PROSPECTUS 497(c)33-90522
Avalon Capital, Inc.
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Avalon Capital, Inc. (the "Company") is a non-diversified closed-end
management investment company. The Company's primary investment objective is
long-term capital appreciation. The Company will seek to achieve its objective
by investing in a portfolio of securities that possess fundamental investment
value and may be purchased at a reasonable cost. There is no assurance that the
Company will achieve its objectives. See "The Company and its Objectives,
Policies, and Risks."
Hutner Capital Management, Inc. ("Hutner Capital Management") is the
Company's investment adviser. The address of the Company and Hutner Capital
Management is 34 Chambers Street, Suite 200, Princeton, New Jersey 08542, and
its telephone number is (609) 683-3916. American Data Services, Inc. ("ADS") is
the Company's administrator. The address of ADS is The Hauppauge Corporate
Center, 150 Motor Parkway, Hauppauge, New York 11788, and its telephone number
is (516) 951-0500.
The Company has listed 3 million shares of its common stock on the Nasdaq
Small Cap Market. The Company's symbol for its common stock is "MIST." The
Company's market value per share of common stock on December 26, 1997 was $12.00
per share.
To provide additional shareholder liquidity, the Company has adopted a
fundamental policy that requires it to make an annual repurchase offer to
purchase a specified percentage of the company's outstanding shares at the
then-current net asset value. The annual repurchase offer will occur in February
of each year. The Company may also, at its sole discretion, offer to sell
additional shares of its common stock on a quarterly basis. See "Repurchase
Offers."
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The Prospectus sets forth concisely information about the Company that a
prospective investor ought to know before investing. Investors are advised to
read this Prospectus carefully and retain it for future reference. A Statement
of Additional Information about the Company has been filed with the Securities
and Exchange Commission and is available, without charge, upon writing or
calling ADS at the above location. The Statement of Additional Information has
been incorporated by reference into this Prospectus. The table of contents of
the Statement of Additional Information appears on page __ of this Prospectus.
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Investors should be aware that shares of a closed-end equity fund
frequently tend to trade at a discount. Accordingly, an investor who purchases
the common stock of the Company may experience a risk of loss to capital.
The date of this Prospectus and the Statement of Additional
Information is January 6, 1998.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
The Company.........................Avalon Capital, Inc. (the "Company") is a
non-diversified closed-end management
investment company. See "The Company and its
Objectives, Policies and Risks."
Investment Objectives...............The Company will seek to achieve its
objectives by investing in a portfolio of
securities that possess fundamental
investment value and may be purchased at a
reasonable cost (the "Business Valuation
Approach"). In applying the Business
Valuation Approach, the investment adviser
will: (1) view each investment as a
business; (2) think independently; (3)
emphasize high returns; (4) seek sustained
business excellence; (5) seek businesses
that consider shareholder interests; (6)
seek to pay a reasonable price; and (7)
invest for the long term. See "The Company
and its Objectives, Policies and Risks."
Investment Adviser..................Hutner Capital Management, Inc. ("Hutner
Capital Management" or the "investment
adviser") will act as the Company's
investment adviser. The Company will pay
Hutner Capital Management a monthly fee at
an annual rate of 1% of the average weekly
net assets of the Company. This fee is
higher than that paid by many other
investment companies. Hutner Capital
Management was founded in 1995.
Administrator.......................American Data Services, Inc. ("ADS") serves
as the Company's administrator. The Company
pays ADS a monthly fee equal to the greater
of an annual rate of .10% of the average
weekly net assets of the Company or $44,400
per year. See "Management of the Company."
Distributions.......................The Company's policy is to distribute to its
shareholders all of its net investment
income and net realized capital gains, if
any, for each year. All distributions to
shareholders whose shares are registered in
their own names or whose shares are held in
the name of a broker or nominee are
automatically reinvested in additional
shares of the Company, unless they elect to
receive cash. See "Taxes" and "Automatic
Dividend Reinvestment Plan."
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Repurchase of Shares................Beginning as of February, 1996 and each
February thereafter, the Company makes an
annual repurchase offer to purchase a
specified percentage of the Company's
outstanding shares at the then-current net
asset value. As of the date of this
prospectus, all such annual repurchase
offers have been set at 5% of the Company's
outstanding shares at the then-current net
asset value per share; however, the Company,
in its sole discretion, repurchased an
additional 2% of the shares outstanding in
1996 pursuant to the terms of the repurchase
offer. The percentage is established
annually at the sole discretion of the Board
of Directors. The Company may also, at its
sole discretion, offer to sell additional
shares on a quarterly basis. See "Repurchase
Offers."
Listing.............................The Company has listed its shares of common
stock on the Nasdaq Small Cap Market. The
Company's symbol is "MIST."
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SPECIAL RISK CONSIDERATIONS
An investment in the Company's common stock cannot be considered a complete
investment program. Because the Company's investment portfolio will be
non-diversified, the shares may be subject to greater risk than the shares of a
closed-end investment company whose portfolio is diversified.
Shares of a closed-end equity fund frequently tend to trade at a discount.
Accordingly, an investor who purchases the common stock of the Company may have
a risk of loss to capital.
The Articles of Incorporation of the Company include certain
"anti-takeover" provisions requiring the approval of three-quarters of the
outstanding voting stock for certain transactions. In addition, the Articles of
Incorporation provide that the Board of Directors is to consist of three classes
of directors, one class to be elected each year. These provisions and others in
the Articles of Incorporation could have the effect of depriving stockholders of
an opportunity to sell their shares at a premium over prevailing market prices
by discouraging third parties from seeking to gain control in a tender offer,
proxy contest or similar transaction. See "The Company and its Objectives,
Policies and Risks" and "Capital Stock of the Company."
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SUMMARY OF THE COMPANY'S EXPENSES
The expense summary below was developed to help you make your investment
decisions. You should consider this expense information along with other
important information in this Prospectus, including the Company's investment
objective.
A. Shareholder Transaction Expenses
Sales Load (as a percentage of offering price) None
Dividend Reinvestment Fee None
Cash Purchase Plan Fee (as a percentage of amount reinvested)* 5%
B. Annual Expenses (as a percentage of net assets attributable
to common stock)
Advisory Fees.................................................. 1.00%
Administration Fees............................................ .34%
Other Expenses................................................. .88%
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Total Annual Expenses............................................ 2.22%
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C. Example:
The purpose of the following table is to assist you in understanding the
various costs and expenses that an investor in the Company would bear directly
or indirectly. You would pay the following expenses on a $1,000 investment in
the Company, assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$23 $69 $119 $255
A. Shareholder Transaction Expenses represent charges paid when you
purchase shares of the Company.
B. Annual Expenses are based on the Company's expenses for the fiscal year
ended August 31, 1997.
C. The Example of Expenses is a hypothetical example that illustrates the
expenses associated with a $1,000 investment in the Company over periods of one
and three years, based on the estimated expenses in the above table and an
assumed annual rate of return of 5%. The 5% return and expenses should not be
considered a representation of future expenses. Actual expenses may be greater
or lesser than those shown.
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* The Cash Purchase Plan Fee has a $3.00 maximum with a $1.00 termination
fee.
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FINANCIAL HIGHLIGHTS
The following table presents per share financial information which has been
derived from the Fund's financial statements audited and reported on by Deloitte
& Touche, LLP, the Fund's independent accountants. The "Report of Independent
Accountants" and financial statements included in the Fund's Annual Report to
Shareholders for the fiscal year ended August 31, 1997 are incorporated by
reference in this Prospectus. The Fund's Annual Report, which contains
additional unaudited performance information, is available without charge upon
request.
<TABLE>
<CAPTION>
Selected Data for a Share Outstanding During the Period
For the year ended November 20, 1995*
August 31, 1997 through August 31, 1996
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<S> <C> <C>
Beginning net asset value per share $10.51 $10.00
Net investment loss (0.09) -
Net realized and unrealized gain on securities 2.93 0.60
Distribution from net investment income - (0.04)
Offering cost - (0.05)
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Ending net asset value per share $13.35 $10.51
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Ending market value per share $13.75 $10.88
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Ratios to average net assets:
Expenses 2.22% 3.14%**
Total return:
Based upon net asset value 27.02% 5.48%
Based upon market value 26.38% 9.18%
Portfolio turnover rate 8.89% 0.00%
Average Brokerage commission rate+ $0.0612 $.0450
Net assets at end of period (000's omitted) $12,269 $10,180
</TABLE>
* Commencement of operations
** Annualized
+ Amount represents average commission per share, paid to brokers, on the
purchase and sale of portfolio securities.
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THE COMPANY AND ITS OBJECTIVES, POLICIES AND RISKS
The Company
The Company is registered as a closed-end, non-diversified management
investment company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and was incorporated on March 14, 1995 under the laws
of the State of Maryland. The Company's primary investment objective is to
provide investors with long-term capital appreciation by investing in a
portfolio of securities that possess fundamental investment value and may be
purchased at reasonable cost. No assurance can be given that the Company's
investment objective will be achieved.
Investment Objectives and Policies
The Company's primary investment objective is long-term capital
appreciation. The Company will seek to achieve its objectives by investing in a
portfolio of securities that possess fundamental investment value and may be
purchased at a reasonable cost (the "Business Valuation Approach").
In applying the Business Valuation Approach, the investment adviser will
follow these investment principles:
o View each investment as a business. In selecting securities, the
investment adviser views common stock and other equity securities as units of
ownership of a business as a going concern. Consistent with this view, the
investment adviser will focus on businesses which he believes will generate high
returns. In evaluating the potential future returns of a business, the
investment adviser will, in general, give little weight to current market
perceptions. Rather the investment adviser will consider such factors relating
to a company as financial statements, profitability, return on equity, cash
flow, asset values and the investment adviser's perception of management's
expertise.
o Think independently. The investment adviser is wary of the irrational
emotions and actions that periodically sweep through Wall Street and thus will
generally avoid popular investment ideas. The investment adviser will base his
investment decisions on the quality of a business, not its popularity. He will
attempt to identify companies that he believes have, for one reason or another,
been misappraised by the market.
o Emphasis on high returns. Whether buying publicly traded stock or
securities of a private company, the investment adviser will be always conscious
of the Company's role as a business owner. Investment gains over the long run
are determined by the return that a business earns on its owners' capital and
the price paid to become an owner. The investment adviser considers a good
measure of earning power to be a high return on equity (net profits divided by
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common equity) sustained over a period of time. Thus, the investment adviser
will look for companies that consistently post a return on equity of 15-50% or
more. Another measure of profitability the investment adviser will use is the
cash generated by the business. The investment adviser will focus on businesses
that do not require significant capital expenditures.
o Look for sustained business excellence. Sustained business excellence
is often due to some competitive advantage that allows a business to earn an
unusually high rate of return consistently over long periods of time. The
investment adviser will focus on companies with a clear business franchise, or
competitive advantage in their market, due to factors such as industry
structure, government regulations, superior management, and favorable reputation
of services or products. In addition, these companies normally must display a
proven record of healthy earnings growth.
o Interest in businesses that are run with the shareholders in mind. The
investment adviser favors companies where management treats shareholders as
partners by, for example, providing excellent communications with owners,
employing reasonable compensation packages that don't compromise shareholders'
earnings, refraining from engaging in insider transactions to the shareholders'
detriment, maximizing shareholders' earnings through such methods as share
repurchases and generally taking consistent action to maximize the value of the
business for its owners.
o Seek to pay a reasonable price. The Company will invest in companies
where the investment adviser believes the return on the investment will be
significantly greater than the risk-free rate of return, such as that on long-
term U.S. Government bonds. The investment adviser will consider such measures
of return as the earnings yield and estimated growth rate of earnings.
o Invest for the long term. The objective of the investment adviser in
managing the Company will be to increase wealth in a manner that reduces as much
as possible the risk of permanent -- as opposed to quotational -- loss. The
investment adviser will attempt to achieve very large long-term gains through
the creation of business value. The Company will, in general, hold most
investments for at least 5 years, unless changed circumstances dictate the
disposition of the investment. However, the Company may also take shorter-term
positions in stocks of companies in special situations such as mergers,
acquisitions, legal proceedings, spin-offs, liquidations, bankruptcies,
recapitalizations, or the like.
While there is no general limit as to types of securities which can be
purchased, most of the Company's investments are in marketable common stocks or
marketable securities convertible into common stocks. Such securities may be
traded on an exchange or in the over-the-counter market. The Company may also
purchase Restricted Securities. As used herein, the term "Restricted Securities"
means securities the transfer of which is limited by legal or contractual
restrictions. See "Restricted Securities" below, for information regarding the
Company's policies as to such purchases.
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Temporary or Defensive Investments. Securities other than common stock or
securities convertible into common stock may be held from time to time, but the
Company will not normally invest in fixed income securities except for defensive
purposes or to temporarily employ uncommitted cash balances. Such action for
defensive purposes would be taken in the belief that future growth may be at an
unacceptable rate or that there is an undue risk of market decline. While
investment for defensive purposes could reduce the risk of market declines, such
a policy cannot eliminate risk or completely protect against fluctuations in the
value of the Company's assets. The amount invested for defensive purposes and
the length of time which such investments may be maintained will depend
primarily upon the investment adviser's judgment as to market and other
conditions and will not be subject to limitations. The kinds of securities in
which the Company may invest for defensive purposes would include investment
grade corporate debt securities, preferred stocks and U.S. Government
securities, or funds may be retained in cash or cash equivalents. Investment
grade corporate debt securities that are rated in the lowest category of
investment grade may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case for higher grade debt
securities. The Company does not have a policy as to whether it will retain or
dispose of a debt security whose rating drops below investment grade. Temporary
investments of uncommitted cash balances will be made in U.S. Government
securities and investment grade short-term money market instruments, and short-
term securities issued or guaranteed by banks.
Foreign Securities. The investment adviser believes that the Company's
investment in foreign securities will be made primarily through the purchase of
the common stock of foreign companies that are traded in the United States or
the purchase of American Depository Receipts ("ADR's"), which are certificates
issued by U.S. banks representing the right to receive securities of a foreign
issuer deposited with that bank or a correspondent bank. Investments by the
Company in the common stock of foreign companies which are traded in the United
States or in ADR's may involve considerations and risks that are different in
certain respects from an investment in securities of U.S. companies. Such risks
concerning the direct investment in foreign securities by the Company are
similar to a lesser degree to those described below. The Company also may invest
in selected foreign securities that, in the Adviser's opinion, will enable the
Company to take advantage of additional opportunities that are consistent with
its investment objective of long-term capital appreciation. No more than 20% of
the total assets of the Company may be invested in foreign securities, and the
Company anticipates that under normal circumstances its investments in foreign
securities will range between 5 and 10% of the Company's total assets. Investing
in foreign securities involves certain risks including those set forth below,
which are not typically associated with investing in domestically traded
securities.
In general, the Company will only invest in foreign securities that can be
purchased and sold on foreign stock exchanges or over-the-counter markets. Fixed
commissions and other transaction costs on foreign stock exchanges are generally
higher than negotiated commissions and other such costs on United States
exchanges. There is generally less governmental supervision and regulation of
foreign stock exchanges, brokers and issuers than in the United
447068.4
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States. In addition, foreign stock markets, with certain exceptions, are not as
developed or efficient as those in the United States. Foreign securities often
trade with less frequency and volume than domestic securities and, therefore,
tend to be less liquid and exhibit greater price volatility.
Certain of the foreign securities in which the Company may invest will not
be registered with, nor will the issuers thereof be subject to the reporting
requirements of, the Securities and Exchange Commission. As a result, there may
be less publicly available information about a foreign company or a foreign
security than about a domestic company or a domestically traded security. In
general, foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies.
The custody of foreign securities is generally maintained abroad, and the
costs and risks involved are generally higher than the costs and risks of
maintaining custody of securities in the United States. With respect to some
foreign countries, there may exist the possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could affect
United States investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the United States economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Dividends and interest payable on foreign securities may be subject to
foreign withholding taxes, thereby reducing the net amount of income available
for distribution to stockholders. Certain countries have entered into tax
treaties with the U.S. that reduce the tax on U.S. taxpayers. There is no
assurance, however, that the Company will be able to take advantage of any such
tax treaties or that the Company or its stockholders will ever be able to claim
any foreign tax credit, for U.S. income tax purposes, on account of any such
foreign income taxes. In addition, the dividends received deduction generally
will not be available to either the Company or its shareholders with respect to
dividends received from foreign corporations.
Investments in foreign securities frequently involve currencies of foreign
countries, and because the Company may hold funds in foreign currencies pending
completion of investment programs, the Company, therefore, may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations including, but not limited to, action by a foreign government to
devalue its currency. There is no guarantee that the Company or the Adviser will
correctly anticipate currency fluctuations. Accordingly, if the Company's funds
are maintained in investments denominated in foreign currencies during periods
when the value of the U.S. dollar is appreciating relative to those foreign
currencies, the Company will experience losses. The Company will also incur
service charges in connection with each currency conversion.
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As a non-diversified investment company, the Company has no specific policy
on diversification of assets nor is it intended that the Company will have any
such policy in the future. However, the Company has elected to be treated as,
and intends to qualify for tax treatment as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the "Code"). The Company will
diversify its assets so that, at the close of each quarter of its taxable year:
(a) at least 50% of the total value of its assets are represented by cash and
cash items, government securities and other securities with respect to which the
Company will not invest more than 5% of its total assets, at market value, in
the securities of any one issuer or own more than 10% of the outstanding voting
securities of any one issuer and (b) not more than 25% of the total value of its
assets are invested in securities of any one issuer or of any two or more
issuers controlled by the Company which, pursuant to the regulations under the
Code, may be deemed to be engaged in the same, similar or related trades or
businesses. Changes in the market value of securities in the Company's portfolio
generally will not cause the Company to cease to qualify as a regulated
investment company unless any failure to satisfy these restrictions exists
immediately after the acquisition of any security or other property and is
wholly or partly the result of such acquisition.
The Company will observe a non-fundamental policy of not investing for the
purpose of exercising control or management, even though it may take substantial
positions in securities of small companies and in certain circumstances this may
result in the acquisition of such control. Such circumstances could arise, for
example, when existing controlling persons of an issuer dispose of their
holdings to larger groups or to the public or where an issuer defaults to the
Company on its obligations pursuant to the provisions of a purchase agreement or
instrument governing the rights of a senior security held by the Company.
Non-Fundamental Investment Practices and Risks
In order to achieve its investment objectives, the Company may engage in
the following non-fundamental investment practices.
Purchasing Put and Call Options on Securities. The Company may purchase
covered put options to protect its portfolio holdings in an underlying security
against a decline in market value. Such hedge protection is provided during the
life of the put option since the Company, as holder of the put option, is able
to sell the underlying security at the put exercise price regardless of any
decline in the underlying security's market price. In order for a put option to
be profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, the Company will reduce any profit
it might otherwise have realized in its underlying security by the premium paid
for the put option and by transaction costs, but it will retain the ability to
benefit from future increases in market value.
The Company may also purchase covered call options to hedge against an
increase in prices of securities it wants ultimately to buy. Such hedge
protection is provided during the life
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of the call option since the Company, as holder of the call option, is able to
buy the underlying security at the exercise price regardless of any increase in
the underlying security's market price. In order for a call option to be
profitable, the market price of the underlying security must rise sufficiently
above the exercise price to cover the premium and transaction costs. By using
call options in this manner, the Company will reduce any profit it might have
realized had it bought the underlying security at the time it purchased the call
option by the premium paid for the call option and by transaction costs, but it
limits the loss it will suffer if the security declines in value to such premium
and transaction costs.
Writing Covered Call Options on Securities. The Company may write covered
call options on optionable securities of the types in which they are permitted
to invest from time to time as determined appropriate in seeking to attain its
objective. Call options written by the Company give the holder the right to buy
the underlying securities from the Company at a stated exercise price.
The Company will receive a premium for writing a covered call option, which
increases the Company's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a covered call option, the
Company limits its opportunity to profit from any increase in the market value
of the underlying security above the exercise price of the option.
The Company may terminate an option that it has written prior to the
option's expiration by entering into a closing purchase transaction in which an
option is purchased having the same terms as the option written. The Company
will realize a profit or loss from such transaction if the cost of such
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, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by unrealized appreciation of the underlying security owned by the
Company.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
Lending of Portfolio Securities. In order to generate additional income,
the Company may lend its portfolio securities in an amount up to 33 1/3% of its
total assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. No lending may be made to any companies
affiliated with the Company. The borrower at all times during the loan must
maintain with the lending Company cash or cash equivalent collateral equal in
value at
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all times to at least 100% of the value of the securities loaned. During the
time portfolio securities are on loan, the borrower pays the Company any
dividends or interest paid on such securities, and the Company may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral. The Company will have the right to regain record ownership of loaned
securities to exercise beneficial rights, such as voting rights and subscription
rights. There is the risk of failure by the borrower to return the securities
involved in such transaction.
Illiquid Securities. The Company has adopted the following non-fundamental
investment policy, which may be changed by the vote of the Board of Directors.
The Company will not invest in illiquid securities (including restricted
securities) if immediately after such investment more than 15% of the Company's
total assets (taken at market value) would be invested in such securities. This
limitation may be subject to additional restrictions imposed by jurisdictions in
which the Company's shares are offered for sale. For this purpose, illiquid
securities include (a) securities that are illiquid by virtue of the absence of
a readily available market or legal or contractual restrictions on resale, (b)
participation interests in loans that are not subject to puts, and (c)
repurchase agreements not terminable within seven days.
Restricted Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended
("Securities Act"). Securities that have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market.
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such investments.
The Securities and Exchange Commission has adopted Rule 144A, which allows
a broader institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the Securities Act applicable to
resales of certain securities to qualified institutional buyers.
As stated above under "Illiquid Securities," the Company may invest up to
15% of its total assets in restricted securities issued under Section 4(2) of
the Securities Act, which exempts from registration "transactions by an issuer
not involving any public offering." Section 4(2) instruments are restricted in
the sense that they can only be resold through the issuing dealer and only to
institutional investors; they cannot be resold to the general public without
registration.
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Certain Risks associated with Illiquid and Restricted Securities. The sale
of illiquid and restricted securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. Restricted securities may sell at
a price lower than similar securities that are not subject to restrictions on
resale. The Company may not be able to sell certain restricted or illiquid
securities in a timely manner or the price obtainable upon resale may not be the
anticipated price, especially if adverse market conditions occur during the
interim period.
Fundamental and Non-Fundamental Investment Restrictions
In pursuing its investment objective, the Company's investment activity is
limited by certain policies and investment restrictions. The following
fundamental policies and investment restrictions have been adopted by the
Company and cannot be changed without approval by the vote of a majority of the
outstanding voting securities of the Company, as defined in the Investment
Company Act.
The Company may not:
1. Issue senior securities, except as provided in restriction number 2
below.
2. Borrow money, except that the Company may borrow from banks (including
the Company's custodian bank) and enter into reverse repurchase agreements as a
temporary defensive measure for extraordinary or emergency purposes, and then
only in amounts not exceeding 10% of its total assets, taken at market value,
and may pledge amounts of up to 20% of its total assets, taken at market value,
to secure such borrowings. For purposes of this restriction, collateral
arrangements with respect to the writing of options, futures contracts, options
on futures contracts and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets, and neither such
arrangements nor the purchase and sale of options, futures or related options
shall be deemed to be the issuance of a senior security. Whenever bank
borrowings and the value of the Company's reverse repurchase agreements exceed
5% of the value of the Company's total assets, the Company will not make any
additional purchases of securities for investment purposes.
3. Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Company's total assets, taken at market value, would be
invested in the securities of issuers having their principal business activities
in the same industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government or by any of its agencies or instrumentalities
but will apply to foreign government obligations unless the SEC permits their
exclusion.
447068.4
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4. Make loans, although the Company may (a) purchase money market
securities and enter into repurchase agreements, (b) acquire bonds, debentures,
notes and other debt securities, governmental obligations and certificates of
deposit, and (c) lend portfolio securities.
5. Purchase a security if, as a result, with respect to 50% of the value of
the Company's total assets, taken at market value, (i) more than 5% of the
Company's total assets, taken at market value, would be invested in the
securities of any one issuer (including repurchase agreements with any one
entity), except securities issued or guaranteed by the U.S. Government or any of
its agencies or instrumentalities and (ii) more than 10% of the outstanding
voting securities of any issuer would be held by the Company.
6. Underwrite securities of other persons, except to the extent that the
Company may be deemed to be an underwriter within the meaning of the Securities
Act, in connection with the purchase and sale of its portfolio securities in the
ordinary course of pursuing its investment program.
7. Purchase or sell real estate or interests in real estate (except that
this restriction does not preclude investments in marketable securities of
companies engaged in real estate activities).
8. Purchase or sell commodities or commodity contracts, except that the
Company may purchase and sell stock index and currency options, stock index
futures, financial futures and currency futures contracts and related options on
such futures.
The following non-fundamental policies and investment restrictions have
been adopted by the Company and cannot be changed without approval by the vote
of a majority of the Board of Directors. The Company may not:
1. Purchase any security on margin, except that the Company may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of portfolio securities. The payment by the Company of initial or variation
margin in connection with futures or related options transactions shall not be
considered the purchase of a security on margin.
2. Purchase or sell interests in oil, gas or other mineral exploration or
development programs.
Repurchase Offers
Repurchase Offer Policies. The Company has adopted certain repurchase
policies as fundamental policies which may not be changed without the vote of
the holders of a majority of the Company's outstanding voting securities (as
determined under the 1940 Act). The Company offers to repurchase shares at
annual intervals in February of each year. The Company will establish a maximum
of fourteen days prior to the deadline for repurchase requests and the
447068.4
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applicable repurchase date such that repurchases of shares may occur on the last
business day of February of each year. The Board of Directors is authorized to
establish other policies relating to repurchases of shares that are consistent
with the 1940 Act.
Repurchase Procedures. Shareholders are entitled to redeem shares through
the Company's annual offer to repurchase shares. Additional dates for
repurchases of shares may be established by the Board of Directors in its sole
discretion, not more frequently than once every two years. Shares rendered by
shareholders on any repurchase date will be repurchased, subject to the
aggregate repurchase amounts established for any such dates, at the then current
net asset value per share. Repurchase proceeds will be repaid, in cash, within
seven days after each of the Company's repurchase dates (a "Repurchase Payment
Deadline"). The Company may deduct a repurchase fee from the repurchase proceeds
equal to no more than 2% of the proceeds which is intended to compensate the
Company for expenses related to the repurchase offer.
Repurchase Amounts. The number of shares that the Company will offer to
repurchase on any repurchase date (the "Repurchase Offer Amount") will be
determined by the Board of Directors, in its sole discretion, but will be at
least 5% and no greater than 25%, of the total number of shares outstanding on
any such date. The Board has, as of the date of this prospectus, set the
percentage for prior repurchase offers at 5%; however, this may change prior to
the date of any subsequent repurchase offer at the sole discretion of the Board
of Directors. In 1996, the Company, at its sole discretion, repurchased an
additional 2% of the shares pursuant to the terms of the offering.
Additional Sales of Shares. The Board of Directors has the right, but not
the obligation, to cause the Company to sell additional shares of its common
stock on a quarterly basis. Sales of additional shares may be made to current
shareholders and to qualified investors who are not currently shareholders.
Proceeds from the offering of additional shares may be used to finance the
Company's repurchase offer, to purchase additional portfolio securities or to
reduce the amount of borrowing or indebtedness incurred by the Company. The
purchase price for any such shares shall be the then-current net asset value per
share.
Notices. Notice of a discretionary repurchase offer at net asset value will
be given to each shareholder of record between twenty-one (21) and forty- two
(42) days before each repurchase request deadline. Such notice will state the
repurchase offer amount and any fees applicable to such repurchase, the dates of
the repurchase request deadline, repurchase pricing date, and repurchase payment
deadline. Shareholders will be advised of the risk of fluctuation in the net
asset value between the repurchase request deadline and the repurchase pricing
date, and the possibility that the Company may use an earlier repurchase pricing
date under certain circumstances. Procedures by which shareholders may tender
their shares, the procedures by which the Company may repurchase such shares on
a pro rata basis, and the circumstances in which the Company may suspend or
postpone a repurchase offer will be set forth in the notice to shareholders.
Procedures by which shareholders may withdraw or modify their tenders until the
repurchase request deadline will also be set forth in the notice. Finally, the
notice will set forth
447068.4
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the net asset value of the shares to be repurchased no more than seven days
before the date of notification, and the means by which shareholders may
ascertain the net asset value thereafter, as well as the market price of the
shares, if any, on the date on which the net asset value was computed, and the
means to determine the market price thereafter.
If shareholders tender more than the repurchase offer amount, the Company
may repurchase an additional amount of stock, not to exceed two percent (2%) of
the shares outstanding on the repurchase request deadline. The Company will
repurchase the shares tendered on a pro rata basis. The Company may, however,
accept all tender offers of shareholders who own less than one hundred shares
and who tender all their shares, before prorating other tender offers, and may
accept stock by lot when tendered by shareholders who tender all their shares
and who elect to have either all or none or at least a minimum amount or none
accepted, if the Company first accepts all shares tendered by shareholders who
do not so elect.
The current net asset value of the Company's shares will be computed daily
on the five business days preceding a repurchase request deadline. During the
period from notification to shareholders of a repurchase pricing date to the
repurchase date, the Company will maintain liquid assets in an amount to 100
percent of the repurchase offer amount.
The Company will not suspend or postpone a repurchase offer except pursuant
to a vote of a majority of the directors, including a majority of the directors
who are not "interested persons" of the Company, as defined in the Investment
Company Act. Further, the Company will suspend or postpone a repurchase offer
only if certain regulatory requirements are met. The Company will give
shareholders notice of any such suspension or postponement, and likewise will
give notice of a renewed repurchase offer.
In compliance with the Investment Company Act requirements for periodic
repurchase offers, a majority of the Company's directors are directors who are
not interested persons of the Company and the selection and nomination of such
directors is within the discretion of those directors.
The Company may borrow to fund repurchases of shares. If the Company must
liquidate portfolio securities to purchase shares, the Company may be required
to sell portfolio securities for other than investment purposes and may realize
gains and losses.
The Company may also make offers to repurchase shares of which it is the
issuer pursuant to any other applicable rules of the SEC, in effect at the time
of the offer.
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MANAGEMENT OF THE COMPANY
Board of Directors
The overall management of the business and affairs of the Company is vested
in the Board of Directors. The Board of Directors approves all significant
agreements between the Company and persons or companies furnishing services to
the Company, including the Company's Advisory Agreement with Hutner Capital
Management, the agreement with Star Bank, N.A. as the custodian, the agreement
with American Stock Transfer & Trust Company as the transfer and dividend
disbursing agent and the agreements with American Data Services, Inc., as
administrator and fund accounting agent. The day-to-day operations of the
Company are delegated to the officers, subject always to the objective and
policies of the Company and to the general supervision of the Board of
Directors.
Investment Adviser
Hutner Capital Management ("Hutner Capital"), an investment adviser
registered with the Securities and Exchange Commission, was initially
incorporated in the State of New York on February 7, 1995 and was reincorporated
in New Jersey in 1996. Hutner Capital manages private accounts for individuals,
trusts, estates, institutions and pension and profit-sharing plans totaling
approximately $60 million. Hutner Capital is located at 34 Chambers Street,
Suite 200, Princeton, New Jersey 08542. Daniel Hutner is the sole stockholder of
Hutner Capital and serves as the Chairman of the Board and President. Mr. Hutner
also serves as the General Partner of each of Avalon Partners, L.P. and Hutner
Special Situations Fund, L.P.
Pursuant to the Advisory Agreement, Hutner Capital provides to the Company
investment management and financial advisory services, including causing the
purchase and sale of securities in the Company's portfolio subject at all times
to the policies set forth by the Board of Directors. Under the terms of the
Advisory Agreement, Hutner Capital Management supervises all aspects of the
Company's investment operations.
Hutner Capital is paid, pursuant to the Advisory Agreement, a monthly fee
from the Company calculated at an annual rate of 1.0% of its average weekly net
assets. This fee is higher than those charged by most investment companies.
Hutner Capital may however, from time to time, voluntarily agree to defer or
waive fees or absorb some or all of the expense of the Company. To the extent
that they should do so, they may seek repayment of such deferred fees and
absorbed expenses after this practice is discontinued.
The Company's portfolio investment decisions will be provided by Daniel
Hutner. At Hutner Capital, Mr. Hutner manages both individual and institutional
portfolios specializing in common stock investments. Mr. Hutner also serves as
the General Partner of Avalon Partners, L.P. and Hutner Special Situations Fund
and is responsible for the investment management of the assets of such funds.
From 1990 to 1996, Mr. Hutner served as President of Pulsifer and
447068.4
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Hutner Incorporated, an investment adviser registered with the Securities and
Exchange Commission, having joined such firm in 1981. Prior to joining Pulsifer
& Hutner, Mr. Hutner was engaged in writing and editing on a wide variety of
subjects including business, economics and science for the National Geographic
Society, the Smithsonian Institution, Charles Owens and Associates, Inc.
(publisher of the Monday Morning Report) and others. In addition, Mr. Hutner
provided research and consulting services with respect to various business and
economic issues for National Economic Research Associates, Data Resources, Inc.,
and the Joint Economic Committee of Congress. Mr. Hutner graduated from
Middlebury College in 1970 with a B.A. in Economics. He also received his M.A.
in English from the University of Virginia in 1973 and his M.B.A. from New York
University in 1984.
Administrator, Distributor, Transfer Agent and Dividend Paying Agent
American Data Services, Inc. ("ADS") serves as the administrator for the
Company pursuant to an Administration Agreement with the Company. ADS also
provides fund accounting services to the Company pursuant to the Administration
Agreement for which it receives no additional compensation. As of the date of
this prospectus, ADS acted as administrator for numerous registered investment
companies with aggregate assets of approximately $ 6 billion. The address of ADS
is The Hauppauge Corporate Center, 150 Motor Parkway, Hauppauge, New York 11788.
Under the Administration Agreement, ADS supervises the administration of
all aspects of the Company's operations, including the Company's receipt of
services for which the Company is obligated to pay, provides the Company with
general office facilities and provides, at the Company's expense, the services
of persons necessary to perform such administrative and clerical functions as
are needed to effectively operate the Company. Those persons, as well as certain
employees and Directors of the Company, may be directors, officers or employees
of ADS and its affiliates. For these services and facilities, ADS receives a fee
computed and paid monthly equal to the greater of an annual rate of .10% of the
average weekly net assets of the Company or $44,400 per year.
American Stock Transfer & Trust Co. ("AST"), a registered transfer agent,
serves as the Company's transfer agent and dividend disbursing agent. AST
maintains an account for each shareholder of the Company (unless such accounts
are maintained by sub-transfer agents or processing agents) and performs other
transfer agency and related functions. For these services, AST will receive an
annual fee of $6,000 plus certain shareholder account fees. The Company will
also reimburse AST for certain expenses incurred on behalf of the Company.
The services provided by AST include answering customer inquiries regarding
account matters; assisting shareholders in designating and changing various
account options; aggregating and processing purchase orders and transmitting and
receiving funds for shareholder orders; transmitting, on behalf of the Company,
proxy statements, prospectuses and shareholder reports
447068.4
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to shareholders and tabulating proxies; processing dividend payments and
providing sub-accounting services for Company shares held beneficially; and
providing such other services as the Company or a shareholder may request.
Custodian
Star Bank, N.A., whose address is 425 Walnut Street, Cincinnati, OH 45201,
is custodian for the securities and cash of the Company.
Expenses
The Company was responsible for the expenses associated with its offering,
which were approximately $98,000, including legal and accounting fees relating
to its organization and the costs of preparing solicitation materials.
Organizational expenses are capitalized and amortized over a period of five
years. In addition to the expenses to be paid to the investment adviser,
administrator, transfer agent, dividend paying agent and custodian discussed
within this prospectus, the Company will pay all other ongoing expenses,
including but not limited to legal fees, accounting fees for preparation of
financial statements and tax returns, annual audits, brokerage commissions,
transfer taxes and other clearing, settlement and transactional charges.
PLAN OF DISTRIBUTION
As described herein under "Repurchase Offers -- Additional Sales of
Shares," the Company, at the discretion of the Board of Directors, may, on a
quarterly basis, offer to sell shares of its common stock to the public at the
then current net asset value per share.
AUTOMATIC DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Automatic Dividend Reinvestment Plan. All shareholders of the Company will
automatically become participants in the Company's Automatic Dividend
Reinvestment and Cash Purchase Plan (the "Plan") upon purchasing shares of the
Company's common stock. Participation is automatic unless a shareholder elects
to receive Company dividends and distributions in cash. Participation may be
terminated or resumed at any time upon written notice from the participant
received by AST, the Plan Agent, prior to the record date of the next dividend.
Additional information regarding the Plan may be obtained from the Company.
Dividend payments and other distributions to be made by the Company to
participants in the Plan either will be paid to the Plan Agent in cash (which
then must be used to purchase shares in the open market) or will be represented
by the delivery of shares depending upon which of the two options would be the
most favorable to participants, as hereafter determined. On each
447068.4
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date on which the Company determines the net asset value of the shares (a
"Valuation Date"), and which occurs not more than five business days prior to a
date fixed for payment of a dividend or other distribution from the Company, the
Plan Agent will compare the determined net asset value per share with the market
price per share. For all purposes of the Plan, "market price" shall be deemed to
be the highest price bid at the close of the market by any market maker on the
date which coincides with the relevant Valuation Date, or, if no bids were made
on such date, the next preceding day on which a bid was made. If the net asset
value in any such comparison is found to be lower than said market price, the
Plan Agent will demand that the Company satisfy its obligation with respect to
any such dividend or other distribution by issuing additional shares to the
Participants in the Plan at a price per share equal to the greater of the
determined net asset value per share or ninety-five percent (95%) of the market
price per share determined as of the close of business on the relevant Valuation
Date. However, if the net asset value per share (as determined above) is higher
than the market price per share, then the Plan Agent will demand that the
Company satisfy its obligation with respect to any such dividend or other
distribution by a cash payment to the Plan Agent for the account of Plan
Participants and the Plan Agent then shall use such cash payment to buy
additional shares in the "open market" for the account of the Plan participants,
provided, however, that the Plan Agent shall not purchase shares in the "open
market" at a price in excess of the net asset value as of the relevant Valuation
Date. In the event the Plan Agent is unable to complete its acquisition of
shares to be purchased in the "open market" by the end of the first trading day
following receipt of the cash payment from the Company, any remaining funds
shall be used by the Plan Agent to purchase newly issued shares of the Company's
common stock from the Company at the greater of the determined net asset value
per share or ninety-five (95%) percent of the market price per share as of the
date coinciding with or next preceding the date of the relevant Valuation Date.
Cash Purchase Plan. Participants in the Plan will also have the option of
making additional cash payments to the Plan Agent, on a monthly basis, for
investment in the Company's shares. Such payments may be made in any amount from
a minimum of $50.00 to a maximum of $1,000.00 per month. The Company may, in its
discretion, waive the maximum monthly limit with respect to any participant. At
the end of each calendar month, the Plan Agent will determine the amount of
funds accumulated. Purchases made from the accumulation of payments during any
one calendar month will be made on or about the first business day of the
following month ("Investment Date"). The funds will be used to purchase shares
of the Company's common stock from the Company. If the net asset value of the
shares is lower than the market price as of the Valuation Date which occurs not
more than five business days prior to the relevant Investment Date, such shares
will be newly issued shares and will be issued at a price per share equal to the
greater of the determined net asset value per share or ninety-five percent (95%)
of the market price per share. If the net asset value per share is higher than
the market price per share, then the Plan Agent shall use such cash payments to
buy additional shares in the "open market" for the account of the Plan
Participants, provided, however, that the Plan Agent shall not purchase shares
in the "open market" at a price in excess of the net asset value as of the
relevant Valuation Date. In the event that the Plan Agent is unable to complete
its acquisition of shares to be purchased in the "open market" by the end of the
Investment Date, any
447068.4
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remaining cash payments shall be used by the Plan Agent to purchase newly issued
shares of the Company's common stock from the Company at the greater of the
determined net asset value per share or ninety-five (95%) percent of the market
price per share as of the relevant Valuation Date. All cash payments received by
the Plan Agent in connection with the Plan will be held without earning
interest. To avoid unnecessary cash accumulations, and also to allow ample time
for receipt and processing by the Plan Agent, participants that wish to make
voluntary cash payments should send such payments to the Plan Agent in such a
manner that assures that the Plan Agent will receive and collect Federal funds
by the end of the month. This procedure will avoid unnecessary accumulations of
cash and will enable participants to realize lower brokerage commissions and to
avoid additional transaction charges. If a voluntary cash payment is not
received in time to purchase shares in any calendar month, such payment shall be
invested on the next Investment Date. A participant may withdraw a voluntary
cash payment by written notice to the Plan Agent if the notice is received by
the Plan Agent at least forty-eight hours before such payment is to be invested
by the Plan Agent.
AST will perform bookkeeping and other administrative functions, such as
maintaining all shareholder accounts in the Plan and furnishing written
confirmation of all transactions in the account, including information needed by
shareholders for personal and tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in noncertificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan and of record as of the record date for
determining those shareholders who are entitled to vote on any matter involving
the Company. In case of shareholders such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time to
time by such shareholders as representing and limited to the total number of
shares registered in the shareholder's name and held for the account of
beneficial owners who have elected to participant in the Plan.
There are no special fees or charges to participants other than reasonable
transactions fees, which shall not exceed the lesser of five percent (5%) of the
amount reinvested or three ($3.00) dollars and a termination fee of up to one
($1.00) dollar.
With respect to purchases from voluntary cash payments, the Plan Agent will
charge three ($3.00) dollars, plus a pro rata share of the brokerage
commissions, if any. Brokerage charges for purchasing small blocks of stock for
individual accounts through the Plan are expected to be less than the usual
brokerage charges for such transactions, as the Plan Agent will be purchasing
shares for all participants in larger blocks and prorating the lower commission
rate thus applied.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax liability associated therewith.
447068.4
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Experience under the Plan may indicate that changes are desirable.
Accordingly, the Company reserves the right to amend or terminate the Plan as
applied to any voluntary cash payment received and any dividend or distribution
to be paid subsequent to a date specified in a notice of the change sent to all
shareholders at least ninety days before such specified date. The Plan may also
be terminated on at least ninety days' written notice to all shareholders in the
Plan.
RETIREMENT PLANS
The Fund, in conjunction with ADS, its administrator, has available a form
of Individual Retirement Account ("IRA") for investment. Self-employed investors
may purchase shares of the Company through tax-deductible contributions to
existing retirement plans for self-employed persons, known as Keogh or H.R. 10
plans. Company shares may also be a suitable investment for other types of
qualified pension or profit-sharing plans which are employer-sponsored,
including deferred compensation or salary reduction plans known as "401(k)
Plans" which give participants the right to defer portions of their compensation
for investment on a tax-deferred basis until distributions are made from the
plans.
The minimum initial investment for all such retirement plans is $1,000. The
minimum for all subsequent investments is $100.
Under the Code, individuals may make wholly or partly tax deductible IRA
contributions of up to $2,000 annually, depending on whether they are active
participants in an employer-sponsored retirement plan and on their income level.
However, dividends and distributions held in the account are not taxed until
withdrawn in accordance with the provisions of the Code. An individual with a
non-working spouse may establish a separate IRA for the spouse under the same
conditions and contribute a combined maximum of $4,000 annually to either or
both IRA's provided that no more than $2,000 may be contributed to the IRA of
either spouse.
Investors should be aware that they may be subject to penalties or
additional tax on contributions or withdrawals from IRAs or other retirement
plans which are not permitted by the applicable provisions of the Code, and,
prior to a withdrawal, shareholders may be required to certify their age and
awareness of such restrictions in writing. Persons desiring information
concerning investments through IRAs or other retirement plans or an application
form for an IRA should telephone the Company at (609) 683-3916 or ADS at (516)
951-0500.
NET ASSET VALUE
The net asset value per share is determined as of the close of the last
business day of the NYSE in each week, by dividing the value of the Company's
portfolio securities plus all cash and other assets (including dividends accrued
but not collected) less all liabilities (including accrued
447068.4
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expenses but excluding capital and surplus) by the number of shares outstanding.
In accordance with generally accepted accounting principles for investment
companies, dividend income is accrued on the ex-dividend date. The net asset
value per share will be made available for publication.
Each security will be valued on the basis of the last sale price on the
valuation date on the principal exchange on which the security is traded or the
National Association of Securities Dealers Automated Quotation National Market
System. With respect to those securities for which no trades have taken place
that day and unlisted securities for which market quotations are readily
available, the value shall be determined by taking the mean between the latest
"bid" and "asked" prices. Securities for which quotations are not readily
available and other assets will be valued at fair value as determined in good
faith by the Board of Directors. Notwithstanding the above, any short-term debt
securities with maturities of 60 days or less are valued at amortized cost.
CAPITAL STOCK OF THE COMPANY
The Company is authorized to issue 100 million shares of capital stock, par
value $.001 per share ("Capital Stock"). Each share of Capital Stock has equal
voting, dividend, distribution and liquidation rights. The shares of Capital
Stock offered hereby, when issued and paid for pursuant to the terms of this
Offer, will be fully paid and non-assessable. The shares of Capital Stock are
not redeemable and have no preemptive, conversion or cumulative voting rights.
The Company's Articles of Incorporation provide that under certain
conditions the affirmative vote of at least three-quarters of the outstanding
voting stock is required: (i) to convert the Company into an open-end company;
(ii) to approve any proposal to dissolve, merge or consolidate the Company;
(iii) to sell its assets or (iv) to effect any amendment to the Articles of
Incorporation to make the Capital Stock a redeemable security (as well as to
amend any of the foregoing provisions). In addition, the Articles of
Incorporation provide that the Board of Directors is to consist of three classes
of directors. During a three year cycle, two directors will be elected in the
first year, another two directors will be elected in the second year, and one
director will be elected in the third year. These provisions and others in the
Articles of Incorporation make it more difficult for a third party to obtain
control of the Company. A copy of the Articles of Incorporation may be obtained
from the Securities and Exchange Commission.
The Company, on a quarterly basis, may offer additional shares in
accordance with its Repurchase Offers and additional shares may be issued under
the Plan. See "Repurchase Offers" and "Automatic Dividend Reinvestment and Cash
Purchase Plan." Other offerings of shares, if made, will require approval of the
Company's Board of Directors. Any additional offering will be subject to the
requirement of the 1940 Act that shares not be sold at a price below the then
current net asset value (exclusive of underwriting discounts and commissions)
except in
447068.4
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connection with an offering to existing shareholders or with the consent of a
majority of the Company's outstanding shares.
Special Voting Provisions
The Company has provisions in its Articles of Incorporation and Bylaws that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Company, to cause it to engage in certain transactions or
to modify its structure. Commencing with the first annual meeting of
stockholders, the Board of Directors will be divided into three classes having
initial terms of one, two and three years, respectively. At the annual meeting
of stockholders in each year thereafter, the term of one class will expire and
directors will be elected to serve in that class for terms of three years. This
provision could delay for up to two years the replacement of a majority of the
Board of Directors. A director may be removed from office only by a vote of the
holders of at least 75% of the shares of the Company entitled to be voted on the
matter.
In addition, conversion of the Company from a closed-end to an open-end
investment company requires the affirmative vote of at least 75% of the
directors and of the holders of 75% of the shares of the Company unless approved
by at least 75% of the Continuing Directors, as defined below, in which case a
majority of the votes entitled to be cast by shareholders of the Company will be
required to approve such conversion. If the Company were to be converted into an
open-end investment company, it could be restricted in its ability to redeem its
shares (otherwise than in kind) because, in light of the limited depth of the
markets for certain securities in which the Company may invest, there can be no
assurance that the Company could realize the then market value of the portfolio
securities the Company would be required to liquidate to meet redemption
requests.
The affirmative votes of at least 75% of the directors and the holders of
at least 75% of the shares of the Company are required to authorize any of the
following transactions:
(i) merger, consolidation or share exchange of the Company with or into any
other person;
(ii) issuance or transfer by the Company (in one or a series of
transactions in any 12-month period) of any securities of the Company to any
other person or entity for cash, securities or other property (or combination
thereof) having an aggregate fair market value of $1,000,000 or more, excluding
sales of securities of the Company in connection with a public offering,
issuances of securities of the Company pursuant to a dividend reinvestment plan
adopted by the Company or pursuant to a stock dividend and issuances of
securities of the Company upon the exercise of any stock subscription rights
distributed by the Company;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Company (in one or a series of transactions in any 12-month
period) to or with any person of any assets of the Company having an aggregate
fair market value of $1,000,000 or more, except for
447068.4
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portfolio transactions effected by the Company in the ordinary course of its
business and except with respect to repurchases or redemptions of shares of the
Corporation (transactions within clauses (i) and (ii) and this clause (iii) each
being known individually as a "Business Combination");
(iv) any proposal as to the voluntary liquidation or dissolution of the
Company or any amendment to the Company's Articles of Incorporation to terminate
its existence; and
(v) any shareholder proposal as to specific investment decisions made or to
be made with respect to the Company's assets.
However, in the case of a Business Combination described in (i) and (iii)
above, a 75% shareholder vote will not be required if the transaction is
approved by a vote of at least 75% of the Continuing Directors (as defined
below). In such case, a majority of the votes entitled to be cast by
shareholders of the Company will be required to approve such transaction. In
addition, a 75% shareholder vote will not be required with respect to a
transaction described in clause (iv) above if it is approved by a vote of at
least 75% of the Continuing Directors (as defined below), in which case a
majority of the votes entitled to be cast by shareholders of the Company will be
required to approve such transaction. The Company's By-laws contain provisions
the effect of which is to prevent matters, including nominations of directors,
from being considered at shareholders' meetings where the Company has not
received sufficient prior notice of the matters.
Reference is made to the Articles of Incorporation and By-laws of the
Company, on file with the Securities and Exchange Commission, for the full text
of these provisions. See "Further Information." These provisions could have the
effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Company in a tender offer or similar transaction. In
the opinion of the Board of Directors, however, these provisions offer several
possible advantages. They may require persons seeking control of the Company to
negotiate with its management regarding the price to be paid for the shares
required to obtain such control, they promote continuity and stability and they
enhance the Company's ability to pursue long-term strategies that are consistent
with its investment objectives. The Board of Directors has determined that the
foregoing voting requirements, which are generally greater than the minimum
requirements under Maryland law and the 1940 Act, are in the best interests of
shareholders generally.
A "Continuing Director" is any member of the Board of Directors of the
Company (i) who is not a person or affiliate of a person who enters or proposes
to enter into a Business Combination with the Company (such person or affiliate,
being an "Interested Party") and (ii) who has been a member of the Board of
Directors of the Company for a period of at least 12 months (or since the
commencement of the Company's operations, if less than 12 months), or is a
successor of a Continuing Director who is unaffiliated with an Interested Party
and is
447068.4
26
<PAGE>
recommended to succeed a Continuing Director by a majority of the Continuing
Directors then on the Board of Directors of the Company.
TAXES
The Company has elected to be treated as and intends to qualify annually as
a regulated investment company pursuant to the provisions of the Code. The
Company did so qualify for its previous taxable year and intends to continue so
to qualify. By so qualifying, the Company generally will not be subject to
Federal income tax to the extent that it distributes its investment company
taxable income and net capital gains in the manner required under the Code. In
addition, the Code subjects regulated investment companies to a non-deductible
4% excise tax in each calender year to the extent that they do not distribute
substantially all of their taxable investment income and capital gain, generally
determined on a calender year basis and the one year period ending October 31,
of each calender year, respectively. In order to be taxed as a regulated
investment company, the Company must meet a number of requirements, including
the requirements with respect to diversification of assets, sources of income
and distribution of income. If the Company fails to qualify as a regulated
investment company, it will be taxed at regular corporate tax rates on all its
taxable income (including capital gains) without any deduction for distributions
to shareholders, and distributions to shareholders will be taxable as ordinary
dividends (even if derived from the Company's net long-term capital gains) to
the extent of the Company's current and accumulated earnings and profits.
It is the Company's policy to distribute to shareholders all of its
investment company taxable income (net of expenses) and any net capital gains
(the excess of net long-term capital gains over net short-term capital losses)
in accordance with the requirements imposed by the Code. Distributions by the
Company of its net investment income, and the excess, if any, of its net
short-term capital gain over its net long-term capital loss will be taxable to
shareholders as ordinary income. Distributions by the Company of the excess, if
any, of its net long-term capital gain over its net short-term capital loss will
be designated as capital gain dividends and will be taxable to shareholders as
mid-term or long-term capital gains, regardless of the length of time
shareholders have held their shares. Shareholders will be advised as to what
portion of capital gains dividends are to be treated as "mid-term" (eligible for
a 28% maximum tax rate) or "long-term" (eligible for a 20% maximum tax rate)
with respect to the maximum tax rate for such gains. The Company may, however,
subject to the review of the Board of Directors, retain the net realized
long-term capital gains of the Company. In such event, the taxes thereon would
be paid by the Company and appropriate credit allowed to the shareholders of the
Company, pursuant to section 852(b)(3)(D) of the Code, for taxes paid by the
Company with respect to undistributed capital gains designated by the Company to
be includible in the income of its shareholders.
Dividends from net investment income and distributions of net realized
short-term gains to shareholders generally are taxable as ordinary income, and
distributions from net realized
447068.4
27
<PAGE>
long-term gains are taxable as long-term or mid-term capital gains, whether
received in cash or reinvested in additional shares.
The Company may be required to withhold for Federal income tax ("backup
withholding) 31% of the distributions and the proceeds of redemptions payable to
shareholders who fail to provide a correct taxpayer identification number or to
make required certifications, or where the Company or shareholder has been
notified by the Internal Revenue Service that it is subject to backup
withholding. Corporate shareholders and certain other shareholders specified in
the Code are exempt from backup withholding.
The Company may invest in securities of foreign issuers may be subject to
withholding and other similar income taxes imposed by a foreign country.
Dividends and distributions may be subject to state and local taxes. Dividends
paid or credited to accounts maintained by non-resident shareholders may also be
subject to U.S. non-resident withholding taxes. You should consult your tax
advisor regarding specific questions as to Federal, state and local income and
withholding taxes.
A statement setting forth the Federal income tax status of all
distributions made (or deemed made) during the year will be sent to shareholders
promptly after the end of each year.
Offers to Repurchase Shares. A shareholder who, pursuant to a repurchase
offer, tenders all shares owned or considered owned by such shareholder will
realize a taxable gain or loss depending upon the shareholder's basis in the
shares. Such gain or loss will be treated as capital gain or loss if the shares
are capital assets in the shareholder's hands and will be long-term, mid-term or
short- term depending upon the shareholder's holding period for the shares. If a
tendering shareholder tenders less than all shares owned by and attributed to
such shareholder (or if the Company purchases only some of the shares tendered
by a shareholder), and if the distribution to such shareholder does not
otherwise qualify as an exchange, the proceeds received will be treated as a
dividend, return of capital or capital gain depending on the Company's earnings
and profits and the shareholder's basis in the tendered shares. There is a risk
that shareholders may be considered to have received a deemed distribution as a
result of the repurchase by the Company of tendered shares and that such
distribution may be taxable as a dividend in whole or in part.
447068.4
28
<PAGE>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
Management........................................................... 2
Directors and Officers............................................... 2
Investment Adviser and Investment Advisory Agreement................. 4
Repurchase Offers.................................................... 4
Portfolio Transactions and Brokerage................................. 7
Allocation of Investments............................................ 8
Tax Matters.......................................................... 8
General Information.................................................. 13
Financial Statements................................................. 14
-----------
No dealer, salesperson or any other person has been authorized to give
information or make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus, and if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the selling agents. This Prospectus does not constitute an
offer to sell, or a solicitation by anyone in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
447068.4
29
<PAGE>
<TABLE>
<CAPTION>
=========================================== =================================================
TABLE OF CONTENTS
Page
----
<S> <C>
Prospectus Summary........................2
Special Risk Considerations...............4
Summary of the Company's Expenses.........5
Financial Highlights......................6
The Company and Its Objectives,
Policies and Risks......................7 AVALON CAPITAL, INC.
Management of the Company................18
Plan of Distribution.....................20
Automatic Dividend Reinvestment and
Cash Purchase Plans....................20 Common Stock
Retirement Plans.........................23
Net Asset Value..........................23
Capital Stock Of The Company.............24
Taxes....................................27 ___________
PROSPECTUS
Investor Information: (516) 951-0500 ___________
INVESTMENT ADVISER
Hutner Capital Management, Inc.
34 Chambers Street, Suite 200 January 5, 1998
Princeton, New Jersey 08542
ADMINISTRATOR
American Data Services, Inc.
The Hauppauge Corporate Center
150 Motor Parkway
Hauppauge, New York 11788
CUSTODIAN
Star Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45201
LEGAL COUNSEL
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281-1414
=========================================== =================================================
</TABLE>
447068.4
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION - January 5, 1998
AVALON CAPITAL, INC.
Avalon Capital, Inc. (the "Company") is a closed-end, non-diversified
management investment company. The Company's primary investment objective is
long-term capital appreciation. The Company will seek to achieve its objectives
by investing in a portfolio of securities that possess fundamental investment
value and may be purchased at a reasonable cost.
This Statement of Additional Information is not a prospectus. It
should be read in conjunction with the Company's current Prospectus, copies of
which may be obtained by writing American Data Services, Inc. at The Hauppauge
Corporate Center, 150 Motor Parkway, Hauppauge, New York 11788 or calling (516)
951-0500.
This Statement of Additional Information relates to the Company's
Prospectus which is dated January 5, 1998.
TABLE OF CONTENTS
Page
MANAGEMENT.................................................................. 2
DIRECTORS AND OFFICERS...................................................... 2
INVESTMENT ADVISER AND INVESTMENT ADVISORY
AGREEMENT.......................................................... 4
REPURCHASE OFFERS........................................................... 4
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 7
ALLOCATION OF INVESTMENTS................................................... 8
TAX MATTERS................................................................. 8
GENERAL INFORMATION......................................................... 13
FINANCIAL STATEMENTS........................................................ 14
- 1 -
272577.7
<PAGE>
MANAGEMENT
The overall management of the business and affairs of the Company is
vested with the Board of Directors. The Board of Directors approves all
significant agreements between the Company and persons or companies furnishing
services to the Company, including agreements with the investment adviser,
administrator, custodian and transfer and dividend disbursing agent. The
day-to-day operations of the Company are delegated to its officers subject
always to the investment objectives and policies of each Company and to general
supervision by the Company's Board of Directors.
DIRECTORS AND OFFICERS
The directors and officers of the Company, and their principal
occupations during the past five years, are set forth below. Directors who are
"interested persons", as defined in the 1940 Act, are denoted by an asterisk.
Daniel Hutner and Nancy Hutner are related by marriage. As of December 31, 1997,
the Directors and Officers of the Company as a group owned beneficially 6.3%of
its outstanding shares.
*Daniel E. Hutner Chairman of the Board of Directors,
Hutner Capital Management, Inc. Chief Executive Officer and President of
34 Chambers Street, Suite 200 the Company; President, Hutner Capital
Princeton, NJ 08542 Management since February 1995;
(48) Consultant, National Association of
Investors Corp. 1995 to 1997; President,
Pulsifer and Hutner, Inc., 1990 to 1996;
General Partner, Avalon Partners, L.P.
since 1990; General Partner, Hutner
Special Situations Fund since 1994.
*Nancy W. Hutner Director of the Company; Vice President
Hutner Capital Management, Inc. and Treasurer of the Company;
34 Chambers Street, Suite 200 Administrator, Avalon Partners, L.P.
Princeton, NJ 08542 since 1990; Vice President, Hutner
(43) Capital Management since 1995;
Consultant, Pulsifer and Hutner, Inc.
1983 to 1996; Assistant to Director,
Development Administration, Princeton
University, 1980-1983; Researcher,
National Geographic Society, 1976-1980.
William Endicott Director of the Company; Senior Advisor
6537 Broad St. to the Associate Administrator for
Bethesda, MD 20816 Communications and Public Liaison, Small
(51) Business Administration, September 1997
to present; Director, Speakers Bureau,
Democratic National Committee, 1996 to
1997, Consultant, 1994 to 1996;
Director, U.S. Canoe & Kayak Team;
Director, NAIC Growth Fund, 1995 to
1997; Consultant for organizing the 1996
Olympic Games, American Canoe
Association, 1994 to 1996; Olympic
Coach, U.S. National Whitewater Canoe
and Kayak Team, 1992; Head Coach 1977 to
1992; Congressional Aide, U.S. House of
Representatives, 1970 to 1982.
- 2 -
272577.7
<PAGE>
Edward Rosen Director of the Company; President, Star
Star Children Children's Dress Company, Inc. since
100 West 33rd St. 1985; Vice-President 1983-1985.
Suite 10005
New York, NY 10001
(46)
Donald Smith Director of the Company; President, Don
Don Smith Realty Smith Realty since 1971.
81 North Maple Avenue
Ridgewood, NJ 07450
(51)
Michele Scheddin Secretary of the Company; Vice
Hutner Capital Management, Inc. President, Hutner Capital Management
34 Chambers Street, Suite 200 since 1996; Assistant Portfolio Manager,
Princeton, NJ 08542 Pulsifer and Hutner, Incorporated,
1989-1996. (29)
The Company pays each director who is not an "interested person" as
defined in the 1940 Act, an annual fee of $1,000 per year, together with such
Director's actual out-of-pocket expenses related to attendance at such meetings.
<TABLE>
<CAPTION>
COMPENSATION TABLE
(Estimated for the year ended July 31, 1996)
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual from Company and
Compensation from Accrued as Part of Benefits upon Complex
Name of Person Position Company Company Expenses Retirement Paid to Directors
- ----------------------------- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
DANIEL E. HUTNER None None None None
Director
NANCY W. HUTNER None None None None
Director
WILLIAM ENDICOTT $1,000 None None $1,000
Director
EDWARD ROSEN $1,000 None None $1,000
Director
DONALD SMITH $1,000 None None $1,000
Director
============================= ====================== ====================== ====================== ======================
</TABLE>
- 3 -
272577.7
<PAGE>
INVESTMENT ADVISER AND INVESTMENT ADVISORY
AGREEMENT
Hutner Capital Management, Inc. (the "Investment Adviser"), 34
Chambers Street, Suite 200, Princeton, NJ 08542, acts as the Investment Adviser
to the Company under an investment advisory agreement (the "Advisory
Agreement"). Daniel Hutner owns 100% of the common stock of the Investment
Adviser and therefore is a "controlling person" as defined by the Investment
Company Act of 1940, as amended.
The Advisory Agreement provides that the Investment Adviser identify
and analyze possible investments for the Company, determine the amount and
timing of such investments, and the form of investment. The Investment Adviser
has the responsibility of monitoring and reviewing the Company's portfolio, and,
on a regular basis, to recommend the ultimate disposition of such investments.
It is the Investment Adviser's responsibility to cause the purchase and sale of
securities in the Company's portfolio, subject at all times to the policies set
forth by the Company's Board of Directors.
The Investment Adviser receives a fee from the Company, payable
monthly, for the performance of its services at an annual rate of 1.0% of its
average weekly net assets. The advisory fees are higher than that paid by most
investment companies but the Board of Directors believes it to be reasonable in
light of the services the Company receives thereunder.
Under the terms of the Advisory Agreement, the Company pays all of its
expenses (other than those expenses specifically assumed by the Investment
Adviser) including the costs incurred in connection with the maintenance of its
registration under the Securities Act of 1933, as amended, and the 1940 Act,
printing of prospectuses distributed to shareholders, taxes or governmental
fees, brokerage commissions, custodial, transfer and shareholder servicing
agents, expenses of outside counsel and independent accountants, preparation of
shareholder reports, and expenses of directors and shareholder meetings.
The Company's Advisory Agreement between the Investment Adviser and
the Company was approved initially by the Board of Directors (including the
affirmative vote of all the directors who were not parties to the Agreement or
interested persons of any such party) on August 9, 1995 and its continuance was
most recently approved on October 24, 1997. The Advisory Agreement may be
terminated without penalty on 60 days' written notice by a vote of the majority
of the Company's Board of Directors or by the Investment Adviser, or by holders
of a majority of the Company's outstanding shares. The Company's Advisory
Agreement will continue from year-to-year provided it is approved, at least
annually, in the manner stipulated in the 1940 Act. This requires that the
Advisory Agreement and any renewal thereof be approved by a vote of the majority
of the Company's directors who are not parties thereto or interested persons of
any such party, cast in person at a meeting specifically called for the purpose
of voting on such approval.
REPURCHASE OFFERS
Policy
- ------
The Company has adopted a fundamental policy of making a "Repurchase
Offer" once each year of not less than 5% nor more than 25% of the Company's
outstanding shares at net asset value. Before each Repurchase Offer, the
"Repurchase Offer Amount", currently 5% of the Company's outstanding shares,
shall be determined by the Board of Directors. The Board has set the current
"Repurchase Offer Amount" at 5% of the Company's shares outstanding. The
Repurchase Offer is open for a period of at least 21 days from the date a
"Notification" is sent to shareholders, during which the Company's net asset
value is calculated daily and may be obtained by
- 4 -
272577.7
<PAGE>
contacting the Administrator at (516) 951-0500. A shareholder may withdraw or
modify the number of shares tendered at any time up to the "Repurchase Request
Deadline", which it is the intention of the Company to set as the close of
business on the last business day of February each calendar year. If the
scheduled day for the Repurchase Request Deadline falls on a Friday or the
weekend, then the last business day prior to the intended date will be set as
the Repurchase Request Deadline. The "Repurchase Pricing Date" is set on the day
following the Repurchase Request Deadline.
Purpose of the Repurchase Offer
- -------------------------------
The Company has adopted a fundamental policy that periodic repurchase
offers are in the best interests of shareholders as a means of providing
liquidity to shareholders. As a result of the development of a secondary market
for the Company's common stock, the market price of the shares may vary from net
asset value from time to time. Such variance may be affected by, among other
factors, relative demand and supply of shares and the performance of the
Company, especially as it affects the yield on and net asset value of the common
stock.
A Repurchase Offer for shares of common stock of the Company is
designed to reduce any spread between net asset value and market price that may
otherwise develop. However, there can be no assurance that such action would
result in the Company's common stock trading at a price which equals or
approximates net asset value.
Although the Board of Directors believes that Repurchase Offers
generally would be beneficial to holders of the Company's common stock, the
acquisition of shares of common stock by the Company will decrease the total
assets of the Company and therefore have the likely effect of increasing the
Company's expense ratio (assuming such acquisition is not offset by the issuance
of additional shares of common stock).
Notification
- ------------
Shareholders of record and each beneficial owner of the Company's
stock will receive notification containing specified information at least
twenty-one days, and no more than forty-two days, before the repurchase request
deadline. The information provided will include the repurchase offer amount, the
dates of the repurchase request deadline, repurchase pricing date and repurchase
payment deadline. Notification will also include the procedures under which the
Company may repurchase such shares on a pro rata basis, and the circumstances
under which the Company may suspend or postpone the repurchase offer. The
Company will provide the net asset value of the common stock, which will be
computed no more than seven days before the date of Notification and the means
by which shareholders may ascertain the net asset value thereafter.
Source of Funds
- ---------------
The Company anticipates using cash on hand to purchase shares acquired
pursuant to the Repurchase Offers. However, if there is insufficient cash
available to consummate a Repurchase Offer, the Company may be required to
liquidate portfolio securities. In this regard, the Company will maintain liquid
assets during the notification period in an amount equal to at least 100% of the
Repurchase Offer Amount. As a result of liquidating portfolio securities, the
Company may realize gains or losses, at a time when the Adviser would otherwise
consider it disadvantageous to do so. Furthermore, if the Company borrows to
finance the making of Repurchase Offers, interest on such borrowing will reduce
the Company's net investment income.
Repurchase Offers could also significantly reduce the asset coverage
of any borrowings below the asset coverage requirement set forth in the 1940
Act. Accordingly, in order to purchase all shares of common stock tendered, the
Company may have to repay all or part of any then outstanding borrowings to
maintain the required asset coverage. Also, the amount of shares of common stock
for which the Company makes any particular
- 5 -
272577.7
<PAGE>
Repurchase Offer may be affected for the reasons set forth above or in respect
of other concerns related to liquidity of the Company's portfolio.
Withdrawal Rights
- -----------------
Tenders made pursuant to the Repurchase Offer will be irrevocable
after the Repurchase Request Deadline. However, shareholders may modify the
number of shares being tendered or withdraw shares tendered at any time up to
the Repurchase Request Deadline. All shares purchased by the Company pursuant to
the Repurchase Offer will be retired by the Company.
Tax Consequences
- ----------------
The following discussion is a general summary of the Federal Income
Tax consequences of a tender of shares pursuant to a Repurchase Offer. You
should consult your own tax advisor regarding the specific tax consequences,
including state and local tax consequences, of such a tender by you.
A tender of shares pursuant to a Repurchase Offer will be a taxable
transaction for Federal income tax purposes. In general, the transaction should
be treated as a sale or exchange of the shares under Section 302 of the Internal
Revenue Code of 1986 as amended (the "Code"), if the tender (i) completely
terminates the shareholder's interest in the Company, (ii) is "substantially
disproportionate" or (iii) is treated as a distribution that is "not essentially
equivalent to a dividend." A complete termination of the shareholder's interest
generally requires that the shareholder dispose of all shares directly owned or
attributed to him under Section 318 of the Code. A repurchase will be considered
"substantially disproportionate" with respect to a shareholder if, after
applying the Section 318 attribution rules, the shareholder's percentage of
ownership is reduced by more than 20% and the shareholder owns less than 50% of
the Company's voting shares. A distribution "not essentially equivalent to a
dividend" requires that there be a "meaningful reduction" in the shareholders
interest, which should be the case if the shareholder has a minimal interest in
the Company, exercises no control over Company affairs, and suffers a reduction
in his proportionate interest.
It is anticipated that tendering shareholders will qualify for sale or
exchange treatment. If the transaction is treated as a sale or exchange for tax
purposes, any gain or loss recognized will be treated as a capital gain or loss
by shareholders who hold their shares as a capital asset and as a mid-term
capital gain or loss if such shares have been held for more than one year or a
long-term capital gain or loss if such shares have been held for more than 18
months.
If the transaction is not treated as a sale or exchange, the amount
received upon a sale of shares may consist in whole or in part of ordinary
dividend income, a return of capital or capital gain, depending on the Company's
current and accumulated earnings and profits and the shareholder's tax basis in
the shares.
Pursuant to the backup withholding requirements of the Code ("backup
withholding"), the Company or its agent could be required to withhold 31% of
gross proceeds paid to a shareholder or other payee pursuant to a Repurchase
Offer if (a) it has not been provided with the shareholder's taxpayer
identification number (which, for an individual, is usually the social security
number) and certification under penalties of perjury (i) that such number is
correct and (ii) that the shareholder is not subject to withholding as a result
of failure to report all interest and dividend income or (b) the Internal
Revenue Service (IRS) or a broker notifies the Company that the number provided
is incorrect or withholding is applicable for other reasons. Backup withholding
does not apply to certain payments that are exempt from information reporting or
are made to exempt payees, such as corporations. Foreign shareholders are
required to provide the Company with a completed IRS Form W-8 to avoid 31%
withholding on payments received on a sale or exchange. Foreign shareholders may
be subject to tax withholding of 30% (or a lower treaty rate) on any portion of
payments received that are deemed to constitute a dividend.
- 6 -
272577.7
<PAGE>
Suspension and Postponements of Repurchase Offers
- -------------------------------------------------
The Company shall not suspend or postpone a Repurchase Offer except by
vote of a majority of the Directors (including a majority of the disinterested
Directors) and only: (1) if such purchases would impair the Company's status as
a regulated investment company under the Code; (2) for any period during which
an emergency exists as a result of which disposal by the Company of securities
owned by it is not reasonably practicable, or during which it is not reasonably
practicable for the Company fairly to determine the value of its net asset
value; or (3) for such other periods as the Commission may by order permit for
the protection of shareholders of the Company.
If the Repurchase Offer is suspended or postponed, the Company will
provide notice thereof to shareholders. If the Fund renews the Repurchase Offer,
the Company will send a new Notification to all shareholders.
Discretionary Repurchase Offers
- -------------------------------
In addition to the Company's policy of periodic repurchase offers, the
Company may make discretionary repurchase offers once every two years. Because a
discretionary repurchase offer would not be made pursuant to a fundamental
policy of the Company, it would require only a vote of the Directors.
Discretionary repurchase offers must comply with several of the requirements
that apply to periodic repurchase offers. Among other requirements, the Company
must pay repurchase proceeds within twenty-one days after the repurchase request
deadline, must compute net asset value daily on the five business days preceding
the discretionary repurchase request deadline, and must send notification
according to applicable procedures. The Company is not required to make
discretionary repurchase offers, and there can be no assurance that one will be
conducted.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Directors, decisions to buy
and sell securities for the Company are made by the Investment Adviser. The
Investment Adviser is authorized to allocate the orders placed by it on behalf
of the Company to such unaffiliated brokers who also provide research or
statistical material, or other services to the Company or the Investment Adviser
for the Company's use. Such allocation shall be in such amounts and proportions
as the Investment Adviser shall determine and the Investment Adviser will report
on said allocations regularly to the Board of Directors indicating the
unaffiliated brokers to whom such allocations have been made and the basis
thereof. In addition, the Investment Adviser may consider sales of shares of the
Company and of any other funds advised or managed by the Investment Adviser as a
factor in the selection of unaffiliated brokers to execute portfolio
transactions for the Company, subject to the requirements of best execution.
In selecting a broker to execute each particular transaction, the
Investment Adviser will take the following into consideration: the best net
price available; the reliability, integrity and financial condition of the
broker; the size and difficulty in executing the order; and, the value of the
expected contribution of the broker to the investment performance of the Company
on a continuing basis. Accordingly, the cost of the brokerage commissions to the
Company in any transaction may be greater than that available from other brokers
if the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies and procedures as the Board
of Directors may determine, the Investment Adviser shall not be deemed to have
acted unlawfully or to have breached any duty solely by reason of its having
caused the Company to pay an unaffiliated broker that provides research services
to the Investment Adviser for the Company's use an amount of
- 7 -
272577.7
<PAGE>
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting the
transaction, if the Investment Adviser determines in good faith that such amount
of commission was reasonable in relation to the value of the research service
provided by such broker viewed in terms of either that particular transaction or
the Investment Adviser's ongoing responsibilities with respect to the Company.
ALLOCATION OF INVESTMENTS
The Investment Adviser has other advisory clients which include
individuals, trusts, pension and profit sharing funds, some of which have
similar investment objectives to the Company. As such, there will be times when
the Investment Adviser may recommend purchases and/or sales of the same
portfolio securities for the Company and its other clients. In such
circumstances, it will be the policy of the Investment Adviser to allocate
purchases and sales among the Company and its other clients in a manner which
the Investment Adviser deems equitable, taking into consideration such factors
as size of account, concentration of holdings, investment objectives, tax
status, cash availability, purchase cost, holding period and other pertinent
factors relative to each account. Simultaneous transactions may have an adverse
effect upon the price or volume of a security purchased by the Company.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the Company and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Company or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning. Prospective investors should consult their own tax
advisors with respect to the tax consequences of an investment in the Company.
Qualification as a Regulated Investment Company
- -----------------------------------------------
The Company has elected and intends to continue to qualify to be taxed
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). The Company did so qualify for its
previous taxable year and intends to continue so to quality. As a regulated
investment company, the Company is not subject to federal income tax on the
portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses and the excess of net short-term
capital gain over net long-term capital loss) and capital gain net income (i.e.,
the excess of net long-term capital gain over net short-term capital loss) that
it distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income for the taxable year (the "Distribution
Requirement"), and satisfies certain other asset diversification and source of
income requirements of the Code. Distributions by the Company made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement. In
determining the amount of capital gains to be distributed, any capital loss
carryover from prior years will be applied against capital gains to reduce the
amount of distributions paid. Any losses incurred in the taxable year subsequent
to October 31, will be deferred to the next taxable year and used to reduce
distributions in the subsequent year.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies (to the extent
such currency gains are
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directly related to the regulated investment company's principal business of
investing in stock or securities) and other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies (the "Income
Requirement").
In general, gain or loss recognized by the Company on the disposition
of an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Company at a market discount
will be treated as ordinary income to the extent of the portion of the market
discount that accrued during the period of time the Company held the debt
obligation.
In addition to satisfying the requirements described above, the
Company must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of
the Company's taxable year, at least 50% of the value of the Company's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which the Company has not invested more than 5% of the value of the Company's
total assets in securities of such issuer and as to which the Company does not
hold more than 10% of the outstanding voting securities of such issuer), and no
more than 25% of the value of its total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Company
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security not the issuer of the option.
If for any taxable year the Company did not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
would be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions would be taxable to the
shareholders as ordinary dividends to the extent of the Company's current and
accumulated earnings and profits. Such distributions generally would be eligible
for the dividends received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
- --------------------------------------------
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net
income, generally for the one-year period ended on October 31 of such calendar
year. The balance of such income must be distributed during the next calendar
year. For the foregoing purposes, a regulated investment company is treated as
having distributed any amount on which it is subject to income tax for any
taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall
reduce its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year.
The Company intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Company may in certain circumstances be required
to liquidate portfolio investments to make sufficient distributions to avoid
excise tax liability.
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Company Distributions
- ---------------------
The Company anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes. Such dividends paid by the Company will qualify for
the 70% dividends received deduction for corporate shareholders only to the
extent discussed below.
The Company may either retain or distribute to shareholders its net
capital gain for each taxable year. The Company currently intends to distribute
any such amounts. If net capital gain is distributed and designated as a capital
gain dividend, it will be taxable to shareholders as mid-term or long-term
capital gain, regardless of the length of time the shareholder has held its
shares or whether such gain was recognized by the Company prior to the date on
which the shareholder acquired its shares.
Conversely, if the Company elects to retain its net capital gain, it
will be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If the Company elects to retain its
net capital gain, it is expected that the Company also will elect to have
shareholders of record on the last day of its taxable year treated as if each
received a distribution of its pro rata share of such gain, with the result that
each shareholder will be required to report its pro rata share of such gain on
its tax return as mid-term or long-term capital gain, will receive a refundable
tax credit for its pro rata share of tax paid by the Company on the gain, and
will increase the tax basis for its shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by the Company with respect to a
taxable year may qualify for the 70% dividends received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Company from domestic
corporations for the taxable year. The dividends received deduction will be
disallowed for shareholders who do not hold their shares in the Company for at
least 45 days during the 90 day period beginning 45 days before a share in the
Company becomes ex-dividend with respect to such dividend. A dividend received
by the Company will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the Company has held for less
than 46 days (91 days in the case of certain preferred stock) during the 90 day
period (180 days in the case of such preferred stock) beginning 45 days (90 days
in the case of such preferred stock) before the share becomes ex-dividend with
respect to such dividend, excluding for this purpose certain periods in which
the Company's risk of loss with respect to the stock is diminished; (2) to the
extent that the Company is under an obligation (pursuant to a short sale or
otherwise) to make related payments with respect to positions in substantially
similar or related property; or (3) to the extent the stock on which the
dividend is paid is treated as debt-financed under the rules of Code Section
246A. Moreover, the dividends received deduction for a corporate shareholder may
be disallowed or reduced (1) if the corporate shareholder fails to satisfy the
foregoing requirements with respect to its shares of the Company or (2) by
application of Code Section 246(b) which in general limits the dividends
received deduction to 70% of the shareholder's taxable income (determined
without regard to the dividends received deduction and certain other items).
Alternative minimum tax ("AMT") is imposed in addition to, but only to
the extent it exceeds, the regular tax and is computed at a maximum marginal
rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. For purposes of the corporate AMT, the corporate
dividends-received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, corporate shareholders will generally be required
to take the full amount of any dividend received from the Company into account
(without a dividends received deduction) in determining its adjusted current
earnings, which are used in computing an additional corporate preference item
(i.e., 75% of the
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excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Distributions by the Company that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in its shares;
any excess will be treated as gain from the sale of the shares, as discussed
below.
Distributions by the Company will be treated in the manner described
above regardless of whether they are paid in cash or reinvested in additional
shares of the Company. Shareholders receiving a distribution in the form of
additional shares will be treated as receiving a distribution in an amount equal
to the amount of the cash dividend that otherwise would have been distributable
(where the additional shares are purchased in the open market), or the fair
market value of the shares received, determined as of the reinvestment date.
Investors should be careful to consider the tax implications of buying shares
just prior to a distribution by the Company. Distributions by the Company reduce
the net asset value of the Company's shares. If the net asset value at the time
a shareholder purchases shares of the Company reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Company, when distributed such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder. The price of shares purchased at that time includes the amount of
the forthcoming distribution.
Ordinarily, shareholders are required to take distributions by the
Company into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in those months will be deemed to
have been received by the shareholders (and made by the Company) on December 31
of such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Company will be required in certain cases pursuant to the backup
withholding rules to withhold and remit to the U.S. Treasury 31% of ordinary
income dividends and capital gain dividends paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the IRS for failure to report the
receipt of interest or dividend income properly, or (3) who has failed to
certify to the Company that it is not subject to backup withholding or that it
is a corporation or other "exempt recipient."
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Company accrues interest or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Company actually collects such receivables or
pays such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, may increase, decrease, or
eliminate the amount of the Company's investment taxable to be distributed to
its shareholders as ordinary income.
Income received by the Company from sources within foreign countries
may be subject to withholding and other similar income taxes imposed by the
foreign country. Generally, a credit for foreign taxes is available but is
subject to the limitation that it may not exceed the shareholder's U.S. tax
attributable to its total foreign source taxable income. For this purpose, the
source of the Company's income flows through to its shareholders. With respect
to the Company, gains from the sale of securities will be treated as derived
from U.S. sources and certain currency fluctuation gains, including fluctuation
gains from foreign currency-denominated debt securities, receivables and
payables, will be treated as ordinary income derived from U.S. sources. The
limitation on the
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foreign tax credit is applied separately to foreign source passive income (as
defined for purposes of the foreign tax credit) including foreign source passive
income of the Company. The foreign tax credit may offset only 90% of the
alternative minimum tax imposed on corporations and individuals, and foreign
taxes generally may not be deducted in computing alternative minimum taxable
income.
Sale of Shares
- --------------
A shareholder will recognize gain or loss on the sale of shares of the
Company in an amount equal to the difference between the proceeds of the sale
and the shareholder's adjusted tax basis in the shares. All or a portion of any
loss so recognized may be disallowed if the shareholder purchases other shares
of the Company within 30 days before or after the sale. In general, any gain or
loss arising from (or treated as arising from) the sale of shares of the Company
will be considered capital gain or loss and will be mid-term if the shares were
held for longer than one year and long-term if the shares were held for more
than 18 months. However, any capital loss arising from the sale of shares held
for six months or less will be treated as a long-term capital loss to the extent
of the amount of capital gain dividends received on such shares. For this
purpose, the special holding period rules applying to certain periods in which
the holder's risk of loss with respect to the stock is diminished (discussed
above in connection with the dividends received deduction for corporations)
generally will apply in determining the holding period of shares. Mid-term
capital gains of noncorporate taxpayers are currently taxed at a maximum rate of
28 percent, and long-term capital gains of such taxpayers are currently taxed at
a maximum rate of 20% (10% if the taxpayer is, and would be after accounting for
such gains, subject to the 15% tax bracket for ordinary income). Capital losses
in any year are deductible only to the extent of capital gains plus, in the case
of a noncorporate taxpayer, $3,000 of ordinary income ($1500 for married
individuals filing separately).
Foreign Shareholders
- --------------------
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Company is "effectively connected" with a U.S. trade or business carried on
by such shareholder.
If the income from the Company is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate) upon the gross amount of the dividend.
Such a foreign shareholder would generally be exempt from U.S. federal income
tax on gains realized on the sale of shares of the Company, capital gain
dividends and amounts retained by the Company that are designated as
undistributed capital gains.
If the income from the Company is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the Company will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Company may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Company with proper notification of
their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein.
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<PAGE>
Exempt Shareholders
- -------------------
Entities that generally qualify for an exemption from Federal income
tax, such as many pension trusts, are nevertheless taxed on "unrelated business
taxable income." A tax-exempt entity's dividend income from the Company and gain
from the sale of shares in the Company or the Company's sale of securities is
not expected to constitute unrelated business income to such tax-exempt entity
unless the acquisition of the share itself is debt-financed or the shares
constitute dealer property in the hands of the tax-exempt entity.
Before investing in the Company, the trustee or investment manager of
an employee benefit plan (e.g., a pension or profit sharing retirement plan)
should consider among other things (a) whether the investment is prudent under
the Employee Retirement Income Security Act of 1974 ("ERISA"), taking into
account the needs of the plan and all of the facts and circumstances of the
investment in the Company; (b) whether the investment satisfies the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether
the assets of the Trust are deemed "plan assets" under ERISA and the Department
of Labor regulations regarding the definition of "plan assets."
Effect of Future Legislation; Local Tax Considerations
- ------------------------------------------------------
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above.
GENERAL INFORMATION
Shareholder and Director Liability
- ----------------------------------
The Company was incorporated on March 14, 1995 in the state of
Maryland. Under Maryland law, shareholders of such a corporation are not held
personally liable for the obligations of the corporation.
The Articles of Incorporation of the Company provide that, to the
fullest extent permitted by the Maryland General Corporation Law, no director or
officer of the corporation will have any liability to the corporation or its
stockholders for damages. The corporation will indemnify and advance expenses to
its directors or officers to the fullest extent that indemnification is
permitted by Maryland General Corporation Law.
The Articles of Incorporation do not waive a director's or officer's
duty to comply with the Securities Act of 1933, as amended, or the Investment
Company Act of 1940, as amended, or any rule, regulation, or order thereunder.
Further, the Articles of Incorporation do not protect the officers and directors
against any liability to the corporation or its stockholders 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.
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Voting Rights
- -------------
The Company will hold annual meetings of shareholders. Shares of the
Company entitle the holders to one vote per share. The shares have no preemptive
or conversion rights. The dividend rights are described in the Prospectus. When
issued, shares are fully paid and nonassessable. The shareholders have certain
rights, as set forth in the Bylaws, to call a meeting for any purpose, including
the purpose of voting on removal of one or more Directors.
Shareholders of the Company shall be entitled to receive distributions
as a class of the assets belonging to the Company. The assets of the Company
received for the issue or sale of the shares of the Company and all income
earnings and the proceeds thereof, subject only to the rights of creditors, are
specially allocated to the Company, and constitute the underlying assets of the
Company.
The Articles of Incorporation of the Company include certain
"anti-takeover" provisions that could have the effect of depriving stockholders
of an opportunity to sell their shares at a premium over prevailing market
prices by discouraging third parties from seeking to gain control in a tender
offer, proxy contest or similar transaction. These provisions are more fully
described in the Prospectus. A copy of the Articles of Incorporation may be
obtained from the Securities and Exchange Commission.
Principal Holders
- -----------------
As of December 31, 1997, no person owned beneficially, directly or
indirectly, 5% or more of the outstanding shares of the Company.
Accountants
- -----------
Deloitte & Touche LLP, New York, New York, serves as the independent
accountant of the Company. Generally, the independent accountants will audit the
financial statement and the financial highlights of the Company, as well as
provide reports to the Directors.
Legal Counsel
- -------------
Messrs. Battle Fowler LLP, 75 E. 55th Street, New York, New York 10022
serves as legal counsel for the Company. Generally, legal counsel reviews
documents relating to the operations of the Company. In addition, legal counsel
will provide counsel to the Board of Directors of the Company.
FINANCIAL STATEMENTS
Shareholders receive reports at least semi-annually showing the
Company's holdings and other information. In addition, shareholders receive
annual financial statements contained in the Annual Report to Shareholders
examined by Deloitte & Touche LLP, the Company's Independent Accountants. A copy
of the Fund's Annual Report to Shareholders will be provided upon request by
writing or calling the Fund at the address or telephone number set forth on page
1 of this Statement of Additional Information.
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