Reg. ICA No. 811-9004
File No. 33-90522
As filed with the Securities and Exchange Commission on January 5, 1998
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/ Post-Effective Amendment No. 1
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|X| Post-Effective Amendment No. 1
AVALON CAPITAL, INC.
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Exact Name of Registrant as Specified in Charter
34 Chambers Street, Suite 200, Princeton, New Jersey 08542
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Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(609) 683-3916
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Registrant's Telephone Number, including Area Code
Battle Fowler LLP
Thomas R. Westle, Esq. 75 East 55th Street, New York, NY 10022
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Name and Address (Number, Street, City, State, Zip Code)
of Agent for Service
As soon as practicable after the effective date of this registration statement
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Approximate Date of Proposed Public Offering
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If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. /X/
It is proposed that this filing will become effective (check appropriate box)
/_/ when declared effective pursuant to section 8(c)
/X/ immediately upon filing pursuant to paragraph (b)
/_/ on (date) pursuant to paragraph (b)
/_/ 60 days after filing pursuant to paragraph (a)
/_/ on (date) pursuant to paragraph (a)
in accordance with Rule 486 under the Securities Act of 1933.
If appropriate, check the following box:
/_/ this [post-effective] amendment designates a new effective date for a
previously filed [post-effective amendment] [registration statement].
272564.3
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CROSS-REFERENCE SHEET
(Pursuant to Rule 404 showing location in the form of Prospectus of
the responses to the Items in Part A and location in the form of Prospectus and
the Statement of Additional Information of the responses to the Items in Part B
of Form N-2).
Item Number
Form N-2,
Part A Prospectus Caption
----------- ------------------
1 Front Cover Page
2 Inside Front and Outside Back
Cover Page
3 Prospectus Summary; Summary
of the Company's Expenses
4 Not Applicable
5 Plan of Distribution
6 Not Applicable
7 The Company and its
Objectives, Policies and Risks
8 The Company and its
Objectives, Policies and Risks
9 Management of the Company
10 Capital Stock of the Company;
Automatic Dividend
Reinvestment and Cash
Purchase Plan; Taxes
11 Not Applicable
12 Not Applicable
13 Table of Contents of the
Statement of Additional
Information
-2-
272564.3
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<TABLE>
<CAPTION>
Item Number
Form N-2, Statement of Additional
Part B Prospectus Caption Information Caption
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<S> <C> <C> <C>
14 * Cover Page
15 * Cover Page
16 * Not Applicable
17 The Company and its *
Objectives, Policies and Risks
18 * Management
19 * General Information
20 * Investment Adviser and
Investment Advisory
Agreement
21 * Portfolio Transactions and
Brokerage; Allocation of
Investments
22 * Tax Matters
23 * Financial Statements
</TABLE>
Part C
------
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
-3-
272564.3
<PAGE>
PROSPECTUS
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."
-----------
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.
-----------
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.
447068.4
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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."
447068.4
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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 on a quarterly basis 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."
447068.4
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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%
-----
Total Annual Expenses............................................ 2.22%
=====
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.
- --------
* The Cash Purchase Plan Fee has a $3.00 maximum with a $1.00 termination
fee.
447068.4
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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)
--- ------
Ending net asset value per share $13.35 $10.51
====== ======
Ending market value per share $13.75 $10.88
====== ======
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.
447068.4
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<PAGE>
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
447068.4
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<PAGE>
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.
447068.4
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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.
447068.4
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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
447068.4
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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.
447068.4
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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
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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 before a repurchase request deadline, at such times to
be determined by the Board of Directors. During the period from notification to
shareholders of a repurchase pricing 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 Board of Directors
has determined that it is reasonably possible that the Company will become large
enough to permit such repayments.
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. 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 and will be asked to complete an authorization form. The
authorization form must be signed by the registered shareholders of an account.
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
24
<PAGE>
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
25
<PAGE>
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
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<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
- 8 -
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<PAGE>
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.
- 9 -
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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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PART C. OTHER INFORMATION
-------------------------
ITEM 24. Financial Statements and Exhibits
(a) Financial Statements.
In Part A:
Financial Highlights
In Part B:
None
In Part C:
The following financial statements and report included
therewith are incorporated by reference herein from the
Annual Report to Shareholders for the year ended August 31,
1997:
(i) Schedule of Investments - August 31, 1997;
(ii) Statement of Assets and Liabilities - August
31, 1997;
(iii) Statements of Changes in Net Assets - for the
period November 20, 1995 through August 31,
1996 and the year ended August 31, 1997;
(iv) Financial Highlights;
(v) Notes to Financial Statements for the year
ended August 31, 1997; and
(vi) Independent Auditor's Report of Deloitte &
Touche LLP dated October 22, 1997.
(b) Exhibits
1. Articles of Incorporation of Registrant(1)
2. By-Laws of Registrant(1)
3. Inapplicable
4. Inapplicable
- --------
(1) Filed herewith
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5. Automatic Dividend Reinvestment and Cash Purchase Plan(1)
6. Inapplicable
7. Investment Advisory Agreement between the Registrant and Hutner
Capital Management, Inc.(1)
8. Inapplicable
9. Inapplicable
10. Custodian Agreement between the Registrant and Star Bank, N.A.(1)
11. (a) Administration Agreement between the Registrant and American
Data Services, Inc.(1)
(b) Transfer Agent Agreement between the Registrant and American
Stock Transfer & Trust Co.(1)
12. (a) Opinion and Consent of Messrs. Battle Fowler LLP as to the
legality of the securities being registered(1)
(b) Opinion and Consent of Venable Baetjer and Howard as to
issues relating to Maryland law(1)
(c) Consent of Messrs. Battle Fowler LLP to be named in the
Prospectus and Statement of Additional Information(1)
13. Inapplicable
14. Consent of Deloitte & Touche LLP to the use of the Report of
Independent Accountants and to be named in the Prospectus and
Statement of Additional Information (1)
15. Inapplicable
16. Subscription Agreement Letter from Avalon Partners, L.P. to
Registrant(1)
17. Inapplicable
18. Financial Data Schedule (1)
ITEM 25. Marketing Arrangements
None.
ITEM 26. Other Expenses at Issuance and Distribution
Not Applicable
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ITEM 27. Persons Controlled By or Under Common Control With Registrant
None.
ITEM 28. Number of Holders of Securities
Title of Class; Shares Number of Record Holders
($0.001 par value) as of December 26, 1997
---------------------- ------------------------
AVALON CAPITAL, INC. 263
Common Stock
ITEM 29. Indemnification
(1) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation Law, no
director or officer of the corporation shall have any liability to the
corporation or its Stockholders for damages. This limitation on liability
applies to events occurring at the time a person serves as a director or officer
of the corporation whether or not such person is a director or officer at the
time of any proceeding in which liability is asserted.
(2) Any person who was or is a party or is threatened to be made a
party in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is a current or former director or officer of the Corporation,
or is or was serving while a director or officer of the Corporation at the
request of the Corporation as a director, officer, partner, trustee, employee,
agent or fiduciary of another corporation, partnership, joint venture, trust,
enterprise or employee benefit plan, shall be indemnified by the Corporation
against judgments, penalties, fines, excise taxes, settlements and reasonable
expenses (including attorneys' fees) actually incurred by such person in
connection with such action, suit or proceeding to the fullest extent
permissible under the Maryland General Corporation Law, the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, as such
statutes are now or hereafter in force. In addition, the Corporation shall also
advance expenses to its currently acting and its former directors and officers
to the fullest extent that such advance of expenses is permitted by the Maryland
General Corporation Law, the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended. The Board of Directors may by Bylaw,
resolution or agreement make further provisions for indemnification of
directors, officers, employees and agents to the fullest extent permitted by the
Maryland General Corporation Law.
19. (3) No provision of this Article shall be effective to protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders 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.
(4) References to the Maryland General Corporation Law in this Article
are to the law as from time to time amended. No amendment to the Articles of
Incorporation of the corporation shall affect any right of any person under this
Article based on any event, omission or proceeding prior to such amendment.
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ITEM 30. Business and Other Connections of Investment Adviser
None.
ITEM 31. Location of Accounts and Records
The accounts, books or other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules promulgated thereunder are
maintained by American Data Services, Inc., The Happaugue Corporate Center, 150
Motor Roadway, Hauppauge, New York 11788.
ITEM 32. Management Services
Not applicable.
ITEM 33. Undertakings
1. The Registrant undertakes to suspend the offering of shares until
the prospectus is amended if (1) subsequent to the effective date of its
registration statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of the registration statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. The Registrant undertakes that for the purpose of determining any
liability under the 1933 Act, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Registrant under Rule
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
3. The Registrant undertakes that for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering thereof.
4. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional Information.
C-4
272564.3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement on Form N-2 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Princeton, and the State of New Jersey, on the 24th day of October, 1997.
AVALON CAPITAL, INC. /s/ Daniel Hutner
- ---------------------- ------------------------------------------
Registrant By: Daniel Hutner, President and Director
- ------------------------------------------------------
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to its Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Daniel E. Hutner Chief Executive Officer October 24, 1997
- ---------------------------- and Director ------------------
Daniel E. Hutner
/s/ Nancy W. Hutner Director and Chief October 24, 1997
- ---------------------------- Financial Officer ------------------
Nancy W. Hutner
/s/ William T. Endicott Director November 6, 1997
- ---------------------------- ------------------
William T. Endicott
/s/ Edward Rosen Director October 24, 1997
- ---------------------------- ------------------
Edward Rosen
/s/ Donald Smith Director October 24, 1997
- ---------------------------- ------------------
Donald Smith
</TABLE>
C-5
272564.3
<PAGE>
EXHIBIT INDEX (1)
1. Articles of Incorporation of Registrant
2. By-Laws of Registrant
5. Automatic Dividend Reinvestment and Cash Purchase Plan
7. Investment Advisory Agreement between the Registrant and Hutner
Capital Management, Inc.
10. Custodian Agreement between the Registrant and Star Bank, N.A.
11. (a) Administration Agreement between the Registrant and American
Data Services, Inc.
(b) Transfer Agent Agreement between the Registrant and American
Stock Transfer & Trust Co.
12. (a) Opinion and Consent of Messrs. Battle Fowler LLP as to the
legality of the securities being registered
(b) Opinion and Consent of Venable Baetjer and Howard as to
issues relating to Maryland law
(c) Consent of Messrs. Battle Fowler LLP to be named in the
Prospectus and Statement of Additional Information
14. Consent of Deloitte & Touche LLP to the use of the Report of
Independent Accountants and to be named in the Prospectus and
Statement of Additional Information
16. Subscription Agreement Letter from Avalon Partners, L.P. to
Registrant
18. Financial Data Schedule
- ----------------
(1) Filed herewith
C-6
272564.3
ARTICLES OF INCORPORATION
OF
AVALON CAPITAL, INC.
------------------------------------
ARTICLE I
THE UNDERSIGNED, Thomas R. Westle, 919 Third Avenue, New York,
New York 10022, being at least eighteen years of age, does hereby act as an
incorporator and form a corporation under and by virtue of the Maryland General
Corporation Law.
ARTICLE II
NAME
The name of the Corporation is Avalon Capital, Inc.
ARTICLE III
PURPOSES AND POWERS
The Corporation is formed to conduct and carry on the business
of a closed-end investment company registered under the Investment Company Act
of 1940, as amended. The Corporation shall have all of the powers granted to
corporations by the Maryland General Corporation Law now or hereafter in force.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the
Corporation in the State of Maryland is c/o CSC-Lawyers Incorporating Service
Company, 11 East Chase St., Suite 9E, Baltimore, Maryland 21202. The name of the
resident agent of the Corporation in the State of
667967.1
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<PAGE>
Maryland is CSC-Lawyers Incorporating Service Company. The post office address
of the resident agent is 11 East Chase St., Suite 9E, Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
(1) The total number of shares of capital stock that the
Corporation shall have authority to issue is one hundred million (100,000,000)
shares, of the par value of one tenth of one cent ($.001) per share and of the
aggregate par value of one hundred thousand dollars ($100,000), all of which one
hundred million (100,000,000) shares are initially designated Common Stock.
(2) The Corporation may issue fractional shares. Any
fractional share shall carry proportionately the rights of a whole share
including, without limitation, the right to vote and the right to receive
dividends and distributions, and the right to participate upon liquidation of
the Corporation. A fractional share shall not, however, have the right to
receive a certificate evidencing it.
(3) All persons who shall acquire stock or other securities of
the Corporation shall acquire the same subject to the provisions of these
Articles of Incorporation and the Bylaws of the Corporation, as from time to
time amended.
(4) No holder of stock of the Corporation by virtue of being
such a holder shall have any right to purchase or subscribe for any shares of
the Corporation's capital stock or any other security that the Corporation may
issue or sell other than a right that the Board of Directors in its discretion
may determine to grant.
(5) The Board of Directors shall have authority by resolution
to classify and reclassify any authorized but unissued shares of capital stock
from time to time by setting or changing in any one or more respects the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of redemption
of the capital stock.
(6) Notwithstanding any provision of law requiring any action
to be taken or authorized by the affirmative vote of the holders of a greater
proportion of the votes of all classes or of any class of stock of the
Corporation, such action shall be effective and valid if taken or authorized by
the affirmative vote of a majority of the total number of votes entitled to be
cast thereon, subject to any applicable requirements of the Investment Company
Act of 1940, as amended, or rules, regulations or orders thereunder by the
Securities and Exchange Commission, except as otherwise provided in these
Articles of Incorporation.
667967.1
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<PAGE>
(7) Dividends payable in cash declared by the Board of
Directors may be automatically invested in shares of Common Stock pursuant to a
Dividend Reinvestment Plan to be adopted by the Board of Directors, as modified
or amended from time to time. If the Board of Directors determines not to
implement or to terminate such Dividend Reinvestment Plan, dividends declared
and payable in cash shall be paid to all stockholders in cash. Any stockholder
who chooses not to participate in the Dividend Reinvestment Plan shall be paid
in cash any dividends declared and payable in cash. The Board of Directors may
appoint a Plan Agent for the Dividend Reinvestment Plan. Appointment of the Plan
Agent by the Board of Directors shall also constitute appointment of the Plan
Agent by the participants in the Dividend Reinvestment Plan. If additional
classes of stock are issued, dividends declared in respect of such classes shall
not be subject to this Section.
ARTICLE VI
BOARD OF DIRECTORS
(1) The initial number of directors of the Corporation shall
be three (3). The number of directors of the Corporation may be changed by the
Bylaws or by the Board of Directors pursuant to the Bylaws. The number of
directors shall in no event be greater than twenty (20). The term of office of a
director in office at the time of any decrease in the number of directors shall
not be affected as a result thereof. The names of directors who shall act until
the first annual meeting of stockholders or until their successors are duly
chosen and qualified are:
Daniel E. Hutner
Nancy W. Hutner
Thomas R. Westle
(2) Beginning with the first annual meeting of stockholders
held after the initial public offering of the shares of the Corporation (the
"initial annual meeting"), the Board of Directors shall be divided into three
classes: Class I, Class II and Class III. The terms of office of the classes of
Directors elected at the initial meeting shall expire at the times of the annual
meetings of the stockholders as follows: Class I on the next annual meeting,
Class II on the second next annual meeting and Class III on the third next
annual meeting, or thereafter in each case when their respective successors are
elected and qualified. At each subsequent annual election, the Directors chosen
to succeed those whose terms are expiring shall be identified as being of the
same class as the Directors whom they succeed, and shall be elected for a term
expiring at the time of the third succeeding annual meeting of stockholders, or
thereafter in each case when their respective successors are elected and
qualified. The number of Directorships shall be apportioned among the classes so
as to maintain the classes as nearly equal in number as possible.
667967.1
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<PAGE>
(3) A Director may be removed with or without cause, but only
by action of the stockholders taken by the holders of at least seventy-five
percent (75%) of the votes entitled to be cast.
(4) In furtherance, and not in limitation, of the powers
conferred by the laws of the State of Maryland, the Board of Directors is
expressly authorized:
(i) to make, alter or repeal the Bylaws of the
Corporation, except as otherwise required by the Investment Company Act of 1940,
as amended.
(ii) From time to time to determine whether and to
what extent and at what times and places and under what conditions and
regulations the accounts, books and records of the Corporation, or any of them
other than the stock ledger, shall be open to the inspection of the
stockholders. No stockholder shall have any right to inspect any account or book
or document of the Corporation, except as conferred by law or authorized by
resolution of the Board of Directors.
(iii) From time to time to determine the net asset
value per share of the Corporation's stock or to establish methods to be used by
the Corporation's officers, employees or agents for determining the net asset
value per share of the Corporation's stock.
(iv) Without the assent or vote of the stockholders,
to authorize the issuance and sale from time to time of shares of the stock of
any class of the Corporation, whether now or hereafter authorized, and
securities convertible into shares of stock of the Corporation of any class or
classes, whether now or hereafter authorized, in such amounts and such terms and
conditions for such amount and kind of consideration as the Board of Directors
may deem advisable.
(v) Without the assent or vote of the stockholders,
to authorize and issue obligations of the Corporation, secured and unsecured, as
the Board of Directors may determine, and to authorize and cause to be executed
mortgages and liens upon the real or personal property of the Corporation.
(vi) In addition to the powers and authorities
granted herein and by statute expressly conferred upon it, the Board of
Directors is authorized to exercise all powers and do all acts that may be
exercised or done by the Corporation pursuant to the provisions of the laws of
the State of Maryland, these Articles of Incorporation and the Bylaws of the
Corporation.
(5) Any determination made in good faith by or pursuant to the
direction of the Board of Directors, with respect to the amount of assets,
obligations or liabilities of the Corporation, as to the amount of net income of
the Corporation from dividends and interest for any period or amounts at any
time legally available for the payment of dividends, as to the
667967.1
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<PAGE>
amount of any reserves or charges set up and the propriety thereof, as to the
time of or purpose for creating reserves or as to the use, alteration or
cancellation of any reserves or charges (whether or not any obligation or
liability for which the reserves or charges have been created has been paid or
discharged or is then or thereafter required to be paid or discharged), as to
the value of any security owned by the Corporation or as to the determination of
the net asset value of shares of any class of the Corporation's capital stock,
shall be final and conclusive, and shall be binding upon the Corporation and all
holders of its capital stock, past, present and future, and shares of the
capital stock of the Corporation are issued and sold on the condition and
understanding, evidenced by the purchase of shares of capital stock or
acceptance of share certificates, that any and all such determinations shall be
binding as aforesaid. No provision of these Articles of Incorporation of the
Corporation shall be effective to (i) require a waiver of compliance with any
provisions of the Securities Act of 1933, as amended, or the Investment Company
Act of 1940, as amended, or of any valid rule, regulation or order of the
Securities and Exchange Commission under those Acts or (ii) protect or purport
to protect any director or officer of the Corporation against any liability to
the Corporation or its security holders 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.
ARTICLE VII
CERTAIN TRANSACTIONS
(1) Except as otherwise provided in this Article VII, at least
seventy-five percent (75%) of the votes entitled to be cast by stockholders, in
addition to the affirmative vote of at least seventy-five (75%) of the entire
Board of Directors, shall be necessary to effect any of the following actions:
(i) any amendment to these Articles to make the
Corporation's Common Stock a "redeemable security" or to convert the corporation
from a "closed-end company" to an "open-end company" (as such terms are defined
in the Investment Company Act of 1940, as amended) or any amendment to Article
III, unless the Continuing Directors (as hereinafter defined) of the
Corporation, by a vote of at least seventy-five percent (75%) of such Directors,
approve such amendment in which case the affirmative vote of a majority of the
votes entitled to be cast by stockholders shall be required to approve such
transaction;
(ii) any stockholder proposal as to specific
investment decisions made or to be made with respect to the Corporation's
assets;
(iii) any proposal as to the voluntary liquidation
or dissolution of the Corporation or any amendment to these Articles of
Incorporation to terminate the existence of the Corporation, unless the
Continuing Directors of the Corporation, by a vote of at least seventy-five
percent (75%) of such Directors, approve such proposals in which case the
667967.1
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<PAGE>
affirmative vote of a majority of the votes entitled to be cast by stockholders
shall be required to approve such transaction;
(iv) any Business Combination (as hereinafter
defined) unless either the condition in clause (A) below is satisfied, or all of
the conditions in clauses (B), (C), (D), (E) and (F) below are satisfied, in
which case paragraph (c) below shall apply.
(A) The Business Combination shall have been
approved by a vote of at least 75% of the Continuing Directors.
(B) The aggregate amount of cash and the Fair Market
Value (as hereinafter defined), as of the date of the consummation of the
Business Combination, of consideration other than cash to be received per share
by holders of any class of outstanding Voting Stock (as hereinafter defined) in
such Business Combination shall be at least equal to the higher of the
following:
(x) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by an
Interested Party (as hereinafter defined) for any shares of such Voting Stock
acquired by it (aa) within the two-year period immediately prior to the first
public announcement of the proposal of the Business Combination (the
"Announcement Date"), or (bb)(i) in the Threshold Transaction (as hereinafter
defined), or (ii) in any period between the Threshold Transaction and the
consummation of the Business Combination, whichever is higher; and
(y) the net asset value per share of such Voting
Stock on the Announcement Date or on the date of the Threshold Transaction,
whichever is higher.
(C) The consideration to be received by holders of
the particular class
of outstanding Voting Stock shall be in cash or in the same form as the
Interested Party has previously paid for shares of any class of Voting Stock. If
the Interested Party has paid for shares of any class of Voting Stock with
varying forms of consideration, the form of consideration for such class of
Voting Stock shall be either cash or the form used to acquire the largest number
of shares of such class of Voting Stock previously acquired by it.
(D) After the occurrence of the Threshold
Transaction, and prior to the consummation of such Business Combination, such
Interested Party shall not have become the beneficial owner of any additional
shares of Voting Stock except by virtue of the Threshold Transaction.
(E) After the occurrence of the Threshold
Transaction, such Interested Party shall not have received the benefit, directly
or indirectly (except proportionately as a shareholder of the Corporation), of
any loans, advances, guarantees, pledges or other financial assistance or any
tax credits or other tax advantages provided by the
667967.1
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<PAGE>
Corporation, whether in anticipation of or in connection with such Business
Combination or otherwise.
(F) A proxy or information statement describing the
proposed Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended, and the Investment Company Act of
1940, as amended, and the rules and regulations thereunder (or any subsequent
provisions replacing such Acts, rules or regulations) shall be prepared and
mailed by the Interested Party, at such Interested Party's expense, to the
shareholders of the Corporation at least 30 days prior to the consummation of
such Business Combination (whether or not such proxy or information statement is
required to be mailed pursuant to such Acts or subsequent provisions).
(2) For the purposes of this Article and Article IX:
(i) "Business Combination" shall mean any of the
transactions described or referred to in any one or more of the following
subparagraphs:
(A) any merger, consolidation or share
exchange of the Corporation with or into any other person;
any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in
one transaction or a series of transactions in any 12-month period) to or with
any other person of any assets of the Corporation having an aggregate Fair
Market Value of $1,000,000 or more except for portfolio transactions of the
Corporation effected in the ordinary course of the Corporation's business;
(B) the issuance or transfer by the
Corporation (in one transaction or a series of transactions in any 12-month
period) of any securities of the Corporation to any other person in exchange for
cash, securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $1,000,000 or more excluding (x) sales of any
securities of the Corporation in connection with a public offering thereof, (y)
issuances of any securities of the Corporation pursuant to a dividend
reinvestment plan adopted by the Corporation upon the exercise of any stock
subscription rights distributed by the Corporation.
(ii) "Continuing Director" means any member of the
Board of Directors of the Corporation who is not an Interested Party or an
Affiliate (as hereinafter defined) of an Interested Party and has been a member
of the Board of Directors for a period at least 12 months (or since the
Corporation's commencement of operations, if that period is less than 12
months), or is a successor of a Continuing Director who is unaffiliated with an
Interested Party and is recommended to succeed a Continuing Director by a
majority of the Continuing Directors then on the Board of Directors.
667967.1
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<PAGE>
(iii) "Interested Party" shall mean any person,
other than an investment company advised by the Corporation's initial investment
manager or any of its Affiliates, which enters, or proposes to enter, into a
Business Combination with the Corporation.
(iv) "Person" shall mean an individual, corporation,
a trust or a partnership.
(v) "Voting Stock" shall mean capital stock of the
Corporation entitled to vote generally in the election of directors.
(vi) A person shall be a "beneficial owner" of any
Voting Stock:
(A) which such person or any of its
Affiliates or Associates (as hereinafter defined) beneficially owns, directly or
indirectly; or
(B) which such person or any of its
Affiliates or Associates has the right to acquire (whether such right is
exercisable immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options; or
(C) which is beneficially owned, directly or
indirectly, by any other person with which such person or any of its Affiliates
or Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of Voting Stock.
(vii) Affiliate" and "Associate" shall have the
respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended.
(viii) "Fair Market Value" means:
(A) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding the relevant
date of a share of such stock on the New York Stock Exchange, or if such stock
is not listed on such Exchange, on the principal United States securities
exchange registered under the Securities Exchange Act of 1934 as amended, on
which such stock is listed, or, if such stock is not listed on any such
exchange, the highest closing sale price (if such stock is a National Market
System security) or the highest closing bid quotation (if such stock is not a
National Market System security) with respect to a share of such stock during
the 30-day period preceding the relevant date on the National Association of
Securities Dealers, Inc. Automated Quotation Systems (NASDAQ) or any system then
in use, or if no such quotations are available, the fair market value on the
relevant date of the share of such stock as determined by at least 75% of the
Continuing Directors in good faith, and
667967.1
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<PAGE>
(B) in the case of property other than cash
or stock, the fair market value of such property on the relevant date as
determined by at least 75% of the Continuing Directors in good faith.
(ix) "Threshold Transaction" means the transaction
by or as a result of which an Interested Party first becomes the beneficial
owner of Voting Stock.
(x) In the event of any Business Combination in
which the Corporation survives, the phrase "consideration other than cash to be
received" as used in subparagraph (a)(iv)(B) above shall include the shares of
Common Stock and/or the shares of any other class of outstanding Voting Stock
retained by the holders of such shares.
(xi) Continuing Directors of the Corporation, acting
by a vote of at least 75%, shall have the power and duty to determine, on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine (a) the number of shares of Voting Stock beneficially owned by any
person, (b) whether a person is an Affiliate or Associate of another, (c)
whether the requirements of subparagraph (a)(iv) above have been met with
respect to any Business Combination, and (d) whether the assets which are the
subject of any Business Combination have, or the consideration to be received
for the issuance or transfer of securities by the Corporation in any Business
Combination has, an aggregate Fair Market Value of $1,000,000 or more.
(c) If any Business Combination described in paragraph
(b)(i)(A) or (B) (if the merger, consolidation, share exchange or transfer or
other disposition constitutes a merger, consolidation, share exchange or
transfer of all or substantially all of the assets of the Corporation with
respect to which stockholder approval is required under Maryland law) is
approved by a vote of 75% of the Continuing Directors or all of the conditions
in paragraph (a)(iv)(B), (C), (D), (E) and (F) are satisfied, a majority of the
votes entitled to be cast by stockholders shall be required to approve such
transaction. If any other Business Combination is approved by a vote of 75% of
the Continuing Directors or all of the conditions in paragraph (a)(iv)(B) (C),
(D), (E) and (F) are satisfied, no stockholder vote shall be required to approve
such transaction unless otherwise provided in these Articles of Incorporation or
required by law.
667967.1
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<PAGE>
ARTICLE VIII
LIMITATIONS ON LIABILITY; INDEMNIFICATION
(1) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation Law, no
director or officer of the Corporation shall have any liability to the
Corporation or its stockholders for damages. This limitation on liability
applies to events occurring at the time a person serves as a director or officer
of the Corporation whether or not such person is a director or officer at the
time of any proceeding in which liability is asserted.
(2) Any person who was or is a party or is threatened to be
made a party in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is a current or former director or officer of the Corporation,
or is or was serving while a director or officer of the Corporation at the
request of the Corporation as a director, officer, partner, trustee, employee,
agent of fiduciary of another corporation, partnership, joint venture, trust,
enterprise or employee benefit plan, shall be indemnified by the Corporation
against judgments, penalties, fines, excise taxes, settlements and reasonable
expenses (including attorneys' fees) actually incurred by such person in
connection with such action, suit or proceeding to the fullest extent
permissible under the Maryland General Corporation Law, the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, as such
statutes are now or hereafter in force. In addition, the Corporation shall also
advance expenses to its currently acting and its former directors and officers
to the fullest extent that such advances of expenses are permitted by the
Maryland General Corporation Law, the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended. The Board of Directors may by
Bylaw, resolution or agreement make further provision for indemnification of
directors, officers, employees and agents to the fullest extent permitted by the
Maryland General Corporation Law.
(3) No provision of this Article shall be effective to protect
or purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders 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.
(4) References to the Maryland General Corporation Law in this
Article are to that law as from time to time amended. No amendment to the
charter of the Corporation shall affect any right of any person under this
Article based on any event, omission or proceeding prior to the amendment.
667967.1
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<PAGE>
ARTICLE IX
AMENDMENTS
(1) The Corporation reserves the right from time to time to
make any amendments to its Charter, now or hereafter authorized by law,
including any amendment that alters the contract rights, as expressly set forth
in its Charter, of any outstanding stock.
(2) Notwithstanding Paragraph (1) of this Article or any other
provision of these Articles of Incorporation, no amendment to these Articles of
Incorporation shall amend, alter, change or repeal any of the provisions of
paragraph (1), (2) or (3) of Article VI unless the amendment effecting such
alteration, change or repeal shall receive the affirmative vote of at least
seventy-five percent (75%) of the votes entitled to be cast by stockholders and
the affirmative vote of at least seventy-five percent (75%) of the entire Board
of Directors, unless the amendment shall have approved by at least 75% of the
Continuing Directors, in which case the affirmative vote of a majority of the
votes entitled to be cast shall be sufficient to approve the amendment, and no
amendment to these Articles of Incorporation shall amend, alter, change or
repeal Articles VII or IX unless the amendment effecting such amendment,
alteration, change or repeal shall receive the affirmative vote of at least
seventy-five percent (75%) of the votes entitled to be cast by stockholders and
a vote of at least seventy-five percent (75%) of the entire Board of Directors.
IN WITNESS WHEREOF, I have adopted and signed these Articles
of Incorporation and do hereby acknowledge that the adoption and signing are my
act.
Dated the 7th day of March, 1995
/s/ Thomas R. Westle
Incorporator
667967.1
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BYLAWS
OF
AVALON CAPITAL, INC.
BYLAW-ONE: NAME OF COMPANY, LOCATION OF OFFICES AND SEAL.
Article 1.1. Name. The name of the Company is Avalon Capital, Inc.
Article 1.2. Principal Offices. The principal office of the Company
in the State of Maryland shall be located in Baltimore, Maryland. The Company
may, in addition, establish and maintain such other offices and places of
business within or outside the State of Maryland as the Board of Directors may
from time to time determine.
Article 1.3. Seal. The corporate seal of the Company shall be circular
in form and shall bear the name of the Company, the year of its incorporation
and the words "Corporate Seal, Maryland." The form of the seal shall be subject
to alteration by the Board of Directors and the seal may be used by causing it
or a facsimile to be impressed or affixed or printed or otherwise reproduced.
Any Officer or Director of the Company shall have authority to affix the
corporate seal of the Company to any document requiring the same.
BYLAW-TWO: STOCKHOLDERS.
Article 2.1. Place of Meetings. All meetings of the Stockholders shall
be held at such place within the United States, whether within or outside the
State of Maryland, as the
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Board of Directors shall determine, which shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Article 2.2. Annual Meeting. Commencing with the first annual meeting
of the Stockholders held after the Company's initial public offering, the annual
meeting of the Stockholders of the Company shall be held at such place as the
Board of Directors shall select on such date, during the 31-day period ending
four months after the end of the Company's fiscal year, as may be fixed by the
Board of Directors each year, at which time the Stockholders shall elect
Directors by plurality of votes cast, and transact such other business as may
properly come before the meeting. Any business of the Company may be transacted
at the annual meeting without being specially designated in the notice except as
otherwise provided by statute, by the Articles of Incorporation or by these
Bylaws.
Article 2.3. Special Meetings. Special meetings of the Stockholders for
any purpose or purposes, unless otherwise prescribed by statute or by the
Articles of Incorporation, may be called by resolution of the Board of Directors
or by the President, and shall be called by the Secretary at the request of a
majority of the Board of Directors or at the request, in writing, of
Stockholders holding at least 25% of the votes entitled to be cast at the
meeting upon payment by such Stockholders to the Company of the reasonably
estimated cost of preparing and mailing a notice of the meeting (which estimated
cost shall be provided to such Stockholders by the Secretary of the Company).
Notwithstanding the foregoing, unless requested by Stockholders entitled to cast
a majority of the votes entitled to be cast at the meeting, a special meeting of
the Stockholders need not be called at the request
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of Stockholders to consider any matter that is substantially the same as a
matter voted on at any special meeting of the Stockholders held during the
preceding 12 months. A written request shall state the purpose or purposes of
the proposed meeting and the matters proposed to be acted upon at it.
Article 2.4. Notice. Written notice of every meeting of Stockholders,
stating the purpose or purposes for which the meeting is called, the time when
and the place where it is to be held, shall be served, either personally or by
mail, not less than ten nor more than ninety days before the meeting, upon each
Stockholder as of the record date fixed for the meeting who is entitled to
notice of or to vote at such meeting. If mailed (i) such notice shall be
directed to a Stockholder at his address as it shall appear on the books of the
Company (unless he shall have filed with the Transfer Agent of the Company a
written request that notices intended for him be mailed to some other address,
in which case it shall be mailed to the address designated in such request) and
(ii) such notice shall be deemed to have been given as of the date when it is
deposited in the United States mail with first-class postage thereon prepaid.
Article 2.5. Notice of Stockholder Business. At any annual or special
meeting of the Stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before an
annual or special meeting, the business must be (i) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (ii) otherwise properly brought before the
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meeting by or at the direction of the Board of Directors, or (iii) otherwise
properly brought before the meeting by a Stockholder.
For business to be properly brought before an annual or special meeting
by a Stockholder, the Stockholder must have given timely notice thereof in
writing to the Secretary of the Company. To be timely, any such notice must be
delivered to or mailed and received at the principal executive offices of the
Company not later than 60 days prior to the date of the meeting; provided,
however, that if less than 70 days' notice or prior public disclosure of the
date of the meeting is given or made to Stockholders, any such notice by a
Stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which notice of the date of the
annual or special meeting was given or such public disclosure was made.
Any such notice by a Stockholder shall set forth as to each matter the
Stockholder proposes to bring before the annual or special meeting (i) a brief
description of the business desired to be brought before the annual or special
meeting and the reasons for conducting such business at the annual or special
meeting, (ii) the name and address, as they appear on the Company's books, of
the Stockholder proposing such business, (iii) the class and number of shares of
the capital stock of the Company which are beneficially owned by the
Stockholder, and (iv) any material interest of the Stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at any annual or special meeting except in accordance with
the procedures set forth in this Article 2.5. The chairman of the annual or
special meeting shall, if the facts
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warrant, determine and declare to the meeting that business was not properly
brought before the meeting in accordance with the provisions of this Article
2.5, and, if he should so determine, he shall so declare to the meeting that any
such business not properly brought before the meeting shall not be considered or
transacted.
Article 2.6. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote, present in person or represented by proxy,
shall be requisite and shall constitute a quorum at all meetings of the
Stockholders for the transaction of business except as otherwise provided by
statute, by the Articles of Incorporation or by these Bylaws. If a quorum shall
not be present in person or by proxy, the Stockholders entitled to vote thereat,
present in person or represented by proxy, shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, to a date not more than 120 days after the original record date, until
a quorum shall be present or represented. At such adjourned meeting, at which a
quorum shall be present or represented, any business which might have been
transacted at the original meeting may be transacted.
Article 2.7. Vote of the Meeting. When a quorum is present or
represented at any meeting, the vote of the holders of a majority of the votes
cast shall decide any question brought before such meeting (except with respect
to election of directors which shall be by a plurality of votes cast), unless
the question is one upon which, by express provisions of applicable statutes, of
the Articles of Incorporation or of these Bylaws, a different vote is required,
in which case such express provisions shall govern and control the decision of
such question.
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Article 2.8. Voting Rights of Stockholders. Each Stockholder of record
having the right to vote shall be entitled at every meeting of the Stockholders
of the Company to one vote for each share of stock having voting power standing
in the name of such Stockholder on the books of the Company on the record date
fixed in accordance with Article 6.5 of these Bylaws, with pro rata voting
rights for any fractional shares and such votes may be cast either in person or
by written proxy.
Article 2.9. Organization. At every meeting of the Stockholders, the
Chairman of the Board, or in his absence or inability to act, the President or a
Vice President of the Company, shall act as chairman of the meeting. The
Secretary, or in his absence or inability to act, a person appointed by the
chairman of the meeting, shall act as secretary of the meeting and keep the
minutes of the meeting.
Article 2.10. Proxies. Every proxy must be executed in writing by the
Stockholder or by his duly authorized attorney-in-fact. No proxy shall be valid
after the expiration of eleven months from the date of its execution unless it
shall have specified therein its duration. Every proxy shall be revocable at the
pleasure of the person executing it or of his personal representatives or
assigns. Proxies shall be delivered prior to the meeting to the Secretary of the
Company or to the person acting as Secretary of the meeting before being voted.
A proxy with respect to stock held in the name of two or more persons shall be
valid if executed by one of them unless, at or prior to exercise of such proxy,
the Company receives a specific written notice to the contrary from any one of
them. A proxy purporting
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to be executed by or on behalf of a Stockholder shall be deemed valid unless
challenged at or prior to its exercise.
Article 2.11. Stock Ledger and List of Stockholders. It shall be the
duty of the Secretary or Assistant Secretary of the Company to cause an original
or duplicate stock ledger to be maintained at the office of the Company's
Transfer Agent.
Article 2.12. Action without Meeting. Any action to be taken by
Stockholders may be taken without a meeting if (1) all Stockholders entitled to
vote on the matter consent to the action in writing, (2) all Stockholders
entitled to notice of the meeting but not entitled to vote at it sign a written
waiver of any right to dissent and (3) said consents and waivers are filed with
the records of the meetings of Stockholders. Such consent shall be treated for
all purposes as a vote at a meeting.
BYLAW-THREE: BOARD OF DIRECTORS.
Article 3.1. General Powers. Except as otherwise provided in the
Articles of Incorporation, the business and affairs of the Company shall be
managed under the direction of the Board of Directors. All powers of the Company
may be exercised by or under authority of the Board of Directors except as
conferred on or reserved to the Stockholders by law, by the Articles of
Incorporation or by these Bylaws.
Article 3.2. Board of Three to Twenty Directors. The Board of Directors
shall consist of not less than three (3) nor more than twenty (20) Directors;
provided that if there are less than three stockholders, the number of Directors
may be less than three but not less
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than the number of stockholders or one, if less. Directors need not be
Stockholders. The majority of the entire Board of Directors shall have power
from time to time, and at any time when the Stockholders as such are not
assembled in a meeting, regular or special, to increase or decrease the number
of Directors. If the number of Directors is increased, the additional Directors
may be elected by a majority of the Directors in office at the time of the
increase. If such additional Directors are not so elected by the Directors in
office at the time they increase the number of places on the Board, or if the
additional Directors are elected by the existing Directors prior to the first
annual meeting of the Stockholders of the Company, then in either of such events
the additional Directors shall be elected or re-elected by the Stockholders at
their next annual meeting or at an earlier special meeting called for that
purpose.
Beginning with the first annual meeting of Stockholders held after the
initial public offering of the shares of the Company (the "initial annual
meeting"), the Board of Directors shall be divided into three classes: Class I,
Class II and Class III. The terms of office of the classes of Directors elected
at the initial annual meeting shall expire at the times of the annual meetings
of the Stockholders as follows: Class I on the next annual meeting, Class II on
the second next annual meeting and Class III on the third next annual meeting,
or thereafter in each case when their respective successors are elected and
qualified. At each subsequent annual election, the Directors chosen to succeed
those whose terms are expiring shall be identified as being of the same class as
the Directors whom they succeed, and shall be elected for a term expiring at the
time of the third succeeding annual meeting of Stockholders, or thereafter in
each case when their respective successors are elected and
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qualified. The number of directorships shall be apportioned among the classes so
as to maintain the classes as nearly equal in number as possible.
Article 3.3. Director Nominations.
(a) Only persons who are nominated in accordance with the procedures
set forth in this Article 3.3 shall be eligible for election or re-election as
Directors. Nominations of persons for election or re-election to the Board of
Directors of the Company may be made at a meeting of Stockholders by or at the
direction of the Board of Directors or by any Stockholder of the Company who is
entitled to vote for the election of such nominee at the meeting and who
complies with the notice procedures set forth in this Article 3.3.
(b) Such nominations, other than those made by or at the direction of
the Board of Directors, shall be made pursuant to timely notice delivered in
writing to the Secretary of the Company. To be timely, any such notice by a
Stockholder must be delivered to or mailed and received at the principal
executive offices of the Company not later than 60 days prior to the meeting;
provided, however, that if less than 70 days' notice or prior public disclosure
of the date of the meeting is given or made to Stockholders, any such notice by
a Stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which notice of the date of the
meeting was given or such public disclosure was made.
(c) Any such notice by a Stockholder shall set forth (i) as to each
person whom the Stockholder proposes to nominate for election or re-election as
a Director, (A) the name,
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age, business address and residence address of such person, (B) the principal
occupation or employment of such person, (C) the class and number of shares of
the capital stock of the Company which are beneficially owned by such person and
(D) any other information relating to such person that is required to be
disclosed in solicitations of proxies for the election of Directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934 or any successor
regulation thereto (including without limitation such person's written consent
to being named in the proxy statement as a nominee and to serving as a Director
if elected and whether any person intends to seek reimbursement from the Company
of the expenses of any solicitation of proxies should such person be elected a
Director of the Company); and (ii) as to the Stockholder giving the notice (A)
the name and address, as they appear on the Company's books, of such Stockholder
and (B) the class and number of shares of the capital stock of the Company which
are beneficially owned by such Stockholder. At the request of the Board of
Directors any person nominated by the Board of Directors for election as a
Director shall furnish to the Secretary of the Company that information required
to be set forth in a Stockholder's notice of nomination which pertains to the
nominee.
(d) If a notice by a Stockholder is required to be given pursuant to
this Article 3.3, no person shall be entitled to receive reimbursement from the
Company of the expenses of a solicitation of proxies for the election as a
Director of a person named in such notice unless such notice states that such
reimbursement will be sought from the Company. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by the
Bylaws,
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and, if he should so determine, he shall so declare to the meeting and the
defective nomination shall be disregarded for all purposes.
Article 3.4. Vacancies. Subject to the provisions of the Investment
Company Act of 1940, as amended, if the office of any Director or Directors
becomes vacant for any reason (other than an increase in the number of
Directors), the Directors in office, although less than a quorum, shall continue
to act and may choose a successor or successors, who shall hold office until the
next election of Directors, or any vacancy may be filled by the Stockholders at
any meeting thereof.
Article 3.5. Removal. At any meeting of Stockholders duly called and at
which a quorum is present, the Stockholders may, by the affirmative vote of the
holders of at least three-fourths of the votes entitled to be cast thereon,
remove any Director or Directors from office, with or without cause, and may
elect a successor or successors to fill any resulting vacancies for the
unexpired term of the removed Director.
Article 3.6. Resignation. A Director may resign at any time by giving
written notice of his resignation to the Board of Directors or the Chairman of
the Board or the Secretary of the Company. Any resignation shall take effect at
the time specified in it or, should the time when it is to become effective not
be specified in it, immediately upon its receipt. Acceptance of a resignation
shall not be necessary to make it effective unless the resignation states
otherwise.
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Article 3.7. Place of Meetings. The Directors may hold their meetings
at the principal office of the Company or at such other places, either within or
outside the State of Maryland, as they may from time to time determine.
Article 3.8. Regular Meetings. Regular meetings of the Board may be
held at such date and time as shall from time to time be determined by
resolution of the Board.
Article 3.9. Special Meetings. Special meetings of the Board may be
called by order of the Chairman of the Board on one day's notice given to each
Director either in person or by mail, telephone, telegram, cable or wireless to
each Director at his residence or regular place of business. Special meetings
will be called by the Chairman or Vice Chairman, if any, of the Board or
Secretary in a like manner on the written request of a majority of the
Directors.
Article 3.10. Quorum. At all meetings of the Board, the presence of a
majority of the entire Board of Directors shall constitute a quorum except when
a vacancy or vacancies prevents such majority, whereupon a majority of the
Directors in office shall constitute a quorum, provided such majority shall
constitute at least one-third of the entire Board and, in no event, less than
two directors. A majority of the Directors present, whether or not a quorum is
present, may adjourn a meeting to another time and place. Except as otherwise
specifically provided by statute, by the Articles of Incorporation, or by these
By-laws, the action of a majority of the Directors present at a meeting at which
a quorum is present shall be the action of the Board of Directors.
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Article 3.11. Organization. The Board of Directors shall designate one
of its members to serve as Chairman of the Board. The Chairman of the Board
shall preside at each meeting of the Board. In the absence or inability of the
Chairman of the Board to act another Director chosen by a majority of the
Directors present, shall act as chairman of the meeting and preside at the
meeting. The Secretary (or, in his absence or inability to act, any person
appointed by the chairman) shall act as secretary of the meeting and keep the
minutes of the meeting.
Article 3.12. Informal Action by Directors and Committees. Any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may, except as otherwise required by statute, be taken
without a meeting if a written consent to such action is signed by all members
of the Board, or of such committee, as the case may be, and filed with the
minutes of the proceedings of the Board or committee. Subject to the Investment
Company Act of 1940, as amended, members of the Board of Directors or a
committee thereof may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other at the same time.
Article 3.13. Executive Committee. There may be an Executive Committee
of two or more Directors appointed by the Board who may meet at stated times or
on notice to all by any of their own number. The Executive Committee shall
consult with and advise the Officers of the Company in the management of its
business and exercise such powers of the Board of Directors as may be lawfully
delegated by the Board of Directors. Vacancies shall
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be filled by the Board of Directors at any regular or special meeting. The
Executive Committee shall keep regular minutes of its proceedings and report the
same to the Board when required.
Article 3.14. Audit Committee. There shall be an Audit Committee of two
or more Directors who are not "interested persons" of the Company (as defined in
the Investment Company Act of 1940, as amended) appointed by the Board who may
meet at stated times or on notice to all by any of their own number. The
Committee's duties shall include reviewing both the audit and other work of the
Company's independent accountants, recommending to the Board of Directors the
independent accountants to be retained, and reviewing generally the maintenance
and safekeeping of the Company's records and documents.
Article 3.15. Other Committees. The Board of Directors may appoint
other committees which shall in each case consist of such number of members (but
not less than two) and shall have and may exercise, to the extent permitted by
law, such powers as the Board may determine in the resolution appointing them. A
majority of all members of any such committee may determine its action, and fix
the time and place of its meetings, unless the Board of Directors shall
otherwise provide. The Board of Directors shall have power at any time to change
the members and, to the extent permitted by law, to change the powers of any
such committee, to fill vacancies and to discharge any such committee.
Article 3.16. Compensation of Directors. The Board may, by resolution,
determine what compensation and reimbursement of expenses of attendance at
meetings, if any, shall be paid to Directors in connection with their service on
the Board. Nothing herein contained
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shall be construed to preclude any Director from serving the Company in any
other capacity or from receiving compensation therefor.
BYLAW-FOUR: OFFICERS.
Article 4.1. Officers. The Officers of the Company shall be fixed by
the Board of Directors and shall include a President, Secretary and Treasurer.
Any two offices may be held by the same person except the offices of President
and Vice President. A person who holds more than one office in the Company may
not act in more than one capacity to execute, acknowledge or verify an
instrument required by law to be executed, acknowledged or verified by more than
one officer.
Article 4.2. Appointment of Officers. The Directors shall appoint the
Officers, who need not be members of the Board.
Article 4.3. Additional Officers. The Board may appoint such other
Officers and agents as it shall deem necessary who shall exercise such powers
and perform such duties as shall be determined from time to time by the Board.
Article 4.4. Salaries of Officers. The salaries of all Officers of the
Company shall be fixed by the Board of Directors.
Article 4.5. Term, Removal, Vacancies. The Officers of the Company
shall serve at the pleasure of the Board of Directors and hold office for one
year and until their successors are chosen and qualify in their stead. Any
Officer elected or appointed by the
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Board of Directors may be removed at any time by the affirmative vote of a
majority of the Directors. If the office of any Officer becomes vacant for any
reason, the vacancy shall be filled by the Board of Directors.
Article 4.6. President. The President shall be the chief executive
officer of the Company, shall, subject to the supervision of the Board of
Directors, have general responsibility for the management of the business of the
Company and shall see that all orders and resolutions of the Board are carried
into effect.
Article 4.7. Vice President. Any Vice President shall, in the absence
or disability of the President, perform the duties and exercise the powers of
the President and shall perform such other duties as the Board of Directors
shall prescribe.
Article 4.8. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all moneys and other valuable effects in the name and to the credit of the
Company in such depositories as may be designated by the Board of Directors. He
shall disburse the funds of the Company as may be ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the Chairman of the
Board and Directors at the regular meetings of the Board, or whenever they may
require it, an account of the financial condition of the Company.
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Any Assistant Treasurer may perform such duties of the Treasurer as the
Treasurer or the Board of Directors may assign, and, in the absence of the
Treasurer, may perform all the duties of the Treasurer.
Article 4.9. Secretary. The Secretary shall attend meetings of the
Board and meetings of the Stockholders and record all votes and the minutes of
all proceedings in a book to be kept for that purpose, and shall perform like
duties for the Executive Committee of the Board when required. He shall give or
cause to be given notice of all meetings of Stockholders and special meetings of
the Board of Directors and shall perform such other duties as may be prescribed
by the Board of Directors. He shall keep in safe custody the seal of the Company
and affix it to any instrument when authorized by the Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the absence of the
Secretary, may perform all the duties of the Secretary.
Article 4.10. Subordinate Officers. The Board of Directors from time to
time may appoint such other officers or agents as it may deem advisable, each of
whom shall serve at the pleasure of the Board of Directors and have such title,
hold office for such period, have such authority and perform such duties as the
Board of Directors may determine. The Board of Directors from time to time may
delegate to one or more officers or agents the power to appoint any such
subordinate officers or agents and to prescribe their respective rights, terms
of office, authorities and duties.
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Article 4.11. Surety Bonds. The Board of Directors may require any
officer or agent of the Company to execute a bond (including, without
limitation, any bond required by the Investment Company Act of 1940, as amended,
and the rules and regulations of the Securities and Exchange Commission) to the
Company in such sum and with such surety or sureties as the Board of Directors
may determine, conditioned upon the faithful performance of his duties to the
Company, including responsibility for negligence and for the accounting of any
of the Company's property, funds or securities that may come into his hands.
BYLAW-FIVE: GENERAL PROVISIONS.
Article 5.1. Waiver of Notice. Whenever the Stockholders or the Board
of Directors are authorized by statute, the provisions of the Articles of
Incorporation or these Bylaws to take any action at any meeting after notice,
such notice may be waived, in writing, before or after the holding of the
meeting, by the person or persons entitled to such notice, or, in the case of a
Stockholder, by his duly authorized attorney-in-fact. Such notice is also waived
if the person entitled to the notice is present at the meeting in person, or, in
the case of a stockholder, by proxy.
Article 5.2. Indemnity.
(a) The Company shall indemnify its directors to the fullest extent
that indemnification of directors is permitted by the Maryland General
Corporation Law. The Company shall indemnify its officers to the same extent as
its directors and to such further extent as is consistent with law. The Company
shall indemnify its directors and officers
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who, while serving as directors or officers, also serve at the request of the
Company as a director, officer, partner, trustee, employee, agent or fiduciary
of another corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan to the fullest extent consistent with law. The
indemnification and other rights provided by this Article shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit
of the heirs, executors and administrators of such a person. This Article shall
not protect any such person against any liability to the Company or any
Stockholder thereof to which such person would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office ("disabling conduct").
(b) Any current or former director or officer of the Company seeking
indemnification within the scope of this Article shall be entitled to advances
from the Company for payment of the reasonable expenses incurred by him in
connection with the matter as to which he is seeking indemnification in the
manner and to the fullest extent permissible under the Maryland General
Corporation Law. The person seeking indemnification shall provide to the Company
a written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Company has been met and a written
undertaking to repay any such advance if it should ultimately be determined that
the standard of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (i) the person seeking
indemnification shall provide security in form and amount acceptable to the
Company for his undertaking; (ii) the Company is insured against losses arising
by reason of the advance; or (iii) a majority of a quorum of Directors
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of the Company who are neither "interested persons" as defined in Section
2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the
proceeding ("disinterested non-party directors"), or independent legal counsel,
in a written opinion, shall have determined, based on a review of facts readily
available to the Company at the time the advance is proposed to be made, that
there is reason to believe that the person seeking indemnification will
ultimately be found to be entitled to indemnification.
(c) At the request of any person claiming indemnification under this
Article, the Board of Directors shall determine, or cause to be determined, in a
manner consistent with the Maryland General Corporation Law, whether the
standards required by this Article have been met. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the person to be indemnified was not
liable by reason of disabling conduct or (ii) in the absence of such a decision,
a reasonable determination, based upon a review of the facts, that the person to
be indemnified was not liable by reason of disabling conduct by (i) the vote of
a majority of a quorum of disinterested non-party directors or (ii) an
independent legal counsel in a written opinion.
(d) Employees and agents who are not officers or directors of the
Company may be indemnified, and reasonable expenses may be advanced to such
employees or agents, as may be provided by action of the Board of Directors or
by contract, subject to any limitations imposed by the Investment Company Act of
1940.
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(e) The Board of Directors may make further provision consistent with
law for indemnification and advance of expenses to directors, officers,
employees and agents by resolution, agreement or otherwise. The indemnification
provided by this Article shall not be deemed exclusive of any other right, with
respect to indemnification or otherwise, to which those seeking indemnification
may be entitled under any insurance or other agreement or resolution of
stockholders or disinterested directors or otherwise.
(f) References in this Article are to the Maryland General Corporation
Law and to the Investment Company Act of 1940, as from time to time amended. No
amendment of these Bylaws shall affect any right of any person under this
Article based on any event, omission or proceeding prior to the amendment.
Article 5.3. Insurance. The Company may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Company or who, while a director, officer, employee or agent of the Company,
is or was serving at the request of the Company as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, other enterprise or employee benefit plan,
against any liability asserted against and incurred by such person in any such
capacity or arising out of such person's position; provided that no insurance
may be purchased by the Company on behalf of any person against any liability to
the Company or to 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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Article 5.4. Checks. All checks or demands for money and notes of the
Company shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Article 5.5. Fiscal Year. The fiscal year of the Company shall be
determined by resolution of the Board of Directors.
BYLAW-SIX: CERTIFICATES OF STOCK.
Article 6.1. Certificates of Stock. The interest of each Stockholder of
the Company shall be evidenced by certificates for shares of stock in such form
as the Board of Directors may from time to time prescribe. The certificates
shall be numbered and entered in the books of the Company as they are issued.
They shall exhibit the holder's name and the number of whole shares and no
certificate shall be valid unless it has been signed by the President, Vice
President or Chairman and the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary and bears the corporate seal. Such seal may
be a facsimile, engraved or printed. Where any such certificate is signed by a
Transfer Agent or by a Registrar, the signatures of any such officer may be
facsimile, engraved or printed. In case any of the officers of the Company whose
manual or facsimile signature appears on any stock certificate delivered to a
Transfer Agent of the Company shall cease to be such Officer prior to the
issuance of such certificate, the Transfer Agent may nevertheless countersign
and deliver such certificate as though the person signing the same or whose
facsimile signature appears thereon had not ceased to be such officer, unless
written instructions of the Company to the contrary are delivered to the
Transfer Agent.
272595.1
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<PAGE>
Article 6.2. Lost, Stolen or Destroyed Certificates. The Board of
Directors, or the President together with the Treasurer or Secretary, may direct
a new certificate to be issued in place of any certificate theretofore issued by
the Company, alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed, or by his legal representative. When authorizing such
issue of a new certificate, the Board of Directors, or the President and
Treasurer or Secretary, may, in its or their discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his legal representative, to advertise the same in
such manner as it or they shall require and/or give the Company a bond in such
sum and with such surety or sureties as it or they may direct as indemnity
against any claim that may be made against the Company with respect to the
certificate alleged to have been lost, stolen or destroyed for such newly issued
certificate.
Article 6.3. Transfer of Stock. Shares of the Company shall be
transferable on the books of the Company by the holder thereof in person or by
his duly authorized attorney or legal representative upon surrender and
cancellation of a certificate or certificates for the same number of shares of
the same class, duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, with such proof of the authenticity of the
signature as the Company or its agents may reasonably require. The shares of
stock of the Company may be freely transferred, and the Board of Directors may,
from time to time, adopt rules and regulations with reference to the method of
transfer of the shares of stock of the Company.
272595.1
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<PAGE>
Article 6.4. Registered Holder. The Company shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person
whether or not it shall have express or other notice thereof, except as
expressly provided by statute.
Article 6.5. Record Date. The Board of Directors may fix a time not
less than 10 nor more than 90 days prior to the date of any meeting of
Stockholders or prior to the last day on which the consent or dissent of
Stockholders may be effectively expressed for any purpose without a meeting, as
the time as of which Stockholders entitled to notice of, and to vote at, such a
meeting or whose consent or dissent is required or may be expressed for any
purpose, as the case may be, shall be determined; and all such persons who were
holders of record of voting stock at such time, and no other, shall be entitled
to notice of, and to vote at, such meeting or to express their consent or
dissent, as the case may be. If no record date has been fixed, the record date
for the determination of Stockholders entitled to notice of, or to vote at, a
meeting of Stockholders shall be the later of the close of business on the day
on which notice of the meeting is mailed or the thirtieth day before the
meeting, or, if notice is waived by all Stockholders, at the close of business
on the tenth day next preceding the day on which the meeting is held. The Board
of Directors may also fix a time not exceeding 90 days preceding the date fixed
for the payment of any dividend or the making of any distribution, or for the
delivery of evidences of rights, or evidences of interests arising out of any
change, conversion or exchange of capital stock, as a record time for the
determination of the Stockholder entitled to receive any such dividend,
distribution, rights or interests.
272595.1
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<PAGE>
Article 6.6. Stock Ledgers. The stock ledgers of the Company,
containing the names and addresses of the Stockholders and the number of shares
held by them respectively, shall be kept at the principal offices of the Company
or at the offices of the Transfer Agent of the Company or at such other location
as may be authorized by the Board of Directors from time to time.
Article 6.7. Transfer Agents and Registrars. The Board of Directors may
from time to time appoint or remove Transfer Agents and/or Registrars of
transfers (if any) of shares of stock of the Company, and it may appoint the
same person as both Transfer Agent and Registrar. Upon any such appointment
being made, all certificates representing shares of capital stock thereafter
issued shall be countersigned by one of such Transfer Agents or by one of such
Registrars of transfers (if any) or by both and shall not be valid unless so
countersigned. If the same person shall be both Transfer Agent and Registrar,
only one countersignature by such person shall be required.
BYLAW-SEVEN: AMENDMENTS.
Article 7.1. General. Except as provided in the next succeeding
sentence and in the Articles of Incorporation, all Bylaws of the Company,
whether adopted by the Board of Directors or the Stockholders, shall be subject
to amendment, alteration or repeal, and new Bylaws may be made, by the
affirmative vote of a majority of either: (a) the holders of record of the
outstanding shares of stock of the Company entitled to vote, at any annual or
special meeting, the notice or waiver of notice of which shall have specified or
summarized
272595.1
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<PAGE>
the proposed amendment, alteration, repeal or new Bylaw; or (b) the Directors,
at any regular or special meeting, the notice or waiver of notice of which shall
have specified or summarized the proposed amendment, alteration, repeal or new
Bylaw. The provisions of Articles 2.5, 3.2, 3.3, 3.5 and 7.1 of these Bylaws
shall be subject to amendment, alteration or repeal by: (i) the affirmative vote
of the holders of record of 75% of the outstanding shares of stock of the
Company entitled to vote, at any annual or special meeting, the notice or waiver
of notice of which shall have specified or summarized the proposed amendment,
alteration or repeal or (ii) the Board of Directors including the affirmative
vote of 75% of the Continuing Directors (as such term is defined in Article VII
of the Company's Articles of Incorporation), at any regular or special meeting,
the notice or waiver of notice of which shall have specified or summarized the
proposed amendment, alteration or repeal.
Dated: ________________________
272595.1
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AVALON CAPITAL, INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
__________ , 1995
1. Participation
All distributions to shareholders whose shares of common stock
shares are registered in their own names (the "Shares") of the Company
will automatically be reinvested in registered in the participant's name
additional shares of Avalon Capital, on the books of the Company.
Inc. (the "Company") pursuant to the
Dividend Reinvestment and Cash Payment 3. Investment of
Plan (the "Plan"), unless the Distributions in Each Account
shareholder elects to receive the
distributions in cash. Shareholders On each date on which the Company
participating in the Plan will be deemed determines the net asset value of
to have appointed the Bank of Boston, the shares (a "Valuation Date"), and
N.A., as their agent and as agent for which occurs not more than five
the Company under the Plan (the "Plan business days prior to a date fixed
Agent"). for payment of a dividend or other
distribution from the Company,
2. Dividend Investment the Plan Agent will compare the
Account determined net asset value per
share with the market price per
The Company's transfer agent and share. For all purposes of the
dividend disbursing agent, Forum Plan, "market price" shall be deemed
Financial Services, Inc. ("Forum") will to be the highest price bid at the
establish a Dividend Investment Account close of the market by any market
(the "Account") with the Plan Agent for maker on the date which coincides
each shareholder participating in the with the relevant Valuation Date,
Plan. Forum will credit to the Account or, if no bids were made on such
of each participant funds it receives date, the next preceding day on
from the following sources: (a) which a bid was made. If the net
dividends from net investment income; asset value in any such comparison
(b) capital gain distributions; and (c) is found to be lower than said
distributions from paid in capital. market price, the Plan Agent will
Sources described in clauses (a), (b) demand that the Company satisfy
and (c) are hereinafter called its obligation with respect
("Distributions"). Such Distributions to any Distribution by issuing
will be paid on 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
276357.1
<PAGE>
determined as of the close of business additional cash payments to the Plan
on the relevant Valuation Date. However, Agent ("Additional Cash Purchases"),
if the net asset value per share (as on a monthly basis, for investment
determined above) is higher than the payments may be made in any amount
market price per share, then the Plan from a minimum of $50.00 to a
Agent will demand that the Company maximum of $1,000.00 per month. The
satisfy its obligation with respect to Company may, in its discretion,
any Distribution by a cash payment to waive the maximum monthly limit with
the Plan Agent for the account of Plan respect to any participant. At the
Participants and the Plan Agent then end of each calendar month, the Plan
shall use such cash payment to buy Agent will determine the amount of
additional shares in the "open market" funds accumulated. Purchases made
for the account of the Plan from the accumulation of payments
Participants, provided, however, that during any one calendar month will
the Plan Agent shall not purchase shares be made on or about the first
in the "open market" at a price in business day of the following
excess of the net asset value as of the month ("Investment Date"). The
relevant Valuation Date. In the event funds will be used to purchase
the Plan Agent is unable to complete its Shares of the Company's common stock
acquisition of shares to be purchased in from the Company. If the net asset
the "open market" by the end of the value of the Shares is lower than
first trading day following receipt of the market price as of the Valuation
the cash payment from the Company, any Date which occurs not more than five
remaining funds shall be used by the business days prior to the relevant
Plan Agent to purchase newly issued Investment Date, such Shares will be
shares of the Company's common stock newly issued Shares and will be
from the Company at the greater of the issued at a price per share equal to
determined net asset value per share or the greater of the determined net
ninety-five (95%) percent of the market asset value per share or ninety-five
price per share as of the date percent (95%) of the market price
coinciding with or next preceding the per share. If the net asset value
date of the relevant Valuation Date. per share is higher than the market
price per share, then the Plan Agent
4. Additional Cash Purchases shall use such cash payments to buy
for Each Account additional Shares in the "open
market" for the account of the Plan
Participants in the Plan will also have Participants, provided, however,
the option of making that the Plan Agent shall not
purchase Shares in
276357.1
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<PAGE>
the "open market" at a price in to be invested by the Plan Agent.
excess of the net asset value as of
the relevant Valuation Date. In the 5. Determination of Purchase
event that the Plan Agent is Price
unable to complete its acquisition of
Shares to be purchased in The cost of Shares and fractional
the "open market" by the end of the Shares acquired for each
Investment Date, any remaining cash participant's Account in connection
payments shall be used by the Plan Agent with a purchase for the Plan shall
to purchase newly issued Shares of the be determined by the average cost
Company's common stock from the Company per share, including brokerage
at the greater of the determined net commissions as described in
asset value per share or ninety-five paragraph 6 hereof, of the Shares
(95%) percent of the market price per acquired by the Plan Agent.
share as of the relevant Valuation Date. Shareholders will receive a
All cash payments received by the Plan confirmation showing the average
Agent in connection with the Plan will cost and number of Shares acquired
be held without earning interest. as soon as practicable after the
Participants that wish to make voluntary Plan Agent has purchased Shares.
cash payments must send such payments to
the Plan Agent in such a manner that
assures that the Plan Agent will receive 6. Brokerage and Service Charges
and collect Federal Funds by the end
of the month. This procedure will There will be no direct brokerage
avoid unnecessary accumulations of charges with respect to Shares
cash and will enable Participants issued directly by the Company as a
to realize lower brokerage commissions result of Distributions. However,
and to avoid additional transaction with respect to the Plan Agent's
charges. If a voluntary cash payment open market purchases of Shares
is not received in time to purchase being purchased as a result of the
Shares in any calendar month, such reinvestment of Distributions,
payment shall be invested on the next Participants will be charged
Investment Date. A participant may reasonable transactions fees, which
withdraw a voluntary cash payment by shall not exceed the lesser of five
written notice to the Plan Agent if the percent (5%) of the amount
notice is received by the Plan Agent at reinvested or three ($3.00) dollars
least forty-eight hours before such and a termination fee of up to one
payment is ($1.00) dollar. With respect to
the voluntary Additional Cash
Purchases, the Plan Agent will
charge Participants three ($3.00)
dollars, plus a pro rata share of
the brokerage commissions,
276357.1
-3-
<PAGE>
if any. Brokerage charges 9. Amendments
for purchasing small amounts of Shares
for individual Accounts through the Plan Experience under the Plan may
can be expected to be less than the indicate that changes are
usual brokerage charges for such desirable. Accordingly, the Company
transactions, as the Plan Agent will be terminate the Plan. Participants
purchasing Shares for all participants will receive written notice at least
in blocks and pro rating the lower 90 days before the Record Date of
commission thus attainable. The Company any Distribution or the Investment
reserves the right to amend the Plan in Date of any Additional Cash Purchase
the future with respect to the actual affected by an amendment. In the
amount of the service charge. case of termination, participants
will receive at least 90 days'
7. Transfer of Shares Held by written notice.
the Plan Agent
10. Withdrawal from the Plan
Shareholders in the Plan may elect
The Plan Agent will maintain the to withdraw from the Plan at any
participant's Account, hold the time and thereby elect once again to
additional Shares acquired through the receive cash in lieu of Dividend
Plan in safekeeping and furnish the Shares and cease to be a participant
participant with written confirmation of in the Additional Cash Purchase
all transactions in the participant's component of the Plan. There will
account. Shares in the Account are be no penalty for withdrawal from
transferable upon prior written the Plan and shareholders who have
instructions to the Plan Agent. Upon previously withdrawn from the Plan
request to the Plan Agent, a certificate may rejoin at any time. Changes in
for any or all full Shares in a elections must be in writing and
participant's Account will be sent to. will only be effective for (i)
the participant. Distributions declared after, and
with a Record Date of at least ten
8. Shares Not Held in days after, or (ii) Additional Cash
Shareholder's Name Purchases with an Investment Date of
at least ten days after, such
Beneficial owners of Shares which are elections are received by the Fund
held in the name of a broker or nominee or Agent.
will not be automatically included in
the Plan and will receive all
Distributions in cash. Such shareholders
should contact the broker or nominee in
whose name their Shares are being held
to determine whether and how they may
participate in the Plan.
276357.1
-4-
FORM OF
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made this 9th day of August, 1995 by and
between AVALON CAPITAL, INC., a Maryland corporation (the "Company"), and HUTNER
CAPITAL MANAGEMENT, INC., a New York corporation (the "Investment Adviser"),
with respect to the following recital of facts:
R E C I T A L
WHEREAS, the Company is registered as a closed-end,
non-diversified management investment company under the Investment Company Act
of 1940, as amended (the "1940 Act") and the rules and regulations promulgated
thereunder; and
WHEREAS, the Investment Adviser is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended, and engages in
the business of acting as an investment adviser; and
WHEREAS, the Company and the Investment Adviser desire to
enter into an agreement to provide for the rendering of investment advisory
services for the Company's assets on the terms and conditions hereinafter set
forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable considerations, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Appointment of the Investment Adviser. The Investment
Adviser shall manage the Company's affairs and shall
275495.1
<PAGE>
supervise all aspects of the Company's operations, including the investment and
reinvestment of cash, securities or other properties comprising the Company's
assets, subject at all times to the policies and control of the Company's Board
of Directors. The Investment Adviser shall give the Company the benefit of its
best judgment, efforts and facilities in rendering its services as Investment
Adviser.
2. Duties of the Investment Adviser. In carrying out its
obligations under paragraph 1 hereof, the Investment Adviser shall:
(a) supervise and oversee all aspects of the Company's
operations;
(b) provide the Company with certain executive, services as
are deemed advisable by the Company's Board of Directors and that are not
otherwise provided by Forum Financial Services, Inc. (the "Administrator");
(c) provide the Company with, or obtain for it, adequate
office space and all necessary office equipment and services;
(d) obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or the portfolio
of the Company, and whether concerning the individual issuers whose securities
are included in the Company's portfolio or the activities in which they engage,
or with respect to securities which the Investment
-2-
275495.1
<PAGE>
Adviser considers desirable for inclusion in the Company's
portfolio;
(e) determine what issuers and securities shall be represented
in the Company's portfolio and regularly report them to the Company's Board of
Directors;
(f) formulate and implement continuing programs for the
purchases and sales of the securities of such issuers and regularly report
thereon to the Company's Board of Directors;
(g) take, on behalf of the Company, all actions which appear
necessary to carry into effect such purchase and sale programs and supervisory
functions as aforesaid, including the placing of orders for the purchase and
sale of portfolio securities, it being understood that the Company shall
reimburse the Investment Adviser for the costs of such actions upon proper
accounting; and
(h) it is understood that you may from time to time employ,
subcontract with or otherwise associate yourself with, entirely at your expense,
such persons as you believe to be particularly fitted to assist you in the
execution of your duties hereunder.
3. Compliance with Applicable Requirements. In carrying out
its obligations under this Agreement, the Investment Adviser shall at all times
conform to:
(a) all applicable provisions of the 1940 Act and any
rules and regulations adopted thereunder, as
amended; and
-3-
275495.1
<PAGE>
(b) the provisions of the Registration Statement of the
Company under the Securities Act of 1933 and the 1940
Act, as amended; and
(c) the provisions of the Articles of Incorporation of the
Company, as amended;
(d) the provisions of the By-Laws of the Company, as amended;
and
(e) any other applicable provisions of state and federal law.
4. Broker-Dealer Relationships. The Investment Adviser is
responsible for decisions to buy and sell securities for the Company,
broker-dealer selection, and negotiation of its brokerage commission rates. The
Investment Adviser's primary consideration in effecting a security transaction
will be execution at the most favorable price.
In selecting a broker-dealer 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-dealer; the size of and difficulty in executing the order; the
value of the expected contribution of the broker-dealer to the investment
performance of the Company on a continuing basis; and other factors such as the
broker-dealer's ability to engage in transactions in shares of issuers which are
typically not listed on an organized stock exchange. Accordingly, the price to
the Company in any transaction may be less favorable than that available from
another broker-dealer if the difference is reasonably justified by other aspects
of the portfolio execution services offered. Subject to such policies as the
Board of
-4-
272495.1
<PAGE>
Directors may determine, the Investment Adviser shall not be deemed to have
acted unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Company to pay a broker or
dealer that provides brokerage and research services to the Investment Adviser
an amount of commission for effecting a portfolio investment transaction in
excess of the amount of commission another broker or dealer would have charged
for effecting that transaction, if the Investment Adviser determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Investment Adviser's overall
responsibilities with respect to the Company.
The Investment Adviser is further authorized to allocate the
orders placed by it on behalf of the Company to such brokers and dealers who
also provide research or statistical material, or other services to the Company
or the Investment Adviser. Such allocations 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 of the
Company indicating the brokers to whom such allocations have been made and the
basis therefor.
5. Control by Board of Directors. Any management or
supervisory activities undertaken by the Investment Adviser pursuant to this
Agreement, as well as any other activities
-5-
272495.1
<PAGE>
undertaken by the Investment Adviser on behalf of the Company pursuant thereto,
shall at all times be subject to any directives of the Board of Directors of the
Company.
6. Expenses. The expenses connected with the Company
shall be allocable between the Company and the Investment Adviser
as follows:
(a) The Investment Adviser shall furnish at its expense and
without cost to the Company the services of a President, Secretary and one or
more Vice Presidents of the Company, to the extent that such additional officers
may be required by the Company for the proper conduct of its affairs;
(b) The Company shall pay or cause to be paid all expenses of
the stock transfer or dividend agent or agents appointed by the Company;
(c) The Company assumes and shall pay or cause to be paid all
other expenses of the Company, including, without limitation: the fees and
expenses of the Investment Adviser under this Agreement and the fees and
expenses of the Administrator pursuant to the Administrative Services Agreement;
the charges and expenses of the registrar, any custodian or depositary appointed
by the Company for the safekeeping of its cash, portfolio securities and other
property, and any accounting agent appointed by the Company; brokers'
commissions chargeable to the Company in connection with portfolio securities
transactions to which the Company is a party; all taxes, including securities
issuance and transfer taxes, and corporate
-6-
275495.1
<PAGE>
fees payable by the Company to federal, state or other governmental agencies;
the cost and expense of engraving or printing of stock certificates representing
shares of the Company; all costs and expenses in connection with the
registration and maintenance of registration of the Company and its shares with
the Securities and Exchange Commission and various states and other
jurisdictions (including filing fees and legal fees and disbursements of
counsel); the costs and expenses in connection with the listing, and maintenance
of such listing, of the Company's shares on any securities exchange; the costs
and expenses of preparing (including typesetting) prospectuses (including
supplements thereto) of the Company, proxy statements and reports to
shareholders, and of printing and distributing such items to the Company's
shareholders; all expenses of shareholders' and directors' meetings; fees and
travel expenses of directors or members of any advisory board or committee; all
expenses incident to the payment of any dividend, distribution, withdrawal or
redemption, whether in shares or in cash; charges and expenses of any outside
service used for pricing of the Company's shares; charges and expenses of legal
counsel, including counsel to the directors of the Company who are not
interested persons (as defined in the Investment Company Act of 1940, as
amended) of the Company, and of independent accountants, in connection with any
matter relating to the Company; membership dues of industry associations;
interest payable on Company borrowings; postage; insurance premiums on property
or personnel
-7-
275495.1
<PAGE>
(including officers and directors) of the Company which inure to its benefit;
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related thereto); and
all other charges and costs of the Company's operation unless otherwise
explicitly provided therein.
7. Delegation of Responsibilities. The Investment Adviser may,
but should be under no duty to, perform services on behalf of the Company which
are not required by this Agreement upon the request of the Company's Board of
Directors. Such services will be performed on behalf of the Company and the
Investment Adviser's charge in rendering such services may be billed monthly to
the Company, subject to examination by the Company's independent accountants.
Payment or assumption by the Investment Adviser of any Company expense that the
Investment Adviser is not required to pay or assume under this Agreement shall
not relieve the Investment Adviser of any of its obligations to the Company nor
obligate the Investment Adviser to pay or assume any similar Company expense on
any subsequent occasions.
8. Compensation. For the services to be rendered, the
facilities furnished and the expenses assumed by the Investment Adviser, the
Company shall pay to the Investment Adviser, on behalf of the Company, monthly
compensation at the annual rate of 1.00% of the Company's average weekly net
assets. Except as hereinafter set forth, compensation under this Agreement shall
be
-8-
275495.1
<PAGE>
calculated and accrued weekly and the amounts of the weekly accruals shall be
paid monthly. If this Agreement becomes effective subsequent to the first day of
a month or shall terminate before the last day of a month, compensation for that
part of the month in which this Agreement is in effect shall be prorated in a
manner consistent with the calculation of the fees as set forth above.
9. Non-Exclusivity. The services of the Investment Adviser to
the Company are not exclusive, and the Investment Adviser shall be free to
render investment management and corporate administrative or other services to
others (including other investment companies) and to engage in other activities,
so long as its services under this Agreement are not impaired thereby. It is
understood and agreed that officers and directors of the Investment Adviser may
serve as officers or directors of the Company, and that officers or directors of
the Company may serve as officers or directors of the Investment Adviser to the
extent permitted by law; and that the officers and directors of the Investment
Adviser are not prohibited from engaging in any other business activity or from
rendering services to any other person, or from serving as partners, officers or
directors of any other firm or corporation, including other investment
companies.
10. Term and Approval. This Agreement shall become effective
at the close of business on the date hereof and shall remain in force and effect
for two years from the date hereof.
-9-
275495.1
<PAGE>
11. Renewal. Following the expiration of its initial two-year
term, the Agreement shall continue in force and effect from year to year,
provided that such continuance is specifically approved at least annually:
(a) (i) by the Company's Board of Directors or (ii) by the
vote of a majority of the Company's outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act, as amended), and
(b) by the affirmative vote of a majority of the directors who
are not parties to this Agreement or interested persons of a party to this
Agreement (other than as Company directors), by votes cast in person at a
meeting specifically called for such purpose.
12. Termination. This Agreement may be terminated at any time,
without the payment of any penalty, by vote of the Company's Board of Directors
or by vote of a majority of the Company's outstanding voting securities (as
defined in Section 2(a)(42) of the 1940 Act, as amended), or by the Investment
Adviser, on sixty (60) days' written notice to the other party. This Agreement
shall automatically terminate in the event of its "assignment", as that term is
defined in Section 2(a)(4) of the 1940 Act, as amended.
13. Liability of the Investment Adviser. In the absence of
willful misfeasance, bad faith or gross negligence on the part of the Investment
Adviser or its officers, directors or employees, or reckless disregard by the
Investment Adviser of its duties under this Agreement, the Investment Adviser
shall not be liable to the Company or to any shareholder of the Company for any
act or omission in the course of, or connected with,
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275495.1
<PAGE>
rendering services hereunder or for any losses that may be sustained in the
purchase, holding or sale of any security
14. Notices. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage paid to the other party at
such address as such other party may designate for the receipt of such notice.
Until further notice to the other party, it is agreed that the address of the
Investment Adviser and that of the Company for this purpose shall be 14 Wall
Street, New York, New York 10005-2133.
15. Questions of Interpretation. Any question of
interpretation of any term or provision of this Agreement having a counterpart
in or otherwise derived from a term or provision of the 1940 Act, as amended,
shall be resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Securities and Exchange Commission issued pursuant to said Act. In
addition, where the effect of a requirement of the 1940 Act, as amended,
reflected in any provisions of this Agreement is revised by rule, regulation or
order of the Securities and Exchange Commission, such provisions shall be deemed
to incorporate the effect of such rule, regulation or order.
-11-
275495.1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in duplicate by their respective officers on the day
and year first above written.
AVALON CAPITAL, INC.
Attest:
By: /s/ Daniel E. Hutner
Title: President
/s/ Nancy Hutner
HUTNER CAPITAL MANAGEMENT, INC.
Attest:
By: /s/ Daniel E. Hutner
Title: President
/s/ Nancy Hutner
-12-
275495.1
CUSTODY AGREEMENT
This agreement (the "Agreement") is entered into as of the 31 day of
December, 1996, by and between Avalon Capital, Inc., (the "Corporation" or the
"Fund"), a corporation organized under the laws of the State of Maryland and
having its office at 34 Chambers, Suite 200, Princeton, New Jersey 08542 which
is operated and maintained for the benefit of the holders of shares of the Fund,
and Star Bank, N.A. (the "Custodian"), a national banking association having its
principal office and place of business at Star Bank Center, 425 Walnut Street,
Cincinnati, Ohio 45202.
WHEREAS, the Fund and the Custodian desire to enter into this Agreement to
provide for the custody and safekeeping of the assets of the Fund as required by
the Investment Company Act of 1940, as amended (the "Act").
WHEREAS, the Custodian is eligible to function as a custodian of investment
company as required by the Act.
WHEREAS, the Fund hereby appoints the Custodian as custodian of all the
Fund's Securities and moneys at any time owned by the Fund during the term of
this Agreement (the "Fund Assets").
WHEREAS, the Custodian hereby accepts such appointment as Custodian and
agrees to perform the duties thereof as hereinafter set forth.
THEREFORE, in consideration of the mutual promises hereinafter set forth,
the Fund and the Custodian agree as follows:
ARTICLE I
Definitions
The following words and phrases, when used in this Agreement, unless the
context otherwise requires, shall have the following meanings:
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<PAGE>
Authorized Person-- the Chairman, President, Secretary, Treasurer,
Controller, or Senior Vice President of the Fund, or any other person, whether
or not any such person is an officer or employee of the Fund, duly authorized by
the Board of Directors of the Fund to give Oral Instructions and Written
Instructions on behalf of the Fund, and listed in the Certificate annexed hereto
as Appendix A, or such other Certificate as may be received by the Custodian
from time to time.
Book-Entry System -- the Federal Reserve Bank book-entry system for United
States Treasury securities and federal agency securities.
Depository -- The Depository Trust Company ("DTC"), a limited purpose trust
company its successor(s) and its nominee(s) or any other person or clearing
agent.
Dividend and Transfer Agent -- the dividend and transfer agent appointed,
from time to time, pursuant to a written agreement between the dividend and
transfer agent and the Fund.
Foreign Securities -- a) securities issued and sold primarily outside of
the United States by a foreign government, a national of any foreign country, or
a trust or other organization incorporated or organized under the laws of any
foreign country or; b) securities issued or guaranteed by the government of the
United States, by any state, by any political subdivision or agency thereof, or
by any entity organized under the laws of the United States or of any state
thereof, which have been issued and sold primarily outside of the United States.
Money Market Security -- debt obligations issued or guaranteed as to
principal and/or interest by the government of the United States or agencies or
instrumentalities thereof, commercial paper, obligations (including certificates
of deposit, bankers' acceptances, repurchase agreements and reverse repurchase
agreements with respect to the same), and time deposits of domestic banks and
thrift institutions whose deposits are insured by the Federal Deposit Insurance
Corporation, and short-term corporate obligations where the purchase and sale of
such securities normally require settlement in federal funds or their equivalent
on the same day as such purchase and sale, all of which mature in not more than
thirteen (13) months.
Officers -- the Chairman, President, Secretary, Treasurer, Controller, and
Senior Vice President of the Fund listed in the Certificate annexed hereto as
Appendix A, or such other Certificate as may be received by the Custodian from
time to time.
669192.1
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<PAGE>
Oral Instructions -- verbal instructions received by the Custodian from an
Authorized Person (or from a person that the Custodian reasonably believes in
good faith to be an Authorized Person) and confirmed by Written Instructions in
such a manner that such Written Instructions are received by the Custodian on
the business day immediately following receipt of such Oral Instructions.
Prospectus -- the Fund's then currently effective prospectus and Statement
of Additional Information, as filed with and declared effective from time to
time by the Securities and Exchange Commission.
Security or Securities -- Money Market Securities, common stock, preferred
stock, options, financial futures, bonds, notes, debentures, corporate debt
securities, mortgages, and any certificates, receipts, warrants, or other
instruments representing rights to receive, purchase, or subscribe for the same
or evidencing or representing any other rights or interest therein, or any
property or assets.
Written Instructions -- communication received in writing by the Custodian
from an Authorized Person.
ARTICLE II
Documents and Notices to be Furnished by the Fund
-------------------------------------------------
A. The following documents, including any amendments thereto, will be
provided contemporaneously with the execution of the Agreement, to the Custodian
by the Fund:
1. A copy of the Articles of Incorporation of the Fund
certified by the Secretary.
2. A copy of the By-Laws of the Fund certified by the
Secretary.
3. A copy of the resolution of the Board of Directors of
the Fund appointing the Custodian, certified by the
Secretary.
4. A copy of the then current Prospectus.
5. A Certificate of the President and Secretary of the
Fund setting forth the names and signatures of the
Officers of the Fund.
669192.1
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<PAGE>
B. The Fund agrees to notify the Custodian in writing of the appointment of
any Dividend and Transfer Agent.
ARTICLE III
Receipt of Fund Assets
----------------------
A. During the term of the Agreement, the Fund will deliver or cause to be
delivered to the Custodian all moneys constituting Fund Assets. The Custodian
shall be entitled to reverse any deposits made on the Fund's behalf where such
deposits have been entered and moneys are not finally collected within 30 days
of the making of such entry.
B. During the term of this Agreement, the Fund will deliver or cause to be
delivered to the Custodian all Securities constituting Fund Assets. The
Custodian will not have any duties or responsibilities with respect to such
Securities until actually received by the Custodian.
C. As and when received, the Custodian shall deposit to the account(s) of
the Fund any and all payment for shares of the Fund issued or sold from time to
time as they are received from the Fund's distributor or Dividend and Transfer
Agent or from the Fund itself.
ARTICLE IV
Disbursement of Fund Assets
---------------------------
A. The Fund shall furnish to the Custodian a copy of the resolution of the
Board of Directors of the Fund, certified by the Fund's Secretary, either (i)
setting forth the date of the declaration of any dividend or distribution in
respect of shares of the Fund, the date of payment thereof, the record date as
of which Fund shareholders entitled to payment shall be determined, the amount
payable per share to Fund shareholders of record as of the date, and the total
amount to be paid by the Dividend and Transfer Agent on the payment date, or
(ii) authorizing the declaration of dividends and distributions in respect of
shares of the Fund on daily basis and authorizing the Custodian to rely on a
Certificate setting forth the date of the declaration of any
669192.1
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<PAGE>
such dividend or distribution, the date of payment thereof, the record date as
of which Fund shareholders entitled to payment shall be determined, the amount
payable per share to Fund shareholders of record as of that date, and the total
amount to be paid by the Dividend and Transfer Agent on the payment date.
On the payment date specified in such resolution or Certificate described
above, the Custodian shall segregate such amounts from moneys held for the
account of the Fund so that they are available for such payment.
B. Upon receipt of Written Instructions so directing it, the Custodian
shall segregate amounts necessary for the payment of redemption proceeds to be
made by the Dividend and Transfer Agent from moneys held for the account of the
Fund so that they are available for such payment.
C. Upon receipt of a Certificate directing payment and setting forth the
name and address of the person to whom such payment is to be made, the amount of
such payment, and the purpose for which payment is to be made, the Custodian
shall disburse amounts as and when directed from the Fund Assets. The Custodian
is authorized to rely on such directions and shall be under no obligation to
inquire as to the propriety of such directions.
D. Upon receipt of a Certificate directing payment, the Custodian shall
disburse moneys from the Fund Assets in payment of the Custodian's fees and
expenses as provided in Article VIII hereof.
ARTICLE V
Custody of Fund Assets
----------------------
A. The Custodian shall open and maintain a separate bank account or
accounts in the United States in the name of the Fund, subject only to draft or
order by the Custodian acting pursuant to the terms of this Agreement, and shall
hold all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund in a bank account established and used by the Fund
in accordance with Rule 17f-3 under the Act. Moneys held by the Custodian on
behalf of the Fund may be deposited by the Custodian to its credit as Custodian
in the banking
669192.1
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<PAGE>
department of the Custodian. Such moneys shall be deposited by the Custodian in
its capacity as such, and shall be withdrawable by the Custodian only in such
capacity.
B. The Custodian shall hold all Securities delivered to it in safekeeping
in a separate account or accounts maintained at Star Bank, N.A. for the benefit
of the Fund.
C. All Securities held which are issued or issuable only in bearer form,
shall be held by the Custodian in that form; all other Securities held for the
Fund shall be registered in the name of the Custodian or its nominee. The Fund
agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold, or deliver in proper form for transfer, any Securities that
it may hold for the account of the Fund and which may, from time to time, be
registered in the name of the Fund.
D. With respect to all Securities held for the Fund, the Custodian shall on
a timely basis (concerning items 1 and 2 below, as defined in the Custodian's
Standards of Service Guide, as amended from time to time, annexed hereto as
Appendix C):
1.) Collect all income due and payable with respect to such
Securities;
2.) Present for payment and collect amounts payable upon
all Securities which may mature or be called, redeemed,
or retired, or otherwise become payable;
3.) Surrender Securities in temporary form for definitive
Securities; and
4.) Execute, as agent, any necessary declarations or
certificates of ownership under the Federal income tax
laws or the laws or regulations of any other taxing
authority, including any foreign taxing authority, now
or hereafter in effect.
E. Upon receipt of a Certificate and not otherwise, the Custodian shall:
1.) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents,
authorizations, and any other instruments whereby the
authority of the Fund as beneficial owner of any
Securities may be exercised;
2.) Deliver any Securities in exchange for other Securities
or cash issued or paid in connection with the
liquidation, reorganization, refinancing,
669192.1
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<PAGE>
merger, consolidation, or recapitalization of any
trust, or the exercise of any conversion privilege;
3.) Deliver any Securities to any protective committee,
reorganization committee, or other person in connection
with the reorganization, refinancing, merger,
consolidation, recapitalization, or sale of assets of
any trust, and receive and hold under the terms of this
Agreement such certificates of deposit, interim
receipts or other instruments or documents as may be
issued to it to evidence such delivery;
4.) Make such transfers or exchanges of the assets of the
Fund and take such other steps as shall be stated in
said Certificate to be for the purpose of effectuating
any duly authorized plan of liquidation,
reorganization, merger, consolidation or
recapitalization of the Fund; and
5.) Deliver any Securities held for the Fund to the
depository agent for tender or other similar offers.
F. The Custodian shall promptly deliver to the Fund all notices, proxy
material and executed but unvoted proxies pertaining to shareholder meetings of
Securities held by the Fund. The Custodian shall not vote or authorize the
voting of any Securities or give any consent, waiver or approval with respect
thereto unless so directed by a Certificate or Written Instruction.
G. The Custodian shall promptly deliver to the Fund all information
received by the Custodian and pertaining to Securities held by the Fund with
respect to tender or exchange offers, calls for redemption or purchase, or
expiration of rights.
ARTICLE VI
Purchase and Sale of Securities
-------------------------------
A. Promptly after each purchase of Securities by the Fund, the Fund shall
deliver to the Custodian (i) with respect to each purchase of Securities which
are not Money Market
669192.1
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<PAGE>
Securities, Written Instructions, and (ii) with respect to each purchase of
Money Market Securities, Written Instructions or Oral Instructions, specifying
with respect to each such purchase the;
1.) name of the issuer and the title of the Securities,
2.) principal amount purchased and accrued interest, if
any,
3.) date of purchase and settlement,
4.) purchase price per unit,
5.) total amount payable, and
6.) name of the person from whom, or the broker through
which, the purchase was made.
The Custodian shall, against receipt of Securities purchased by or for the Fund,
pay out of the Fund Assets, the total amount payable to the person from whom or
broker through which the purchase was made, provided that the same conforms to
the total amount payable as set forth in such Written Instructions or Oral
Instructions, as the case may be.
B. Promptly after each sale of Securities by the Fund, the Fund shall
deliver to the Custodian (i) with respect to each sale of Securities which are
not Money Market Securities, Written Instructions, and (ii) with respect to each
sale of Money Market Securities, Written Instructions or Oral Instructions,
specifying with respect to each such sale the;
1.) name of the issuer and the title of the Securities,
2.) principal amount sold and accrued interest, if any,
3.) date of sale and settlement,
4.) sale price per unit,
5.) total amount receivable, and
6.) name of the person from whom, or the broker through
which, the sale was made.
The Custodian shall deliver the Securities against receipt of the total amount
receivable, provided that the same conforms to the total amount receivable as
set forth in such Written Instructions or Oral Instructions, as the case may be.
C. On contractual settlement date, the account of the Fund will be charged
for all purchased Securities settling on that day, regardless of whether or not
delivery is made.
669192.1
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<PAGE>
Likewise, on contractual settlement date, proceeds from the sale of Securities
settling that day will be credited to the account of the Fund, irrespective of
delivery.
D. Purchases and sales of Securities effected by the Custodian will be made
on a delivery versus payment basis. The Custodian may, in its sole discretion,
upon receipt of a Certificate, elect to settle a purchase or sale transaction in
some other manner, but only upon receipt of acceptable indemnification from the
Fund.
E. The Custodian shall, upon receipt of a Written Instructions so directing
it, establish and maintain a segregated account or accounts for and on behalf of
the Fund. Cash and/or Securities may be transferred into such account or
accounts for specific purposes, to-wit:
1.) in accordance with the provision of any agreement among
the Fund, the Custodian, and a broker-dealer registered
under the Securities and Exchange Act of 1934, as
amended, and also a member of the National Association
of Securities Dealers (NASD) (or any futures commission
merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of the Options
Clearing Corporation and of any registered national
securities exchange, the Commodity Futures Trading
Commission, any registered contract market, or any
similar organization or organizations requiring escrow
or other similar arrangements in connection with
transactions by the Fund;
2.) for purposes of segregating cash or government
securities in connection with options purchased, sold,
or written by the Fund or commodity futures contracts
or options thereon purchased or sold by the Fund;
3.) for the purpose of compliance by the fund with the
procedures required for reverse repurchase agreements,
and short sales by Act Release No. 10666, or any
subsequent release or releases or rule of the
Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered
investment companies; and
669192.1
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<PAGE>
4.) for other corporate purposes, only in the case of this
clause 4 upon receipt of a copy of a resolution of the
Board of Directors of the Fund, certified by the
Secretary of the Fund, setting forth the purposes of
such segregated account.
F. Except as otherwise may be agreed upon by the parties hereto, the
Custodian shall not be required to comply with any Written Instructions to
settle the purchase of any Securities on behalf of the Fund unless there is
sufficient cash in the account(s) at the time or to settle the sale of any
Securities from an account(s) unless such Securities are in deliverable form.
Notwithstanding the foregoing, if the purchase price of such Securities exceeds
the amount of cash in the account(s) at the time of such purchase, the Custodian
may, in its sole discretion, advance the amount of the difference in order to
settle the purchase of such Securities. The amount of any such advance shall be
deemed a loan from the Custodian to the Fund payable on demand and bearing
interest accruing from the date such loan is made up to but not including the
date such loan is repaid at a rate per annum customarily charged by the
Custodian on similar loans.
ARTICLE VII
Fund Indebtedness
-----------------
In connection with any borrowings by the Fund, the Fund will cause to be
delivered to the Custodian by a bank or broker requiring Securities as
collateral for such borrowings (including the Custodian if the borrowing is from
the Custodian), a notice or undertaking in the form currently employed by such
bank or broker setting forth the amount of collateral. The Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to each such
borrowing:
(a) the name of the bank or broker, (b) the amount and terms of the borrowing,
which may be set forth by incorporating by reference an attached promissory note
duly endorsed by the Fund, or a loan agreement, (c) the date, and time if known,
on which the loan is to be entered into, (d) the date on which the loan becomes
due and payable, (e) the total amount payable to the Fund on the borrowing date,
and(f) the description of the Securities securing the loan, including the name
of
669192.1
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<PAGE>
the issuer, the title and the number of shares or the principal amount. The
Custodian shall deliver on the borrowing date specified in the Certificate the
required collateral against the lender's delivery of the total loan amount then
payable, provided that the same conforms to that which is described in the
Certificate. The Custodian shall deliver, in the manner directed by the Fund,
such Securities as additional collateral, as may be specified in a Certificate,
to secure further any transaction described in this Article VII. The Fund shall
cause all Securities released from collateral status to be returned directly to
the Custodian and the Custodian shall receive from time to time such return of
collateral as may be tendered to it.
The Custodian may, at the option of the lender, keep such collateral in its
possession, subject to all rights therein given to the lender because of the
loan. The Custodian may require such reasonable conditions regarding such
collateral and its dealings with third-party lenders as it may deem appropriate.
ARTICLE VIII
Concerning the Custodian
------------------------
A. Except as otherwise provided herein, the Custodian shall not be liable
for any loss or damage resulting from its action or omission to act or
otherwise, except for any such loss or damage arising out of its own gross
negligence or willful misconduct. The Fund shall defend, indemnify and hold
harmless the Custodian and its directors, officers, employees and agents with
respect to any loss, claim, liability or cost (including reasonable attorneys'
fees) arising or alleged to arise from or relating to the Fund's duties
hereunder or any other action or inaction of the Fund or its Directors,
officers, employees or agents, except such as may arise from the negligent
action, omission, willful misconduct or breach of this Agreement by the
Custodian. The Custodian may, with respect to questions of law, apply for and
obtain the advice and opinion of counsel, at the expense of the Fund, and shall
be fully protected with respect to anything done or omitted by it in good faith
in conformity with the advice or opinion of counsel. The provisions under this
paragraph shall survive the termination of this Agreement.
669192.1
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<PAGE>
B. Without limiting the generality of the foregoing, the Custodian, acting
in the capacity of Custodian hereunder, shall be under no obligation to inquire
into, and shall not be liable for:
1.) The validity of the issue of any Securities purchased
by or for the account of the Fund, the legality of the
purchase thereof, or the propriety of the amount paid
therefor;
2.) The legality of the sale of any Securities by or for
the account of the Fund, or the propriety of the amount
for which the same are sold;
3.) The legality of the issue or sale of any shares of the
Fund, or the sufficiency of the amount to be received
therefor;
4.) The legality of the redemption of any shares of the
Fund, or the propriety of the amount to be paid
therefor;
5.) The legality of the declaration or payment of any
dividend by the Fund in respect of shares of the Fund;
6.) The legality of any borrowing by the Fund on behalf of
the Fund, using Securities as collateral.
C. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount due to the Fund from any Dividend and
Transfer Agent of the Fund nor to take any action to effect payment or
distribution by any Dividend and Transfer Agent of the Fund of any amount paid
by the Custodian to any Dividend and Transfer Agent of the Fund in accordance
with this Agreement.
D. Notwithstanding Section D of Article V, the Custodian shall not be under
any duty or obligation to take action to effect collection of any amount, if the
Securities upon which such amount is payable are in default, or if payment is
refused after due demand or presentation, unless and until (i) it shall be
directed to take such action by a Certificate and (ii) it shall be assured to
its satisfaction (including prepayment thereof) of reimbursement of its costs
and expenses in connection with any such action.
669192.1
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<PAGE>
E. The Fund acknowledges and hereby authorizes the Custodian to hold
Securities through its various agents described in Appendix B annexed hereto.
The Fund hereby represents that such authorization has been duly approved by the
Board of Directors of the Fund as required by the Act. The Custodian
acknowledges that although certain Fund Assets are held by its agents, the
Custodian remains primarily liable for the safekeeping of the Fund Assets.
In addition, the Fund acknowledges that the Custodian may appoint one or
more financial institutions, as agent or agents or as sub-custodian or
sub-custodians, including, but not limited to, banking institutions located in
foreign countries, for the purpose of holding Securities and moneys at any time
owned by the Fund. The Custodian shall not be relieved of any obligation or
liability under this Agreement in connection with the appointment or activities
of such agents or sub-custodians. Any such agent or sub-custodian shall be
qualified to serve as such for assets of investment companies registered under
the Act. Upon request, the Custodian shall promptly forward to the Fund any
documents it receives from any agent or sub-custodian appointed hereunder which
may assist trustees of registered investment companies fulfill their
responsibilities under Rule 17f-5 of the Act.
F. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to or held by it for the account of
the Fund are such as properly may be held by the Fund under the provisions of
the Articles of Incorporation and the Fund's ByLaws.
G. The Custodian shall treat all records and other information relating to
the Fund and the Fund Assets as confidential and shall not disclose any such
records or information to any other person unless (i) the Fund shall have
consented thereto in writing or (ii) such disclosure is required by law.
H. The Custodian shall be entitled to receive and the Fund agrees to pay to
the Custodian such compensation as shall be determined pursuant to Appendix D
attached hereto, or shall be determined pursuant to amendments to such Appendix
D. The Custodian shall be entitled to charge against any money held by it for
the account of the Fund, the amount of any of
669192.1
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<PAGE>
its fees, any loss, damage, liability or expense, including counsel fees. The
expenses which the Custodian may charge against the account of the Fund include,
but are not limited to, the expenses of agents or sub-custodians incurred in
settling transactions involving the purchase and sale of Securities of the Fund.
I. The Custodian shall be entitled to rely upon any Oral Instructions and
any Written Instructions. The Fund agrees to forward to the Custodian Written
Instructions confirming Oral Instructions in such a manner so that such Written
Instructions are received by the Custodian, whether by hand delivery, facsimile
or otherwise, on the same business day on which Oral Instructions were given.
The Fund agrees that the failure of the Custodian to receive such confirming
instructions shall in no way affect the validity of the transactions or
enforceability of the transactions hereby authorized by the Fund. The Fund
agrees that the Custodian shall incur no liability to the Fund for acting Oral
Instructions given to the Custodian hereunder concerning such transactions.
J. The Custodian will (i) set up and maintain proper books of account and
complete records of all transactions in the accounts maintained by the Custodian
hereunder in such manner as will meet the obligations of the Fund under the Act,
with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder and those records are the property of the Fund, and (ii) preserve for
the period prescribed by applicable Federal statute or regulation all records
required to be so preserved. All such books and records shall be the property of
the Fund, and shall be open to inspection and audit at reasonable times and with
prior notice by Officers and auditors employed by the Fund.
K. The Custodian shall send to the Fund any report received on the systems
of internal accounting control of the Custodian, or its agents or
sub-custodians, as the Fund may reasonably request from time to time.
L. The Custodian performs only the services of a custodian and shall have
no responsibility for the management, investment or reinvestment of the
Securities from time to time owned by the Fund. The Custodian is not a selling
agent for shares of the Fund and
669192.1
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<PAGE>
performance of its duties as custodian shall not be deemed to be a
recommendation to the Fund's depositors or others of shares of the Fund as an
investment.
M. The Custodian shall take all reasonable action, that the Fund may from
time to time request, to assist the Fund in obtaining favorable opinions from
the Fund's independent accountants, with respect to the Custodian's activities
hereunder, in connection with the preparation of the Fund's Form N-2, Form
N-SAR, or other annual reports to the Securities and Exchange Commission.
N. The Fund hereby pledges to and grants the Custodian a security interest
in any Fund Assets to secure the payment of any liabilities of the Fund to the
Custodian, whether acting in its capacity as Custodian or otherwise, or on
account of money borrowed from the Custodian. This pledge is in addition to any
other pledge of collateral by the Fund to the Custodian.
ARTICLE IX
Force Majeure
-------------
Neither the Custodian nor the Corporation shall be liable for any failure
or delay in performance of its obligations under this Agreement arising out of
or caused, directly or indirectly, by circumstances beyond its reasonable
control, including, without limitation, acts of God; earthquakes; fires; floods;
wars; civil or military disturbances; governmental actions; or inability to
obtain labor, material, equipment or transportation; provided, however, that the
Custodian, in the event of a failure or delay, shall use its best efforts to
ameliorate the effects of such failure or delay.
ARTICLE X
Termination
-----------
A. Either of the parties hereto may terminate this Agreement for any reason
by giving to the other party a notice in writing specifying the date of such
termination, which shall be not less than ninety (90) days after the date of
giving of such notice. If such notice is
669192.1
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<PAGE>
given by the Fund, it shall be accompanied by a copy of a resolution of the
Board of Directors of the Fund, certified by the Secretary of the Fund, electing
to terminate this Agreement and designating a successor custodian or custodians.
In the event such notice is given by the Custodian, the Fund shall, on or before
the termination date, deliver to the Custodian a copy of a resolution of the
Board of Directors of the Fund, certified by the Secretary, designating a
successor custodian or custodians to act on behalf of the Fund. In the absence
of such designation by the Fund, the Custodian may designate a successor
custodian which shall be a bank or trust company having not less than
$100,000,000 aggregate capital, surplus, and undivided profits. Upon the date
set forth in such notice this Agreement shall terminate, and the Custodian,
provided that it has received a notice of acceptance by the successor custodian,
shall deliver, on that date, directly to the successor custodian all Securities
and moneys then owned by the Fund and held by it as Custodian. Upon termination
of this Agreement, the Fund shall pay to the Custodian on behalf of the Fund
such compensation as may be due as of the date of such termination. The Fund
agrees on behalf of the Fund that the Custodian shall be reimbursed for its
reasonable costs in connection with the termination of this Agreement.
B. If a successor custodian is not designated by the Fund, or by the
Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Fund shall, upon the delivery by the
Custodian to the Fund of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the fund, be deemed to be the custodian for the Fund, and the Custodian shall
thereby be relieved of all duties and responsibilities pursuant to this
Agreement, other than the duty with respect to Securities held in the Book-Entry
System, which cannot be delivered to the Fund, which shall be held by the
Custodian in accordance with this Agreement.
669192.1
-16-
<PAGE>
ARTICLE XI
Miscellaneous
-------------
A. Appendix A sets forth the names and the signatures of all Authorized
Persons, as certified by the Secretary of the Fund. The Fund agrees to furnish
to the Custodian a new Appendix A in form similar to the attached Appendix A, if
any present Authorized Person ceases to be an Authorized Person or if any other
or additional Authorized Persons are elected or appointed. Until such new
Appendix A shall be received, the Custodian shall be fully protected in acting
under the provisions of this Agreement upon Oral Instructions or signatures of
the then current Authorized Persons as set forth in the last delivered Appendix
A.
B. No recourse under any obligation of this Agreement or for any claim
based thereon shall be had against any organizer, shareholder, Officer,
Director, past, present or future as such, of the Fund or of any predecessor or
successor, either directly or through the Fund or any such predecessor or
successor, whether by virtue of any constitution, statute or rule of law or
equity, or be the enforcement of any assessment or penalty or otherwise; it
being expressly agreed and understood that this Agreement and the obligations
thereunder are enforceable solely against the Fund, and that no such personal
liability whatever shall attach to, or is or shall be incurred by, the
organizers, shareholders, Officers, Directors of the Fund or of any predecessor
or successor, or any of them as such. To the extent that any such liability
exists, it is hereby expressly waived and released by the Custodian as a
condition of, and as a consideration for, the execution of this Agreement.
C. The obligations set forth in this Agreement as having been made by the
Fund have been made by the Board of Directors, acting as such Directors for and
on behalf of the Fund, pursuant to the authority vested in them under the laws
of the State of Maryland, the Articles of Incorporation and the By-Laws of the
Fund. This Agreement has been executed by Officers of the Fund as officers, and
not individually, and the obligations contained herein are
669192.1
-17-
<PAGE>
not binding upon any of the Directors, Officers, agents or holders of shares,
personally, but bind only the Fund.
D. Provisions of the Prospectus and any other documents (including
advertising material) specifically mentioning the Custodian (other than merely
by name and address) shall be reviewed with the Custodian by the Fund prior to
publication and/or dissemination or distribution, and shall be subject to the
consent of the Custodian.
E. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at Star
Bank Center, 425 Walnut Street, M.L. 6118, Cincinnati, Ohio 45202, attention
Mutual Fund Custody Department, or at such other place as the Custodian may from
time to time designate in writing.
F. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given when
delivered to the Fund or on the second business day following the time such
notice is deposited in the U.S. mail postage prepaid and addressed to the Fund
at its office at 34 Chambers Street, Suite 200, Princeton, New Jersey 08542 or
at such other place as the Fund may from time to time designate in writing.
G. This Agreement, with the exception of the Appendices, may not be amended
or modified in any manner except by a written agreement executed by both parties
with the same formality as this Agreement, and authorized and approved by a
resolution of the Board of Directors of the Fund.
H. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund or by the Custodian, and no
attempted assignment by the Fund or the Custodian shall be effective without the
written consent of the other party hereto.
I. This Agreement shall be construed in accordance with the laws of the
State of Ohio.
669192.1
-18-
<PAGE>
J. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
669192.1
-19-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, thereunto duly authorized as of the day
and year first above written.
ATTEST: Avalon Capital, Inc.
/s/ Michelle Sheedden By: /s/ Daniel E. Hutner
Title: Chairman, President
ATTEST: Star Bank, N.A.
/s/ Lynette C. Gibson By: /s/ Marsha A. Croxton
Title: Vice President
669192.1
-20-
<PAGE>
APPENDIX A
Authorized Persons Specimen Signatures
Chairman: Daniel E. Hutner /s/ Daniel E. Hutner
President: Daniel E. Hutner /s/ Daniel E. Hutner
Secretary: Michele Scheddin /s/ Michele Scheddin
Treasurer: Nancy W. Hutner /s/ Nancy W. Hutner
Controller: n/a
Adviser Employees:
Transfer Agent/Fund Accountant
Employees:
Michael Miola /s/ Michael Miola
Michael J. Wagner /s/ Michael J. Wagner
Sally A. Lent /s/ Sally A. Lent
----------------- -----------------------
669192.1
-21-
<PAGE>
APPENDIX B
The following agents are employed currently by Star Bank, N.A. for securities
processing and control...
The Depository Trust Company (New York)
7 Hanover Square
New York, NY 10004
The Federal Reserve Bank
Cincinnati and Cleveland Branches
Bankers Trust Company
16 Wall Street
New York, NY 10005
(For Foreign Securities and certain non-DTC eligible Securities)
669192.1
-22-
<PAGE>
APPENDIX C
Star Bank, N.A.
Standards of Service Guide
Star Bank, N.A. is committed to providing superior quality service to all
customers and their agents at all times. We have compiled this guide as a tool
for our clients to determine our standards for the processing of security
settlements, payment collection, and capital change transactions. Deadlines
recited in this guide represent the times required for Star Bank to guarantee
processing. Failure to meet these deadlines will result in settlement at our
client's risk. In all cases, Star Bank will make every effort to complete all
processing on a timely basis.
Star Bank is a direct participant of the Depository Trust Company, a direct
member of the Federal Reserve Bank of Cleveland, and utilizes the Bankers Trust
Company as its agent for ineligible and foreign securities.
For corporate reorganizations, Star Bank utilizes SEI's Reorg Source,
Financial Information, Inc., XCITEK, DTC Important Notices, and The Wall Street
Journal.
For bond calls and mandatory puts, Star Bank utilizes SEI's Bond Source,
Kenny Information Systems, Standard & Poor's Corporation, and DTC Important
Notices. Star Bank will not notify clients of optional put opportunities.
Any securities delivered free to Star Bank or its agents must be received
three (3) business days prior to any payment or settlement in order for the Star
Bank standards of service to apply.
Should you have any questions regarding the information contained in this
guide, please feel free to contact your account representative.
The information contained in this Standards of Service Guide
is subject to change. Should any changes be made Star Bank
will provide you with an updated copy of its Standards of
Service Guide.
669192.1
-23-
<PAGE>
<TABLE>
<CAPTION>
Star Bank Security Settlement Standards
- ------------------------------------------------------------------------------------------------------------------------------
Transaction Type Instructions Deadlines* Delivery Instructions
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DTC 1:30 P.M. on Settlement Date DTC Participant #2219
Agent Bank ID#27895
Institutional #____________
For Account #______________
Federal Reserve Book Entry 12:30 P.M. on Settlement Date Federal Reserve Bank of Cinti/Trust
for Star Bank, N.A. ABA# 042000013
For Account #______________
Federal Reserve Book Entry (Repurchase 1:00 P.M. on Settlement Date Federal Reserve Bank of Cinti/Spec
Agreement Collateral Only) for Star Bank, N.A. ABA# 042000013
For Account #______________
PTC Securities 12:00 P.M. on Settlement Date PTC For Account BTRST/CUST
(GNMA Book Entry) Sub Account: Star Bank, N.A. #090334
Physical Securities 9:30 A.M. EST on Settlement Date Bankers Trust Company
(for Deliveries, by 4:00 P.M. on Settlement 16 Wall Street 4th Floor, Window 43
Date minus 1) for Star Bank Account #090334
CEDEL/EURO-CLEAR 11:00 A.M. on Settlement Date minus 2 Euroclear Via Cedel Bridge
In favor of Bankers Trust Comp
Cedel 53355
For Star Bank Account #501526354
Cash Wire Transfer 3:00 P.M. Star Bank, N.A. Cinti/Trust ABA# 042000013
Credit Account #9901877
Further Credit to _______________
Account #______________
</TABLE>
* All times listed are Eastern Standard Time.
669192.1
-24-
<PAGE>
Star Bank Payment Standards
Security Type Income Principal
- --------------- ------------ -------------
Equities Payable Date
Municipal Bonds* Payable Date Payable Date
Corporate Bonds* Payable Date Payable Date
Federal Reserve Bank Book Entry* Payable Date Payable Date
PTC GNMA's (P&I) Payable Date + 1 Payable Date + 1
CMOs*
DTC Payable Date + 1 Payable Date + 1
Bankers Trust Payable Date + 1 Payable Date + 1
SBA Loan Certificates When Received When Received
Unit Investment Trust Certificates* Payable Date Payable Date
Certificates of Deposit* Payable Date Payable Date
Limited Partnerships When Received When Received
Foreign Securities When Received When Received
*Variable Rate Securities
Federal Reserve Bank Book Entry Payable Date Payable Date
DTC Payable Date + 1 Payable Date + 1
Bankers Trust Payable Date + 1 Payable Date + 1
NOTE: If a payable date falls on a weekend or bank holiday,
payment will be made on the immediately following business day.
669192.1
-25-
<PAGE>
<TABLE>
<CAPTION>
Star Bank Corporate Reorganization Standards
- -----------------------------------------------------------------------------------------------------------------------------------
Type of Action Notification to Client Deadline for Client Instructions Transaction
to Star Bank Posting
- --------------------------------- ----------------------------------------- -------------------------------------- ---------------
<S> <C> <C> <C>
Rights, Warrants, Later of 10 business days prior to 5 business days prior to expiration Upon receipt
and Optional Mergers expiration or receipt of notice
Mandatory Puts with Later of 10 business days prior to 5 business days prior to expiration Upon receipt
Option to Retain expiration or receipt of notice
Class Actions 10 business days prior to expiration 5 business days prior to expiration Upon receipt
date
Voluntary Tenders, Later of 10 business days prior to 5 business days prior to expiration Upon receipt
Exchanges, expiration or receipt of notice
and Conversions
Mandatory Puts, Defaults, At posting of funds or securities None Upon receipt
Liquidations, Bankruptcies, received
Stock, Splits, Mandatory
Exchanges
Full and Partial Calls Later of 10 business days prior to None Upon receipt
expiration or receipt of notice
NOTE: Fractional shares/par amounts resulting from any of the above will be sold.
</TABLE>
669192.1
-26-
<PAGE>
APPENDIX D
Star Bank, N.A.
Domestic Custody Fee Schedule
Avalon Capital, Inc.
Star Bank, N.A., as Custodian, will receive monthly compensation for services
according to the terms of the following Schedule:
I. Portfolio Transaction Fees:
a. For each repurchase agreement transaction $7.00
b. For each portfolio transaction processed through $9.00
DTC or Federal Reserve
c. For each portfolio transaction processed through $25.00
our New York custodian
d. For each GNMA/Amortized Security Purchase $16.00
e. For each GNMA Prin/Int Paydown, GNMA Sales $8.00
f. For each option/future contract written, exercised $40.00
or expired
g. For each Cedel/Euro Clear transaction $80.00
h. For each Disbursement (Fund expenses only) $5.00
A transaction is a purchase/sale of s security, free receipt/free delivery
(excludes initial conversion), maturity, tender or exchange:
II. Market Value Fee
Based upon an annual rate of: Million
.0003 (3 Basis Points) on First $20
.0002 (2 Basis Points) on Next $20
.00015 (1.5 Basis Points) on Balance
III. Monthly Minimum Fee-Per Fund $250.00
IV. Out-of-Pocket Expenses The only out-of-pocket
expenses charged to your account will be shipping
fees or transfer fees.
V. IRA Documents Per Shareholder/year to hold each IRA Document $8.00
VI. Earnings Credits On a monthly basis any earnings credits generated from
uninvested custody balances will be applied against any cash management
service fees generated. Earnings credits are based on a Cost of Funds
Tiered Earnings Credit Rate. Revised November 25, 1996
669192.1
-27-
ADMINISTRATIVE SERVICE AGREEMENT
between
AVALON CAPITAL, INC.
and
AMERICAN DATA SERVICES, INC.
668852.1
<PAGE>
INDEX
1. DUTIES OF THE ADMINISTRATOR.
2. COMPENSATION OF THE ADMINISTRATOR.
3. RESPONSIBILITY AND INDEMNIFICATION.
4. REPORTS.
5. ACTIVITIES OF THE ADMINISTRATOR.
6. RECORDS.
7. CONFIDENTIALITY.
8. DURATION AND TERMINATION OF THE AGREEMENT.
9. ASSIGNMENT.
10. NEW YORK LAWS TO APPLY
11. AMENDMENTS TO THIS AGREEMENT.
12. MERGER OF AGREEMENT
13. NOTICES.
SCHEDULE A
(A) ADMINISTRATIVE SERVICE FEE.
(B) EXPENSES.
(C) STATE REGISTRATION (BLUE SKY) SURCHARGE:
(D) SPECIAL REPORTS.
(E) SERVICE DEPOSIT.
SCHEDULE B
668852.1
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT made the 1ST day of January, 1997, by and between Avalon Capital,
Inc., a Maryland Corporation, having its principal office and place of business
at 34 Chambers Street, Princeton, New Jersey 08542 (the "Fund"), and American
Data Services, Inc., a New York corporation having its principal office and
place of business at 24 West Carver Street, Huntington, New York 11743 (the
"Administrator").
BACKGROUND
WHEREAS, the Fund is a non-diversified closed-end management investment
company registered with the United States Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Administrator is a corporation experienced in providing
administrative services to closed-end investment companies and possesses
facilities sufficient to provide such services; and
WHEREAS, the Fund desires to avail itself of the experience, assistance
and facilities of the Administrator and to have the Administrator perform for
the Fund certain services appropriate to the operations of the Fund and the
Administrator is willing to furnish such services in accordance with the terms
hereinafter set forth.
TERMS
NOW, THEREFORE, in consideration of the promises and mutual covenants
hereinafter contained, the Fund and the Administrator hereby agree to the
following:
1. DUTIES OF THE ADMINISTRATOR.
The Administrator will provide the Fund with the necessary office
space, communication facilities and personnel to perform the following services
for the Fund:
(a) Monitor all regulatory (1940 Act IRS and state) and prospectus
restrictions for compliance;
(b) Prepare and coordinate the preparation and printing of semi-annual
and annual financial statements, other communication to shareholders, notices of
shareholder meetings, proxy statements and proxy card;
(c) Prepare selected management reports for performance and compliance
analyses as agreed upon by the Fund and Administrator from time to time;
(d) Prepare selected financial data required for directors' meetings as
agreed upon by the Fund and the Administrator from time to time and coordinate
directors meeting agendas with outside legal counsel to the Fund;
(e) Determine income and capital gains available for distribution and
calculate distributions required to meet regulatory, income, and excise tax
requirements, to be reviewed by the Fund's independent public accountants;
(f) Prepare the Fund's federal, state, and local tax returns to be
reviewed by the Fund's independent public accountants;
(g) Prepare and maintain the Fund's operating expense budget to
determine proper expense accruals to be charged to the Fund in order to
calculate it's daily net asset value including calculation of contractual or
other expense limitations, expense waivers, and all Fund disbursements;
668852.1
<PAGE>
(h) 1940 ACT filings -
In conjunction with the Fund's outside legal counsel the
Administrator will:
* Prepare the Fund's Form N-SAR reports;
* Update all financial sections of the Fund's Prospectus and Statement
of Additional Information and coordinate their completion;
* Update all financial sections of the Fund's proxy statement and
coordinate its completion;
* Prepare an annual update to Fund's 24f-2 filing (if applicable);
* Prepare annual repurchase offer and periodic subscription offers for
shareholders.
(i) Monitor services provided by the Fund's custodian bank as well as
any other service providers to the Fund;
(j) Provide appropriate financial schedules (as requested by the Fund's
independent public accountants or SEC examiners), coordinate the Fund's annual
or SEC audit, and provide office facilities as may be required;
(k) Attend management and board of directors meetings as requested;
(l) The preparation and filing (filing fee to be paid by the Fund) of
applications and reports as necessary to register or maintain the Funds
registration under the securities or "Blue Sky" laws of the various states
selected by the Fund or its Distributor.
(m) Fund Accounting Services to be provided:
1) Obtain daily securities quotations for all securities in the Fund's
portfolio from independent pricing services and determination of unrealized
appreciation/depreciation of portfolio securities.
2) Timely calculate and transmit to NASDAQ the Fund's weekly net asset value
and communicate such value to the Fund and its transfer agent;
3) Maintain and keep current all books and records of the Fund as required by
Rule 31a-1 under the 1940 Act, as such rule or any successor rule may be amended
from time to time ("Rule 31a-1"), that are applicable to the fulfillment of the
Administrator's duties hereunder, as well as any other documents necessary or
advisable for compliance with applicable regulations as may be mutually agreed
to between the Fund and the Administrator. Without limiting the generality of
the foregoing, the Administrator will prepare and maintain the following records
upon receipt of information in proper form from the Fund or its authorized
agents:
* Cash receipts journal
* Cash disbursements journal
* Dividend record
* Purchase and sales - portfolio securities journals
* Subscription and redemption journals
* Security ledgers
* Broker ledger
* General ledger
* Daily expense accruals
* Daily income accruals
* Securities and monies borrowed or loaned and collateral therefore
* Foreign currency journals
* Trial balances
668852.1
<PAGE>
4) Provide the Fund and its investment adviser with daily portfolio valuation,
net asset value calculation and other standard operational reports as requested
from time to time.
5) Provide facilities to accommodate annual audit and any audits or
examinations conducted by the Securities and Exchange Commission or any other
governmental or quasi-governmental entities with jurisdiction.
6) Verify and reconcile with Fund's custodian bank all daily trade activity.
The Administrator shall, for all purposes herein, be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
2. COMPENSATION OF THE ADMINISTRATOR.
In consideration of the services to be performed by the Administrator
as set forth herein for each portfolio listed in Schedule B, the Administrator
shall be entitled to receive compensation and reimbursement for all reasonable
out-of-pocket expenses. The Fund agrees to pay the Administrator the fees and
reimbursement of out-of-pocket expenses as set forth in the fee schedule
attached hereto as Schedule A, which may be amended from time to time by mutual
agreement of the parties hereto.
3. RESPONSIBILITY AND INDEMNIFICATION.
(a) The Administrator shall be held to the exercise of reasonable care
in carrying out the provisions of the Agreement, but shall be without liability
to the Fund for any action taken or omitted by it in good faith without
negligence, bad faith, willful misconduct or reckless disregard of its duties
hereunder. It shall be entitled to rely upon and may act upon the accounting
records and reports generated by the Fund, advice of the Fund, or of counsel for
the Fund and upon statements of the Fund's independent accountants, and shall be
without liability for any action reasonably taken or omitted pursuant to such
records and reports or advice, provided that such action is not, to the
knowledge of the Administrator, in violation of applicable federal or state laws
or regulations, and provided further that such action is taken without
negligence, bad faith, willful misconduct or reckless disregard of its duties.
(b) The Administrator shall not be liable to the Fund for any error of
judgment or mistake of law or for any loss arising out of any act or omission by
the Administrator in the performance of its duties hereunder except as
hereinafter set forth. Nothing herein contained shall be construed to protect
the Administrator against any liability to the Fund or its security holders to
which the Administrator shall otherwise be subject by reason of willful
misfeasance, bad faith, negligence in the performance of its duties on behalf of
the Fund, reckless disregard of the Administrator's obligations and duties under
this Agreement or the willful violation of any applicable law.
(c) Except as may otherwise be provided by applicable law, neither the
Administrator nor its stockholders, officers, directors, employees or agents
shall be subject to, and the Fund shall indemnify and hold such persons harmless
from and against, any liability for and any damages, reasonable expenses
(including attorney's fees) or losses incurred by reason of the inaccuracy of
information furnished to the Administrator by the Fund or its authorized agents
or in connection with any error in judgment or mistake of law or any act or
omission in the course of, connected with or arising out of any services to be
rendered hereunder, except by reason of willful misfeasance, bad faith or
negligence in the performance of its duties, by reason of reckless disregard of
the Administrator's obligations and duties under this Agreement or the willful
violation of any applicable law.
4. REPORTS.
(a) The Fund shall provide to the Administrator on a quarterly basis a
report of a duly authorized officer of the Fund representing that all
information furnished to the Administrator during the preceding quarter was
true, complete and correct to the best of its knowledge. The Administrator shall
not be responsible for the accuracy of
668852.1
<PAGE>
any information furnished to it by the Fund, and the Fund shall hold the
Administrator harmless in regard to any liability incurred by reason of the
inaccuracy of such information.
(b) The Administrator shall provide to the Board of Directors of the
Fund, on a quarterly basis, a report, in such a form as the Administrator and
the Fund shall from time to time agree, representing that, to its knowledge, the
Fund was in compliance with all requirements of applicable federal and state
law, including without limitation, the rules and regulations of the Securities
and Exchange Commission and the Internal Revenue Service, or specifying any
instances in which the Fund was not so in compliance. Whenever, in the course of
performing its duties under this Agreement, the Administrator determines, on the
basis of information supplied to the Administrator by the Fund, that a violation
of applicable law has occurred, or that, to its knowledge, a possible violation
of applicable law may have occurred or, with the passage of time, could occur,
the Administrator shall promptly notify the Fund and its counsel of such
violation.
5. ACTIVITIES OF THE ADMINISTRATOR.
The Administrator shall be free to render similar services to others so
long as its services hereinunder are not impaired thereby.
6. RECORDS.
The accounts and records maintained by the Administrator shall be the property
of the Fund, and shall be surrendered to the Fund promptly upon request by the
Fund in the form in which such accounts and records have been maintained or
preserved. The Administrator agrees to maintain a back-up set of accounts and
records of the Fund (which back-up set shall be updated on at least a weekly
basis) at a location other than that where the original accounts and records are
stored. The Administrator shall assist the Fund's independent auditors, or, upon
approval of the Fund, any regulatory body, in any requested review of the Fund's
accounts and records. The Administrator shall preserve the accounts and records
in its possession (at the expense of the Fund) as they are required to be
maintained and preserved by Rule 31a-1.
7. CONFIDENTIALITY.
The Administrator agrees that it will, on behalf of itself and its
officers and employees, treat all transactions contemplated by this Agreement,
and all other information germane thereto, as confidential and such information
shall not be disclosed to any person except as may be authorized by the Fund.
8. DURATION AND TERMINATION OF THE AGREEMENT.
This Agreement shall become effective as of the date hereof and shall
remain in force for a period of three (3) years, provided however, that both
parties to this Agreement have the option to terminate the Agreement, upon sixty
(60) days prior written notice.
Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be borne by
the Fund. Additionally, the Administrator reserves the right to charge for any
other reasonable expenses associated with such termination.
9. ASSIGNMENT.
This Agreement shall extend to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable by the Fund without the prior written consent
of the Administrator, or by the Administrator without the prior written consent
of the Fund.
10. NEW YORK LAWS TO APPLY
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the 1940 Act. To the extent that the applicable law
of the State of New York, or any of the provisions herein, conflict with the
applicable provisions of the 1940 Act, the latter shall control.
668852.1
<PAGE>
11. AMENDMENTS TO THIS AGREEMENT.
This Agreement may be amended by the parties hereto only if such
amendment is in writing and signed by both parties.
12. MERGER OF AGREEMENT
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
13. NOTICES.
All notices and other communications hereunder shall be in writing,
shall be deemed to have been given when delivered in person or by certified
mail, return receipt requested, and shall be given to the following addresses
(or such other addresses as to which notice is given):
To the Fund: To the Administrator:
Daniel E. Hutner Michael Miola
President President
Avalon Capital, Inc. American Data Services, Inc.
34 Chambers Street 24 West Carver Street
Princeton, NJ 08542 Huntington, New York 11743
With a copy to:
Thomas R. Westle, Esq.
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
AVALON CAPITAL, INC. AMERICAN DATA SERVICES, INC.
.
By: /s/ Daniel E. Hutner By: /s/ Michael Miola
Daniel E. Hutner, President Michael Miola, President
668852.1
<PAGE>
SCHEDULE A
(a) ADMINISTRATIVE SERVICE FEE:
For the services rendered by the Administrator in its capacity
as administrator, as specified in Paragraph 1. DUTIES OF THE
ADMINISTRATOR, the Fund shall pay the Administrator within ten (10)
days after receipt of an invoice from the Administrator at the
beginning of each month, a fee equal to the greater of:
NOTE: The following fees are per portfolio serviced.
MINIMUM FEE:
CALCULATED FEE WILL BE BASED UPON PRIOR MONTH AVERAGE NET ASSETS:
(No prorating partial months)
Each Portfolio
Under $11 million....................... $3,100
From $11 million to $20 million......... 3,700
From $20 million on..................... 4,400
OR,
NET ASSET CHARGE:
* 1/12th of 0.010% (10 basis points) of first $100 million of average
net assets of portfolio for month, plus; * 1/12th of 0.075% (7.5 basis
points) of next $100 million of average net assets of portfolio for
month, plus; * 1/12th of 0.050% (5 basis points) of average net assets
of portfolio for month in excess of $200 million.
(b) EXPENSES.
The Fund shall reimburse the Administrator for any direct
out-of-pocket expenses, exclusive of salaries, advanced by the
Administrator in connection with but not limited to the printing or
filing of documents for the Fund, travel, telephone, quotation
services, facsimile transmissions, stationery and supplies, record
storage, postage, telex, and courier charges, incurred in connection
with the performance of its duties hereunder. the Administrator shall
provide the Fund with a monthly invoice of such expenses and the Fund
shall reimburse the Administrator within fifteen (15) days after
receipt thereof.
(c) STATE REGISTRATION (BLUE SKY) SURCHARGE:
The fees enumerated in paragraph (a) above include the initial
state registration, renewal and maintenance of registrations (as
detailed in Paragraph 1(l) DUTIES OF THE ADMINISTRATOR) for three
states. Each additional state registration requested will be subject to
the following fees:
668852.1
<PAGE>
Initial registration.................... $295.00
From $11 million to $20 million......... $150.00
From $20 million on..................... $ 25.00
(d) SPECIAL REPORTS.
All reports and /or analyses requested by the Fund, its
auditors, legal counsel, portfolio manager, or any regulatory agency
having jurisdiction over the Fund, that are not in the normal course of
fund administrative activities as specified in Section 1 of this
Agreement shall be subject to an additional charge, agreed upon in
advance, based upon the following rates:
Labor:
Senior staff - $150.00/hr. Junior staff - $ 75.00/hr.
Computer time - $45.00/hr.
(e) SERVICE DEPOSIT.
The Fund will remit to the Administrator upon execution of this Agreement a
security deposit equal to one (1) month's minimum fee under this Agreement,
computed in accordance with the number of portfolios listed in Schedule B of
this Agreement. The Fund will have the option to have the security deposit
applied to the last month's service fee, or applied to any new contract between
the Fund and the Administrator.
668852.1
<PAGE>
SCHEDULE B
PORTFOLIOS TO BE SERVICED UNDER THIS AGREEMENT:
AVALON CAPITAL, INC.
PAGE 1
PAGE 11
668852.1
<TABLE>
<CAPTION>
BY 2. The following are the duly elected and
qualified officers of the Corporation, holding
Avalon Capital, Inc. the respective offices set opposite their names,
(name of corporation) and the signatures set opposite their names are
their genuine signatures:
a Maryland corporation
(state of corporation) NAME SIGNATURE
<S> <C> <C> <C>
I, the undersigned, Secretary of the above named Corporation, DO HEREBY
CERTIFY that: Chairman
1. The following resolution was duly adopted by the Board of Directors
of the Corporation at a meeting thereof duly called and held on ____________, Daniel Hutner President /s/ Daniel E. Hutner
November 22, 1996, at which a quorum was present, the resolution has not been
rescinded, and is still in full force and effect. Nancy Hutner Vice-President /s/ Nancy W. Hutner
WHEREAS, the Corporation is authorized to issue, and it has issued the Michele Scheddin Vice-President/s/ Michele Scheddin
---------------- --------------------
following capital stock:
Number of Number of Nancy Hutner Treasurer /s/ Nancy W. Hutner
------------ -------------------
Shares Shares
Class Par Value Authorized Issued Assistant
Treasurer
$.001 100,000,000 958,360
----- ----------- -------
Michele Scheddin Secretary /s/ Michele Scheddin
Assistant
Secretary
The address of the Corporation to which Notices may be sent is: 3. The name and address of legal counsel of the
Corporation is:
34 Chambers Street, Suite 200 Thomas Westle, Battle Fowler
----------------------------- ----------------------------
Princeton, NJ 08542 75 East 55th St., 5th Fl., NY, NY 10022
-------------------- ---------------------------------------
NOW, THEREFORE, IT IS RESOLVED that American Stock Transfer 4. Attached is a specimen stock certificate for
& Trust Company ("AST") is hereby appointed transfer agent and each denomination of capital stock (the "Stock") for
registrar* for all said authorized shares [the following shares -- which AST has been authorized to act as transfer
_________________________________________________________]** of the agent or registrar.
Corporation, in accordance with the general practices of AST and its
regulations set forth in the pamphlet submitted to this meeting entitled 5. Attached is a true copy of the certificate of
incorporation,
"Regulations of the American Stock Transfer & Trust Company."
______________________________________________________________________ 6. Attached is a true copy of the by-laws, as
amended, of the Corporation.
*Delete either "transfer agent" or "registrar," if the appointment is not 7. If any provision of the certificate of
to cover such. incorporation or by-laws of the Corporation, any
**If the appointment is to cover less than the entire amount of the court order or administrative order, or any other
authorized capital stock, the words "all said authorized shares" should document, affects any transfer agency or registrar
be stricken out and the class and (if the appointment is for less than all function or responsibility relating to the shares,
authorized shares of a class) number of shares to be covered by the attached is a statement of each such provision.
appointment inserted in the blank space.
669192.1
<PAGE>
8. All certificates representing Shares which were not issued pursuant to an---------------------------------------------------
CERTIFICATE OF APPOINTMENT OF effective registration statement under the
Securities Act of 1933, as amended, bear AMERICAN STOCK TRANSFER a legend in
substantially the following form: & TRUST COMPANY as
The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended (the "Act"). The shares may not CERTIFICATE OF APPOINTMENT OF
be sold, transferred or assigned in the absence of an effective registration AMERICAN STOCK TRANSFER
for these shares under the Act or an opinion of the Corporation's counsel & TRUST COMPANY as
that registration is not required under the Act.
All Shares not so registered were issued or transferred in a transaction or ___ TRANSFER AGENT ___ REGISTRAR
series of transactions exempt from the registration provisions of the Act, and
in each such issuance or transfer, the Corporation was so advised by its legal
counsel.
9. If any class of the Corporation's securities are registered under the
Securities Exchange Act of 1934, as amended, the most recent Form 10-K, proxy
statement and annual report to stockholders of the Corporation are attached.
10. The initial term of AST's appointment hereunder shall be three years
from the date hereof and the appointment shall automatically be renewed for
further three year successive periods unless terminated by either party by
written notice to the other given not less than ninety (90) days before the end
of the initial or any subsequent three year period. AST's fees will not be
increased during the initial three year term and, thereafter, may only be
increased by agreement. Notwithstanding the aforegoing, AST shall be entitled to
terminate the appointment forthwith on not less than thirty (30) days notice in
the event that the Corporation commits any breach of its material obligations to
AST including payment of any amount owing to AST. On termination of the
appointment for any reason, AST shall be entitled to retain all transfer records
and related documents until all amounts owing to AST have been paid in full.
11. The Corporation will advise AST promptly of any change in any
information contained in, or attached to, this Certificate by a supplemental
Certificate or otherwise in writing.
WITNESS my hand and seal of the Corporation this 6th day of
February, 1997.
/s/ Michele Scheddin
---------------------------------------
Secretary
(corporate seal)
---------------------------------------------------
</TABLE>
669192.1
BATTLE FOWLER LLP
A LIMITED LIABILITY PARTNERSHIP
75 East 55th Street
New York, New York 10022
(212) 856-7000
(212) 856-7053
(212) 856-7815
September 11, 1995
Avalon Capital, Inc.
14 Wall Street
New York, NY 10005
Gentlemen:
We have acted as counsel to Avalon Fund, Inc., a Maryland
corporation (the "Company"), in connection with the preparation and filing of
Registration Statement No. 33-90522 on Form N-2 and all amendments thereto (the
"Registration Statement") covering shares of Common Stock, par value $.001 per
share, of the Company.
We have examined copies of the Articles of Incorporation and
By-Laws of the Company, the Registration Statement, and such other corporate
records, proceedings and documents, including the consent of the Board of
Directors and the minutes of the meeting of the Board of Directors of the
Company, as we have deemed necessary for the purpose of this opinion. In our
examination of such material, we have assumed the genuineness of all signatures
and the conformity to original documents of all copies submitted to us. As to
various questions of fact material to such opinion, we have relied upon
statements and certificates of officers and representatives of the Company and
others.
We are not admitted to the practice of law in any jurisdiction
but the State of New York and we do not express any opinion as to the laws of
other states or jurisdictions except as to matters of Federal law. In addition,
we have relied upon the attached opinion of Venable, Baetjer and Howard as to
matters of Maryland law.
Based upon and subject to the foregoing, we are of the opinion
that the shares of Common Stock, par value $.001 per share,
302057.1
<PAGE>
2
Avalon Capital, Inc. September 11, 1995
of the Company, to be issued in accordance with the terms of the offering, as
set forth in the Prospectus and Statement of Additional Information included as
part of the Registration Statement, and when issued and paid for, will
constitute validly authorized and legally issued shares of Common Stock, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to us in the Registration
Statement under the heading "Legal Counsel" in the Statement of Information.
Very truly yours,
/s/ Battle Fowler LLP
302057.1
Venable, Baetjer and Howard, LLP
including professional corporations
1800 Mercantile Bank & trust Building
Two Hopkins Plaza Plaza
Baltimore, Maryland 21206-2978
(410) 244-7400, Fax (410) 244-7742
September 11, 1995
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Re: Avalon Capital, Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel for Avalon Capital, Inc., a
Maryland corporation (the "Fund"), in connection with the organization of the
Fund and the issuance of shares of its common stock, par value $.001 per share
(the "Common Stock").
As special Maryland counsel for the Fund, we are familiar with its
Charter and Bylaws. We have examined the prospectus and statement of additional
information included in its Registration Statement on Form N-2 (File Nos.
33-90522; 811-9004) (the "Registration Statement"), substantially in the form in
which they are to become effective (collectively, the "Prospectus"). We have
further examined and relied upon a certificate of the Maryland State Department
of Assessments and Taxation to the effect that the Fund is duly incorporated and
existing under the laws of the State of Maryland and is in good standing and
duly authorized to transact business in the State of Maryland.
We have also examined and relied upon such corporate records of the
Fund and other documents and certificates with respect to factual matters as we
have deemed necessary to render the opinion expressed herein. With respect to
the documents we have received, we have assumed, without independent
verification, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, and the conformity with originals of all
documents submitted to us as copies.
<PAGE>
Battle Fowler LLP
September 11, 1995
Page 2
Based on such examination, we are of the opinion and so advise you
that:
(1) The Fund is duly organized and validly existing as a
corporation in good standing under the laws of the State of Maryland.
(2) The 10,000 presently issued and outstanding shares of
Common Stock have been validly and legally issued and are fully paid and
non-assessable.
(3) The 3,000,000 shares of Common Stock of the Fund to be
offered for sale pursuant to the Prospectus are duly authorized and, when sold,
issued and paid for as contemplated by the Prospectus, will be validly and
legally issued and will be fully paid and nonassessable.
This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the authorization
and issuance of stock. It does not extend to the securities or "blue sky" laws
of Maryland, to federal securities laws or to other laws.
You may rely upon our foregoing opinion in rendering your opinion to
the Fund that is to be filed as an exhibit to the Registration Statement. We
consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Venable, Baetjer and Howard, LLP
667967.1
CONSENT OF MESSRS. BATTLE FOWLER
We consent to the reference to our Firm in Post-Effective Amendment No. 1
to the Registration Statement on Form N-2 of Avalon Capital, Inc. as filed with
the Securities and Exchange Commission on December 30, 1997.
BATTLE FOWLER
New York, New York
December 30, 1997
645643.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 1 to Registration
Statement No. 33-90522 on Form N-2 of Avalon Capital, Inc., of our report dated
October 22, 1997, appearing in the Statement of Additional Information, which is
included in such Registration Statement, and to the references to us under the
headings "Accountants" and "Financial Statements" also in the Statement of
Additional Information.
Deloitte & Touche LLP
New York, New York
December 29, 1997
AVALON PARTNERS, L.P.
14 Wall Street
New York, New York 10005
September 6, 1995
Board of Directors of
Avalon Capital, Inc.
14 Wall Street
New York, New York 10005-2113
Ladies and Gentlemen:
On behalf of Avalon Partners, L.P. (the "Partnership"), a Delaware
limited partnership and, in my sole capacity as the General Partner of the
Partnership, I hereby subscribe for 10,000 shares of the Common Stock, $.001 par
value per share, of Avalon Capital, Inc., a Maryland corporation (the
"Company"), at $10.00 per share for an aggregate purchase price of $100,000. The
Partnership's payment in full is confirmed.
I hereby represent and agree that the Partnership is purchasing these
shares of stock for investment purposes, for its own account and risk and not
with a view to any sale, division or other distribution thereof within the
meaning of the Securities Act of 1933 as amended, nor with any present intention
of distributing or selling such shares. I further agree that if any
organizational expenses of the Company are being amortized, the Partnership will
reimburse the Company the then unamortized organizational expenses in the same
ratio as the number of shares redeemed bears to the number of such shares held
at the time of redemption.
Very truly yours,
AVALON PARTNERS, L.P.
By: /s/ Daniel E. Hutner
Daniel E. Hutner,
General Partner
Confirmed and Accepted:
AVALON CAPITAL, INC.
By: /s/ Daniel E. Hutner
Daniel E. Hutner,
President
667967.1
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND> The schedule contains summary financial
information extracted from the financial
statements and supporting schedules as of
the end of the most current period and is
qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000942600
<NAME> AVALON
<S> <C>
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<PERIOD-TYPE> YEAR
<INVESTMENTS-AT-COST> 8876557
<INVESTMENTS-AT-VALUE> 12153055
<RECEIVABLES> 401751
<ASSETS-OTHER> 63213
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12618019
<PAYABLE-FOR-SECURITIES> 304476
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 44103
<TOTAL-LIABILITIES> 348579
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9090883
<SHARES-COMMON-STOCK> 918726
<SHARES-COMMON-PRIOR> 968,361
<ACCUMULATED-NII-CURRENT> (88576)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9365)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3276498
<NET-ASSETS> 12269440
<DIVIDEND-INCOME> 139840
<INTEREST-INCOME> 33180
<OTHER-INCOME> 0
<EXPENSES-NET> 260562
<NET-INVESTMENT-INCOME> (87632)
<REALIZED-GAINS-CURRENT> (37380)
<APPREC-INCREASE-CURRENT> 2859839
<NET-CHANGE-FROM-OPS> 2734827
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19309
<NUMBER-OF-SHARES-REDEEMED> 68944
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2089767
<ACCUMULATED-NII-PRIOR> (944)
<ACCUMULATED-GAINS-PRIOR> 28015
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 118194
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 260652
<AVERAGE-NET-ASSETS> 11224557
<PER-SHARE-NAV-BEGIN> 10.51
<PER-SHARE-NII> (0.09)
<PER-SHARE-GAIN-APPREC> 2.93
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.75
<EXPENSE-RATIO> 2.22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
