemption Fees....................................................None*
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees.................................................0.80% **
12b-1 Fees........................................................0.35%***
Other Expenses (audit, legal, stockholder services, transfer agent and
custodian based on estimated amounts for the first full fiscal
year)...........................................................0.80% Total
Fund Operating Expenses ........................................1.95%
Example
You would pay the following expenses 1 Yr 3 Yrs 5 Yrs 10 Yrs
on a $1,000 investment, assuming (1)
5% average annual return and (2)
redemption at the end of each time period: $76 $115 $157 $272
--------------------
</TABLE>
* The information in the table does not reflect a charge of up to $30 that
may be imposed for the transfer of redemption proceeds by wire.
** The Management Fee is higher than that charged by many other mutual funds.
*** Long-term stockholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by the National Association of
Securities Dealers, Inc. See "Fund Expenses and Management - Plan of
Distribution." A trailer fee of .25% of the .35% 12b-1 fee will be paid by
Rupay-Barrington Securities to dealers whose stockholder accounts with the
Fund equal or exceed $500,000.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. Federal
regulations require the Example to assume a 5% annual return. Actual returns
will vary.
No projection can be made with respect to total expenses to be
incurred in future years of operation. The Rupay-Barrington Financial Group,
Inc. ("Rupay-Barrington Financial") has agreed to limit the operational expense
to be paid by the Fund during its first five years of operations, by paying such
fees and expenses as exceed 1.95% during each of such first five years of
operation. More information about these expenses may be found under "Management
of the Fund" and "Fund Expenses and Management Fee."
FINANCIAL HIGHLIGHTS
The table below presents per share financial information for the Shares.
This information has been audited and reported on by the Fund's independent
accountants. The report of independent accountants and financial statements
included in the Fund's Statement of Additional Information for the 1997 fiscal
year are incorporated by reference into this Prospectus. The Fund's Annual
Report, will be provided when available, upon request, without charge.
<TABLE>
<CAPTION>
Financial Highlights
(For a share outstanding throughout the period)
<S> <C> <C> <C> <C> <C> <C>
Year Ended For the period
December 31, August 11, 1995
(commencement of
operations) to
December 31,
1997 1996 1995
--------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $9.72 $9.67 $10.00
Income from Investment Operations
Net Investment Income 0.20 0.13 0.04
Net Realized and
Unrealized Gain (Loss)on Investments 0.67 0.44 (0.33)
Total from Investment
Operations 0.87 0.57 (0.29)
Less Distributions from:
Net Investment Income (0.21) (0.12) (0.04)
Net Realized Gain on
Investments (0.70) (0.40) 0.00
Total Distributions (0.91) (0.52) (0.04)
Net Asset Value
End of Period $9.68 $9.72 $9.67
Total Investment
Return at Net
Asset Value (a) 8.91% 5.89% (2.89%)(b)
Net Assets, End of
Period (000's) $2,202 $4,926 $1,126
Ratio of Expenses to
Average Net Assets (d) 1.95% 1.95% 1.95%(c)
Ratio of Net Investment
Income (Loss) to Average
Net Assets (d) 1.68% 2.06% 1.72%(c)
Portfolio Turnover Rate 112.02% 1.14% 0.00%
Avg. Commission Rate paid $0.0825 - -
per Share
+ Per share net investment income for the year ended December 31,
1995 has been determined on the basis of the weighted average number
of shares outstanding during the period.
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) Not annualized
(c) Annualized.
(d) Management Fee waivers reduced the expense ratios and increased net
investment income by 1.87% in 1997,
4.34% in 1996, and 3.14% in 1995.
</TABLE>
RISK FACTORS
General. All investments involve risk. There can be no
guarantee against loss resulting from an investment in the Fund, nor can there
be any assurance that the Fund's investment objective will be attained. As with
any investment in securities, the value of, and income from, an investment in
the Fund can decrease as well as increase depending on a variety of
factors which may affect the values and income generated by the Fund's
portfolio securities, including general economic conditions, market
factors and currency exchange rates. Because of its investment
policy, the Fund may or may not be a suitable or appropriate
investment for all investors. The Fund is not a money market fund and is not an
appropriate investment for those investors whose primary objective is principal
stability. Although the Fund seeks to reduce risk, by investing
in a diversified portfolio, such diversification does not eliminate all
risk. There are risk considerations other than those disclosed herein
described in the SAI.
Debt Obligations. Yields on short, intermediate, and long-term securities
are dependent on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. Debt securities with longer
maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations
with shorter maturities and lower yields. The market prices of debt
securities usually vary, depending upon available yields. An increase in
interest rates will generally reduce the value of portfolio investments,
and a decline in interest rates will generally increase the value of
portfolio investments. The ability of the Fund to achieve its investment
objectives is also dependent on the continuing ability of the issuers of the
debt securities in which the Fund invests to meet their obligations for
the payment of interest and principal when due.
Foreign Investing. The Fund may invest in the securities of foreign
issuers, but intends to limit any such investments to not more than 15% of its
assets. Because the Fund may invest in foreign securities, investment in the
Fund involves risks that are different in some respects from an investment
in a fund which invests only in securities of U.S. domestic issues.
Foreign investments may be affected favorably or unfavorably by changes
in currency rates and exchange control regulations. There may be less
publicly available information about a foreign company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing,
and financial reporting standards and requirements comparable to those
applicable to U.S. companies. Securities of some foreign companies are less
liquid or more volatile than securities of U.S. companies, and foreign
broker commissions and custodian fees are generally higher than in the
United States. Investments in foreign securities may also be subject to
other risks different from those affecting U.S. investment, including
local political or economic developments, expropriation or nationalization
of assets, imposition of withholding taxes on dividend or
interest payments, and currency blockage (which would prevent cash from
being brought back to the United States).
Possible Investment of Certain Assets in Specific Industry. As a matter of
fundamental policy, the Fund may not purchase the securities of any issuer if,
as a result, 25% or more of the value of the Fund's total assets would be
invested in the securities of issuers having their principal business
activities in the same industry (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities).
Consistent with this policy, the Fund will limit its investment in
equity securities of issuers having their principal business activity in the
real estate industry, including securities of real estate investment trusts
("REITs") to less than 25% of its assets. In the event the Fund makes a
significant investment in equity REIT securities, any prolonged downturn in
the REIT securities market could have a negative impact on the Fund's assets
and/or its overall performance. Certain of the general risks associated
with investment in REITs may include cash flow dependency, inability to
service debt and the possibility of failing to qualify for tax-free pass-
through of income under the Internal Revenue Code of 1986, amended (the
"Code").
INVESTMENT POLICIES
TYPES OF INVESTMENTS. The Fund's investments include, but are not limited
to, the equity and fixed income securities described below.
Equity Securities. The Fund may invest in equity securities of domestic and
foreign entities. For a general discussion of the equity securities in which the
Fund may invest see "Fundamental and Other Investment Policies." With respect to
foreign securities, the Fund may invest up to 15% of its total assets in
U.S. dollar-denominated and non U.S. dollar-denominated securities
issued by foreign issuers. While investments in foreign securities are
intended to reduce risk by providing further diversification, such
investments involve sovereign risk in addition to credit and market risks.
Sovereign risk includes local political or economic developments, potential
nationalization, withholding taxes on dividend or interest payments, and
currency blockage (which would prevent cash from being brought back to the
United States). Foreign investments may be affected favorably or unfavorably
by changes in currency rates and exchange control regulations. Foreign
companies may have less public or less reliable information available
about them and may be subject to less governmental regulation than U.S.
companies. Securities of foreign companies may be less liquid or more
volatile than securities of U.S. companies. Foreign securities of the Fund
are subject to currency risk, that is, the risk that the U.S. dollar value
of these securities may be affected favorably or unfavorably by changes in
foreign currency exchange rate and exchange control regulations. To manage
this risk and to facilitate the purchase and sale of foreign securities,
the Fund may engage in foreign currency transactions. Although
transactions in foreign currency may be used in attempting to protect the
Fund from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted and may
result in losses to the Fund.
Fixed Income Securities. The Fund may invest in fixed income securities of
any type that are considered investment grade (e.g., AAA, AA, A, or BBB by
Standard & Poor's Corporation ("S&P"), or Aaa, Aa, A, or Baa by Moody's
Investors Service, Inc. ("Moody's) or if not rated, are of equivalent
investment quality as determined by the Investment Advisor. Debt Securities
within the top credit categories (e.g., AAA and AA by S&P) comprise what are
generally known as high-quality bonds. Medium grade bonds (e.g., BBB by
S&P or Baa by Moody's) are regarded as having an adequate capacity to pay
principal and interest, although adverse economic conditions or changing
circumstances are more likely to lead to a weakening of such capacity than
that for higher grade bonds. In light of the possible risks associated
with an economic downturn, medium grade bonds are considered speculative
in some respects. The Fund has no current intent to purchase any
security which at the time of purchase is rated below investment grade or,
if not rated, is not of equivalent investment quality. Such policy
will not preclude the Fund from retaining a security whose credit quality is
downgraded to a non-investment grade level after purchase. In no event will
the Fund purchase or hold non-investment grade securities if as a result
such securities would, in the aggregate, comprise 5% or more of the Fund's
net assets.
A fixed income security's yield reflects the fixed annual interest as a
percent of its current price. This price (the fixed income security's market
value) must increase or decrease in order to adjust the fixed income security's
yield to current interest rate levels. Therefore, fixed income security
prices generally move in the opposite direction of interest rates.
Movements in interest rates typically have a greater effect on the prices
of longer fixed income securities than on those with shorter maturities. The
following table illustrates the effect of a one percentage point change in
interest rates on a $1,000 bond with a 7% coupon.
<TABLE>
<CAPTION>
<S> Principal value if rates:
<C> Maturity Increase 1% ecrease 1%
-----------
Intermediate fixed income security 5 years $959 $1,043
Long-term fixed income security 20 years $901 $1,116
</TABLE>
The other types of fixed income securities in which the Fund may invest
include the securities described below.
Asset-Backed Securities. Asset-backed securities are securities which
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool or pools of similar
assets (e.g. trade receivables). Asset-backed commercial paper, one type of
asset-backed security, is issued by a special purpose entity, organized
solely to issue the commercial paper and to purchase interests in the
assets. The credit quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit support and/or
enhancement provided. The Fund may invest in asset-backed securities which
are rated in one of the two highest rating categories by a nationally
recognized rating agency such as Standard & Poor's Corporation, Moody's
Investors Services, Inc. or Duff & Phelps or if not so rated, of
equivalent investment quality in the opinion of the Investment Advisor.
Certain of the asset-backed securities in which the Fund may invest
include automobile and credit card receivable securities. See the
"Investment Objectives and Policies" section of the SAI for a more detailed
discussion of asset-backed securities.
Bonds. The quality of a bond is measured by credit risk--the ability of the
issuer to meet interest and principal payments on a timely basis. Issuers who
are believed to be good credit risks receive high quality ratings, and those
believed to be poor credit risks receive low quality ratings. High-quality bonds
involve less credit risk and typically offer a lower yield than bonds of low
quality.
Convertible Securities and Preferred Stock. The Fund may invest in
preferred equity securities and/or debt and equity securities convertible into
or exchangeable for common equity securities. Preferred stocks are securities
that represent an ownership interest in a corporation providing the owner
with claims on the company's earnings and assets before common stock
owners, but after debt owners. It is not anticipated that the investment
quality of the preferred equity or debt convertible securities in
which the Fund may invest will be rated; however, teh Fund will not invest
in securities that the Investment Advisor does not deem to be investment
grade.
Mortgage Obligations. The Fund may invest in mortgage obligations issued or
guaranteed by non-governmental entities as well as the U.S. Government, its
agencies or instrumentalities. Such mortgage obligations may include, but are
not limited to, collateralized mortgage obligations, which are obligations
fully collateralized by a portfolio of mortgages or mortgage-related
securities ("CMOs"), principal obligations ("POs"), interest obligations
("IOs") and other mortgage-backed securities. Some mortgage-backed
securities, such as GNMA cetificates, are backed by the full faith and
credit of the U.S. Treasury while others, such as Freddie Mac
certificates, are not. Risks associated with investment in mortgage
obligations include, but are not limited to, principal volatility,
fluctuations in interest rates and prepayment. Payments of principal and
interest on the mortgages are passed through to the holders of the CMOs on
the same schedule as they are received, although certain classes of CMOs
have priority over others with respect to the receipt of prepayments
in the mortgages. Therefore, depending on the type of CMOs in which the Fund
invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities, which
prepayments could have an adverse impact on the Fund's overall yield. CMOs
may also be less marketable than other securities.
Other Fixed Income Securities. Certain of the other fixed income securities
in which the Fund may invest include, but are not limited to, the following:
U.S. Government Obligations (debt securities issued by the U.S. Treasury); U.S.
Government Agency Securities (securities issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies); Bank
Obligations (certificates of deposit, bankers' acceptances, and other
debt obligations); and Savings and Loan Obligations (negotiable
certificates of deposit and other debt obligations of savings and
loan associations).
Hybrid Instruments. As part of its investment program and to maintain
greater flexibility, the Fund may invest in instruments which have the
characteristics of futures and securities. Such instruments may take a variety
of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency or commodity at a future
point in time. Examples of hybrid instruments in which the Fund may invest
include swaps, options on swaps and inverse floaters. The risks of
such investments would reflect both the risks of investing in futures
and the risks of investing in securities, including volatility and
illiquidity. The Fund's investments in hybrid instruments will be limited
to less than 5% of the Fund's net assets.
Other Securities. Other securities in which the Fund may invest include,
but are not limited to, the following:
Futures Contracts and Options. The Fund may enter into futures contracts
(or options thereon) to hedge all or a portion of its portfolio, as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates, or as an efficient means of adjusting its exposure to the bond,
stock and currency markets. The Fund will limit its use of futures
contracts so that no more than 5% of the Fund's total assets would be
committed to initial margin deposits or premiums on such
contracts. The Fund may write covered call and put options and purchase put
and call options on securities, financial indices, and currencies, also for
hedging purposes. The aggregate market value of the Fund's portfolio
securities or currencies covering call or put options will not exceed 25% of
the Fund's net assets. Futures contracts and options can be highly
volatile and could result in reduction of the Fund's total return, and the
Fund's attempt to use such investments for hedging purposes may not be
successful. The Fund could suffer substantial and even unlimited losses if
the prices of its futures contracts and options were poorly correlated with
its other investments, or if it could not close out its position because of
an illiquid secondary market. For additional information regarding the
risks that may be associated with futures contracts and options, see
"Investment Objective and Policies - Special Risks of Transactions in Futures
Contracts" in the SAI.
Repurchase Agreements. The Fund may enter into repurchase agreements with a
well-established securities dealer or a bank that is a member of the Federal
Reserve System. In the event of a bankruptcy or default of certain sellers of
repurchase agreements, the Fund may experience costs and delays in
liquidating the underlying security which is held as collateral, and the
Fund might incur a loss if the value of the collateral held declines during
this period.
FUNDAMENTAL AND OTHER INVESTMENT POLICIES
Fundamental Investment Policies. As a matter of fundamental policy, the
Fund will not, among other things: (i) purchase a security of any issuer if, as
a result, it would (a) cause the Fund to have 25% or more of its total assets
concentrated in any one industry, or (b) with respect to 75% of its assets,
cause the Fund's holdings of any issuer to amount to more than 5% of the
Fund's total assets or cause the Fund to own more than 10% of the
outstanding voting securities of any issuer, provided that, as an operating
policy, the Fund will not purchase a security if, as a result, more than
10% of the outstanding voting securities of any issuer would be held by
the Fund; (ii) borrow money, except temporarily from banks to facilitate
redemption requests, in amounts exceeding 30% of its total assets
valued at market; or (iii) in any manner transfer as collateral for
indebtedness any securities owned by the Fund except in connection
with permissible borrowings, which in no event will exceed 30% of the
Fund's total assets valued at market. For the purpose of realizing income,
as a fundamental policy, the Fund may lend securities with a value of up to
30% its total assets to domestic broker-dealers or institutional
investors. Any such loan will be continuously secured by collateral
at least equal to the value of the security loaned; however, such
lending could result in delays in receiving additional collateral or in
the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. See "Investment Restrictions -
Fundamental Policies" in the SAI.
Other Investment Policies. As a matter of operating policy, the Fund will
not, among other things: (i) purchase securities of an issuer if, as a result,
(a) more than 10% of the value of the Fund's net assets would be invested in
illiquid securities, including repurchase agreements which do not provide
for payment within seven days, or other securities which are not readily
marketable or (b) more than 5% of the value of the Fund's total assets
would be invested in the securities of unseasoned issuers which at the
time of purchase have been in operation for less than three years, including
predecessors and unconditional guarantors; (ii) purchase securities when
money borrowed exceeds 5% of the Fund's total assets; (iii) purchase or
hold the securities of other investment companies if, as a result: (a)
the Fund owns, in the aggregate, more than 3% of the total outstanding
voting stock in such investment companies; (b) securities issued by
such investment companies are in excess of 5% of the value of the
Fund's total assets; or (c) more than 10% of the value of the Fund's assets
would be invested in such investment companies; (i other mineral
exploration or development programs; (v) purchase warrants, valued at the
lower of cost or market, if, as a result, more than 5% of the value of the
Fund's net assets would be invested in warrants, more than 2% of which are
not listed on the New Exchange or Nasdaq National Market, and (vi)
purchase POs and IOs, if, as a result, more than 5% of the value of the
Fund's net assets would be invested in POs and IOs. The Fund may acquire
illiquid securities which are privately placed, subject to the
forego active trading market may not exist for such securities, the sale of any
such privately placed securities may be subject to delay and additional costs.
In addition, the Fund may purchase securities which while privately placed, are
eligible for purchase and s Securities Act of 1933, as amended (the "Act"). The
liquidity of Rule 144A securities would be monitored, and, if as a result of
changed conditions it is determined by the Board of Directors of the Fund that a
Rule 144A security is no longer liquid, the Fund' would be reviewed to determine
what, if any, steps are required to assure that the Fund does not invest more
than 10% of its assets in illiquid securities. In any event, the Fund will not
purchase 144A securities if, as a result, more than 5% of the value of invested
in 144A securities. In addition, the Fund may establish and maintain cash
reserves for temporary defensive purposes or to enable it to take advantage of
buying opportunities. For a discussion of the Fund's temporary defensive
strategy see "Investmen invested in domestic and foreign money market
instruments including, but not limited to, government obligations, certificates
of deposit, bankers' acceptances, commercial paper, short-term corporate debt
issues, and repurchase agreements.
Portfolio Turnover. Generally, the Fund does not intend to purchase
securities for short-term trading; however, when circumstances warrant,
securities may be sold without regard to the length of time held. The Fund
cannot accurately predict its annu the equity or fixed income portion of its
portfolio; however, for the period from January 1, 1997 to December 31, 1997,
the Fund's portfolio turnover rate was 112.02%.
Further Information. The Fund's investment program and policies, discussed
above, are subject to further restrictions and risks which are described in the
SAI. The Fund's investment objective and investment program, unless otherwise
specified, are n changed without stockholder approval. Stockholders will be
notified of any material change in such program. Fundamental policies may be
changed only with stockholder approval.
PERFORMANCE INFORMATION
Total Return Performance. The Fund may advertise total return figures on
both a compound average annual and cumulative basis. Cumulative total return
compares the amount invested at the beginning of a period with the amount
redeemed at the end of th all dividends and capital gain distributions. The
compound average annual total return, derived from the cumulative total return
figure, indicates a yearly average of the Fund's performance. The annual
compound rate of return for the Fund may vary from its average annual
return.
Total Return Components. The total return from the Fund consists of the
change in its net asset value per share and the income it generates. The net
asset value of the Fund will be affected primarily by changes in stock values
and interest rate levels, the maturity and credit quality of the Fund's debt
securities, as well as changes in the values of foreign currencies.
Yield. The Fund may advertise a yield figure derived by dividing the Fund's
net investment income per share (as defined by applicable SEC regulations)
during a 30-day base period by the maximum offering price on the last day of the
base period.
HOW TO BUY SHARES
Shares of the Fund may be purchased on any Business Day (as defined below)
at the offering price through any broker which has a dealer agreement with
Rupay-Barrington Securities+, the Principal Underwriter of the Fund's shares, or
directly from Rupay-a completed New Account Form and a check made payable to
Rupay-Barrington Total Return Fund, by the Fund's transfer agent, Fund Services
Inc., ("FSI") 1500 Forest Avenue, Suite 111, Richmond, VA 23229, Attention:
Rupay-Barrington Total Return Fund. A "Busines York Stock Exchange (the "NYSE")
and the Federal Reserve Bank of Richmond (the "FRB") is open for business. The
minimum initial purchase order is $250 with subsequent investments of $25 or
more.
With respect to telephone orders placed with Rupay-Barrington Securities by
dealers, the dealer must receive the investor's order before the close of the
NYSE and transmit it to FSI by 4:00 p.m., Eastern Standard Time ("E.S.T."), for
the investor to r Payment for such orders must be by check in U.S. currency and
must be promptly submitted to Rupay-Barrington Securities c/o FSI, P.O. Box
26305, Richmond, VA 23260-6305.
Orders mailed to Rupay-Barrington Securities c/o FSI by dealers or
individual investors are effected at the offering price next computed after the
purchase order accompanied by payment has been received by FSI. Such payment
must be by check in U.S. currency drawn on a commercial bank in the U.S.
Any subscription may be rejected by Rupay-Barrington Securities or by
the Fund.
Investors should promptly check the confirmation advice that is mailed
after each purchase (or redemption) to insure that it has been accurately
recorded in the investor's account.
Cumulative Quantity Discount. The schedule of reduced sales commissions
also may be applied to qualifying sales on a cumulative basis. For this purpose,
the dollar amount of the sale is added to the higher of: (i) the value
(calculated at the appli purchase price of any other shares of the Fund owned at
that time by the investor. For example, if the investor held shares valued at
$40,000 (or, if valued at less than $40,000, had
- ---------
++Rupay-Barrington may recommend brokers who have dealer agreements with Rupay-
Barrington Securities for potential stockholders residing in states in which
Rupay-Barrington Securities is nto registered.
been purchased for $40,000) and purchased an additional $20,000 of the Fund'
$20,000 purchase would be at the rate of 5.00%. It is Rupay-Barrington
Securities' policy to give investors the best sales commission rate possible;
however, there can be no assurance that an Investor will receive the
appropriate discount unless, at the time investor or the dealer makes a
request for the discount and gives Rupay-Barrington Securities
sufficient information to determine whether the purchase will qualify
for the discount. On telephone orders from dealers for the purchase of shares to
be registered dealer's instructions with respect to the applicable sales
commission rate to be applied. The cumulative quantity discount may be amended
or terminated at any time. Any money market funds which may be offered now or in
the future will not qualify for the cum Stockholder Services - Exchange
Privileges, page 22).
Letter of Intent. Investors may also reduce sales charges on all
investments by means of a Letter of Intent ("LOI") which expresses the
investor's intention to invest a certain amount within a 13-month period in the
Fund's shares. See the New Accoun investment under an LOI is 5% of the total LOI
amount. Shares purchased with the first 5% of such amount will be held in escrow
to secure payment of the higher sales charge applicable to the Shares actually
purchased if the full amount indicated is not purcha involuntarily redeemed to
pay the additional sales charge, if necessary. Such escrowed Shares will be
registered in the Stockholder's name and will continue to earn any dividends and
capital gains paid by the Fund. Dividends declared on escrowed shares will
otherwise instructed by the stockholder. The escrowed Shares will be released
when the full amount indicated has been purchased. Any redemptions made during
the 13-month period will be subtracted from the amount of purchase in
determining whether the LOI has originally made pursuant to an LOI may be
included under a subsequent LOI executed within 90 days of the purchase. The
Stockholder must instruct the transfer agent upon making subsequent purchases
that such purchases are subject to an LOI. All dividends and invested in
additional Shares are applied to the LOI.
Group Purchases. An individual who is a member of a qualified group may
also purchase shares of the Fund at the reduced sales charge applicable to the
group as a whole. The sales charge is based upon the aggregate dollar value of
shares previously p plus the amount of the current purchase. For example, if
members of the group had previously invested and still held $80,000 of the Fund
shares and now were investing $25,000, the sales charge would be 4.00%.
Information concerning the current sales charge a by contacting Rupay Barrington
Securities at 1-800-469-7220.
A "qualified group" is one which: (i) has been in existence for more than
six months; (ii) has a purpose other than acquiring Fund shares at a discount;
and (iii) satisfies uniform criteria which enable Rupay-Barrington Securities to
realize economie distributing shares. A qualified group must have more than 10
members, must be available to arrange for group meetings between representatives
of the Fund and the members, must agree to include sales and other materials
related to the Fund in its publications at reduced or no cost to Rupay-
Barrington Securities, and must seek to arrange for payroll deduction or
other bulk transmission of investments to the Fund.
Net Asset Value Purchases. Shares of the Fund may be purchased at net asset
value ("NAV") without imposition of a sales commission by the following persons:
(i) dealers who initiate and are responsible for purchases of $1 million or
more; (ii) trust securities for certain retirement plans with assets of $10
million or more; (iii) directors, trustees and officers of the investment
companies sponsored by Rupay-Barrington Financial and its affiliates
(collectively, "The Rupay-Barrington Financial Group"), di (current or retired)
in The Rupay-Barrington Financial Group (and their families), and retirement
plans established by The Rupay-Barrington Financial Group for employees; (iv)
companies exchanging shares with or selling assets to the Fund pursuant to a
merger, dealers or brokers who have a sales agreement with Rupay-Barrington
Securities for their own accounts, or for retirement plans for their employees
or sold to registered representatives or full time employees (and their
families) that certify to Rupay-Barringto that such purchase is for their own
account (or for the benefit of their families); (vi) insurance company separate
accounts; (vii) accounts managed by The Rupay-Barrington Financial Group
affiliates; and (viii) certain unit investment trusts and unit holders
distributions from the trusts in the Fund.
Shares of the Fund may also be purchased at NAV by employee benefit plans
qualified under Section 401 of the Code, including salary reduction plans
qualified under Section 401(k) of the Code, subject to minimum requirements with
respect to number of e may be established by Rupay-Barrington Securities.
Currently, those criteria require that the employer establishing the plan have
500 or more employees or that the amount invested or to be invested during the
subsequent 13-month period in the Fund totals at l plans not qualified under
Section 401 of the Code may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for qualified groups
described above under "Group Purchases" which enable Rupay-Barrington Securities
to re efforts and sales-related expenses.
Shares of the Fund may be purchased at NAV by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity minimum requirements with respect to amount of
purchase, which may be established by Rupay-Barrington Securities. Currently,
those criteria require that the amount invested or to be invested during the
subsequent 13-month period in the Fund must total at leas accounts will be
accepted by mail accompanied by a check, or by wire transfer directly from the
bank or trust company, with payment by federal funds received by the close of
business on the next business day following such order.
OPENING A NEW ACCOUNT AND PURCHASING SHARES
Minimum initial investment: $250
By Mail: Send your New Account Form and check by Regular, Express,
Registered, or Certified Mail, to: Checks payable to Rupay-Barrington
Total Return Fund Rupay-Barrington Total Return Fund Account Services
c/o FSI 1500 Forest Avenue, Suite 111 Richmond, VA 23299
PURCHASING ADDITIONAL SHARES
Minimum subsequent investment: $25
Stockholder Services1 1-800-628-4077
By Wire: Call Stockholder Services and use the Wire Address below.
Wire Address
(to give to
your bank): Crestar Bank
Richmond, VA
ABA #051000020
CREDIT: 201648180
FURTHER CREDIT: Rupay-Barrington
Total Return Fund Purchase Account
By Mail: Indicate your account number and the name of the Fund on your
check. (Please use the additional investment portion (tear-off
stub) from a confirmation statement.)
COMPLETING THE NEW ACCOUNT FORM
You must provide your Tax ID number and sicn the New Account Form.
Tax Identification Number. We must have your correct social security or
corporate tax identification number and a signed New Account Form or W-9 Form.
Otherwise, federal law requires the Fund to withhold 31% of your dividends,
capital gain distributions and upon redemption or exchanges of your shares and
may subject you to a fine. You also will be prohibited from opening another
account. If this information is not received within 60 days after your account
is established, the Fund will begin withholding.
Services. By signing up for services on the New Account Form, rather than
after the account is opened, you will avoid having to complete a separate form
and obtain a signature guarantee (See Conditions of Your Purchase - Signature
Guarantees page 21 )
NET ASSET VALUE, PRICING AND EFFECTIVE DATE
Net Asset Value Per Share (NAV). The NAV per share, or share price, for the
Fund is determined at the close of trading normally 4:00 p.m. E.S.T. each day
the New York Stock Exchange is open. The Fund's share price is calculated by
subtracting its liabilities from its total assets and dividing the result by the
total number of shares outstanding. Among other things, the Fund's liabilities
include accrued expenses and dividends payable, and its total assets include
portfolio securities valued at market as well as income accrued but not yet
If your order is received before 4:00 p.m. E.S.T., you will receive that day's
NAV.
Purchased shares are priced at that day's NAV plus sales charge if your
request is received before 4:00 p.m. E.S.T. in good order. If received later
than 4:00 p.m., shares will be priced at the next business day's NAV plus sales
charge. We cannot a c particular date for purchase or which specify any special
conditions.
Redemptions are priced at that day's NAV if your request is received before
4:00 p.m. E.S.T. in good order. If received after 4:00 p.m., shares will be
priced at the next business day's NAV. Requests mailed directly to the Fund must
be forwarded to effective until received there in good order. Also, we cannot
accept requests which specify a particular date for redemption or which specify
any special conditions. If your redemption request cannot be accepted, you will
be notified and given further instructions.
The Fund reserves the right to change the time at which purchases,
redemptions and exchanges are priced if the New York Stock Exchange closes
earlier than 4:00 p.m. E.S.T.
REDEEMING SHARES
By Phone: Call Stockholders Services at 1-800-628-4077. If you find our
phones busy during unusually volatile markets, please consider placing your
order by express mail.
Redemption proceeds can be mailed or wired to your bank. The Fund's bank
charges a $10.00 fee for all wire redemptions, subject to change without notice.
Your bank may also charge you for receiving wires.
By Mail: Indicate account name(s) and numbers, fund name(s), and exchange
or redemption amount. For exchanges, mail to the attention of the Fund you are
exchanging from and indicate the Fund(s) you are exchanging to (See Stockholder
Services -- Exch signature of all owners exactly as registered, and possibly a
signature guarantee (See Conditions of Your Purchase - Signature Guarantees,
page 21).
Note: Distributions from retirement accounts, including IRAs, must be in
writing. For employer-sponsored retirement accounts, call Stockholder Services
or your plan administrator for instructions.
Repurchase of Shares. The Fund, through Rupay-Barrington Securities, also
repurchases shares through securities dealers. The Fund normally will accept
orders to repurchase such shares by wire from dealers for their customers at the
NAV next computed stockholder's request for repurchase, if the dealer received
such request before closing time of the NYSE on that day. Dealers have the
responsibility of submitting such repurchase requests by calling not later than
4:00 p.m. E.S.T. on such day in order to ob price. Repurchase of shares is for
the convenience of stockholders and does not involve a charge by the Fund;
however, securities dealers may impose a charge on the stockholder for
transmitting the notice of repurchase to the Fund. The Fund reserves the righ
which right of rejection might adversely affect stockholders seeking redemption
through the repurchase procedure; however, such stockholders may redeem shares
other than through repurchase. Ordinarily payment will be made to the securities
dealer within seven order in "Good Order" as set forth above. The Fund will also
accept, from member firms of the NYSE, orders to repurchase shares by wire or
telephone with a redemption request signed by the stockholder, provided the
member firm indemnifies the Fund and Rupay-B liability resulting from the
absence of the stockholder's signature. Forms for such indemnity agreement can
be obtained from Rupay-Barrington Securities.
Stock Certificates. To facilitate redemptions and transfers, stockholders
will not receive stock certificates. Call Stockholder Services for further
information.
Systematic Withdrawal Plan. Stockholders owning $10,000 or more of the Fund
shares may elect to have periodic redemptions from his account to be paid on a
monthly basis. The minimum periodic payment is $50. A sufficient number of
shares to make the on the 25th day of the month. Redemptions for the purpose of
making such payments may reduce or even exhaust your account if the monthly
redemption payments exceed the dividends, interest and capital appreciation, if
any, on your shares. A stockholder may re predesignated bank or other designated
party.
Amounts paid to you pursuant to the Systematic Withdrawal Plan are not a
return on your investment. Payments to you pursuant to the Systematic Withdrawal
Plan are derived from the redemption of shares in your account and are taxable
transactions on w for Federal, state and city income tax purposes.
RECEIVING YOUR PROCEEDS
Generally, redemption proceeds will be mailed to the address you designated
on your New Account Form or wired to your bank the next business day after
receiving your redemption request in good order. In addition, under unusual
conditions, or when dee Fund, redemption proceeds may not be sent for up to
seven calendar days after your request is received to allow for the orderly
liquidation of securities. Requests by mail for wire redemptions (unless
previously authorized) must have a signature guarantee.
DIVIDENDS AND DISTRIBUTIONS
The Fund normally distributes all net income and capital gains to
stockholders. Dividends from net investment income will be declared and paid
quarterly. Distributions from capital gains, if any, are normally declared in
December and paid in early J declared by the Fund will be reinvested unless you
choose an alternative payment option on the New Account Form. Dividends not
reinvested are paid by check or ACH transfer. Your bank must be a member of the
National Automatic Clearing House Association. If your check, then your
dividends will be held by the Fund and will not be reinvested.
CONDITIONS OF YOUR PURCHASE
Account Balance. If, as a result of redemptions, your account drops below
$250 for three months or more, the Fund has the right to close your account,
after giving 60 days notice, unless you make additional investments to bring
your account value to $250 or more.
Nonpayment. If your check or wire does not clear, you will be responsible
for any loss the Fund incurs. If you are already a stockholder, the Fund can
redeem shares from any identically registered account in this Fund as
reimbursement for any loss incurred.
Non-U.S. Bank Checks. Checks drawn on foreign banks must be in U.S. dollars
and have the routing number of the U.S. bank indicated on the check.
Redemptions in Excess of $250,000. Redemption proceeds are normally paid in
cash. However, if you redeem more than $250,000, or 1% of the Fund's net assets,
in any 90-day period, the Fund may in its discretion: (i) pay the difference
between the re $250,000 or 1% of the Fund's assets with securities owned by the
Fund; or (ii) delay the transmission of your proceeds for up to five business
days (but in no event more than seven calendar days) after your request is
received. In the event the Fund elects to proceeds with Fund securities, you
will bear the market risk associated with the ownership of such securities and
the brokerage costs associated with the disposition of any such securities.
Signature Guarantees. A signature guarantee is designed to protect you and
the Fund by verifying your signature. You will need a signature guarantee to:
(1) Establish certain services after the account is opened.
(2) Redeem over $5,000 by written request if you do not have telephone
redemption services.
(3) Redeem or exchange shares when someone who is not a registered
owner of the account will receive the proceeds, or when proceeds
are being sent to a bank account not listed on your fund account.
(4) Transfer shares to another owner.
(5) Send us written instructions asking us to wire redemption proceeds.
These requirements may be waived or modified in certain instances.
"Eligible guarantors" are: national or state banks, savings associations,
savings and loan associations, trust companies, savings banks, industrial loan
companies and credit unions; national securities exchanges, registered
securities associations an dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, and government securities
brokers. We cannot accept guarantees from institutions or individuals who do not
provide reimbursement in the case of fraud, such as notary public.
Fifteen-Day Hold. The mailing of proceeds on redemption requests involving
any Shares recently purchased by personal, corporate or government check may be
delayed by the Fund's Transfer Agent for a period of up to 15 calendar days
after the purchase check has cleared or funds have been received. Proceeds of
redemption requests sent by mail or telegram will be mailed no later than the
seventh day following receipt unless the check has not cleared. The clearing
period does not apply to purchases made by wire or cashier's treasurer's or
certified checks.
The Fund and its agents reserve the right to: (i) reject any purchase or
exchange and cancel any purchase due to nonpayment; (ii) waive or lower the
investment minimums; (iii) accept initial purchases by telephone or telegram;
(iv) waive the limit on (v) reject any purchase or exchange prior to receipt of
the confirmation statement; (vi) redeem your account (see Tax Identification
Number); and (vii) modify the conditions of purchase at any time.
STOCKHOLDER SERVICES
The following is a brief summary of our services, some of which may be
restricted or unavailable to retirement plan accounts. Services may be modified
at any time without notice.
Be sure to sign up for all telephone services on the New Account Form.
Exchange Privileges. Shares of one Fund may be exchanged for shares of
other Rupay-Barrington Funds, if any. Exchanges of shares will be made at their
relative net asset values. Shares may only be exchanged if the amount being
exchanged satisfies the minimum investment required and the stockholder is a
resident of a state where shares of the appropriate Fund are qualified for sale.
Investors should note that an exchange may result in a taxable event. Exchange
privileges may be terminated, modified or suspended by the Fund upon 60 days'
notice to stockholders.
Telephone Exchange and Redemption Services. All telephone calls to
Stockholder Services, including transaction-related calls, are recorded in order
to protect you, the Fund, and its agents. You may elect to effect exchanges or
redemptions by telepho exchange or redemption services, you authorize us to: (i)
redeem or exchange shares from your account based on any instructions believed
to be genuine; and (ii) honor any written instructions for a redemption or
exchange without a signature guarantee (other t Guarantees). The Fund reserves
the right to change or suspend these services upon 60 days prior written notice.
The Fund and Rupay-Barrington Securities will not be liable for any loss,
liability, cost or expense for acting upon telephone instructions that a In
attempting to confirm that telephone instructions are genuine, the Fund will use
such procedures as are considered reasonable, including reporting of
instructions and requesting information as to account registration (such as the
name in which an account is recent transactions in the account, and the
accountholder's Social Security Number, address and/or bank). To the extent that
the Fund fails to use reasonable procedures as the basis for its belief, it
and/or its service contractors may be liable for instructions that prove
to be fraudulent or unauthorized.
Automated Investment Program. If your bank is a member of the Automated
Clearing House ("ACH") network, we offer a method of purchasing Fund Shares in
amounts of $25 to $100,000 through automatic transfers from your bank account to
your Fund account. any additional fees for automatic transfers, your bank may
impose a fee for such services. See "Net Asset Value, Pricing and Effective
Date" for additional information.
Wire Transfers. Bank-Fund transfers can be made through bank wires (a
$10.00 charge applies to all wire redemptions). While this is usually the
quickest transfer method, the Fund reserves the right to temporarily suspend
wires under unusual circumstances.
TAXES
Form 1099-DIV will be mailed to you in January
Taxes on Dividends and Distributions. In January, the Fund will mail you
Form 1099-DIV indicating the federal tax status of your dividends and capital
gain distributions. Generally, dividends and distributions are taxable in the
year they are paid. However, any distributions paid in January but declared
during the prior three months are taxable in the year they are declared.
Dividends and distributions are taxable to you regardless of whether they are
taken in cash or reinvested. Dividends and short-term capital gains are taxable
as ordinary income; distributions from long-term capital gains are taxable as
long-term capital gains. The capital gains holding period for such distributions
is determined by the length of time the Fund has held the securities, not the
length of time you owned Fund shares.
Taxes on Foreign Transactions. Distributions resulting from the sale of
foreign currencies and debt securities, to the extent of foreign exchange gains,
are taxed as ordinary income. The payment of foreign taxes will not be passed
through to investo paid at the Fund level or offset against other taxes at the
Fund level. If the Fund pays taxes to foreign governments during the year, the
taxes will reduce the Fund's dividends.
Taxes on Redemptions (Shares Sold or Exchanged). A redemption or exchange
of Fund shares is treated as a sale for tax purposes which will result in a
short or long-term capital gain or loss, depending on how long you have owned
the shares. In January the Fund will mail you Form 1099-B ndicating the date of
and proceeds from all sales and exchanges.
Taxes on Undistributed Income and Gains. At the time of purchase, the Share
price of the Fund may reflect undistributed income, capital gains or unrealized
appreciation of securities. Any income or capital gains from these amounts which
are later distributed to you are fully taxable, even though they represent
a portion of the price you paid for your shares.
Tax-Qualified Retirement Plans. Tax-qualified retirement plans generally
will not be subject to federal tax liability on either distributions from the
Fund or redemption of shares of the Fund. Rather, participants in such plans
will be taxed when they begin taking distributions from the plans.
MANAGEMENT OF THE FUND
Fund Advisor. Rupay-Barrington Advisors Inc., (the "Investment Advisor") a
wholly owned subsidiary of Rupay-Barrington Financial manages the Fund's
investments. The Investment Advisor has a limited operating history upon which
investors may base an e the Fund. Investment decisions made by The Investment
Advisor are made primarily by Fritz Bensler, President and Frederick A. Wolf,
Senior Portfolio Manager. Mr. Bensler has 2 years of experience as an equity
portfolio manager to individuals and institutions experience as an equity
portfolio manager to individuals, governments, corporations, and pension and
profit sharing plans.
Board of Directors. The management of the Fund's business and affairs is
the responsibility of the Fund's Board of Directors. The Board of Directors sets
broad policies for the Fund and chooses its officers. The officers of the Fund
manage its day - to day operations and are responsible to the Fund's Board of
Directors.
Investment Services. Rupay-Barrington Securities Corporation, a
wholly-owned subsidiary of Rupay-Barrington Financial, is the distributor for
this Fund.
Transfer and Dividend Disbursing Agent. Fund Services Inc. ("FSI") serves
the Fund as transfer agent and dividend disbursing agent. FSI's main office is
in Richmond, Virginia and may be contacted at FSI, P.O. Box 26305, Richmond,
Virginia 23260-6305.
FSI will perform the transfer and dividend disbursing agent functions as
well as: (i) certain stockholder services for all accounts, for which FSI may be
paid fees totaling approximately $1,000 per month; (ii) and calculation of daily
share price accounting records of the Fund, for which Commonwealth Fund
Accounting, Inc. may be paid fees totaling approximately $1,250 per month.
FUND EXPENSES AND MANAGEMENT FEES
Fund Expenses. Fund expenses include: the management fee; stockholder
servicing fees and expenses; custodian and accounting fees and expenses; legal
and auditing fees; expenses of preparing and printing prospectuses and
stockholder reports; registra annual meeting expenses, if any; and directors'
fees and expenses. In addition, the expenses of organizing, registering, and
qualifying its shares under federal, state, and other securities laws will be
charged to the Fund's operations, as an expense, over a period not to
exceed 60 months.
Rupay-Barrington Financial has agreed to bear any expenses for the Fund's
first five years of operations, which would cause the Fund's ratio of operating
expenses to average net assets to exceed 1.95%. This guarantee is not subject to
later reimbursement.
Management Fee. The Fund pays its Investment Advisor an investment
management fee equal to .80% of the Fund's net assets ("Management Fee").
Distribution Plan and Agreement. The Fund has adopted a Distribution Plan
and Agreement (the "Plan") pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The purpose of the Plan is to permit the Fund to compensate
Rupay-Barrington Securi expenses incurred by it in promoting the sale of shares
of the Fund, reducing redemptions, and maintaining or improving services
provided to stockholders by Rupay-Barrington Securities or dealers. The Plan
provides for payments by the Fund to Rupay-Barrington 0.35% of the Fund's
average net assets subject to the authority of the Fund's Board of Directors to
reduce the amount of payments or to suspend the Plan for such periods as they
may determine. Subject to these limitations, the amount of such payments and the
made shall be determined from time to time by the Board of Directors. At
present, the Board of Directors have approved payments under the Plan for the
purpose of compensating Rupay-Barrington Securities for services provided and
reimbursing Rupay-Barrington S payments made by it to dealers whose stockholder
accounts with the Fund equal or exceed $500,000, as described below, subject to
the overall limitation that payments under the Plan shall not exceed a maximum
annual rate of .35% of average net assets. The Plan increase the costs which the
Fund may bear for distribution pursuant thereto without stockholder approval.
Dealers whose stockholder accounts with the Fund equal or exceed $500,000 are
paid a continuing trailer fee by Rupay-Barrington Securities at the annual rate
of 0.25% of the value of the shares purchased in those stockholder accounts, as
adjusted to r in order to promote selling efforts and to compensate dealers for
providing certain services, including processing purchase and redemption
transactions, establishing stockholder accounts and providing certain
information and assistance with respect to the Fund.
THE FUND
The Fund is a Maryland corporation organized in January 1994 and registered
with the Securities and Exchange Commission under the Investment Company Act of
1940 as a diversified, open-end investment company, commonly known as a "mutual
fund." A mutua stockholders to: (i) obtain professional management of
investments, including the Investment Advisor's proprietary research; (ii)
diversify their portfolio to a greater degree than would be generally possible
if they were investing as individuals and thereby (iii) simplify the record
keeping and reduce transaction costs associated with investments.
Stockholder Rights. The Fund issues one class of capital stock, all shares
of which have equal rights with regard to voting, redemptions, dividends,
distributions, and liquidations. Fractional shares have voting rights and
participate in any distrib have no preemptive or conversion rights. When the
Fund's shares are issued, they are fully paid and nonassessable. Shares of the
Fund do not have cumulative voting rights. The Fund does not routinely hold
annual meetings of stockholders. However, if stockh all votes of the Fund
entitled to vote so desire, they may call a special meeting of stockholders of
the Fund for the purpose of voting on the question of the removal of any
director(s). The total authorized capital stock of the Fund consists of
1,000,000,000 $0.01. As of December 31, 1997, Rupay-Barrington Financial owned
8,782.296 shares of the Fund which represented approximately 4.14% of the Fund's
total outstanding shares.
STATEMENT OF ADDITIONAL INFORMATION
Rupay-Barrington Total Return Fund, Inc. (the "Fund")
Part B
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Fund's prospectus dated March 12, 1998, which
may be obtained from Rupay-Barrington Securities Corporation, 1000
Ballpark Way, Suite 207A, Arlington, TX 76011 or by calling 1-800-628-4077.
The date of this Statement of Additional Information is March 12, 1998.
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Intentionally Left Blank]
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES..........................................1
Investment Objective..............................................1
Investment Program................................................1
Fixed Income Securities..................................2
U.S. Government Obligations.....................2
U.S. Government Agency Securities...............2
Bank Obligations................................2
Savings and Loan Obligations....................2
Asset-Backed Securities.........................3
Mortgage Obligations............................5
Options. ................................................6
Futures Contracts.......................................10
Lending of Portfolio Securities.........................16
Foreign Securities......................................17
Foreign Currency Transactions...........................17
Hybrid Commodity and Security Investments...............19
Private Placements (Restricted Securities)..............19
Repurchase Agreements...................................20
When-Issued Securities..................................21
RISK FACTORS..............................................................21
General ........................................................21
Debt Obligations.................................................21
Foreign Investing................................................21
Possible Investment of Certain Assets in Specific Industry.......22
INVESTMENT RESTRICTIONS...................................................22
Fundamental Policies.............................................22
Operating Policies...............................................23
Redemption in Kind...............................................24
MANAGEMENT OF FUND........................................................24
Compensation of Executive Officers and Directors.................27
PRINCIPAL HOLDERS OF SECURITIES...........................................28
INVESTMENT MANAGEMENT SERVICES............................................29
Management Fees..................................................29
Limitation on Fund Expenses......................................29
DISTRIBUTOR FOR FUND......................................................30
Sales Commission.................................................30
Distribution Plan and Agreement..................................32
CUSTODIAN.................................................................32
PORTFOLIO TRANSACTIONS....................................................32
PRICING OF SECURITIES.....................................................34
DIVIDENDS.................................................................34
NET ASSET VALUE PER SHARE.................................................34
TAX STATUS................................................................35
Taxation of Foreign Shareholders.................................35
Foreign Currency Gains and Losses................................35
YIELD INFORMATION.........................................................36
Investment Performance...........................................36
THE FUND'S CAPITAL STOCK..................................................38
FEDERAL AND STATE REGISTRATION OF SHARES..................................39
LEGAL COUNSEL.............................................................39
INDEPENDENT AUDITORS......................................................40
RATINGS OF CORPORATE DEBT SECURITIES......................................40
FINANCIAL STATEMENTS ....................................................F-1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The following information supplements the discussion of the Fund's
investment objective and policies discussed on pages 1 and 2 and 7 through 13 of
the Prospectus. Unless otherwise specified, the investment program, restrictions
and operating policies of the Fund are not fundamental policies and are subject
to change by its Board of Directors without stockholder approval. However,
stockholders will be notified of a material change in the investment program,
restrictions or operating policies. The fundamental policies of the Fund may not
be changed without the approval of at least a majority of the outstanding shares
of the Fund; however, if holders of 50% or more of the shares are represented at
a meeting of stockholders, such percentage must be at least 67% of the shares
represented.
Investment Objective.
The Fund invests in a diversified portfolio of equity securities
(typically common stocks and securities which carry the right to buy common
stocks) and fixed income securities (typically bonds and preferred stocks) with
equity securities expected to usually represent approximately 80% of total Fund
assets. The Fund is designed for investors primarily seeking potential for
dividends and capital appreciation from equity securities as well as the income
and relative principal stability from fixed-income securities.
The Fund's share price will fluctuate with changing market conditions;
therefore, your investment may be worth more or less when redeemed than when
purchased. The Fund should not be relied upon for short-term financial needs,
nor used to play short-term swings in the stock market. The Fund cannot
guarantee it will achieve its investment objective.
Investment Program.
The Fund invests in both stocks and bonds.
The Fund is designed for investors primarily seeking the potential for
dividend income from, and capital appreciation of, common stocks and the income
and principal stability of bonds over the long term. The Fund's investment in
common stocks is intended to provide sufficient capital growth to offset the
erosive effects of inflation. For an IRA, retirement plan, or other long-term
investment, the Fund offers an investment program which seeks to combine
attractive returns with the benefits of broad diversification.
To achieve its investment objective, the Fund will normally invest
approximately 80% of its assets in equity securities (primarily common stocks)
and the remainder in fixed income securities (primarily bonds). While this
portfolio mix may vary depending on the Fund Investment Advisor's (as
hereinafter defined) short-term and long-term assessments of market conditions,
the Fund will not attempt to time short-term moves in the market. In no event
will the Fund invest less than 50% or more than 80% of its assets in equity
securities, except for the purpose of effecting temporary defensive strategies.
The investment of Fund assets in fixed income securities (primarily bonds) adds
diversification that may serve to lessen the volatility normally associated with
funds dedicated primarily to investment in common stock. However, movements in
interest rates may still affect the overall value of the Fund.
The Fund's common stock investments will be concentrated primarily in
established companies which are believed to exhibit good prospects for growth.
<PAGE>
Consistent with the investment program, the Fund may invest in equity
securities issued by real estate investment trusts ("REITs"). Bond and other
fixed income investments will include U.S. Treasury and agency securities,
investment-grade (rated BBB or better) corporate securities, mortgage-backed
securities and other types of fixed income investments. The average maturity of
the Fund's fixed income investments will vary with economic conditions.
The Fund's investment portfolio is managed by Rupay-Barrington
Advisors, Inc. (the "Investment Advisor"). See "Management of Fund."
Up to 15% of the Fund's assets may be invested in foreign securities,
including sponsored American Depository Receipts ("ADRs"). The international
component of the Fund's investment program is intended to increase
diversification and provide the potential for higher returns with lower overall
volatility.
1. Fixed Income Securities. Fixed income securities in which the Fund may
invest include, but are not limited to, those described below.
A. U.S. Government Obligations. Debt securities issued by the U.S.
Treasury. These are direct obligations of the U.S. Government and differ mainly
in the length of their maturities.
B. U.S. Government Agency Securities. Securities issued or
guaranteed by U.S. Government sponsored enterprises and federal agencies. These
include securities issued by the Federal National Mortgage Association,
Government National Mortgage Association, Federal Home Loan Bank, Federal Land
Banks, Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, and the Tennessee
Valley Authority. Some of these securities are supported by the full faith and
credit of the U.S. Treasury, and the remainder are supported only by the credit
of the instrumentality, which may include the right of the issuer to borrow from
the Treasury.
C. Bank Obligations. Certificates of deposit, bankers'
acceptances, and other debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn on
a commercial bank by a borrower, usually in connection with international
commercial transactions. The Fund will not invest in any security issued by a
commercial bank unless: (i) the bank has total assets of at least $1 billion, or
the equivalent in other currencies, or, in the case of domestic banks which do
not have total assets of at least $1 billion, the aggregate investment made in
any one such bank is limited to $100,000 and the principal amount of such
investment is insured in full by the Federal Deposit Insurance Corporation; (ii)
in the case of U.S. banks, it is a member of the Federal Deposit Insurance
Corporation; and (iii) in the case of foreign banks, the security is, in the
opinion of the Investment Advisor, of an investment quality comparable with
other debt securities which may be purchased by the Fund. These limitations do
not prohibit investments in securities issued by foreign branches of U.S. banks,
provided such branches meet the foregoing requirements.
D. Savings and Loan Obligations. Negotiable certificates of
deposit and other debt obligations of savings and loan associations. The Fund
will not invest in any security issued by a savings and loan association unless:
(i) the savings and loan association has total assets of at least $1 billion,
or, in the case of savings and loan associations which do not have total assets
of at least $1 billion, the aggregate investment made in any one savings and
loan association is limited to $100,000 and the principal amount of such
investment is insured in full by the Federal Deposit Insurance Corporation; and
(ii) the savings and loan association issuing the security is a member of the
Federal Home Loan Bank System.
<PAGE>
The Fund will not purchase any security of a small bank or savings and
loan association which is not readily marketable if, as a result, more than 10%
of the value of its net assets would be invested in such securities or illiquid
securities, including repurchase agreements maturing in more than seven days.
(See Investment Restrictions beginning on page 22.)
E. Asset-Backed Securities. As described in the Prospectus, the
Fund may invest a portion of its assets in debt obligations known as
"asset-backed securities" which are rated in one of the two highest rating
categories by a nationally recognized rating agency such as Standard and Poor's
Corporation, Moody's Investors Services, Inc. or Duff & Phelps, or if not so
rated, of equivalent investment quality in the opinion of the Investment
Advisor. The credit quality of most asset-backed securities depends primarily on
the credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of the originator or any
other affiliated entities and the amount and quality of any credit support
provided to the securities. The rate of principal payment on asset-backed
securities generally depends on the rate of principal payments received on the
underlying assets which in turn may be affected by a variety of economic and
other factors. As a result, the yield on any asset-backed security is difficult
to predict with precision and actual yield to maturity may be more or less than
the anticipated yield to maturity. Asset-backed securities may be classified as
"pass-through certificates" or "collateralized obligations."
"Pass-through certificates" are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "-Types
of Credit Support," below.
"Collateralized obligations" are asset-backed securities issued in the
form of debt instruments and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. The assets collateralizing such asset-backed securities are
pledged to a trustee or custodian for the benefit of the holders thereof. Such
issuers generally hold no assets other than those underlying the asset-backed
securities and any credit support provided. As a result, although payments on
such asset-backed securities are obligations of the issuers, in the event of
defaults on the underlying assets not covered by any credit support, the issuing
entities are unlikely to have sufficient assets to satisfy their obligations on
the related asset-backed securities.
There are various types of credit support for asset-backed securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets to make payments, such securities may contain
elements of credit support. Such credit support falls into two classes:
liquidity protection and protection against ultimate default by an obligor on
the underlying assets. Liquidity protection refers to providing advances,
generally by the entity administering the pool of assets, to ensure that
scheduled payments on the underlying pool are made in a timely fashion.
Protection against ultimate default ensures ultimate payment of the protection
may be provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as to
the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve funds" (where cash or investments,
sometimes funded from a portion of the initial
<PAGE>
payments on the underlying assets, are held in reserve against future losses) or
that have been "over-collateralized" (where the scheduled payments on, or the
principal amount of, the underlying assets
substantially exceeds that required to make payment of the asset-backed
securities and pay any servicing or other fees). The degree of credit support
provided on each issue is based generally on historical information respecting
the level of credit risk associated with such payments. Delinquency or loss in
excess of that anticipated could adversely affect the return on an investment in
an asset-backed security.
While many asset-backed securities are issued with only one class of
security, many asset-backed securities are issued in more than one class, each
with different payment terms. Multiple class asset-backed securities are issued
for two main reasons. First, multiple classes may be used as a method of
providing credit support. This is accomplished typically through creation of one
or more classes whose right to payments on the asset-backed security is made
subordinate to the right to such payments of the remaining class or classes.
Second, multiple classes may permit the issuance of securities with payment
terms, interest rates or other characteristics differing both from those of each
other and from those of the underlying assets. Examples include so-called
"strips" (asset-backed securities entitling the holder to disproportionate
interests with respect to the allocation of interest and principal of the assets
backing the security), and securities with class or classes having
characteristics which mimic the characteristics of non-asset-backed securities,
such as floating interest rates (i.e., interest rates which adjust as a
specified benchmark changes) or scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Fund may invest in such asset-backed securities if
such investment is otherwise consistent with its investment objective and
policies and with the investment restrictions of the Fund.
"Automobile Receivable Securities" are asset-backed securities backed
by receivables from motor vehicle installment sales contracts or installment
loans secured by motor vehicles ("Automobile Receivable Securities"). Since
installment sales contracts for motor vehicles or installment loans related
thereto ("Automobile Contracts") typically have shorter durations and lower
incidences of prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts were
to sell the same Automobile Contracts to another party, in violation of its
obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also, although most Automobile Contracts grant
a security interest in the motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to create an enforceable security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the Automobile Contracts
underlying the Automobile Receivable Security, usually is not amended to reflect
the assignment of the seller's security interest for the benefit of the holders
of the Automobile Receivable Securities. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be available
to support payments on the securities. In addition, various state and federal
securities laws give the motor vehicle owner the right to assert against the
holder of the owner's Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such defenses could
reduce payments on the Automobile Receivable Securities.
<PAGE>
"Credit Card Receivable Securities" are asset-backed securities backed
by receivables from revolving credit card agreements ("Credit Card Receivable
Securities"). Credit balances on revolving credit card agreements ("Accounts")
are generally paid down more rapidly than are Automobile Contracts. Most of the
Credit Card Receivable Securities issued publicly to date have been Pass Through
Certificates. In order to lengthen the maturity of Credit Card Receivable
Securities, most such securities provide for a fixed period during which only
interest payments on the underlying Accounts are passed through to the security
holder and principal payments received on such Accounts are used to fund the
transfer to the pool of assets supporting the related Credit Card Receivable
Securities of additional credit card charges made on an Account. The initial
fixed period usually may be shortened upon the occurrence of specified events
which signal a potential deterioration in the quality of the assets backing the
security, such as the imposition of a cap on interest rates. The ability of the
issuer to extend the life of an issue of Credit Card Receivable Securities thus
depends upon the continued generation of additional principal amounts in the
underlying accounts during the initial period and the non-occurrence of
specified events. An acceleration in cardholders' payment rates or any other
event which shortens the period during which additional credit card charges on
an Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could shorten the weighted average life and
yield of the Credit Card Receivable Security.
Credit cardholders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holder the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
Other Assets. The asset-backed securities backed by assets other than
those described above may be issued in the future. The Fund may invest in such
securities in the future if such investment is otherwise consistent with its
investment objective and policies.
F. Mortgage Obligations. The Fund may invest in mortgage
obligations issued or guaranteed by non-governmental entities as well as the
U.S. Government, its agencies or instrumentalities. Such mortgage obligations
may include, but are not limited to, collateralized mortgage obligations, which
are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities ("CMOs"), principal obligations ("POs"), interest
obligations ("IOs") and other mortgage-backed securities. Some mortgage-backed
securities, such as GNMA certificates, are backed by the full faith and credit
of the U.S. Treasury while others, such as Freddie Mac certificates, are not.
Risks associated with investment in mortgage obligations include, but are not
limited to, principal volatility, fluctuations in interest rates and prepayment.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments in the mortgages. Therefore, depending on the type of CMOs in which
the Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities, which prepayments
could have an adverse impact on the Fund's overall yield. CMOs may also be less
marketable than other securities. The Fund will not invest in POs and IOs, if,
as a result, more than 5% of the value of the Fund's net assets would be
invested in POs and IOs.
<PAGE>
2. Options.
Writing Covered Call Options. The Fund may write (sell) "covered" call
options and purchase options to close out options previously written by the
Fund. In writing covered call options, the Fund expects to generate premium
income which should serve to enhance the Fund's total return and reduce the
effect of any price decline of the security or currency involved in the option.
Covered call options will generally be written on securities or currencies
which, in the Investment Advisor's opinion, are not expected to make any major
price increases or moves in the near future but which, over the long term, are
deemed to be attractive investments for the Fund.
A call option gives the holder (buyer) the "right to purchase" a
security or currency at a specified price (the exercise price) at any time until
a certain date (the expiration date). So long as the obligation of the writer of
a call option continues, he may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by repurchasing
an option identical to that previously sold. To secure his obligation to deliver
the underlying security or currency in the case of a call option, a writer is
required to deposit in escrow the underlying security or currency or other
assets in accordance with the rules of a clearing corporation. The Fund will
write only covered call options. This means that the Fund will own the security
or currency subject to the option or an option to purchase the same underlying
security or currency having an exercise price equal to or less than the exercise
price of the "covered" option, or will establish and maintain with its custodian
for the term of the option, an account consisting of cash, U.S. Government
securities or other liquid high grade debt obligations having a value equal to
the fluctuating market value of the option securities or currencies. In order to
comply with the requirements of the securities or currencies laws in several
states, the Fund will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
options or put options exceeds 25% of the market value of the Fund's net assets.
Should these state laws change or should the Fund obtain a waiver of their
application, the Fund reserves the right to increase this percentage. In
calculating the 25% limit, the Fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk (in
contrast to the writing of naked or uncovered options, which the Fund will not
do), but capable of enhancing the Fund's total return. When writing a covered
call option, the Fund, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price, but conversely retains the risk of loss should the price of the
security or currency decline. Unlike one who owns securities or currencies not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities or currencies, since it may be assigned an
exercise notice at any time prior to the expiration of its obligation as a
writer. If a call option which the Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or currency during the
option period. If the call option is exercised, the Fund will realize a gain or
loss from the sale of the underlying security or currency. The security or
currency covering the call will be maintained in a segregated account of the
Fund's custodian. The Fund does not consider a security or currency covered by a
call to be "pledged" as that term is used in the Fund's policy which limits the
pledging or mortgaging of its assets.
<PAGE>
The premium received is the market value of an option. The premium the
Fund will receive from writing a call option will reflect, among other things,
the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, the Investment
Advisor, in determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Fund for writing covered call
options will be recorded as a liability of the Fund. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the Fund desires to sell
a particular security or currency from its portfolio on which it has written a
call option, or purchased a put option, it will seek to effect a closing
transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Fund will be able to effect
such closing transactions at a favorable price. If the Fund cannot enter into
such a transaction, it may be required to hold a security or currency that it
might otherwise have sold. When the Fund writes a covered call option, it runs
the risk of not being able to participate in the appreciation of the underlying
securities or currencies above the exercise price, as well as the risk of being
required to hold on to securities or currencies that are depreciating in value.
This could result in higher transaction costs. The Fund will pay transaction
costs in connection with the writing of options to close out previously written
options. Such transaction costs are normally higher than those applicable to
purchases and sales of portfolio securities.
Call options written by the Fund will normally have expiration dates of
less than nine months from the date written. The exercise price of the options
may be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to time,
the Fund may purchase an underlying security or currency for delivery in
accordance with a exercise notice of a call option assigned to it, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.
The Fund will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Fund.
Writing Covered Put Options. The Fund may write covered put options and
purchase options to close out options previously written by the Fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at the
exercise price during the option period. So long as the obligation of the writer
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring him to make payment of the exercise price
against delivery of the underlying security or currency. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options. The
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Fund would write put options only on a covered basis, which means that the Fund
would maintain in a segregated account cash, U.S. Government Securities or other
liquid high-grade debt obligations in an amount not less than the exercise price
or the Fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The rules of a clearing corporation currently require that such
assets be deposited in escrow to secure payment of the exercise price.) The Fund
would generally write covered put options in circumstances where the Investment
Advisor wishes to purchase the underlying security or currency for the Fund's
portfolio at a price lower than the current market price of the security or
currency. In such event the Fund would write a put option at an exercise price
which, reduced by the premium received on the option, reflects the lower price
it is willing to pay. Since the Fund would also receive interest on debt
securities or currencies maintained to cover the exercise price of the option,
this technique could be used to enhance the current return during periods of
market uncertainty. The risk in such a transaction would be that the market
price of the underlying security or currency would decline below the exercise
price less the premiums received. Such a decline could be substantial and result
in a significant loss to the Fund. In addition, the Fund, because it does not
own the specific securities or currencies which it may be required to purchase
in the exercise of the put, can not benefit from appreciation, if any, with
respect to such specific securities or currencies.
Purchasing Put Options. The Fund may purchase put options on securities
which give the Fund the right to sell the underlying security or currency at the
exercise price at any time during the option period. The Fund may enter into
closing sale transactions with respect to such options, exercise them or permit
them to expire. The Fund may purchase put options for defensive purposes in
order to protect against an anticipated decline in value of its securities or
currencies. An example of such use of put options is provided below.
The Fund may purchase a put option on an underlying security or
currency (a "protective put") owned by the Fund as a defensive technique in
order to protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the Fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange value.
For example, a put option may be purchased in order to protect unrealized
appreciation of a security or currency where the Investment Advisor deems it
desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
The Fund may also purchase put options at a time when the Fund does not
own the underlying security or currency. By purchasing put options on a security
or currency it does not own, the fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remain equal to or greater than the exercise price during
the life of the put option, the Fund will lose its entire investment in the put
option. In order for the purchase of a put option to be profitable, the market
price of the underlying security or currency must decline sufficiently below the
exercise price to cover the premium and transaction costs, unless the put option
is sold in a closing sale transaction.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
put and call options. Should these state laws change or should the Fund obtain a
waiver of their application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and input options. The premium paid by the Fund
when purchasing a put option will be recorded as an asset of the Fund. This
asset will be adjusted daily to the option's current
<PAGE>
market value, which will be the latest sale price at the time at which the net
asset value per share of the Fund is computed (close of New York Stock
Exchange), or, in the absence of such sale, the latest bid price. This option
will be terminated upon expiration of the option, the selling (writing) of an
identical option in a closing transaction, or the delivery of the underlying
security or currency upon the exercise of the option.
Purchasing Call Options. The Fund may purchase call options, on various
securities which give the Fund the right to purchase the underlying security or
currency at the exercise price at any time during the option period. The Fund
may enter into closing sale transactions with respect to such options, exercise
them or permit them to expire. The Fund may purchase call options for the
purpose of increasing its current return or avoiding tax consequences which
could reduce its current return. The Fund may also purchase call options in
order to acquire the underlying securities or currencies. Examples of such uses
of call options are provided below.
Call options may be purchased by the Fund for the purpose of acquiring
the underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the Fund to acquire the securities
or currencies at the exercise price of the call option plus the premium paid. At
times the net cost of acquiring securities or currencies in this manner may be
less than the cost of acquiring the securities or currencies directly. This
technique may also be useful to the Fund in purchasing a large block of
securities that would be more difficult to acquire by direct market purchases.
So long as it holds such a call option rather than the underlying security or
currency itself, the Fund is partially protected from any unexpected decline in
the market price of the underlying security or currency and in such event could
allow the call option to expire, incurring a loss only to the extent of the
premium paid for the option.
To the extent required by the laws of certain states, the Fund may not
be permitted to commit more than 5% of its assets to premiums when purchasing
call and put options. Should these state laws change or should the Fund obtain a
waiver of their application, the Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The Fund may also purchase call
options on underlying securities or currencies it owns in order to protect
unrealized gains on call options previously written by it. A call option would
be purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may also
be purchased at times to avoid realizing losses that would result in a reduction
of the Fund's current return. For example, where the Fund has written a call
option on an underlying security or currency having a current market value below
the price at which such security or currency was purchased by the Fund, an
increase in the market price would result in the exercise of the call option
written by the Fund and the realization of a loss on the underlying security or
currency with the same exercise price and expiration date as the option
previously written.
Dealer Options. The Fund may engage in transactions involving dealer
options. Certain risks are specific to dealer options. While the Fund would look
to a clearing corporation to exercise exchange-traded options, if the Fund were
to purchase a dealer option, it would rely on the dealer from whom it purchased
the option to perform if the option were exercised. Failure by the dealer to do
so would result in the loss of the premium paid by the Fund as well as loss of
the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the Fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it or
reselling it to the dealer who issued it. Similarly, when the Fund writes a
dealer option, it generally will be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to which the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers who will agree to and which are expected
to be capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will be able to liquidate a dealer
<PAGE>
option at a favorable price at any time prior to expiration. Until the Fund, as
a covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency of
the contract party, the Fund may be unable to liquidate a dealer option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, since the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the asset which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair the Fund's ability to sell portfolio securities at a time when such sale
might be advantageous.
The staff of the Securities and Exchange Commission (the "SEC") has
taken the position that purchased dealer options and the assets used to secure
the written dealer options are illiquid securities. The Fund may treat the cover
used for written OTC options as liquid if the dealer agrees that the Fund may
repurchase the OTC option it has written for a maximum price to be calculated by
a predetermined formula. In such cases, the OTC option would be considered
illiquid only to the extent the maximum repurchase price under the formula
exceeds the intrinsic value of the option. Accordingly, the Fund will treat
dealer options as subject to the Fund's limitation on unmarketable securities.
If the SEC changes its position on the liquidity of dealer options, the Fund
will change its treatment of such instruments accordingly.
Federal Income Tax Treatment of Options. Certain option transactions
have special tax results for the Fund. Listed non-equity options, including
options on currencies will be considered to have been closed out at the end of
the Fund's fiscal year and any gains or losses would be characterized as 60%
long-term capital gain or loss and 40% short-term capital gain or loss
regardless of the holding period of the option. Gains or losses on unlisted
currency options will not be subject to this treatment and will generally result
in ordinary income or loss.
In addition, losses on purchased puts and written covered calls,
excluding "qualified covered call options" on equity securities, to the extent
they do not exceed the unrealized gains on the securities or currencies covering
the options, may be subject to deferral until the securities or currencies
covering the options have been sold. The holding period of the securities
covering these option will be deemed not to begin until the option is
terminated. For securities covering a purchased put, this adjustment of the
holding period may increase the gain from sales of securities held less than
three months. The holding period of the security covering an "in-the-money
qualified covered call" option on an equity security will not include the period
of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for more
than twelve months prior to the writing of the option.
3. Futures Contracts. The Fund may enter into financial futures contracts,
including stock index, interest rate and currency futures ("futures or futures
contracts").
Stock index futures contracts may be used to provide a hedge for a
portion of the Fund's portfolio, as a cash management tool, or as an efficient
way for the Investment Advisor to implement either an increase or decrease in
portfolio market exposure in response to changing market conditions. The Fund
may purchase or sell stock index futures contracts with respect to any stock
index whose movements will, in its judgment, have a significant correlation with
movements in the prices of all or portions of the Fund's portfolio securities.
<PAGE>
Interest rate or currency futures contracts may be used as a hedge
against changes in prevailing levels of interest rates or currency exchange
rates in order to establish more definitely the effective return on securities
or currencies held or intended to be acquired by the Fund. In this regard, the
Fund could sell interest rate futures as an offset against the effect of
expected increases in interest rates or currency exchange rates and purchase
such futures as an offset against the effect of expected declines in interest
rates or currency exchange rates.
The Fund will enter into futures contracts which are traded on national
or foreign futures exchanges and are standardized as to maturity date and
underlying financial instrument. The principal stock index, interest rate and
currency futures exchanges in the United States are the Board of Trade of the
City of Chicago and the Chicago Mercantile Exchange. Futures exchanges and
trading in the United States are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (the "CFTC"). Futures are traded in
London at the London International Financial Futures Exchange, in Paris at the
MATIF and in Tokyo at the Tokyo Stock Exchange. Although techniques other than
the sale and purchase of futures contracts could be used for these purposes,
futures contracts offer an effective and relatively low cost means of
implementing the Fund's objectives in these areas.
Regulatory Limitations. The Fund will engage in transactions in
financial futures contracts and options thereon only for bona fide hedging,
yield enhancement and risk management purposes, in each case in accordance with
the rules and regulations of the CFTC, and not for speculation.
In accordance with CFTC regulations, as an operating, non-fundamental
policy, the Fund may not purchase or sell futures contracts or options thereon
if immediately thereafter the sum of the amounts of initial margin deposits on
the Fund's existing futures and premiums paid for options on futures would
exceed 5% of the market value of the Fund's total assets; provided, however,
that in the case of an option that is in the money at the time of purchase, the
in the money amount may be excluded in calculating the 5% limitation. In
instances involving the purchase of futures contracts and options thereon (less
any related margin deposits), amounts will be deposited in a segregated account
with the Fund's custodian to cover the position, or alternative cover will be
employed thereby limiting amounts leveraged by the Fund in its use of such
futures contracts and options. The segregated account the Fund maintains with
the custodian to cover its futures or options positions will consist of cash,
U.S. government securities or other liquid high-grade debt securities that, when
added to the amounts or premiums deposited with respect to the futures contract
or option, are equal to the market value of the underlying security not
otherwise covered.
As an alternative to bona fide hedging as defined by the CFTC, the Fund
may comply with a different standard established by CFTC rules with respect to
futures contracts and options thereon purchased by the Fund incidental to the
Fund's activities in the securities markets, under which the value of the assets
underlying such positions will not exceed the sum of: (i) cash set aside in an
identifiable manner or short-term U.S. securities segregated for this purpose;
(ii) cash proceeds on existing investments due within thirty (30) days; and
(iii) accrued profits on the particular futures contract or option thereon.
In addition, CFTC regulations may impose limitations on the Fund's
ability to engage in certain yield enhancement and risk management strategies.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Fund would comply with such new
restrictions.
Trading in Futures. A futures contract provides for the future sale by
one party and purchase by another party of a specified amount of a specific
financial instrument (units of a stock index, debt security or currency) for a
specified price, date, time and place designated at the time the contract is
made.
<PAGE>
Brokerage fees are incurred when a futures contract is bought or sold and margin
deposits must be maintained. Entering into a contract to buy is commonly
referred to as buying or purchasing a contract or holding a long position;
entering into a contract to sell is commonly referred to as selling a contract
or holding a short position.
For example, one contract in the Financial Times Stock Exchange 100
Index future is a contract to buy 25 pounds sterling multiplied by the level of
the UK Financial Times 100 Share Index on a given future date. Settlement of a
stock index futures contract may or may not be in the underlying security. If
not in the underlying security, then settlement will be made in cash, equivalent
over time to the difference between the contract price and the actual price of
the underlying asset at the time the stock index futures contract expires.
Unlike when the Fund purchases or sells a security, no price would be
paid or received by the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund's open positions
in futures contracts, the Fund would be required to deposit with its custodian
in a segregated account in the name of the futures broker an amount of cash,
U.S. government securities, suitable money market instruments, or liquid,
high-grade debt securities, known as "initial margin." The margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased and
sold on margins that may range upward from less than 5% of the value of the
contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase), so that the loss on
the futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of favorable price changes
in the futures contract so that the margin deposit exceeds the required margin,
the broker will pay the excess to the Fund.
These subsequent payments, called variation margin, to and from the
futures broker, are made on a daily basis as the price of the underlying assets
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Fund expects to
earn interest income on its margin deposits.
Although interest and currency futures contracts, by their terms,
typically require actual future delivery of and payment for financial
instruments or currencies, while stock index futures settle in cash, in practice
most futures contracts are usually closed out before the delivery date. Closing
out an open futures contract sale or purchase is effected by entering into an
offsetting futures contract purchase or sale, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If the
offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. The transaction costs
also must be included in these calculations. There can be no assurance, however,
that the Fund will be able to enter into an offsetting transactions with respect
to a particular futures contract at a particular time. If the Fund is not able
to enter into an offsetting transaction, the Fund will continue to be required
to maintain the margin deposits on the futures contract; thus, the Fund could be
required to make daily cash payments of variation margin. In addition, the
inability of the Fund to enter into an offsetting transaction to close out its
position could subject the Fund to substantial losses.
As an example of an offsetting transaction in which the financial
instrument or currency is not delivered, the contractual obligations arising
from the sale of one contract or September Treasury Bills on an exchange may be
fulfilled at any time before delivery of the contract is required (i.e., on a
specified date
<PAGE>
in September, the "delivery month") by the purchase of one contract of September
Treasury Bills on the same exchange. In such instance, the difference between
the price at which the futures contract was sold and the price paid for the
offsetting purchase, after allowance for transaction costs, represents the
profit or loss to the Fund.
Special Risks of Transactions in Futures Contracts
Volatility and Leverage. The prices of futures contracts are volatile
and are influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international policies and economic events.
Most United States futures exchanges have established limits in 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
futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss or
gain to the investor. For example, if at the time of purchase, 10% of the value
of the futures contract is deposited as margin, a subsequent 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out. A 15% decrease would result in a loss equal to 150% of the
original margin deposit, if the contract were closed out. Thus, a purchase or
sale of a futures contract may result in losses in excess of the amount invested
in the futures contract. However, the Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline. Furthermore, in
the case of a futures contract purchase, in order to be certain that the Fund
has sufficient assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract an amount of money market instruments
equal in value to the current value of the underlying instrument, less the
margin deposit.
Liquidity. The Fund may elect to close some or all of its futures
positions at any time prior to their expiration. The Fund would do so to reduce
exposure represented by long futures positions or increase exposure represented
by short futures positions. The Fund may close its positions by taking opposite
positions which would operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin would then be made,
additional cash would be required to be paid by or released to the Fund, and the
Fund would realize a loss or gain.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract at any
particular time. In such event, it might not be possible to close a futures
contract, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. However, in the
event futures contracts have been used to hedge portfolio securities or
currencies, the Fund would continue to hold
<PAGE>
securities or currencies subject to the hedge until the futures contracts could
be terminated. In such circumstances, an increase in the price of the securities
or currencies, if any, might partially or completely offset losses on the
futures contract. However, as described below, there is no guarantee that the
price of the securities or currencies will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Hedging Risk. A decision of whether, when, and how to hedge involves
skill and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior or interest rate trends. There are
several risks in connection with the use by the Fund of futures contracts as a
hedging device. One risk arises because of the imperfect correlation between
movements in the prices of the futures contracts and movements in the prices of
securities or currencies which are the subject of the hedge. The Investment
Advisor will, however, attempt to reduce this risk by entering into futures
contracts whose movements, in its or their judgment, will have significant
correlation with movements in the prices of the Fund's portfolio securities or
currencies sought to be hedged.
Successful use of futures contracts by the Fund for hedging purposes is
also subject to the ability of the Investment Advisor to correctly predict
movements in the direction of the market. It is possible that, when the Fund has
sold futures to hedge its portfolio against a decline in the market, the index
or indices, securities or currencies on which the futures are written might
advance and the value of securities or currencies held in the Fund's portfolio
might decline. If this were to occur, the Fund would lose money on the futures
and also would experience a decline in value in its portfolio securities or
currencies. However, while this might occur to a certain degree, the Investment
Advisor believes that over time the value of the Fund's portfolio will tend to
move in the same direction as the securities or currencies underlying the
futures, which are intended to correlate to the price movements of the portfolio
securities or currencies sought to be hedged. It is also possible that if the
Fund were to hedge against the possibility of a decline in the market (adversely
affecting securities or currencies held in its portfolio) and prices instead
increased, the Fund would lose part of all of the benefit of increased value of
those securities or currencies that it has hedged, because it would have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund had insufficient cash, it might have to sell securities or currencies
to meet daily variation margin requirements. Such sales of securities or
currencies might be, but would not necessarily be, at increased prices (which
would reflect the rising market). The Fund might have to sell securities or
currencies at a time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contract and the portion of the portfolio being hedged, the price movements of
future contracts might not correlate perfectly with price movements in the
underlying stock index, security or currency due to certain market distortions.
First, all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions which could distort the normal relationship between the underlying
instruments and futures markets. Second, the margin requirements in the futures
market are less onerous than margin requirement in the securities markets, and
as a result the futures market might attract more speculators than the
securities markets do. Increased participation by speculators in the futures
market might also cause temporary price distortions. Due to the possibility of
price distortion in the futures market and also because of the imperfect
correlation between price movements in the underlying instruments and movements
in the prices of futures contracts, even a correct forecast of general market
trends by the Investment Advisor might not result in a successful hedging
transaction over a very short time period.
<PAGE>
Options on Futures Contracts. Options on futures are similar to options
on securities or currencies except that options on futures give the purchaser
the right, in return for the premium paid, to assume a position in a futures
contract (a long position in the option is a call and a short position if the
option is a put), rather than to purchase or sell the futures contract, at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by the delivery of
the accumulated balance in the writer's futures margin account which represents
the amount by which the market price of the futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the futures contract. Alternatively, settlement
may be made totally in cash. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid.
As an alternative to writing or purchasing call and put options on
stock index futures, the Fund may write or purchase call and put options on
stock indices. Such options would be used in a manner similar to the use of
options on futures contracts.
Special Risks of Transactions in Options on Futures Contracts. The Fund
may seek to close out an option position by writing or buying an offsetting
option covering the same index, securities, currencies or contract and having
the same exercise price and expiration date. The ability to establish and close
out positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options, or underlying securities or currencies,; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange for the options (or in the
class or series of options) would cease to exist, although outstanding options
that had been issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms. There
is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of any
of the clearing corporations inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
Federal Tax Treatment of Futures Contracts. Generally, the Fund is
required, for federal income tax purposes, to recognize as income for each
taxable year its net unrealized gains and losses on futures contracts as of the
end of the year as well as those actually realized during the year. Gain or loss
recognized with respect to a futures contract will generally be 67% long-term
capital gain or loss and 33% short-term capital gain or loss, without regard to
the holding period of the contract.
Futures contracts which are intended to hedge against a change in the
value of securities or currencies may be classified as "mixed straddles," in
which case the recognition of losses may be deferred to a later year. In
addition, sales of such futures contracts on securities or securities indexes
may affect the holding period of the hedged security and, consequently, the
nature of the gain or loss on such security on disposition.
In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
<PAGE>
securities or currencies. Pending tax regulations could limit the extent to
which net gain realized from futures contracts on currencies is qualifying
income for purposes of the 90% requirements. In addition, gains realized on the
sale or other disposition of securities, including futures contracts on
securities or securities indices and, in some cases, currencies, including
futures contracts on currencies, held for less than three months, must be
limited to less than 30% of the Fund's annual gross income. In order to avoid
realizing excessive gains on securities or currencies held less than three
months, the Fund may be required to defer the closing out of futures contracts
beyond the time when it would other wise be advantageous to do so. It is
anticipated that unrealized gains on futures contracts, which have been open for
less than three months as of the end the Fund's fiscal year and which are
recognized for tax purposes, will not be considered gains on securities or
currencies held less than three months for purposes of the 30% test.
The Fund will distribute to stockholders annually any net gains which
have been recognized for federal income tax purposes from futures transactions
(including unrealized gains at the end of the Fund's fiscal year). Such
distributions will be combined with distributions of ordinary income or capital
gains realized on the Fund's other investments. Stockholders will be advised of
the nature of the payments.
Foreign Futures and Options. Participation in foreign futures and
foreign options transactions involves the execution and clearing of trades on or
subject to the rules of foreign board of trade. Neither the National Futures
Associates nor any domestic exchange regulates activities of any foreign board
of trade, including the execution, delivery and clearing of transactions, or has
the power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked to
a domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign options
transaction occurs. For these reasons, customers who trade foreign futures or
foreign options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the CFTC's regulations and the rules of
the National Futures Association and any domestic exchange, including the right
to use reparations proceedings before the Commission and arbitration proceedings
provided by the National Futures Association or any domestic futures exchange.
In particular, funds received from customers for foreign futures or foreign
options transactions may not be provided the same protections as funds received
in respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time your order is placed and the time it is
liquidated, offset or exercised.
Additional Futures Contracts. Although the Fund has no current
intention of engaging in financial futures transactions other than those
described above, it reserves the right to do so. Such futures trading might
involve risks which differ from those involved in the futures and options
described above.
4. Lending of Portfolio Securities.
For the purposes of realizing additional income, the Fund may make
secured loans of portfolio securities amounting to not more than 30% of its
total assets. This policy is a fundamental policy. Securities loans will be made
to broker-dealers or institutional investors pursuant to agreements requiring
that the loans be continuously secured by collateral at least equal at all times
to the value of the securities lent market to market on a daily basis. The
collateral received will consist of cash, U.S. government securities, letters of
credit or such other collateral as may be permitted under its investment
program. The cash collateral received by the Fund will be invested only in money
market securities. While the securities are being lent, the Fund will continue
to receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund
<PAGE>
has a right to call each loan and obtain the securities on five business days'
notice or, in connection with securities trading on foreign markets, within such
longer period of time which coincides with the normal settlement period for
purchases and sales of such securities in such foreign markets. The Fund will
not have the right to vote securities while they are being lent, but it will
call a loan in anticipation of any important vote. The risks in lending
portfolio securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to persons deemed by the Investment Advisor
to be of good standing and will not be made unless, in the judgment of the
Investment Advisor, the consideration to be earned from such loan would justify
the risk.
5. Foreign Securities.
The Fund may invest up to 15% of its total assets in U.S.
dollar-denominated and non U.S. dollar-denominated securities issued by foreign
issuers. While investments in foreign securities are intended to reduce risk by
providing further diversification, such investments involve sovereign risk in
addition to credit and market risks. Sovereign risk includes local political or
economic developments, potential nationalization, withholding taxes on dividend
or interest payments, and currency blockage (which would prevent cash from being
brought back to the United States). Foreign investments may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. Foreign companies may have less public or less reliable information
available about them and may be subject to less governmental regulation than
U.S. companies. Securities of foreign companies may be less liquid or more
volatile than securities of U.S. companies.
6. Foreign Currency Transactions.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are principally traded in
the interbank market conducted directly between currency traders (usually large,
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
The Fund will generally enter into forward foreign currency exchange
contracts under two circumstances. First, when the Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying security transactions, the
Fund will be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and the subject
foreign currency during the period between the date the security is purchased or
sold and the date on which payment is made or received.
Second, when the management of the Fund believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, including the U.S. dollar, it may enter into forward contract
to sell or buy the amount of the former foreign currency, approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. Alternatively, where appropriate, the Fund may hedge all or
part of its foreign currency exposure through the use of a basket of currencies
or a proxy currency where such currency or currencies act as an effective proxy
for other currencies. In such a case, the Fund may enter into a forward contract
where the amount of the foreign currency to be sold exceeds the value of the
securities denominated in such currency. The use of
<PAGE>
this basket hedging technique may be more efficient and economical than entering
into separate forward contracts for each currency held in the Fund. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. Other than as set forth above,
the Fund will also not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated in to the longer term investment decisions made
with regard to overall diversification strategies. However, management of the
Fund believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the Fund will be
served.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Fund to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Fund is obligated to deliver and if a decision is made to sell the
security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the same of the portfolio security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for sale
of a foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, the Fund will suffer a
loss to the extent the price of the currency it has agreed to purchase exceeds
the price of the currency it has agreed to sell.
The Fund's dealings in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. In instances involving the
purchase of forward foreign currency exchange contracts, amounts will be
deposited in a segregated account with the Fund's custodian to cover the
position, or alternative cover will be employed, thereby limiting amounts
leveraged by the Fund in its use of such forward contracts. Of course, the Fund
is not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Investment Advisor. It also should be realized that this method of hedging
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange at a future risk of loss due to a decline in the value of the
<PAGE>
hedged currency, and, at the same time, tends to limit any potential gain which
might result from an increase in the value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and investors should be aware
of the cost of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resale that currency to the dealer.
7. Hybrid Commodity and Security Investments.
Recently, instruments have been developed which combine the elements of
futures contracts or options with those of debt, preferred equity or a
depository instrument (hereinafter "Hybrid Instruments"). Often these Hybrid
Instruments are indexed to the price of a commodity or particular currency.
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity at a future
point in time, preferred stock with dividend rates determined by reference to
the value of a currency, or convertible securities with the conversion terms
related to a particular commodity. Examples of hybrid instruments in which the
Fund may invest include swaps, options on swaps and inverse floaters.
The risks of investing in Hybrid Instruments reflect a combination of
the risks from investing in securities, futures and currencies, including
volatility and lack of liquidity. (See the discussion of risks associated with
transactions in futures contracts beginning on page 13 and forward contracts
beginning on page 17). Further, the prices of the Hybrid Instrument and the
related commodity or currency may not move in the same direction or at the same
time. Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. In addition, because the purchase and
sale of Hybrid Instruments could take place in an over-the-counter market or in
a private transaction between the Fund and the seller of the Hybrid Instruments,
the creditworthiness of the contra party to the transaction would be a risk
factor which the Fund would have to consider. Because Hybrid Instruments are
illiquid, any investment in such instruments is subject to the Fund's
restriction of investing no more than 10% of its assets in illiquid securities.
Hybrid Instruments also may not be subject to regulation of the CFTC, which
generally regulates the trading of commodity futures by U.S. persons, or the
SEC, which regulates the offer and sale of securities by and to U.S. persons, or
any other governmental regulatory authority.
8. Private Placements (Restricted Securities)).
The Fund may invest in restricted securities (privately placed debt
securities) and other securities without readily available market quotations but
will not acquire illiquid securities, including repurchase agreements which do
not provide for payment within seven days, if as a result they would comprise
more than 10% of the value of the Fund's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 as amended (the "1933
Act"). Where registration is required, the Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a securities under an effective registration statement. If, during such a
period, adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed
<PAGE>
when it decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Board of Directors. If through the appreciation
of restricted securities or the depreciation of unrestricted securities, the
Fund should be in a position where more than 10% of the value of its net assets
are invested in illiquid assets, including restricted securities, the Fund will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities which while
privately placed, are eligible for purchase and sale under Rule 144A under the
1933 Act. This rule permits certain qualified institutional buyers, such as the
Fund, to trade in privately placed securities even though such securities are
not registered under the 1933 Act. The Investment Advisor, under the supervision
of the Fund's Board of Directors, will consider whether securities purchased
under Rule 144A are illiquid and thus subject to the Fund's restriction of
investing no more than 10% of its assets in illiquid securities. A determination
of whether a Rule 144A security is liquid or not is a question of fact. In
making this determination, the Investment Advisor will consider trading markets
for the specific security taking into account the unregistered nature of a Rule
144A security. In addition, the Investment Advisor could consider the: (i)
frequency of trades and quotes; (ii) number of dealers and potential purchasers;
(iii) dealer undertakings to make a market; and (iv) the nature of the security
and of marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
ule 144A securities would be monitored, and, if as a result of changed
conditions it is determined that a Rule 144A security is no longer liquid, the
Fund's holdings of illiquid securities would be reviewed to determine what, if
any, steps are required to assure that the Fund does not invest more than 10% of
its assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of the Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities. In any event, the Fund will not purchase 144A securities if, as a
result, more than 5% of the value of the Fund's net assets would be invested in
144A securities.
9. Repurchase Agreements.
The Fund may enter into repurchase agreements through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. At that time, the bank or securities dealer agrees to
repurchase the underlying security at the same price, plus specified interest.
Repurchase agreements are generally for a short period of time, often less than
a week. The Fund will not enter into a repurchase agreement which does not
provide for payment within seven days if, as a result, more than 10% of the
value of its net assets would then be invested in such repurchase agreements.
The Fund will only enter into repurchase agreements where: (i) the underlying
securities are of the type (excluding maturity limitations) which the Fund's
investment guidelines would allow it to purchase directly; (ii) the market value
of the underlying security, including interest accrued, will be at all times
equal to or exceed the value of the repurchase agreement; and (iii) payment for
the underlying security is made only upon physical delivery or evidence of
book-entry transfer to the account of the custodian or a bank acting as agent.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
securities and losses, including: (i) possible decline in the value of the
underlying security during the period while the Fund seeks to enforce its rights
thereto; (ii) possible subnormal levels of income and lack of access to income
during this period; and (iii) expenses of enforcing its rights.
<PAGE>
10. When-Issued Securities.
The Fund may from time to time purchase securities on a "when-issued"
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time the commitment to purchase is made, but delivery and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within 90 days of the purchase. During the period between
purchase and settlement, no payment is made by the Fund to the issuer and no
interest accrues to the Fund. Forward commitments involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date,
which risk is in addition to the risk of decline in value of the Fund's other
assets. Such when-issued securities may be sold prior to the settlement date. At
the time the Fund makes the commitment to purchase a security on a when-issued
basis, it will record the transaction and reflect the value of the security in
determining its net asset value. The Fund does not believe that its net asset
value or income will be adversely affected by its purchase of securities on a
when-issued basis. The Fund will maintain (and mark-to-market) liquid assets
such as cash, U.S. government securities or other appropriate high-grade debt
obligations equal in value to commitments for when-issued securities. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date.
RISK FACTORS
General. Because of its investment policy, the Fund may or may not be a
suitable or appropriate investment for all investors. The Fund is not a money
market fund and is not an appropriate investment for those investors whose
primary objective is principal stability. There is risk in all investment. The
value of the portfolio securities of the Fund will fluctuate based upon market
conditions. Although the Fund seeks to reduce risk by investing in a diversified
portfolio, such diversification does not eliminate all risk. There can, of
course, be no assurance that the Fund will achieve these results. The Investment
Advisor has not previously managed and does not currently manage the assets of
another investment company. See "Management of the Fund" and "Investment
Management Services."
Debt Obligations. Yields on short, intermediate, and long-term
securities are dependent on a variety of factors, including the general
conditions of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue. Debt securities with
longer maturities tend to produce higher yields and are generally subject to
potentially greater capital appreciation and depreciation than obligations with
shorter maturities and lower yields. The market prices of debt securities
usually vary, depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a decline in
interest rates will generally increase the value of portfolio investments. The
ability of the Fund to achieve its investment objectives is also dependent on
the continuing ability of the issuers of the debt securities in which the Fund
invests to meet their obligations for the payment of interest and principal when
due.
Foreign Investing. The Fund may invest in the securities of foreign
issuers, but intends to limit any such investments to not more than 15% of its
assets. Because the Fund may invest in foreign securities, investment in the
Fund involves risks that are different in some respects from an investment in a
fund which invests only in securities of U.S. domestic issues. Foreign
investments may be affected favorably or unfavorably by changes in currency
rates and exchange control regulations. There may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing, and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
Securities of some foreign companies are less liquid or more volatile than
securities of U.S. companies, and foreign broker commissions and custodian fees
are generally higher
<PAGE>
than in the United States. Investments in foreign securities may also be subject
to other risks different from those affecting U.S. investment, including local
political or economic developments, expropriation or nationalization of assets,
imposition of withholding taxes on dividend or interest payments, and currency
blockage (which would prevent cash from being brought back to the United
States).
Possible Investment of Certain Assets in Specific Industry. As a matter
of fundamental policy, the Fund may not purchase the securities of any issuer
if, as a result, 25% or more of the value of the Fund's total assets would be
invested in the securities of issuers having their principal business activities
in the same industry (other than obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities). Consistent with this policy, the
Fund will limit its investment in equity securities of issuers having their
principal business activities in the real estate industry, including securities
of real estate investment trusts ("REITs") to less than 25% of its assets. In
the event the Fund makes a significant investment in equity REIT securities, any
prolonged downturn in the REIT securities market could have a negative impact on
the Fund's assets and/or its overall performance. Certain of the general risks
associated with investment in REITs may include cash flow dependency, inability
to service debt and the possibility of failing to qualify for tax-free
pass-through of income under the Internal Revenue Code of 1986, as amended (the
"Code").
INVESTMENT RESTRICTIONS
Fundamental policies of the Fund may not be changed without the
approval of the lesser of: (i) 67% of the Fund's shares present at a meeting of
Stockholders if the holders of more than 50% of the outstanding shares are
present in person or by proxy; or (ii) more than 50% of the Fund's outstanding
shares. Other restrictions, in the form of operating policies, are subject to
change by the Fund's Board of Directors without stockholder approval.
Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an
acquisition of securities or assets of, or borrowings by, the Fund.
(See also "Fundamental and Other Investment Policies" in the Prospectus
beginning at Page 11).
Fundamental Policies.
As a matter of fundamental policy, the Fund may not:
1 Borrowing. Borrow money, except the Fund may borrow from
banks as a temporary measure for extraordinary or emergency
purposes, and then only in amounts not exceeding
30% of its total assets valued at market. The Fund will not
borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require
untimely disposition of portfolio securities. Interest paid on
any such borrowings will reduce net investment income. The
Fund may enter into futures contracts as set forth in (3)
below;
2 Commodities. Purchase or sell commodities or commodity
contracts, except that it may: (i) enter into futures
contracts and options on futures contracts, subject to (3)
below; (ii) enter into forward foreign currency exchange
contracts, so long as no more than 5% of the Fund's total
assets are invested in forward foreign currency exchange
contracts (although the Fund does not consider such contracts
to be commodities); and (iii) invest in instruments which have
the characteristics of both futures contracts and securities;
3
<PAGE>
Futures Contracts. Enter into a futures contract or an option
thereon, although the Fund may enter into financial and
currency futures contracts or options on financial and
currency futures contracts;
4 Industry Concentration. Purchase the securities of any issuer
if, as a result, 25% or more of the value of the Fund's total
assets would be invested in the securities of issuers having
their principal business activities in the same industry
(other than obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities);
5 Loans. Make loans, although the Fund may: (i) purchase money
market securities and enter into repurchase agreements; (ii)
acquire publicly-distributed bonds, debentures, notes and
other debt securities and purchase debt securities in private
placements; and (iii) lend portfolio securities;
6 Margin. Purchase securities on margin, except that the Fund
may use short-term credit necessary for clearance of purchases
of portfolio securities and make margin deposits in connection
with futures contracts, subject to (3) above;
7 Mortgaging. Mortgage, pledge, hypothecate or, in any manner,
transfer any security owned by the Fund as security for
indebtedness except as may be necessary in connection with
permissible borrowings and then such mortgaging, pledging or
hypothecating may not exceed 30% of the Fund's total assets
valued at market at the time of the borrowing;
8 Percent Limit on Assets Invested in Any One Issuer. Purchase a
security if, as a result, more than 5% of the value of the
Fund's total assets would be invested in the securities of a
single issuer, except securities issued or guaranteed by the
U.S. Government, or any of its agencies or instrumentalities;
9 Percent Limit on Share Ownership of Any One Issuer. Purchase
a security if, as a result, with respect to 75% of the value
of the Fund's total assets, more than 10% of the
outstanding voting securities of any issuer would be held by
the Fund (other than obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities)
provided that, as an operating policy, the Fund will not
purchase a security if, as a result, more than 10% of the
outstanding voting securities of any issuer would be held by
the Fund;
10 Real Estate. Purchase or sell real estate or real estate
limited partnerships (although it may purchase securities
secured by real estate or interests therein, or issued by
REITs (whether organized as corporations or as trusts) which
invest in real estate or interests therein);
11 Senior Securities. Issue senior securities;
12 Underwriting. Underwrite securities issued by other persons,
except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the 1933 Act in connection
with the purchase and sale of its portfolio securities in the
ordinary course of pursuing its investment program;
Operating Policies. As a fundamental policy, the Fund may not invest in
companies for the purpose of exercising management or control.
<PAGE>
Under the Investment Company Act of 1940, the Fund may not invest in
any securities of any issuer which, in its most recent fiscal year, derived more
than 10% gross revenues from "securities related activities," as defined by
rules of the Investment Company Act of 1940, unless certain conditions are met.
As a result of these restrictions, the Fund may not invest in the securities of
certain banks, broker-dealers and other companies in foreign countries. If the
Fund finds that this restriction prevents it from pursuing its investment
objective, it may apply to the SEC for an order which would permit it to acquire
such securities, but no assurance can be given that any such order will be
granted. It is also possible the law in this area will change, in which case the
Fund could have greater flexibility in the purchase of the securities of foreign
banks, broker-dealers, and other companies.
As a matter of operating policy, the Fund will not, among other things:
(i) purchase securities of an issuer if, as a result, (a) more than 10% of the
value of its net assets would be invested in illiquid securities, including
repurchase agreements which do not provide for payment within seven days, or
other securities which are not readily marketable or (b) more than 5% of the
value of the Fund's total assets would be invested in the securities of
unseasoned issuers which at the time of purchase have been in operation for less
than three years, including predecessors and unconditional guarantors; (ii)
purchase securities when money borrowed exceeds 5% of the Fund's total assets;
(iii) purchase or hold the securities of other investment companies if, as a
result: (a) the Fund owns, in the aggregate, more than 3% of the total
outstanding voting stock in such investment companies; (b) securities issued by
such investment companies are in excess of 5% of the value of the Fund's total
assets; or (c) more than 10% of the value of the Fund's assets would be invested
in such investment companies; (iv) purchase interests in oil, gas or other
mineral exploration or development programs; (v) purchase warrants, valued at
the lower of cost or market, if, as a result, more than 5% of the value of the
Fund's net assets would be invested in warrants, more than 2% of which are not
listed on the New York Stock Exchange, American Stock Exchange or the Nasdaq
National Market; and (vi) purchase POs and IOs, if, as a result, more than 5% of
the value of the Fund's net assets would be invested in POs and IOs.
Redemption in Kind. In the unlikely event a stockholder were to receive
an in kind redemption of portfolio securities of the Fund, brokerage fees
generally would be incurred by the stockholder in the subsequent sale of such
securities.
MANAGEMENT OF FUND
The directors and executive officers of the Fund are listed below. The
address of each of Messrs. Bensler, Wolf, Mao and Holman is c/o The
Rupay-Barrington Financial Group, Inc., 1000 Ballpark Way, Suite 302, Arlington,
TX 76011 ("Rupay-Barrington Financial"). The addresses of Messrs. Newman and
Wilkerson and Ms. Champine are 5429 Dana Point Drive, Arlington, TX 76017, 5518
Oak Branch Drive, Arlington, TX 76016 and 3516 Beagle Drive, Commerce, MI 48382,
respectively. In the list below, the Fund's directors who are considered
"interested persons" of Rupay-Barrington Financial, as defined under Section
2(a) (10) of the Investment Company Act of 1940 are noted with an asterisk(*).
These directors are referred to as inside directors by virtue of their
directorship and/or employment with Rupay-Barrington Financial. No family
relationship exists between the persons listed below.
<PAGE>
Name Position
Fritz Bensler President
Frederick A. Wolf* Treasurer and Director
Larry S. Mao Senior Vice President - Operations and Secretary
Dixon R. Holman Vice President
Bradley D. Newman Director
Glen Wilkerson Director
Judy A. Champine Director
Fritz Bensler (age 41) is President of the Fund and President and Portfolio
Manager for Rupay- Barrington Advisors, a subsidiary of Rupay-Barrington
Financial. From November 1995 until joining Rupay-Barrington Advisors in January
1997, Mr. Bensler was an equity security analyst and portfolio manager for JPJ
Investment Management, Inc. ("JPJ"). From 1993 until joining JPJ, Mr. Bensler
was a self-employed consultant. Mr. Bensler was a financial analyst with Martin
Marietta Corp. from 1984 to 1991 where he analyzed sales and expense data for a
division of the company. Mr. Bensler was a senior accountant for Pryor &
Associates, P.C., C.P.A., a public accounting firm, from 1980 to 1984. Mr.
Bensler received a CPA certificate from the state of Colorado in 1983. Mr.
Bensler received a Masters of Business Administration degree from Texas
Christian University in 1993 and a Bachelor of Science degree in accounting from
the University of Northern Colorado in 1980. Mr. Bensler is a member of the
Denver Society of Security Analysts.
Frederick A. Wolf (age 45) is Treasurer and a Director of the Fund and
Senior Portfolio Manger for Rupay-Barrington Investment Advisory Services, Inc.
and Rupay-Barrington Advisors, both of which are subsidiaries of
Rupay-Barrington Financial. Mr. Wolf was employed by Barrington, Ltd. for 22
years prior to its acquisition by Rupay-Barrington Investment Advisory Services,
Inc. in April 1994 where he managed equity portfolios for individuals,
governments, corporations and pension and profit sharing plans. Mr. Wolf is a
graduate of the University of Detroit and is a member of the Detroit Society of
Financial Analysts and the American Finance Association. He is also a board
member of A.R.C. Credit Union, a Trustee and Investment Advisor to the Southeast
Michigan Taxsavers Association, a non-profit organization, and a member of
numerous community and fraternal organizations.
Larry S. Mao (age 53) is a Senior Vice President - Operations and
Secretary of the Fund and operations manager of the San Francisco office of
Rupay-Barrington Financial. Mr. Mao was a Senior Vice President of the
California National Bank from January 1993 until joining Rupay-Barrington
Financial in December 1993, where his duties included managing loan portfolios
and marketing financial products. Mr. Mao has been a director of California
National Bank since July 1994. From 1989 until he joined the California National
Bank, he was a Vice President, the Senior Lending Officer, and Chairman of the
Management Loan Committee of America California Bank. Prior to this time, Mr.
Mao served in senior executive positions at Western Federal Savings and Loan,
National American Bank, Bank of Canton, and other financial institutions, where
he managed loan portfolios, developed retail credit card services, and
coordinated corporate strategic planning. Mr. Mao received a Bachelor of Arts
degree in Economics and Mathematics from Park College, Missouri, and continued
his education through the American Institute of Banking and Robert Morris
Associates. Mr. Mao serves as President of his local Lions Club and Merchants
Association and is active in many other civic programs.
Dixon R. Holman (age 37) is Vice President of the Company and Vice
President, Chief Operating Officer and a Director of Rupay-Barrington Financial.
Mr. Holman has served as Vice President of JPJ Investment Management and its
wholly-owned subsidiary, JPJ Asset Group, the majority stockholder of
<PAGE>
Rupay-Barrington Financial Group since May of 1996. Since 1983, and prior to
joining JPJ, Mr. Holman served as a principal and senior officer of three
investment management firms. He has also been active in the real estate
investment and development industries. Mr. Holman's civic activities include
services as a Director of the Arlington, Texas Chamber of Commerce and as an
at-large Member of the Arlington City Council (population approx. 300,000). He
also serves as President of the Arlington Housing Finance Corporation and acting
President of the Tarrant County Junior College Foundation board.
Bradley D. Newman (39) is a Director of the Company. Mr. Newman has been
Property Tax Agent for Union Pacific Resources Group, Fort Worth, TX, since
1986. He is a certified public accountant and a member of both the Council of
Petroleum Accountant's Society and the Institute of Professionals in Taxation.
Glen Wilkerson (age 60) is a Director of the Company. Mr. Wilkerson has
held various sales and sales management positions with Hormel Food Corporation,
Austin, MN, for the past 33 years.
Judy A. Champine (51) is a Director of the Company. Ms. Champine has been
Vice President and Co-Owner of Town Center Gallery, Novi, MI, since 1992. From
1991 to 1992, she served as the Graphics Services Manager of the National Board
for Professional Teaching Standards, Detroit, MI.
It is anticipated that an Executive Committee may be established
consisting of two or more Directors. The Executive Committee would likely
exercise all powers of the Directors except for those which require actions by
all of the Directors or independent Directors under the Fund's Articles of
Amendment and Restatement as amended or By-Laws or under applicable law.
<PAGE>
Compensation of Executive Officers and Directors.
The following table sets forth certain information with respect to the
aggregate compensation paid by the Fund during the fiscal year ended December
31, 1997 to the executive officers and directors of the Fund.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
Name of Person, Aggregate Pension or Estimated Annual Total
Position Compensation Retirement Benefits Upon Compensation
From Benefits as Retirement From Fund and
Fund Accrued as Part Fund Complex
of Fund Expenses Paid to
Director
- --------------------------------------------------------------------------------------------------------------------------------
Fritz Bensler, * N/A N/A *
President
Frederick A. Wolf,
Treasurer, * N/A N/A *
Director
Larry S. Mao,
Senior Vice
President,
Operations
Secretary * N/A N/A *
Dixon R. Holman,
Vice President * N/A N/A *
Bradley D. Newman,
Director ** N/A N/A **
Glen Wilkerson,
Director ** N/A N/A **
Judy A. Champine,
Director ** N/A N/A **
</TABLE>
* Executive officers of the Fund and directors of the Fund, who are
considered "interested persons" within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940, do not receive compensation from
the Fund.
** Directors of the Fund, who are not considered "interested persons"
within the meaning of Section 2(a)(19) of the Investment Company Act of
1940 may at sometime in the future receive, a fee for their services as
outside directors of the Fund. As of the date of the registration
statement which includes this SAI, such disinterested directors have
received no compensation for their attendance at meetings of the Board
of Directors.
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth certain information regarding the
beneficial ownership of the outstanding shares of the Fund as of December 31,
1997 by each person known by the Fund to own beneficially more than five percent
of the outstanding shares of the Fund and all directors and executive officers
of the Fund as a group.
<TABLE>
<CAPTION>
Shares Beneficially Owned
-------------------------------------------------------------------------------
Name and Address Percentage
of Beneficial Owner Number Ownership
<S> <C> <C> <C> <C> <C> <C>
Star Bank C/F
Joseph M. Beals IRA
22151 Moross G-03
Detroit, MI 48236 ....... 29,355.308 12.905
Anchor Bay Dental Assoc. PSP
Donald J. Burkhardt TTEE
dtd. 12-30-89
35050 - 23 Mile Rd. Suite A
New Baltimore, MI 48047......... 58,297.794 25.628
St. Clair Physicians PC PS Trust
Joseph M. Beals TTEE
Attn: John Hastings, VP Investments
400 Renaissance Center, Suite 1600
Detroit, MI 48243 ............. 29,090.128 12.788
</TABLE>
<PAGE>
INVESTMENT MANAGEMENT SERVICES
The Fund's investment portfolio is managed by the Investment Advisor. See
"Management of Fund."
The Investment Advisor has entered into a Management Agreement with the
Fund. Under the Management Agreement, the Investment Advisor provides
discretionary investment services to the Fund. The Investment Advisor is
responsible for supervising and directing the Fund's investments in equity and
fixed income securities in accordance with the Fund's investment objectives, and
restrictions as provided in the Prospectus and this Statement of Additional
Information. The Investment Advisor also is responsible for effecting all
securities transactions with respect to the Fund's portfolio on behalf of the
Fund, including the negotiation of commissions and the allocation of principal
business and portfolio brokerage. In addition to these services, the Investment
Advisor provides the Fund with certain corporate administrative services,
including: maintaining the Fund's corporate existence, corporate records, and
registering and qualifying Fund Shares under federal and state laws; monitoring
the financial, accounting, and administrative functions of the Fund; maintaining
liaison with the agents employed by the Fund, such as the Fund's custodian and
transfer agent; assisting the Fund in the coordination of such custodian's and
transfer agent's activities; and permitting the Investment Advisor's employees
to serve as officers, directors, and committee members of the Fund without cost
to the Fund. The Management Agreement also provides that the Investment Advisor,
its directors, officers, employees, and certain other persons performing
specific functions for the Fund will only be liable to the Fund for losses
resulting from willful misfeasance, bad faith, gross negligence, or reckless
disregard of duty.
Management Fees. The Fund pays the Investment Advisor a management fee
(the "Management Fee") equal to .80% of the Fund's net assets per annum. The
Management Fee is payable monthly on the first business day of the next
succeeding calendar month and is calculated as described below.
The monthly Management Fee is the sum of the daily fund fee accruals
("Daily Fund Fee Accruals") for each month. The Daily Fund Fee Accrual for any
particular day is computed by multiplying the fraction of one (1) over the
number of calendar days in the year by the fund fee rate of .80% and multiplying
this product by the net assets of the Fund for that day, as determined in
accordance with the Fund's prospectus as of the close of business on the
previous business day on which the Fund was open for business. Management Fees
which have accrued but not yet been paid to the Investment Advisor for the
fiscal years ended December 31, 1995, 1996 and 1997 were $2,171, $26,828, and
$30,443, respectively.
Limitation on Fund Expenses. The Management Agreement between the Fund
and the Investment Advisor provides that the Fund will bear all expenses of its
operations not specifically assumed by the Investment Advisor. In the interest
of limiting the expenses of the Fund during its initial period of operation,
Rupay-Barrington Financial has agreed to bear any expenses for the Fund's first
five years of operations, which would cause the Fund's ratio of operating
expenses to average net assets to exceed 1.95%. However, if in any year
following such five-year period, the Fund's expenses exceed the limits
prescribed by any state in which the Fund's shares are qualified for sale, the
Investment Advisor will be required to reimburse the Fund for such excess, but
may be reimbursed in subsequent years therefor to the extent such reimbursement
would not cause the Fund to exceed such limits. Presently, the most restrictive
expense ratio limitation imposed by any state is 2.5% of the first $30 million
of the Fund's average daily net assets, 2% of the next $70 million of the
average daily net assets, and 1.5% of net assets in excess of $100 million. For
the purpose of determining whether the Fund is entitled to reimbursement, the
expenses of the Fund are calculated on a monthly basis. If the Fund is entitled
to reimbursement, that month's Management Fee will
<PAGE>
be reduced or postponed, with any adjustment made after the end of the year. An
expense reimbursement of $71,381 was required for the fiscal year ended December
31, 1997.
DISTRIBUTOR FOR FUND
Rupay-Barrington Securities Corporation ("Rupay-Barrington
Securities"), a Nevada corporation formed in 1993 as a wholly-owned subsidiary
of Rupay-Barrington Financial, serves as the Fund's distributor.
Rupay-Barrington Securities is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. The offering of the Fund's shares is continuous.
Rupay-Barrington Securities is located at the same address as the Fund - 1000
Ballpark Way, Suite 207A, Arlington, TX 76011.
Rupay-Barrington Securities serves as distributor to the Fund pursuant
to an underwriting agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection with registering and
qualifying its shares under the various state "blue sky" laws, preparing,
setting in type, printing, and mailing its prospectuses and reporting to
stockholders, and issuing its shares, including expenses of confirming purchase
orders.
The Underwriting Agreement provides that Rupay-Barrington Securities
will pay all fees and expenses in connection with distributing prospectuses and
reports for use in offering and selling Fund shares, preparing, setting in type,
printing, and mailing all sales literature and advertising, Rupay-Barrington
Securities' federal and state registrations as a broker-dealer, and offering and
selling Fund shares, except for those fees and expenses specifically assumed by
the Fund. Rupay-Barrington Securities' expenses are paid by Rupay-Barrington
Financial to the extent they exceed revenues.
Sales Commission. Rupay-Barrington Securities acts as the agent of the
Fund in connection with the sale of its shares in all states in which the shares
are qualified and in which Rupay-Barrington Securities is qualified as a
broker-dealer. Under the Underwriting Agreement, Rupay-Barrington Securities
accepts orders for Fund shares at net asset value. The following sales
commission are paid by investors:
<PAGE>
<TABLE>
<CAPTION>
Total Sales Commission+
As a Percentage As a Percentage Portion of Total
of Offering Price of Net Asset of Offering
Amount of Single Sale of the Shares Value of Shares Price Retained
at Offering Price Purchased Purchased by Dealers
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 5.75% 6.10% 5.00%
but less than $100,000 5.00% 5.26% 4.40%
but less than $250,000 4.00% 4.17% 3.50%
but less than $500,000 3.00% 3.09% 2.50%
but less than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 or more none none see below++
- ------------------------------------
</TABLE>
+ At the discretion of Rupay-Barrington Securities, the entire sales
commission may at times be reallowed to dealers. Rupay-Barrington
Securities also may, at its expense, provide additional promotional
incentives or payments to dealers that sell the Fund's shares. In some
instances, the full reallowance, incentives or payments may be offered
only to certain dealers who have sold or may sell significant amounts
of shares. When 90% or more of the sales commission is reallowed, such
dealers may be deemed to be underwriters as that term is defined in the
1933 Act.
++ The following commissions will be paid by Rupay-Barrington Securities
to dealers who initiate and are responsible for purchases of $1 million
or more and for purchases made at net asset value by certain retirement
plans or organizations with collective retirement plan assets of $10
million or more: 1.00% on sales of up to $2 million, plus 0.80% on
sales of $2 million to $3 million, plus 0.50% on sales of $3 million to
$10 million, plus 0.25% on sales of $10 million to $25 million, plus
0.15% on sales in excess of $25 million.
A sales commission equal to 4.00% of the offering price (4.17% of the
net asset value) is applicable to all purchases of shares, regardless
of amount, made for any qualified or non-qualified employee benefit
plan. Of the 4.00% sales commission applicable to such purchases, 3.20%
of the offering price will be reallowed to dealers.
In connection with sales made on behalf of the Fund, Rupay-Barrington
Securities received sales commissions for the fiscal years ended
December 31, 1995, 1996 and 1997 of $3,888, $3,450 and $3,620,
respectively.
The following table sets forth the amount of commission and other
compensation received by Rupay-Barrington Securities for the fiscal
year ended December 31, 1997:
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
Net Underwriting Compensation on Compensation on
Name of Principal Discounts and Redemption and Brokerage Other
Underwriter Commissions Repurchases Commissions Compensation
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rupay-Barrington
Securities [$3,620] [$ 0] [$80] [$805*]
</TABLE>
(*) Fees paid under the Fund's Distribution Plan and Agreement pursuant to
Rule 12b-1 of the Investment Company Act of 1940.
Distribution Plan and Agreement. The Fund has adopted a Distribution
Plan and Agreement (the "Plan") pursuant to Rule 12b-1 of the Investment Company
Act of 1940, for the purpose of compensating Rupay-Barrington Securities for
services provided and expenses incurred by it in promoting the sale of shares of
the Fund, reducing redemptions, and maintaining and improving services provided
to stockholders by Rupay-Barrington Securities.
Continuance of the Plan is subject to annual approval by a vote of the
Board of Directors, including a majority of the Directors who are not interested
persons of the Fund and who have no direct or indirect interest in the Plan or
related arrangements ("Qualified Directors"), cast in person at a meeting called
for that purpose. All material amendments to the Plan must be likewise approved
by the Directors and the Qualified Directors. The Plan may not be amended to
materially increase the costs which the Fund may bear for distribution pursuant
thereto without stockholder approval. The Plan terminates automatically in the
event of its assignment and may be terminated without penalty, at any time, by a
vote of a majority of the Qualified Directors or by approval of a vote of a
majority of the outstanding voting securities of the Fund.
CUSTODIAN
Star Bank, N.A. ("Star Bank") serves as the custodian for the Fund's
securities and cash, but it does not participate in the Fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust Corporation.
Star Bank's mailing address is as follows: Star Bank, N.A., Mutual Fund Custody,
P.O. Box 1118, Cincinnati, Ohio 45218.
PORTFOLIO TRANSACTIONS
Decisions with respect to the purchase and sale of portfolio securities
on behalf of the Fund are made by the Investment Advisor. The Investment Advisor
is responsible for implementing these decisions with respect to the Fund's
portfolio, including the allocation of portfolio brokerage and principal
business. For fixed income securities, it is expected that purchases and sales
of portfolio securities will ordinarily be transacted with the issuer or with a
primary market maker acting as principal on a net basis, with no brokerage
commission being paid the Fund.
In purchasing and selling the Fund's portfolio securities, it is the
Investment Advisor's policy to obtain quality execution at the most favorable
prices through responsible broker-dealers and, in the case of
<PAGE>
agency transactions, at competitive competition rates. However, under certain
conditions, the Fund may pay higher brokerage commissions in return for
brokerage and research services, although it has no current arrangement to do
so. In selecting broker-dealers to execute the Fund's portfolio transactions,
the Investment Advisor will consider such factors as the price of the security,
the rate of the commission, the size and difficulty of the order, the
reliability, integrity, financial condition, general execution and operation
capabilities of competing broker-dealers, and the brokerage and research
services they provide to the Investment Advisor.
The Investment Advisor may cause the Fund to pay a broker-dealer who
furnishes brokerage and/or research services a commission that is in excess of
the commission another broker-dealer would have received for executing the
transaction if it is determined that such commission is reasonable in relation
to the value of the brokerage and/or research services which would have been
provided. In some cases, research services are generated by third parties, but
are provided to the Investment Advisor by or through broker-dealers.
The Investment Advisor may effect principal transactions on behalf of
the Fund with a broker-dealer who furnishes brokerage and/or research services,
or designate any such broker-dealer to receive selling concessions, discounts or
other allowances, or otherwise deal with any such broker-dealer in connection
with the acquisition of securities in underwritings. Additionally, purchases and
sales of fixed income securities are transacted with the issuer, the issuer's
underwriter, or with a primary market maker acting as principal or agent. The
Fund does not usually pay brokerage commissions for these purchases and sales,
although the price of the securities generally includes compensation which is
not disclosed separately. The prices the Fund pays to underwriters of
newly-issued securities usually include a concession paid by the issuer to the
underwriter. Transactions placed through dealers who are serving as primary
market makers reflect the spread between the bid and asked prices.
The Investment Advisor may receive a wide range of research services
from broker-dealers, including information on securities markets, the economy,
individual companies, statistical information, accounting and tax law and
interpretations, technical market action, pricing and appraisal services, and
credit analyses. Research services are received primarily in the form of written
reports, telephone contacts, personal meetings with security analysts, corporate
and industry spokespersons, economists, academicians, government
representatives, and access to various computer-generated data. Research
services received from broker-dealers are supplemental to the Investment
Advisor's own research efforts and, when utilized, are subject to internal
analysis before being incorporated into the investment process.
The Investment Advisor assesses the contribution of the brokerage and
research services provided by broker-dealers, and allocates a portion of the
brokerage business of its clients on the basis of these assessments. In
addition, broker-dealers sometimes suggest a level of business they would like
to receive in return for the various brokerage and research services they
provide. Actual brokerage received by any firm may be less than the suggested
allocation, but can (and often does) exceed the suggestions because total
brokerage is allocated on the basis of all the considerations described above.
In no instance is a broker-dealer excluded from receiving business because it
has not been identified as providing research services.
The Investment Advisor can not readily determine the extent to which
net prices charged by broker-dealers reflect the value of their research
services. In some instances, the Investment Advisor will receive research
services it might otherwise have had to perform for itself. The research
services provided by broker-dealers can be useful to the Investment Advisor in
serving its other clients, but they can also be useful in serving the Fund.
<PAGE>
The Fund does not allocate business to any broker-dealer on the basis
of its sales of the Fund's shares. However, this does not mean that
broker-dealers who purchase Fund shares for their clients will not receive
business from the Fund.
As provided in the Management Agreement between the Fund and the
Investment Advisor, the Investment Advisor is responsible not only for making
decisions with respect to the purchase and sale of the Fund's portfolio
securities, but also for implementing these decisions, including the negotiation
of commissions and the allocation of portfolio brokerage and principal business.
PRICING OF SECURITIES
Securities listed or traded on a national securities exchange are
valued at the last quoted sales prices on the date the valuations are made.
Securities regularly traded in the over-the-counter market are valued at the
last quoted sales price on the Nasdaq National Market. If no sales price is
available for a listed or Nasdaq National Market security, or if the security is
not listed on the Nasdaq National Market, such security is valued at a price
equal to the mean of the latest bid and ask prices. Securities listed or traded
on certain foreign exchanges are valued at the last quoted sales prices on the
date the valuations are made. A security which is listed or traded on more than
one exchange is valued at the quotations on the exchange determined to be the
primary market for such security by the Board of Directors or its delegates.
Fixed income securities are generally traded in the over-the-counter
market and will be valued at a price deemed best to reflect a fair value as
quoted by dealers who make markets in these securities or by an independent
pricing service. Short-term securities (maturing or expiring in 60 days or less)
are valued at their cost in local currency which, when combined with accrued
interest, approximate fair value.
In instances where the price of a security determined by these methods
is deemed not to be representative, the security is valued in the manner
prescribed by the Board to reflect its fair value.
For purposes of determining the Fund's net asset value per share, all
assets and liabilities initially expressed in foreign currencies are converted
to U.S. dollars at the mean of the bid and offer prices of such currencies
against U.S. dollars quoted by any major bank, as determined from time to time
by the Board of Directors. If such quotations are not available, the rate of
exchange will be determined in accordance with policies established in good
faith by the Board. On an ongoing basis, the Board monitors the Fund's method of
valuation.
DIVIDENDS
Unless you elect otherwise, dividends or distributions will be
reinvested on the reinvestment date using the net asset value per share of that
date. The reinvestment date normally precedes the payment date by about 10 days
although the exact timing is subject to change.
NET ASSET VALUE PER SHARE
The purchase and redemption price of the Fund's shares is equal to the
Fund's net asset value per share or share price, plus the applicable sales
commission. The Fund determines its net asset value per
<PAGE>
share by subtracting the Fund's liabilities from its total assets and dividing
the result by the total number of shares outstanding. Among other things, the
Fund's liabilities include accrued expenses and dividends payable and its total
assets include portfolio securities valued at market as well as income accrued
but not yet received. The net asset value per share of the Fund is calculated as
of the close of trading on the New York Stock Exchange ("Exchange") every day
the Exchange is open for trading. The Exchange is closed on the following days:
New Year's Day, Martin Luther King, Jr. Day, Presidents Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
TAX STATUS
The Fund intends to operate in a manner to continue to qualify as a
"regulated investment company" under Subchapter M of the Code.
A portion of the dividends paid by the Fund may be eligible for the
dividends-received deduction for corporate stockholders. For tax purposes, it
does not make any difference whether dividends and capital gain distributions
are paid in cash or in additional shares. The Fund must declare dividends equal
to at least 98% of ordinary income (as of December 31) and capital gains (as of
October 31) in order to avoid a federal excise tax and distribute 100% of
ordinary income and capital gains for the period ending December 31 to avoid
federal income tax.
At the time of your purchase, the Fund's net asset value may reflect
undistributed income, capital gains or net unrealized appreciation of securities
held by the Fund. A subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable either as dividends
or capital gain distributions. For federal income tax purposes, the Fund is
permitted to carry forward its net realized capital losses, if any, for eight
years, and realize net capital gains up to the amount of such losses without
being required to pay taxes on, or distribute such gains.
If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income without deduction for
dividends or other distributions to stockholders; and (ii) the Fund's
distribution to the extent made out of the Fund's current or accumulated
earnings and profits would be taxable to stockholders as ordinary dividends
(regardless of whether they would otherwise have been considered capital gain
dividends).
Taxation of Foreign Stockholders. The Code provides that dividends from
net income will be subject to U.S. tax. For stockholders who are not engaged in
a business in the U.S., this tax would be imposed at the rate of 31% upon the
gross amount of the dividends in the absence of a Tax Treaty providing for a
reduced rate or exemption from U.S. taxation. Distributions of net long-term
capital gains realized by the Fund are not subject to tax unless the foreign
stockholder is a nonresident alien individual who was physically present in the
U.S. during the tax year for more than 182 days.
To the extent the Fund invests in foreign securities, the following
would apply:
Foreign Currency Gains and Losses. Foreign currency gains and losses,
including the portion of gain or loss on the sale of debt securities
attributable to foreign exchange rate fluctuations are taxable as ordinary
income. If the net effect of these transactions is a gain, the dividend paid by
the Fund will be increased; if the result is a loss, the income dividend paid by
the Fund will be decreased. Adjustments to reflect these gains and losses will
be made at the end of the Fund's taxable year.
<PAGE>
YIELD INFORMATION
From time to time, the Fund may advertise a yield figure calculated in
the following manner:
An income factor is calculated for each security in the portfolio,
which in the case of bonds is based upon the security's market value at the
beginning of the period and expected yield-to-maturity, and in the case of
stocks is based upon the stated dividend rate. The income factors are then
totaled for all securities in the portfolio. Next, expenses of the Fund for the
period are deducted from the income to arrive at net income, which is then
converted to a per-share amount by dividing net income by the average number of
shares outstanding during the period. The net income per share is divided by the
net asset value on the last day of the period to produce an annualized yield.
Quoted yield factors are for comparison purposes only, and are not
intended to indicate future performance or forecast the dividend per share of
the Fund.
Investment Performance
Total Return Performance. The Fund's calculation of total return
performance includes the reinvestment of all capital gains distributed and
income dividends for the period or periods indicated, without regard to tax
consequences to a stockholder in the Fund. Total return is calculated as the
percentage change between the beginning value of a static account in the Fund
and the ending value of that account measured by the then current net asset
value, including all shares acquired through reinvestment of income and capital
gains dividends. The results shown are historical and should not be considered
indicative of the future performance of the Fund. Each average annual compound
rate of return is derived from the cumulative performance of the Fund over the
time period specified. The annual compound rate of return for the Fund over any
other period of time will vary from the average.
From time to time, in reports and promotional literature, one or more
existing or future Rupay-Barrington funds, including the Fund, may compare its
yield to Overnight Government Repurchase Agreements, Treasury bills, notes,
and bonds, certificates of deposit, and six-month money market certificates.
Performance or yield may also be compared to indices of broad groups of
unmanaged securities considered to be representative of or similar to
Fund portfolio holdings such as:
Advertising News Services Inc., - "Bank Rate Monitor - the Weekly
Financial Rate Reporter" - a weekly publication which lists the yields
on various money market instruments offered to the public by 100
leading banks and thrift institutions in the U.S., including loan rates
offered by these banks. Bank certificates of deposit differ from mutual
funds in several ways: the interest rate established by the sponsoring
bank is fixed for the term of a CD; there are penalties for early
withdrawal from CDs; and the principal on a CD is insured.
Donaghue Organization, Inc., - "Donaghue's Money Fund Report" - a
weekly publication which tracks net assets, yield, maturity, and
portfolio holdings on approximately 380 money market mutual funds
offered in the U.S. These funds are broken down into various categories
such as U.S. Treasury, Domestic Prince and Euros, Domestic Prime and
Euros and Yankees, and Aggressive.
Lipper Analytical Services, Inc. - Average of Balanced Funds - a
widely used independent research
firm which ranks mutual funds by overall performance, investment
objectives, and assets.
<PAGE>
Lipper Analytical Services, Inc., - "Lipper Mutual Fund Performance
Analysis" - a monthly publication which tracks net assets, total
return, principal return and yield on approximately 950 fixed income
mutual funds offered in the United States. Fund categories include:
Growth, Mixed Income, and Flexible Portfolios.
Major Competitors - the average of the following mutual funds: Fidelity
Balanced, Vanguard Wellington, Twentieth Century Balanced, or other
similar mutual funds.
Merrill Lynch, Pierce, Fenner & Smith, Inc., - "Taxable Bond Indices" -
a monthly publication which lists principal, coupon and total return on
over 100 different taxable bond indices which Merrill Lynch tracks,
together with the par weighted characteristics of each Index. The index
used as a benchmark for the High Yield Fund is the High Yield Index.
The two indices used as benchmarks for the Short-Term Bond Fund are the
91-Day Treasury Bill Index and the 1-2.99 Year Treasury Note Index.
Mutual Fund Values, published by Morningstar, Inc. - a mutual fund
tracking system which provides a top performer list every two weeks
based on performance and risk management.
Salomon Brothers, Inc. "Market Performance" - a monthly publication
which tracks principal return, total return and yield on the Salomon
Brothers Broad Investment Grade Bond Index and the components of the
Index.
Salomon Brothers Broad Investment Grade Index - a widely used index
composed of U.S. domestic government, corporate and mortgage-backed
fixed income securities.
Shearson Lehman Brothers, Inc., "The Bond Market Report" - a monthly
publication which tracks principal, coupon and total return on the
Shearson Lehman Govt./Corp. Index and Shearson Lehman Aggregate Bond
Index, as well as the components of these indices.
Tolerate Systems, Inc., a computer system to which we subscribe which
tracks the daily rates on money market instruments, public corporate
debt obligations and public obligations of the U.S.
Treasury and agencies of the U.S. Government.
Wall Street Journal - a daily newspaper publication which lists the
yields and current market values on money market instruments, public
corporate debt obligations, public obligations of the U.S. Treasury and
agencies of the U.S. government as well as common stocks, preferred
stock, convertible preferred stocks, options and commodities; in
addition to indices prepared by the research department of such
financial organizations as Shearson Lehman/American Express, Inc., and
Merrill Lynch, Pierce, Fenner and Smith, Inc., including information
provided by the Federal Reserve Board.
Performance rankings and ratings periodically in national financial
publications such as MONEY, FORBES, BUSINESS WEEK, BARRON's, etc., will also be
used.
From time to time, in reports and promotions literature: (i) the Fund's
total return performance or P/E ratio may be compared to: (a) the Standard &
Poor's 500 Stock Index and Dow Jones Industrial Average so that you may compare
the Fund's results with those of a group of unmanaged securities widely regarded
by investors as representative of the stock market in general; (b) other groups
of mutual funds
<PAGE>
tracked by: (1) Lipper Analytical Services, a widely used independent research
firm which ranks mutual funds by overall performance, investment objectives, and
assets; or (2) other financial or Business publications, such as Business Week,
Money Magazine, Forbes and Barron's, which provide similar information; or (c)
indices of stock comparable to those in which the Fund invests; (ii) the
Consumer Price Index (the measure for inflation) may be used to assess the real
rate of return from an investment in the Fund; (iii) other government statistics
such as GNP, and import and export figures derived from governmental
publications, e.g., the Survey of Current Business, may be used to illustrate
investment attributes of the Fund or the general economic, business, investment,
or financial environment in which the Fund operates; (iv) the effect of
tax-deferred compounding on the Fund's investment returns, or on return in
general, may be illustrated by graphs, charts, etc., where such graphs or charts
would compare, at various points in time, the return from an investment in the
Fund (or returns in general) on a tax-deferred basis (assuming one or more tax
rates) with the return on a taxable basis; and (v) the sectors or industries in
which the Fund invests may be compared to relevant indices or surveys (e.g., S&P
Industry Surveys) in order to evaluate the Fund's historical performance or
current or potential value with respect to the particular industry or sector. In
connection with (iv) above, information derived from the following chart may be
used.
IRA Versus Taxable Return
Assuming 9% annual rate of return, $2,000 annual contribution and 28%
tax bracket.
Year Taxable Tax Deferred (IRA)
10 $ 28,700 $ 33,100
15 52,400 64,000
20 82,500 111,500
25 125,100 184,600
26 183,300 297,200
An IRA is a long-term investment whose objective is to accumulate
personal savings for retirement. Due to the long-term nature of the investment,
even slight differences in performance will result in significantly different
assets at retirement. Mutual funds, with their diversity of choice, can be used
for IRA investments. Generally, individuals may need to adjust their underlying
IRA investment as their time to retirement and tolerance for risk changes.
THE FUND'S CAPITAL STOCK
The Fund's Amended and Restated Articles of Incorporation, as amended
(the "Articles") authorize the Board of Directors to classify and reclassify any
and all shares which are then unissued, including unissued shares of capital
stock into any number of classes or series, each class or series consisting of
such number of shares and having such designations, such powers, preferences,
rights, qualifications, limitations, and restrictions, as shall be determined by
the Board of Directors subject to the Investment Company Act of 1940, and other
applicable law. The shares of any such additional classes or series might
therefore differ from the shares of the present class and series of capital
stock and from each other as to preferences, conversions or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption, subject to applicable law, and might thus be superior
or inferior to the capital stock or to other classes or series in various
characteristics. The Board of Directors may increase or
<PAGE>
decrease the aggregate number of shares of stock or the number of shares of
stock of any class or series that the Fund has authorized to issue without
stockholder approval.
Except to the extent that the Fund's Board of Directors might provide
by resolution that holders of shares of a particular class are entitled to vote
as a class on specified matters presented for a vote of the holders of all
shares entitled to vote on such matters, there would be no right of class vote
unless and to the extent that such a right might be construed to exist under
Maryland law. The Articles contain no provision entitling the holders of the
present class of capital stock to a vote as a class on any matter. Accordingly,
the preferences, rights, and other characteristics attaching to any class of
shares, including the present class of capital stock, might be altered or
eliminated, or the class might be combined with another class or classes, by
action approved by the vote of the holders of a majority of all the shares of
all classes entitled to be voted on the proposal, without any additional right
to vote as a class by the holders of the capital stock or of another effected
class or classes.
Stockholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of or
removal of directors (to the extent hereinafter provided) and on other matters
submitted to the vote of stockholders. There will normally be no meetings of
stockholders for the purpose of electing directors unless and until such time as
less than a majority of the directors holding office have been elected by
stockholders, at which time the directors then in office will call a
stockholders' meeting for the election of directors. Except as set forth above,
the directors shall continue to hold office and may appoint successor directors.
Voting rights are not cumulative, so that the holders of more than 50% of the
shares voting in the election of directors can, if they choose to do so, elect
all the directors of the Fund, in which event the holders of the remaining
shares will be unable to elect any person as a director. As set forth in the
By-Laws of the Fund, a special meeting of stockholders of the Fund shall be
called by the Secretary of the Fund on the written request of stockholders
entitled to cast at least 10% of all votes of the Fund entitled to be cast at
such meeting. Stockholders requesting such a meeting must pay to the Fund the
reasonably estimated costs of preparing and mailing the notice of the meeting.
The Fund, however, will otherwise assist the stockholders seeking to hold the
special meeting in communicating to the other stockholders of the Fund to the
extent required by Section 16(c) of the Investment Company Act of 1940.
FEDERAL AND STATE REGISTRATION OF SHARES
The Fund's shares are registered for sale under the 1933 Act, and the
Fund or its shares are registered under the laws of all states requiring
registration in which it intends to sell its shares, as well as the District of
Columbia and Puerto Rico.
LEGAL COUNSEL
Sachnoff & Weaver, Ltd., whose address is 30 South Wacker Drive, 29th
Floor, Chicago, Illinois, 60606-7484, is legal counsel to the Fund.
<PAGE>
INDEPENDENT AUDITORS
Tait, Weller & Baker, whose address is 2 Penn Center Plaza, Suite 700,
Philadelphia, PA 19102- 1707, are independent auditors to the Fund.
The financial statements of the Fund for the year ended December 31,
1997, and the report of independent accountants are included in this Statement
of Additional Information.
RATINGS OF CORPORATE DEBT SECURITIES
Moody's Investors Services, Inc. (Moody's)
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge."
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known of high grade
bonds.
A - Bonds rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interests payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Standard & Poor's Corporation (S&P) or Duff & Phelps Investor Services.
AAA - This is the highest rating assigned to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditor's Report..................................... F-2
Schedule of Portfolio Investments................................ F-3
Statement of Assets and Liabilities December 31, 1997............ F-5
Statement of Operations for the Year Ended December 31, 1997 F-6
Statement of Changes in Net Assets for the Years Ended
December 31, 1996 and 1997 F-7
Financial Highlights For a Share Outstanding Throughout Each Period for
the Years Ended
December 31, 1995, 1996 and 1997........................................F-8
Notes to the Financial Statements.......................................F-9
PAGE>
Report of Independent Certified Public Accountants
To the Shareholders and Board of Directors of Rupay-Barrington Total Return
Fund, Incorporated
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of the
Rupay-Barrington Total Return Fund, Inc., including the schedule of portfolio
investments as of December 31, 1997, and the related statement of operations,
the statement of changes in net assets, and the financial highlights for the
period then ended. These financial statements and financial highlights are the
responsibility of the Funds management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The Financial Statements and financial highlights presented for the
year ended December 31, 1996 and prior were audited by other auditors whose
report dated February 7, 1996, expressed an unqualified opinion on those
statements. We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatements. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Rupay-Barrington Total Return Fund, Inc., as of Decmeber 31, 1997, the results
of its operations, the changes in its net assets, and the financial high-
lights for the period then ended, in conformity with generally accepted
accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 23, 1998
<PAGE>
Schedule of Portfolio Investments
December 31, 1997
<TABLE>
<CAPTION>
Number
of Market
Shares Security Value
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK: 53.64%
AGRICULTURE EQUIPMENT: 1.33%
1,000 AGCO Corp. $ 29,250
------------
BEVERAGES: 1.65%
1,000 PepsiCo, Inc. 36,437
------------
COMMUNICATION EQUIPMENT: 4.66%
1,000 Andrew Corp * 24,000
1,000 Loral Space & Communications * 21,438
1,000 Motorola, Inc. 57,063
------------
102,501
-------
COMPUTERS: 6.56%
1,000 Hewlett Packard Co. 62,500
600 International Business Machines Corp. 62,737
1,000 Seagate Technology * 19,250
------------
144,487
-------
COMPUTER SOFTWARE: 2.00%
1,000 Electronic Data System 43,937
------------
ELECTRICAL EQUIPMENT: 1.91%
1,000 AMP, Inc. 42,000
------------
ENERGY: 7.32%
1,000 Baker Hughes, Inc. 43,625
1,000 Diamond Offshore Drilling, Inc. 48,125
1,000 Noble Drilling Corp. * 30,625
1,000 Unocal Corp. 38,813
------------
161,188
-------
ENTERTAINMENT-RECREATION: 4.70%
1,000 Circus Circus Entertainment, Inc. * 20,500
2,000 Viacom Inc. Class B * 82,875
------------
103,375
-------
FINANCIAL: 2.59%
1,000 Fannie Mae 57,062
------------
INSURANCE: 7.44%
1,000 Fremont General Corp. 54,750
2,000 Reliance Group Holdings 28,250
1,500 Travelers Group, Inc. 80,812
------------
163,812
-------
MEDICAL SUPPLIES: 1.61%
1,000 Texas Biotechnology * 6,187
1,000 US Surgical Corp. 29,313
------------
35,500
------
METALS & MINING: 0.66%
500 Newmont Mining Corp. 14,656
------------
OFFICE SUPPLIES: 1.29%
2,000 Office Max, Inc. * 28,375
------------
PHARMACEUTICALS: 2.16%
1,000 Mylan Laboratories, Inc. 20,938
2,000 Perrigo Co. * 26,750
------------
47,688
------
REAL ESTATE: 2.61%
1,998 Patriot American Hospitality, Inc. 57,443
------------
RESTAURANTS: 1.09%
1,000 Wendy's Int'l., Inc. 24,063
------------
TOBACCO: 2.06%
1,000 Philip Morris Cos., Inc. 45,312
------------
UTILITIES: 2.00%
1,000 CMS Energy Corp. 44,063
------------
TOTAL COMMON STOCK:
(Cost: $1,137,435) 1,181,149
-----------
PREFERRED STOCK: 13.34%
BEVERAGES: 1.24%
1,000 Cadbury Schweppes P.L.C. 27,250
------------
COMMUNICATIONS: 3.61%
3,000 GTE Delaware 79,500
------------
FINANCE: 3.54%
1,000 KMart Financing Convertible; 7.75% 51,625
1,000 UNUM Corp.; 8.8% 26,375
------------
78,000
------
INSURANCE: 1.20%
1,000 American General Capital L.L.C.
Series A; 8.45% 26,313
------------
REAL ESTATE: 3.75%
2,000 Equity Residential Property
Series C; 9.125% 53,875
1,000 Equity Residential Property 7% 28,750
------------
82,625
------
TOTAL PREFERRED STOCKS:
(Cost: $295,140) 293,688
------------
Principal
Amount
CORPORATE OBLIGATIONS: 9.08%
$100,000 Fixed Income UIT 12/30/01; 9.25% 100,000
100,000 Graves Financial Bond #8 6/05/98; 10% 100,000
------------
TOTAL CORPORATE OBLIGATIONS:
(Cost: $200,000) 200,000
------------
SHORT TERM INVESTMENTS: 20.02%
440,791 Star Bank Money Market Fund
(Cost: $440,791) 440,791
------------
TOTAL INVESTMENTS:
(Cost: $2,073,366)** 96.08% 2,115,628
Other assets-net 3.92% 86,264
------- ------------
NET ASSETS 100.00% $ 2,201,892
======= ===========
</TABLE>
* Non-income producing security
** Cost for Federal income tax purpose is $2,073,366 and net
unrealized appreciation consists of:
Gross unrealized appreciation $ 124,796
Gross unrealized depreciation (82,534)
-------
Net unrealized appreciation $ 42,262
============
See Notes to Financial Statements
<PAGE>
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value
(identified cost of $1,632,575)(Notes 1 & 3) $1,674,837
Short term investments 440,791
Receivables:
Dividend and interest 7,200
Capital stock sold 377 7,577
------
Deferred organization costs (Note 1) 106,031
-----------
TOTAL ASSETS 2,229,236
-----------
LIABILITIES
Distribution payable 502
Due to advisor 25,480
Accrued expenses 1,362
-------
TOTAL LIABILITIES 27,344
------
NET ASSETS $2,201,892
==========
NET ASSET VALUE OFFERING AND REDEMPTION
PRICE PER SHARE ($2,201,892 / 227,517 shares outstanding) $ 9.68
==========
At December 31, 1997 there were 50,000,000 shares of $.01 par value stock
authorized and components of net assets are:
Paid in capital $2,094,620
Accumulated net realized gain on investments 65,010
Net unrealized appreciation of investments 42,262
------
Net Assets $2,201,892
==========
</TABLE>
See Notes to Financial Statements
<PAGE>
Statement of Operations
Year ended December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Interest $ 81,876
Dividend 56,376
----------
Total income $ 138,252
-----------
Expenses:
Investment management fees (Note 2) 30,443
Transfer agent fees 14,499
Administration (Note 2) 18,762
Legal and audit fees 16,005
Custody and accounting fees 15,739
Registration fees 4,300
Printing 3,244
Amortization of
organization cost (Note 1) 40,938
Insurance expense 1,693
-----
Total expenses 145,623
Less: reimbursements and waivers by manager (71,381)
-------
Net expenses 74,242
------
Net investment income 64,010
------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 152,327
Net change in unrealized appreciation on investments 193,117
-------
Net gain on investments 345,444
-------
Net increase in net assets resulting from operations $ 409,454
===========
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Years ended December 31,
- ------------------------
1997 1996
------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 64,010 $ 73,403
Net realized gain on investments 152,327 253,585
Net change in unrealized appreciation
(depreciation) of investments 193,117 (119,465)
------- --------
Net increase in net assets resulting
from operations 409,454 207,523
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income
($.21 and $.12 per share, respectively) (68,866) (59,802)
Net realized gain from investment transaction
($.70 and $.40 per share) (147,579) (191,699)
CAPITAL SHARE TRANSACTIONS
Net increase (decrease) in net assets resulting
from capital share transactions* (2,916,852) 3,843,303
---------- ---------
Net increase (decrease) in net assets (2,723,843) 3,799,325
Net assets at beginning of the year 4,925,735 1,126,410
--------- ---------
NET ASSETS at the end of the year
(including undistributed net investment
income of $-0- and $3,233, respectively) $ 2,201,892 $4,925,735
============ ===========
*A summary of capital share transactions follows:
Year ended Year ended
December 31, 1997 December 31, 1996
----------------- -----------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold 74,341 $ 760,185 457,840 $4,503,585
Shares reinvested
from distributions 21,591 212,316 25,764 251,256
Shares redeemed (375,106) (3,889,353) (93,385) (911,538)
-------- ---------- ------- --------
Net increase (decrease) (279,174)($2,916,852) 390,219 $3,843,303
======== =========== ======= ==========
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For a Share Outstanding Throughout Each Period
- ----------------------------------------------
Aug. 11, 1995*
Years ended December 31 thru
1997 1996 Dec. 31, 1995
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value,
beginning of period $ 9.72 $ 9.67 $10.00
Income from investment operations-
Net investment income 0.20 0.13 0.04
Net realized and unrealized
gain (loss) on investments 0.67 0.44 (0.33)
---- ---- ------
Total from investment operations 0.87 0.57 (0.29)
---- ---- ------
Less distributions-
Distributions from net
investment income (0.21) (0.12) (0.04)
Distributions from realized
gains on investments (0.70) (0.40) -0-
------ ------ ---
Total distributions (0.91) (0.52) (0.04)
------ ------ ------
Net asset value, end of period $ 9.68 $ 9.72 $9.67
======= ======= =====
Total Return 8.91% 5.89% (2.89)%
Ratios/Supplemental Data
Net assets, end of period (000's) $2,202 $4,926 $1,126
Ratio to average net assets-(A)
Expenses (B) 3.82% 6.29% 1.95%**
Expenses-net (C) 1.95% 1.95%
Net investment income (B) 1.68% 2.06% 1.72%**
Portfolio turnover rate 112.02% 1.14% 0.00%
Average commission rate
paid per share $0.0825 --- ---
</TABLE>
* Commencement of operations
** Annualized
(A) Management fee waivers reduced the expense ratios and increased net
investment income ratios by 1.87% in 1997, 4.34% in 1996 and 3.14% in 1995.
(B) Expense ratio has been increased to include additional custodian fees in
1995 which were offset by custodian fee credits.
(C) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
December 31, 1997
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Rupay-Barrington Total Return Fund,
Inc. (formerly Valley Forge Capital Holdings Total Return Fund, Inc.)(the
"Fund") is registered under The Investment Company Act of 1940, as a diversified
open-end management company.
The investment objective of the fund is to seek capital appreciation, current
income and preservation of capital by investing in a diversified portfolio of
equity securities and fixed income securities.
The following is a summary of significant accounting policies consistently
followed by the Fund. The policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Investments in securities listed or traded on a
nationally recognized securities exchange are valued at the last quoted sales
price on the date the valuations are made. Securities regularly traded in the
over-the-counter market are valued at the last quoted sales price on the NASDAQ
System. If no sales price is available for a listed or NASDAQ security, or if
the security is not listed on NASDAQ, such security is valued at a price equal
to the mean of the latest bid and ask prices.
B. Federal Income Taxes. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no federal
income tax provision is required.
C. Security Transactions. Security transactions are accounted for
on the trade date. The cost of securities sold is determined on a
first-in, first-out basis.
D. Deferred Organizational Expenses. Organizational expenses are being amortized
on a straight line basis over a period not exceeding 60 months beginning at the
Fund's commencement of operations.
E. Distribution to Shareholders. Distributions from investment
income and realized gains, if any, are recorded on the
ex-dividend date.
F. Other. Dividend income is recorded on the ex-dividend date. Interest income
is recorded on an accrual basis.
G. Accounting Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS--The Fund has engaged
Rupay-Barrington Advisors, Inc. a wholly-owned subsidiary of Rupay-Barrington
Financial Group Inc., to manage its investments. The Fund pays its Advisors an
investment management fee for investment management and advisory services which
is computed at an annual rate of 0.80 of 1% of the Fund's daily net assets.
Rupay-Barrington Fianancial Group Inc. has agreed to reimburse the Fund for any
expenses, during the Fund's first five years of operations, which would cause
the Fund's ratio of operating expenses to exceed 1.95% of average net assets. An
expense reimbursement of $71,381 was required for the year ended December 31,
1997.
Certain officers and directors of the Fund are also officers and directors of
the investment advisor.
NOTE 3-PURCHASES AND SALES OF SECURITIES--For the year ended December 31, 1997,
the Fund made purchases and sales of securities other than short-term notes
aggregated $2,903,877 and $4,728,654 respectively.
NOTE 4-DISTRIBUTION PLAN-- The Fund has adopted a Distribution Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940. Under the plan in effect
for the year ended December 31, 1997, Rupay-Barrington Securities Corp., a
wholly-owned subsidiary of Rupay-Barrington Financial Group Inc., was entitled
to a fee at an annual rate of 0.35 of 1% of the Fund's daily net assets.
Rupay-Barrington Securities Corp. uses these fees to pay its dealers whose
clients hold portfolio shares and for other distribution-related activities.
<PAGE>
<PAGE>
PART C
Other Information
Item 24. Financial Statements and Exhibits
(a) Condensed Financial Information
(Financial Highlights) is included in Part A of
the Registration Statement.
Schedules of Portfolio Investments, Statement of
Assets and Liabilities, Statement of Operations,
Statement of Changes in Net Assets, Financial
Highlights for a Share Outstanding throughout Each
Period is included in the Statement of Additional
Information. These financial statements have been
audited by Tait, Weller & Baker, independent
auditors, as stated in their report appearing in the
Statement of Additional Information and is given upon
their authority as experts in accounting and
auditing.
(b) Exhibits.
(1)(a) Articles of Amendment and Restatement
(Exhibit (1) to the Company's
Registration Statement on Form N-1A
(No. 33-79068) as filed with the
SEC on May 16, 1994)*
(b) Articles of Amendment (filed herewith).
(2) By-Laws of Registrant, dated January 20,
1994 (Exhibit (2) to the
Company's Registration Statement on Form
N-1A (No. 33-79068) as filed
with the SEC on May 16, 1994)*
(3) Inapplicable
(4)(a) Specimen Stock Certificate - Inapplicable
(Shares to be uncertificated)
(b) The Articles of Amendment and Restatement
and By-Laws of the Registrant included as
Exhibits (1) and (2) are incorporated herein
by reference.
(5)(a) Investment Management Agreement between
Registrant and Valley Forge
Advisors, Inc. (Exhibit (5)(a) to the
Company's Registration Statement on
Form N-1A (No. 33-79068) as filed with the
SEC on March 1, 1995)*
(b) Investment Management Agreement between
Registrant and The Marshall
Plan, L.P.**
(6)(a) Distribution Agreement between Registrant
and Valley Forge Distributors,
Inc. (Exhibit (6)(a) to the Company's
Registration Statement on Form N-
1A (No. 33-79068) as filed with the SEC on
March 1, 1995)*
<PAGE>
(b) Dealer Agreement of Valley Forge
Distributors, Inc. (Exhibit (6)(b) to the
Company's Registration Statement on Form
N-1A (No. 33-79068) as filed
with the SEC on March 1, 1995)*
(7) Inapplicable
(8)(a) Custodian Services Agreement between
Registrant and PNC Bank,
N.A.***
(b) Custody Agreement between the Registrant
and Star Bank, N.A. (Exhibit
(8)(b) to the Company's Registration
Statement on Form N-1A (No. 33-
79068) as filed with the SEC on April 28,
1997)*
(9)(a) Transfer Agency Services Agreement, between
Registrant and PFPC,
Inc.***
(b) Administration and Accounting Services
Agreement***
(c) Expense Limitation Agreement between
Registrant and Valley Forge Capital Holding
Inc. (Exhibit (9)(c) to the Company's
Registration Statement on Form N-1A (No.
33-79068) as filed with the SEC on
March 1, 1995)*
(d) Transfer Agent Agreement between the
Registrant and Fund Services Inc.Exhibit (9)
(d) to the Company's Registration Statement
on Form N-1A (No. 33-79068) as filed with
the SEC on April 28, 1997)*
(e) Administrative Services Agreement between
the Registrant and Commonwealth Shareholder
Services, Inc. (Exhibit (9)(e) to the
Company's Registration Statement on Form
N-1A (No. 33-79068) as filed
with the SEC on April 28, 1997)*
(f) Accounting Services Agreement between the
Registrant and Commonwealth Fund Accounting,
Inc. (Exhibit (9)(f) to the Company's
Registration Statement on Form N-1A
(No. 33-79068) as filed with the
SEC on April 28, 1997)*
(10) Opinion and Sachnoff & Weaver, Ltd.
(filed herewith)
(11) Consent of Tait, Weller & Baker
(filed herewith)
(12) Inapplicable
(13) Initial Capitalization Agreement between
Registrant and Valley Forge
Capital Holdings Inc. (Exhibit (13) to the
Company's Registration Statement on Form
N-1A (No. 33-79068) as filed with the SEC on
March 1, 1995)*
(14) Inapplicable
<PAGE>
(15) Distribution Plan and Agreement between the
Fund and Valley Forge Distributors.
(Exhibit (15) to the Company's Registration
Statement on Form N-1A (No. 33-79068) as
filed with the SEC on March 1, 1995)*
(16) Inapplicable
(17) Financial Data Schedule
(18) Inapplicable
- --------------------------
* These exhibits are incorporated herein by reference to the registration
statement referenced after each exhibit next to which an asterisk appears.
** This Agreement was terminated effective March 31, 1996.
*** This Agreement was terminated effective October 31, 1996.
Item 25. Persons Controlled by or Under Common Control With Registrant.
None.
Item 26. Number of Holders of Securities
As of December 31, 1997, there were 118 record holders of the
capital stock of Rupay-Barrington Total Return Fund, Inc.
Item 27. Indemnification
The Registrant does not presently have an Officers and
Directors insurance policy for the benefit of its officers and
directors.
Article X, Section 10.01 of the Registrant's By-Laws provides
as follows:
Section 10.01. Indemnification and Payment of Expenses in Advance: The
Corporation shall indemnify any individual ("Indemnitee") who is a present or
former director, officer, employee, or agent of the Corporation, or who is or
has been serving at the request of the Corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust or
other enterprise, who, by reason of his position was, is, or is threatened to be
made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against any judgments,
penalties, fines, settlements, and reasonable expenses (including attorneys'
fees) incurred by such Indemnitee in connection with any Proceeding, to the
fullest extent that such indemnification may be lawful under Maryland law. The
Corporation shall pay any reasonable expenses so incurred by such Indemnitee in
defending a Proceeding in advance of the final disposition thereof to the
fullest extent that such advance payment may be lawful under Maryland law.
Subject to any applicable limitations and requirements set forth in the
Corporation's Articles of
<PAGE>
Incorporation and in these By-Laws, any payment of indemnification or advance of
expenses shall be made in accordance with the procedures set forth in Maryland
law.
Notwithstanding the foregoing, nothing herein shall protect or
purport to protect any Indemnitee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office ("Disabling Conduct").
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court or
other body before whom the Proceeding was brought
that the Indemnitee was not liable by reason of
Disabling Conduct; or
(b) in the absence of such a decision, there is a
reasonable determination, based upon a review of the
facts, that the Indemnitee was not liable by reason
of Disabling Conduct, which determination shall be
made by:
(i) the vote of a majority of a quorum of
directors who are neither "interested
persons" of the Corporation as defined in
Section 2(a)(19) of the Investment Company
Act of 1940, nor parties to the Proceeding;
or
(ii) an independent legal counsel in a written
opinion.
Anything in this Article X to the contrary notwithstanding, any advance
of expenses by the Corporation to any Indemnitee shall be made only upon the
undertaking by such Indemnitee to repay the advance unless it is ultimately
determined that such Indemnitee is entitled to indemnification as above
provided, and only if one of the following conditions is met:
(a) the Indemnitee provides security for his undertaking; or
(b) the Corporation shall be insured against losses arising by
reason of any lawful advances; or
(c) there is a determination, based on a review of readily
available facts, that there is reason to believe that the
Indemnitee will ultimately be found entitled to
indemnification, which determination shall be made by:
(i) a majority of a quorum of directors who are neither
"interested persons" of the Corporation as defined
in Section 2(a)(19) of the Investment Company Act,
nor parties to the Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.02 of the Registrant's By-Laws provides as follows:
Section 10.02. Insurance of Officers, Directors, Employees and Agents:
To the fullest extent permitted by applicable Maryland Law and by Section 17(h)
of the Investment Company Act, as from time to time amended, the Corporation may
purchase and maintain insurance on behalf of any person who is or
<PAGE>
was a director, officer, employee, or agent of the Corporation, or who is or was
serving at the request of the Corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him in or
arising out of his position, whether or not the Corporation would have the power
to indemnify him against such liability.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections of Investment Advisor.
Rupay-Barrington Advisors, Inc. (the "Investment Advisor"), a wholly owned
subsidiary of Rupay-Barrington Financial, is not currently substantially
employed other than as investment advisor to the Fund.
Set forth below are the officers and Directors of the
Investment Advisor who have other substantial businesses, professions,
vocations, or employment aside from that of Director or officer of the
Investment Advisor:
Fritz Bensler (age 41) is President of the Fund and President and Portfolio
Manager for Rupay-Barrington Advisors, a subsidiary of Rupay-Barrington
Financial. From November 1995 until joining Rupay- Barrington Advisors in
January 1997, Mr. Bensler was an equity security analyst and portfolio manager
for JPJ Investment Management, Inc. ("JPJ"). From 1993 until joining JPJ, Mr.
Bensler was a self-employed consultant. Mr. Bensler was a financial analyst with
Martin Marietta Corp. from 1984 to 1991 where he analyzed sales and expense data
for a division of the company. Mr. Bensler was a senior accountant for Pryor &
Associates, P.C., C.P.A., a public accounting firm, from 1980 to 1984. Mr.
Bensler received a CPA certificate from the state of Colorado in 1983. Mr.
Bensler received a Masters of Business Administration degree from Texas
Christian University in 1993 and a Bachelor of Science degree in accounting from
the University of Northern Colorado in 1980. Mr. Bensler is a member of the
Denver Society of Security Analysts.
Certain directors and officers of the Investment Advisor also may, in the
future, serve as officers and/or directors of one or more of other mutual funds
sponsored by Rupay-Barrington Financial and/or one or more of the affiliated
entities listed herein. See also "Management of Fund," in Registrant's Statement
of Additional Information.
Item 29. Principal Underwriters.
The principal underwriter for the Registrant is Rupay-Barrington Securities
Corporation ("Rupay- Barrington Securities"). Rupay-Barrington Securities may
serve, in the future, as the principal underwriter
<PAGE>
for one or more other funds. Rupay-Barrington Securities is a wholly-owned
subsidiary of Rupay- Barrington Financial, is registered as a broker-dealer
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. Rupay-Barrington Securities will receive
commissions or other compensation for acting as principal underwriter.
The address of each of the directors and officers of Rupay-Barrington Securities
listed below is 1000 Ballpark Way, Suite 207A, Arlington, TX 76011.
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter With Registrant
Don Watkins President None
Item 30. Location of Accounts and Records.
All accounts, books, and other documents required to be maintained by the
Registrant under Section 31(a) of the Investment Company Act of 1940 and the
rules thereunder will be maintained by the Registrant at its offices at 1000
Ballpark Way, Suite 302, Arlington, TX 76011. Its transfer, dividend disbursing,
and stockholder service activities are performed by Fund Services Inc., P.O. Box
26305, Richmond, Virginia 23260-6305. Custodian activities for the Registrant
are performed at Star Bank, N.A., Mutual Fund Custody, P.O. Box 1118,
Cincinnati, Ohio 45201. Although the Registrant does not presently intend to
purchase portfolio securities outside of the United States, at such time as it
determines to make such purchases, appropriate service providers will be
retained to perform such services as are necessary.
Item 31. Management Services.
Registrant is not a party to any management related service
contract, other than as set forth in the Prospectus.
Item 32. Undertakings.
(a) Not Applicable
(b) Not Applicable
(c) Upon request, the Registrant will furnish, without
charge, a copy of the Registrant's latest annual
report to stockholders and the most recent
semi-annual report succeeding the annual report, when
available, to each person to whom a prospectus is
delivered.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Denver and State of Colorado, this 5th day of March, 1998.
RUPAY-BARRINGTON TOTAL RETURN FUND, INC.
By: /s/ Fritz Bensler
Fritz Bensler, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Fritz Bensler, his or her true and lawful
attorney and agent to take any and all action and execute any and all
instruments which said attorney and agent may deem necessary or advisable to
enable the Rupay-Barrington Total Return Fund, Inc. (the "Corporation") to
comply with the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended, and any rules, regulations, orders or other
requirements of the United States Securities and Exchange Commission thereunder,
in connection with the registration under the Securities Act of 1933, as
amended, of shares of the Corporation, to be offered by the Corporation, and the
registration of the Corporation under the Investment Company Act of 1940, as
amended, including specifically, but without limitation of the foregoing, power
and authority to sign the name of the Corporation on its behalf, and to sign the
names of each of such directors and officers on his or her behalf as such
director or officer to any amendment or supplement (including Post-Effective
Amendments) to the Registration Statement on Form N-1A of the Corporation filed
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended, and the Registration Statement on Form N-1A of the Corporation under
the Investment Company Act of 1940, as amended, and to any instruments or
documents filed or to be filed as a part of or in connection with such
Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Signature Title Date
/s/ Fritz Bensler President (Principal March 5, 1998
- ------------------------------------
Fritz Bensler Executive Officer)
/s/ Frederick A. Wolf Treasurer of Financial March 5, 1998
- -----------------------------------
Frederick A. Wolf Officer) and Director
/s/ Bradley L. Newman Director March 5, 1998
- ---------------------------------
Bradley L. Newman
/s/ Glen Wilkerson
Director March 5, 1998
Glen Wilkerson
/s/ Judy A. Champine Director March 5, 1998
- ----------------------------------
Judy A. Champine
</TABLE>
<PAGE>
VALLEY FORGE CAPITAL HOLDINGS TOTAL RETURN FUND, INC.
ARTICLES OF AMENDMENT
Valley Forge Capital Holdings Total Return Fund, Inc., a Maryland
corporation having its principal office in Baltimore, Maryland (hereinafter
called the "Corporation"), hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The Articles of Incorporation are hereby amended by striking out
Article 1 in its entirety and inserting in lieu thereof the following:
The name of the Corporation is Rupay-Barrington Total Return Fund, Inc.
SECOND: The amendment of the Articles of Incorporation of the Corporation
as hereinabove set forth has been duly advised by the board of directors and
approved by the stockholders of the Corporation.
IN WITNESS WHEREOF: Valley Forge Capital Holdings Total Return Fund, Inc.,
has caused these presents to be signed in its name and on its behalf by its
President and attested by its Secretary on this 21st day of November, 1997.
ATTEST: Valley Forge Capital Holdings
Total Return Fund, Inc.
/s/ Larry S. Mao /s/ Fritz Bensler
- ----------------- -----------------
Larry S. Mao, Secretary Fritz Bensler, President
THE UNDERSIGNED, Fritz Bensler, the President of Valley Forge Capital
Holdings Total Return Fund, Inc., who executed on behalf of said Corporation,
the foregoing Articles of Amendment, of which this certificate is made a part,
hereby acknowledges, in the name and on behalf of said Corporation, the
foregoing Articles of Amendment to be the corporate act of said Corporation and
further certifies that, to the best of his knowledge, information, and belief,
the matters and facts set forth therein with respect to the approval thereof are
true in all material respects, under the penalties of perjury.
/s/ Fritz Bensler
----------------------------------
Fritz Bensler
(Sachnoff & Weaver letterhead)
(312) 207-6463
March 5, 1998
Board of Directors
Rupay-Barrington
Total Return Fund, Inc.
1000 Ballpark Way, Suite 302
Arlington, Texas 76011
Re: Rupay-Barrington Total Return Fund, Inc.
Post-Effective Amendment No. 3 to Registration Statement on
Form N-1A
Registration No. (33-79068)
To The Board Of Directors:
At your request, we have examined the above-referenced Post-Effective
Amendment to the Registration Statement on Form N-1A (the " Registration
Statement") to be filed by Rupay- Barrington Total Return Fund, Inc., a Maryland
corporation (the Fund) with the Securities and Exchange Commission under the
Securities Act of 1933, as amended and the Investment Company Act of 1940, as
amended, with respect to the offering on a continuous basis of an indefinite
number of shares of capital stock of the Fund, par value $.01 per share (the
"Capital Stock").
As counsel to the Fund, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Articles of Amendment and
Restatement of the Fund, and the Bylaws of the Fund and such other documents,
corporate records, certificates of public officials and instruments as we have
considered necessary or advisable for the purpose of this opinion. We have
assumed the authenticity of all documents submitted to us as originals and the
conformity to original documents of all documents submitted to us as copies. We
have not independently verified such assumptions.
<PAGE>
Board of Directors
March 5, 1998
Page 2
We are members of the Bar of the State of Illinois and we express no
opinion as to the law of any jurisdiction other than the laws of the State of
Illinois and the federal laws of the United States.
Subject to the foregoing and based on such examination, we are of the
opinion that the shares of the Fund's Capital Stock to be issued and sold by the
Company pursuant to the Registration Statement will be, upon issuance, sale and
delivery in the manner and under the terms and conditions described in the
Registration Statement, legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us contained in the "Legal
Matters" section of the Registration Statement, including the Statement of
Additional Information constituting a part thereof.
Very truly yours,
SACHNOFF & WEAVER, LTD.
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in Post-Effective Amendment No.3
to the Registration Statement on Form N-1A of the Rupay-Barrington Total Return
Fund, Inc. and to the use of our report dated January 23, 1998 on the financial
statements and financial highlights. Such financial statements and financial
highlights are included in the Statement of Additional Information, which is
part of such Registration Statement.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
March 5, 1998
<PAGE>
