GemCom, LLC
1933 Act File No. 333-
1940 Act File No. 811-
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No.
[ ] Post-Effective Amendment No. ___
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] Amendment No. _
NATIONAL RETAIL FUND II I
Exact Name of Registrant as Specified in Declaration of Trust)
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, NE 68137
(Address of Principal Executive Offices)
(877)-295-6275
(Registrant's Telephone Number, including Area Code)
PERTUITY, INC.
(Exact Name of Co-Registrant as Specified in Articles of Incorporation)
8603 Westwood Center Drive Suite 200
Vienna VA 22182
(Address of Principal Executive Offices)
(703) 942-5058
(Co-Registrant's Telephone Number, including Area Code)
Andrew Rogers
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, NE 68137
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service for the Registrant
Kim Muhota
Pertuity, Inc.
8603 Westwood Center Drive Suite 200
Vienna VA 22182
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service for the Co-Registrant)
Copies of Communications to:
Alston & Bird LLP
950 F Street NW
Washington DC 20004
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are 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)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Title of Securities Offering Being Registered
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Amount Being Registered
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Proposed Maximum Offering Price per Unit
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Proposed Maximum Aggregate Price per Unit(1)
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Common Stock
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10,000,000 Shares
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$10.00
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$100,000,000
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Amount of Registration Fee _________
1) Estimated solely for the purpose of calculating the registration fee.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS
DATED _______________________, 2008
SUBJECT TO COMPLETION
NATIONAL RETAIL FUND II
I
10,000,000 Shares
$10.00 Per Share
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The National Retail Fund
Investment Objective. The investment objective of the Fund is to seek a high level of current income. There can be no assurance that the Fund’s investment objective will be achieved.
Not Exchange Listed. The Fund does not intend to list its shares on any national securities exchange.
SHARES OF THE FUND HAVE NO HISTORY OF PUBLIC TRADING AND THERE IS NOT EXPECTED TO BE ANY SECONDARY TRADING MARKET IN THE SHARES.
Investing in the Fund involves significant risks.
The Fund invests in unsecured consumer notes, which may be speculative and may be considered the equivalent of “junk” securities.
If you cannot afford to lose the entire amount of money you plan to invest, you should not invest in the Fund. See the "Principal Risks" section of this Prospectus.
The minimum purchase amount of shares of the Fund is $1,000. At this time, investors must be residents of the United States.
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Fund
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Per Share
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Total
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Public offering price1
| $10.00
| $10.00
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Sales load
| None
| None
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Proceeds to the Fund
| $
| $
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1 The estimated offering expenses of the Fund are $____, per share and $___, total. Proceeds to the Fund are net of estimated offering expenses.
The Securities and Exchange Commission (“SEC”) has not approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
You should read this Prospectus, which contains important information about the Fund, before deciding whether to invest and retain it for future reference. A Statement of Additional Information (“SAI”), dated _______, 2008, containing additional information about the Fund, has been filed with the SEC and is incorporated by reference in its entirety into this Prospectus. You may request a free copy of the SAI, the table of contents of which is on the last page of this Prospectus, the annual and semi-annual reports as they become available, by calling 877-295-6275 or by writing to the Fund, or obtain a copy (and other information regarding the Fund) from the SEC's web site (www.sec.gov).
The Fund’s shares are not deposits or obligation of any bank, are not endorsed or guaranteed by any bank and are not insured or guaranteed by the U.S. government, the Federal Reserve Board or any other government agency.
Please see the inside back cover of this Prospectus for important privacy policy information.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY
TABLE OF CONTENTS
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PROSPECTUS SUMMARY
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Overview
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Credit Scoring
Continuous Offering
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Periodic Repurchase Offers
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SUMMARY OF FUND EXPENSES
INVESTMENT STRATEGIES
PRINCIPAL SECURITIES
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Consumer Notes
Fixed Income Securities
Lower-Rated, Fixed Income Securities
Investing in Securities of other Investment Companies
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Portfolio Transactions
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PRINCIPAL RISKS
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Investment and Market Risk
Consumer Note Risk
Loan Originator Risk
Credit Risk
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Prepayment Risk
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Borrower Risk
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Unrated and Junk Securities Risk
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Interest Rate Risk
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Illiquid Securities Risk
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Liquidity Risk
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Leverage Risk
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Service Provider Risk
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Disaster Recovery/Business Continuity Risk
Market Disruption Risk
Regulatory Risk
Inflation Risk
Deflation Risk
No Operating History
No Relevant Adviser Experience
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VALUATION
Net Asset Value
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ORGANIZATION AND MANAGEMENT
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Corporate Information
Management of the Trust
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Custodian, Fund Accounting and Transfer Agent
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PURCHASES AND PERIODIC REPURCHASE OF SHARES
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How to Buy Shares
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Procedure for Purchasing Fund Shares
Purchases through the Internet
Purchases Through Financial Services Agents
Purchases by Telephone
Automatic Investment Plan
Minimum Investment
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Periodic Repurchase Offers
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Repurchase Procedure
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Repurchase Amounts
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Early Repurchase Fee
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Notices to Shareholders
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Medallion Signature Guarantees
Repurchase Price
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Suspension or Postponement of Repurchase Offer
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Liquidity Requirements
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DIVIDENDS AND DISTRIBUTIONS
DISTRIBUTION OF SHARES
DISTRIBUTION AND SHAREHOLDER SERVICES PLAN
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ORGANIZATION AND DESCRIPTION OF FUND SHARES
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Dividends, Voting and Liquidation Rights
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Anti-Takeover Provisions in the Declaration of Trust
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FEDERAL TAX MATTERS
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Information Reporting and Backup Withholding
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LEGAL OPINIONS
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TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
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You should rely only on the information contained in this Prospectus. We have not authorized anyone to provide you with information that is different. This Prospectus may only be used where it is legal to offer these securities.
PROSPECTUS SUMMARY
Overview
The Fund. The Fund is a non-diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (“1940 Act”) and is operated as an “interval fund.” The Fund was organized as a Delaware business trust on February 29, 2008, pursuant to the Declaration of Trust, which is governed by the laws of the State of Delaware. Because the Fund is recently organized and commenced investment operations on ____, 2008, the Fund has no operating history. The Fund’s principal office is located at 4020 S. 147th Street, Omaha, Nebraska, 68137, and its telephone number is (877)-295-6275.
Co-Registrant. Pertuity Inc. (“Pertuity”) is the Co-Registrant of this offering. Pertuity is a Co-Registrant by virtue of the fact that the Fund anticipates that notes originated by Pertuity will constitute greater than 25% of the Fund’s total assets upon the initial offering of the Fund’s shares.
At no time will consumer notes originated by any single loan originator (including Pertuity) exceed 50% of the Fund’s total assets.
Use of Proceeds. The Fund will invest the net proceeds of the continuous offering of shares in accordance with the Fund’s investment objective and policies as stated below. Except to the extent used to satisfy periodic repurchase offers, it is presently anticipated that the Fund will be able to invest substantially all of the net proceeds in investments that meet its investment objective and policies within three months of the receipt of such proceeds. It is anticipated that the proceeds will be invested in consumer notes representing loans that the Fund’s investment adviser (“Adviser”) has determined to be prime borrowers and that the Adviser believes offer attractive yield.
Investment Objective. The Fund’s investment objective is to seek a high level of current income.
The Fund will not directly purchase consumer notes that are delinquent. In the event that the Fund purchases any other type of bundled consumer note security (e.g. asset backed securities), the Adviser’s limit on delinquent notes, at the time of purchase, will be 6% of the Fund’s total assets.
Through proprietary research, the Adviser believes that the consumer note market offers attractive yields to investors due to the relatively high interest rates on consumer credit available from banks and other financial institutions. The historical spread between such consumer interest rates and the yields available to investors in short maturity investments provide an opportunity for the Fund to cover operating expenses, and at the same time provide a competitive yield to investors. However, there is no assurance that a security will perform as expected or that the proprietary research will incorporate all relevant information. The Fund may invest up to 100% of its assets in unrated or below-investment grade debt securities, subject to the above limitations. This debt, including the consumer notes, is considered speculative with respect to an issuer’s capacity to pay interest and repay principal. In addition, the Fund may invest in money market securities directly as an efficient means of implementing its investment strategies or managing its uninvested cash.
The Fund will hold notes to maturity, with the exception of any loans that are charged off, in which case the Fund may choose to sell the loans at a considerable discount, as is customary in the industry.
After the initial public offering, investors can purchase shares of the Fund at the prevailing net asset value (NAV). The minimum amount of investment in the Fund is $1,000.
Because the Fund refers to retail loans to consumers in its name, it will notify shareholders at least 60 days in advance of any change in its investment policies that would enable the Fund to normally invest less than 80% of its assets in retail loans to consumers. The Fund does not intend to leverage its assets in the first 12 months of operation.
Investor Profile. As noted above, the consumer notes in which the Fund invests are risky and speculative investments suitable only for investors of adequate financial means. If you cannot afford to lose the entire amount of money you plan to invest, you should not invest in the Fund.
There is a risk that the Fund may not qualify as a “regulated investment company” under federal tax laws. If the Fund fails to qualify as a “regulated investment company”, income generated from the securities in which the Fund invests will be taxed at corporate tax rates and the net returns to shareholders will therefore decline significantly.
Consumer notes to be purchased are analyzed by the Adviser through an examination of the credit policy of the loan originator, and including the consumer’s credit score. The consumer notes are assigned credit score ratings based on the FICO® credit score developed by Fair Isaac Corporation and calculated by a credit reporting agency at time of origination. Credit scores are typically used by lenders to estimate a perspective borrower’s credit risk. Credit scores range from 300 to 850. Generally, the higher the borrower’s score, the lesser the risk of the note. A credit score of 760 and above is considered to represent very good or excellent credit risk. A credit score below 660 is considered sub-prime by the Adviser. The Fund does not maintain an average credit score for the portfolio due to the short term maturity of the consumer notes and the costs associated with repeated retrieval of credit scores. The following credit score ratings are based on FICO®:
Excellent (760-850): Consumers with excellent ratings have demonstrated the highest ability and willingness to meet financial commitments.
Very Good (720-759): Consumers with very good credit differ only slightly from excellent credit borrowers. They also have a high ability and willingness to meet financial commitments.
Good (660-719): Consumers with good credit may be more susceptible to the adverse effects of changes in their financial situation than higher rated categories. However, their ability and willingness to meet financial commitments is still strong.
Not Good (560-659): Consumers with fair credit may be more susceptible to the effects of changes in their financial situation. Consumers in this category typically have a limited or inconsistent history of paying debt obligations on time. Their ability and willingness to meet financial commitments is moderate.
Bad (300-559): Consumers with bad credit are susceptible to adverse changes in their financial situation. They typically have a limited or inconsistent history of paying debt obligations on time. Their ability and willingness to meet financial commitments is poor.
Interest Rates on the Consumer Notes
Interest rates may vary among consumer notes and are typically based on the credit score determined through a credit reporting agency. The interest rate characteristics of the consumer notes in which the Fund invests will be both fixed and variable rate. Variable rate notes may generate increased rates of delinquencies or defaults, which may adversely affect the Fund. Interest on the consumer notes accrues daily based on the then current outstanding principal amount of the loan. Depending on the regulatory scheme that the originating institution falls under, interest rates may be limited by state consumer lending laws, some of which specify maximum interest rates at which money can be loaned to borrowers in that state.
Consumer Loan Origination Process
The Fund’s Adviser will select loan originators who it believes employ prudent and cost effective loan origination processes. The loan origination process for loans purchased by the Fund will generally entail the following steps: (i) each prospective borrower will submit personally identifiable information to the loan originator such as name, social security number, address, and date of birth (ii) the loan originator will obtain the FICO score of each borrower from one of the three major credit bureaus (Experian, Trans Union, or Equifax) based on the personally identifiable information that he or she provides, (iii) the loan originator will verify, through the credit report, the identity of the borrower and will evaluate the credit history of the borrower to ensure that they meet the Fund’s credit criteria, (iv) the loan originator will go through the typical federally required identity checks such as PATRIOT ACT checks, on each borrower, and (iv) once the borrower passes the credit review process and the identity check process, the loan originator will fund the loan.
Continuous Offering
The Fund has designated the common shares of beneficial interest as “shares.” This Prospectus applies to the continuous offering of shares.
Periodic Repurchase Offers
The Fund’s shares are not listed on a securities exchange and are not publicly traded, such that there is no secondary market for the shares. However, the Fund is an “interval fund” and provides some liquidity to shareholders by making periodic repurchase offers for a portion of the shares. An investment in the Fund is suitable only for long-term investors who can bear the risks associated with the limited liquidity of the shares.
The Fund is an “interval fund” and, in order to provide some liquidity to shareholders, makes quarterly repurchase offers between 5% and 25% of its outstanding shares at NAV, pursuant to Rule 23c-3 under the 1940 Act. The Fund has adopted a fundamental policy to offer each calendar quarter to repurchase a specified percentage (between 5% and 25%) of the shares then outstanding at NAV (“Repurchase Offers”). Repurchase Offers are scheduled to occur on or about the 15th day (or the next business day if the 15th is not a business day) in the months of March, June, September and December. It is anticipated that normally the date on which the repurchase price of shares will be determined (the “Repurchase Pricing Date”) will be the same date as the deadline for shareholders to provide their repurchase requests to the transfer agent (the “Repurchase Request Deadline”), and if so, the Repurchase Request Deadline will be set for a time no later than the close of regular trading on the New York Stock Exchange (the “NYSE”) on such date. The Repurchase Pricing Date will occur no later than the 14th day after the Repurchase Request Deadline, or the next business day if the 14th day is not a business day. Repurchase proceeds will be paid to shareholders no later than seven days after the Repurchase Pricing Date. The end of the seven days is referred to as the “Repurchase Payment Deadline.” See the section entitled “Periodic Repurchase Offers” in this Prospectus.
SUMMARY OF FUND EXPENSES
The Fund
Shareholder Transaction Expenses
Maximum Sales Load (as a percentage of offering price) 0.00%
Sales Load Imposed on Reinvested Dividends None
Early Withdrawal Fee1 (as a percentage of amount repurchased, if applicable) 2.00%
Exchange Fee None
Percentage of Net Assets
Attributable to Common
Annual Expenses
Shares
Management Fee 0.30%
Shareholder Servicing and Distribution Fees 0.25%
Other Expenses2 1.60%
Acquired Fund Fees and Expenses 3 0.02%
Loan Servicing Fees4 1.00%
Total Annual Expenses 3.17%
Less Advisory Fee Waivers5 (0.20)%
Net Expenses 2.97%
1. The Fund charges a fee of 2.00% on repurchases of shares held for less than one year (365 days). This fee will not apply to shares involuntarily redeemed. You will be charged a $10.00 fee for repurchases by wire and you will be assessed fees for returned checks.
2. “Other Expenses” include transfer agent fees, custodial expenses, accounting, administrative, Chief Compliance Officer fees and legal fees and other direct servicing fees, as well as any indirect costs, including, for example, investing in other investment companies and collection costs for delinquent loans. Where loans purchased by the Fund
3. Acquired (Underlying) Fund Fees and Expenses are the indirect costs of investing in other pooled investment vehicles such as mutual funds. The operating expenses in this fee table will not correlate to the expense ratio in the Fund's financial statements (or the financial highlights in this Prospectus) because the financial statements include only the direct operating expenses incurred by the Fund, not the indirect costs of investing in the Underlying Funds. Excluding the indirect costs of investing in Acquired Funds, Net Annual Fund Operating Expenses for the Fund would be 2.95%.
The following example is intended to help you understand the cost of investing in the Fund. The Example assumes that (1) you invest $1,000 in the Fund; (2) your investment has a 5% return each year; (3) certain operating expenses increase by 0.20% after year 1*; and (4) all income dividends and capital gains distributions are reinvested in additional shares.
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1 Year
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3 Years
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Did Not Sell Your Shares
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$30
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$9 6
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Repurchased Shares Within the First Year
| $50
| $9 6
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·
The Adviser has contractually agreed to reduce its advisory fee, at least until the end of the Fund’s first year of operations, to ensure that the advisory fee will not exceed 0.10% of the Fund’s average daily net assets..
INVESTMENT STRATEGIES
The Fund will seek to achieve its investment objective by investing, under normal circumstances, in a professionally managed, non-diversified portfolio of below-investment grade and investment grade debt securities that the Fund’s Adviser believes offer attractive yield.
Consumer notes are unrated securities which may be considered equivalent to below-investment grade securities regardless of the borrower’s credit rating. In each instance the Fund will buy the entire loan evidenced by the promissory note.
The Fund may invest up to 100% of its assets in securities that, at the time of investment, are illiquid. Consumer notes are illiquid securities. Under normal market conditions, the Fund invests its assets in consumer notes from borrowers having a minimum credit score of
The Fund will not purchase securities or structured portfolios backed by subprime borrowers.
for assets such as consumer notes and other forms of high yield debt, is of paramount importance. The Fund and its Adviser believe that a combination of fundamental credit analysis provided by the originating institution and valuation information that will be available from a third party valuation firm provide a means of identifying what the Fund and its Adviser believe to be high performing consumer notes.
Investment Process. In identifying consumer notes and other securities for potential purchase, the Fund will rely on its Adviser to periodically review information on notes and portfolios purchased from the originating financial institution to insure that the notes meet the risk parameters of the Fund. Further, the servicing of the notes will not be an additional Fund expense.
In assessing the loan originator, The Adviser will consider the loan originator’s ability to attract high quality borrowers and efficiently originate the loans. The Adviser will also look at the credit quality of the underlying borrower, and historical credit performance of similar risk borrowers, to assess the quality of the consumer notes that it will be purchasing. The Adviser will identify loan originators that can leverage origination channels that are traditionally more cost effective and attractive, such as the web.
Consumer Notes
Consumer notes represent unsecured fully-amortizing credit obligations. The Fund will treat each borrower as the issuer for purposes of complying with the diversification requirements under the 1940 Act. Generally, the Fund invests in short term consumer notes having terms of 2 to 4 years, and in amounts ranging from $1,000 to $25,000. Interest rates, terms and principal amounts vary among the consumer notes.
The Fund may engage one or more unaffiliated companies who specialize in collections or managing collection agencies (“Third Party Collection Agency”) to collect on a delinquent or in default loan. Any amount recovered for the Fund by a Third Party Collection Agency will be net of its fees for performing this service. These fees are considered an indirect cost of the Fund and are contingency based. The Fund will only pay collection fees if and to the extent a collection agency collects on a delinquent loan. Neither the loan originators nor the Third Party Collection Agencies will be affiliates of the Fund
nor will they be affiliates of each other.
Fixed Income Securities
The fixed income securities in which the Fund invests are unsecured. Prices of fixed income securities rise and fall in response to changes in the interest rate paid by similar securities. Generally, when interest rates rise, prices of fixed income securities fall. Fixed income securities pay interest, dividends or distributions at a specified rate. The rate may be a fixed percentage of the principal or adjusted periodically. In addition, the issuer of a fixed income security must repay the principal amount of the security, normally within a specified time. Fixed income securities provide more regular income distributions than equity securities. However, the returns on fixed income securities are limited and normally do not increase with the issuer’s earnings. This limits the potential appreciation of fixed income securities as compared to equity securities.
A security’s yield measures the annual income earned on a security as a percentage of its price. A security’s yield will increase or decrease depending upon whether it costs less (a discount) or more (a premium) than the principal amount. If the issuer may redeem the security before its scheduled maturity, the price and yield on a discount or premium security may change based upon the probability of an early repurchase. Securities rated below investment grade, with higher yields, also known as junk securities, generally entail greater market, credit and liquidity risks than investment-grade securities.
Lower-Rated, Fixed Income Securities
Lower-rated fixed income securities, also known as “junk securities” are securities rated below investment-grade (i.e., BB or lower) by a nationally recognized rating service. These securities will generally be illiquid, thinly traded and difficult to value. There is no minimal acceptable rating for a security to be purchased or held by the Fund and the Fund may purchase or hold unrated securities.
Investing in Securities of other Investment Companies
The Fund may invest its assets in securities of other investment companies, including primarily the securities of money market funds, as an efficient means of seeking its investment objective and/or managing its uninvested cash and liquidity. These other investment companies are managed independently of the Fund and incur additional fees and/or expenses which would, therefore, be borne indirectly by the Fund in connection with any such investment. However, the Adviser believes that the benefits and efficiencies of this approach should outweigh the potential additional fees and/or expenses. The Fund generally may invest up to 5% of its assets in the shares of any one registered investment company, but may not own more than 3% of the securities of any one registered investment company and may not invest more than 10% of its assets in the shares of other registered investment companies (“3, 5, 10% limits”). In addition, pursuant to new SEC exemptive rules, the Fund may exceed the general 3, 5, 10% limits subject to certain conditions of the rules. The Fund will not invest its assets in National Retail Fund I or National Retail Fund
Temporary Defensive Investments
The Fund may temporarily depart from its principal investment strategies by investing its assets in cash and shorter-term debt securities and similar obligations. It may do this to minimize potential losses and maintain liquidity to meet shareholder repurchases during adverse market conditions. This may cause the Fund to give up potentially greater investment returns to maintain the safety of principal.
Portfolio Transactions
The Adviser may purchase securities through financial intermediaries or directly from the originators. In the case of consumer notes, the Fund will purchase notes from the loan originator or from an intermediary such as a consumer finance company, a loan servicer, a broker or other financial institution which makes notes available to the market place. The loan originator and intermediaries will not be affiliates of the Fund or the Adviser. The Fund will not purchase
consumer
notes directly from the borrower/issuer,
but the Fund will purchase consumer notes directly from the loan originators.
No Recourse
The consumer notes represent unsecured credit obligations of individual borrowers, without any right of recourse. Neither a depository institution nor any collection agency has any obligation for payment of principal of or interest or other charges on the notes. The consumer notes are not guaranteed or issued by any governmental agency or any other third party.
PRINCIPAL RISKS
There can be no guarantee that the Fund will achieve its investment objective. You may lose money by investing in the Fund. The Fund is subject to the following principal risks.
Investment and Market Risk. An investment in the Fund is subject to investment risk, including the possible loss of principal. Shares of the Fund will fluctuate in value and the NAV may be affected by such factors as interest rate changes and the perceived credit quality of the borrowers issuing the notes in which the Fund invests. You should be aware that consumer notes are risky and speculative investments suitable only for investors of adequate financial means. If you cannot afford to lose the entire amount of money you plan to invest, you should not attempt to invest in the Fund.
Consumer Note Risk. Although the consumer notes in which the Fund invests are based on FICO® scores of
Loan Originator Risk. The Fund will purchase consumer notes from various loan originators. The number of loan originators may be limited, especially early in the Fund’s operations. The Fund’s Adviser has identified Pertuity, as a loan originator from which it will purchase consumer notes. Pertuity is the Co-Registrant of this offering. Given that the loan originators perform the credit analysis of the borrowers, and that in most instances, these loan originators will service the loans it sells to the Fund, these loan originators will be considered to be co-issuers of the consumer notes that it sells to the Fund. None of the loan originators, however, will guarantee the credit performance of the underlying consumer notes.
Although the Fund does not intend to purchase more than 50% of its securities from any single loan originator, any originator that sells and services notes representing 25% or more of the Fund’s total assets will also be deemed to be a Co-Registrant
Given that the Fund will rely on information provided by loan originators on their ability to efficiently originate loans, there is a risk that the loan originators will misrepresent their abilities.
As a result of the small number of loan originators that will sell notes to the Fund, the Fund will be exposed to increased risk related to:
Long term viability of loan originators: One or more of the loan originators from which the Fund purchases consumer notes may no longer be in a position to sell notes to the Fund. This may limit the overall size of the market or hinder the ability of the Fund to actively purchase consumer notes on an ongoing basis, which would negatively impact the Fund’s ability to achieve its investment objective.
Underwriting Risk: the Fund and its Adviser will be relying on the underwriting expertise of the loan originators to identify and underwrite qualified consumer notes. There is a risk that the loan originator’s underwriting process does not adequately assess risk or prices the consumer notes incorrectly based on risk guidelines that are not appropriate.
Non-Diversification Risk. Because the Fund is not diversified under the 1940 Act, the Fund is more vulnerable to events affecting a single issuer, specifically any one of the loan originators, and therefore, subject to greater volatility than a fund that is more broadly diversified. Accordingly, an investment in the Fund may present greater risk to an investor than an investment in a diversified company.
Fund Tax Status Risk.
There is a risk that the Fund may not qualify as a “regulated investment company” under federal tax laws. If the Fund fails to qualify as a “regulated investment company”, income generated from the securities in which the Fund invests will be taxed at corporate tax rates and the net returns to shareholders will therefore decline significantly.
Prepayment Risk. If a borrower prepays his or her note in full or in part, the Fund will not realize the return expected on the notes and may not be able to find a similar rate of return on another investment at the time at which the note is repurchased or prepaid. Prevailing interest rates may change during the terms of the notes. If this occurs, the Fund’s investment in the notes may become less valuable in comparison to other investment options. Most of the notes purchased have a term of 2- to 3- years and bear a fixed, not floating, rate of interest. If prevailing interest rates increase, any return on the notes might be less than the return the Fund could earn on other investments. While the Fund may still receive a return on its investment in the notes, if prevailing interest rates exceed the rate of interest payable on the notes, the payments received during the term of the notes may not reflect the full opportunity cost to the Fund when taking into account factors such as the time value of money. If prevailing interest rates on consumer loans decrease, borrowers may choose to prepay their notes with money they borrow from other sources or other resources, and the Fund may not realize the return expected on the notes or be able to find sufficient alternative investments to realize a similar rate of return at the time at which the note is prepaid.
Borrower Risk
Collection Risk. In the event of a delinquency on a note for 30 days, the loan will be assigned to a Third Party Collection Agency; however, the Fund will maintain custody of the loan. The Adviser will not segregate the delinquent loans within the portfolio that are assigned to a Third Party Collection Agency; however, the Adviser will monitor these loans within the portfolio. Third Party Collection Agencies receive a percentage of any recovered funds as a service fee for the recovery of the payments due upon the notes and such fee will be paid before the Fund receives any proceeds. The typical range of collection fees is between 10% and 30%. However, there can be no assurance that the collection agencies will recover the full amount of the delinquency payments. In some cases, the collection agencies will not be able to recover any portion of the delinquency payments.
The Fund will not incur any liability for the actions of the Third Party Collection Agencies. As stated above, there is a significant risk that the collection agency may not be able to recover the unpaid balance of a note. If the designated collection agency is unable to recover the payments due upon a note and the note becomes 120 days past due, the note will be deemed uncollectible and offered for sale at a steep discount to an unaffiliated third-party debt buyer, and the Fund may recover only a small portion of the note and your investment. In some cases, notes cannot be sold at any price, and the Fund will not recover any portion of the notes. The Fund will typically succeed to all of the rights of the original creditor/obligor of the consumer notes and will have full rights of ownership. The Fund will be identified on the consumer notes that it purchases as the new creditor/obligee and it will always have custody. The Fund will be able to legally enforce all claims that the original consumer note creditor/obligor would have been able to enforce and will be able to recover directly on the consumer notes. There will be no instances where the Fund would be required to rely on the originator or original obligor of the consumer notes in order to enforce its rights.
The Adviser is not aware of any current legislation that may impose limitations on the Fund or the Third Party Collection Agencies’ ability to collect on a delinquent or defaulted consumer notes. However, there may be future legislation that may have an effect on this.
Over-Extension/Bankruptcy Risk. Consumer notes generally do not limit the ability of borrowers to incur additional debt after the notes have been issued. Therefore, there can be no assurance that a borrower’s debt-to-income ratio will remain fixed during the term of the note. If a borrower incurs additional indebtedness, it may adversely affect the ability of the borrower to meet his or her payment obligations on the notes and the borrower’s creditworthiness generally, and could result in the bankruptcy of the borrower. Consumer notes represent unsecured credit obligations of individual borrowers, and if a borrower incurs additional secured indebtedness, the notes will be effectively subordinated to existing and future secured indebtedness to the extent of the value of any assets securing such indebtedness. In addition, a borrower may decide to repay his or her obligations under secured indebtedness before his or her obligations under the notes due to the unsecured nature of the notes. If a borrower is unable to make payments on a note, he or she may be able to successfully seek judicial intervention based upon a variety of debtor protection and bankruptcy laws. These risks may result in the loss of the Fund’s investment in the notes.
Death of Borrower Risk. If a borrower with outstanding obligations under consumer notes dies while the notes are outstanding, the Third Party Collection Agencies will work with the executor of the estate of the borrower, but there can be no assurance that the Fund can collect the outstanding balance of such notes, or any amount of the Fund’s investment in the notes.
Degradation of Consumer Credit Quality Risk. Consumer credit quality is not a constant. Delinquency and default rates can improve or degrade--sometimes rapidly--across lending products and credit segments. Recent changes in consumer credit have resulted in increased levels of default with continued degradation projected in the coming year.
Consumer Fraud Risk. Loan underwriting processes use data from a variety of sources, including information provided by the borrower. Misrepresentation of self-reported information, such as income or employment status, can lead to an inflated assessment of borrowers’ credit quality and result in higher default rates for consumer notes owned by the Fund.
Unrated and Junk Securities Risk. The Fund can invest up to 100% of its assets in unrated or below-investment grade debt securities, also known as “junk securities”. These securities generally entail greater market, credit and liquidity risks than investment-grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices negatively, and their trading market may be more limited.
The Fund may purchase consumer notes and other debt instruments that are rated
below investment grade or that are unrated but judged to be of comparable
quality. Securities of below investment-grade quality are regarded as having
predominately speculative characteristics with respect to capacity to pay
interest and repay principal. The prices of such securities have been found to
be less sensitive to interest rate changes than higher-rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. The Fund’s intention is to invest in consumer notes in which the
borrower has that have traditionally exhibited good credit (FICO 660+) behavior. The Fund deems these notes to be credit-worthy and of sound credit risk. However, it is important to note that given that these consumer notes are not rated by any rating agency, they could be considered to be ‘junk bonds’ or ‘junk securities’.
Interest Rate Risk. Debt securities, such as consumer notes, have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security can fall when interest rates rise and can rise when interest rates fall. However, market factors, such as the demand for particular debt security, may cause the price of certain debt securities to fall while the prices of other securities rise or remain unchanged.
Securities with longer maturities can be more sensitive to interest rate changes. Interest rate changes have a greater impact on the price of debt securities with longer durations. Duration measures the price sensitivity of a fixed income security to changes in interest rates.
Liquidity Risk. The Fund’s shares are not listed on a securities exchange and are not publicly traded, such that there is no secondary market for the shares. However, the Fund is an “interval fund” and provides some liquidity to shareholders by making periodic repurchase offers for a portion of the shares. An investment in the Fund is suitable only for long-term investors who can bear the risks associated with the limited liquidity of the shares.
The Fund will maintain a minimum of 2% of its total assets in cash and cash equivalents (i.e. liquid assets) to meet repurchase requests. The notes that the Fund purchases will be straight line amortizing loans (as opposed to balloon loans in which the cash flows are weighted towards the end of the loan), which will each pay back principal and interest on a monthly basis. The Fund will pay out the interest component of these payments in the form of dividends and the principal amount will either be held in cash or reinvested to purchase additional notes. When the Fund’s Board determines the repurchase level for any given quarter, the Fund will hold the principal payment amounts and any additional capital from share purchases in liquid assets in order to meet repurchase requests at the end of the quarter.
Trading opportunities are more limited for fixed income securities that have not received any credit ratings, have received ratings below investment grade or are not widely held. These features may make it more difficult to sell or buy a security at a favorable price or time. Consequently, the Fund may have to accept a lower price to sell a security, sell other securities to raise cash or give up an investment opportunity, any of which could have a negative effect on the Fund’s performance. Infrequent trading of securities may also lead to an increase in their price volatility.
Leverage Risk. The Fund is authorized to borrow money and may leverage its assets for temporary defensive investments. Leverage risk is created when an investment exposes the Fund to a level of risk that exceeds the amount invested. The Fund may leverage its assets to manage repurchase requests and/or manage the portfolio. The Fund’s use of leverage carries the possibility of higher volatility of NAV per share, market value per share, and dividends. Borrowings are limited to 331/3% of the Fund’s total assets. The Fund will not issue preferred shares.
Service Provider Risk. Upon approval of the Board, the Fund may hire third-parties to provide various services to the Fund related to its operations including collection of consumer note payments in the case of default. If the Fund is unable to continue utilizing these services, the ability to service the notes may be adversely affected. Because the Fund is not a bank, it cannot belong to and directly access the Automated Clearing House (ACH) payment network. As a result, the Fund will rely on the Custodian and transfer agent to process the transactions. If the Fund cannot continue to obtain such services from these institutions or elsewhere, or if it cannot transition to another processor quickly, the Fund will discontinue purchasing consumer notes and the ability to process payments and to collect on the notes will be delayed or impaired.
Disaster Recovery/Business Continuity Risk. Events beyond the Fund’s control may damage the ability to maintain adequate records or perform servicing obligations. If such events result in a system failure, the Fund’s ability to collect on the notes would be substantially harmed. If a catastrophic event resulted and physical data loss, the Fund’s ability to perform the servicing obligations would be materially and adversely affected. Such events include, but are not limited to: fires, earthquakes, terrorist attacks, natural disasters, computer viruses and telecommunications failures. The Fund stores backup records in an offsite facility located at Iron Mountain Storage Facility. If the electronic data storage and backup data storage system are affected by such events, the Fund cannot guarantee that a shareholder would be able to recoup investment in the notes.
Market Disruption Risk. Certain events have a disruptive effect on the securities markets, such as terrorist attacks (including the terrorist attacks in the U.S. on September 11, 2001), war and other geopolitical events. The Fund cannot predict the effects of similar events in the future on the U.S. economy.
Lower rated securities tend to be more volatile than higher rated securities so that these events and any actions resulting from them may have a greater impact on the prices and volatility of lower rated securities than on higher rated securities.
Regulatory Risk. Consumer notes purchased by the Fund will be subject to applicable state and federal lending laws. Failure by the loan originator or fund servicing partners to comply with these laws could limit the Fund’s ability to collect interest and fees due on consumer notes, collect on delinquent loans, enforce all or parts of the consumer loan agreement, or conduct proposed activities. Applicable laws will include, but not be limited to: state usury, licensing, and disclosure regulations; and the following federal laws: the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, the Servicemembers Civil Relief Act, the Electronic Funds Act, the Electronics Signatures in Global and National Commerce Act, the Gramm Leach Bliley Act, and the Patriot Act. To the extent that legislation or state or federal regulators that regulate certain financial institutions impose additional requirements or restrictions with respect to the ability of such institutions to make loans, the availability of consumer notes for investment may be adversely affected. Further, such legislation or regulation could depress the market value of consumer notes. For a more complete description of the aforementioned federal laws and how they affect the Fund, please see the Fund’s SAI, which is available without charge upon request.
Inflation Risk. Inflation risk is the risk that the value of assets or income from investment will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the common shares and distributions can decline.
Deflation Risk. Deflation risk is the risk that prices throughout the economy decline over time, which may have an adverse effect on the market valuation of companies, their assets and revenues, and the valuation of real estate. In addition, deflation may have an adverse effect on the creditworthiness of borrowers and may make borrower default more likely, which may result in a decline in the value of the Fund's portfolio.
No Operating History. The Fund is a newly organized closed-end management investment company with no operating history.
No Relevant Adviser Experience. The Fund’s Adviser has no experience operating a registered investment company with a substantially similar portfolio of assets. The Adviser’s ability to choose suitable investments has a significant impact on the Fund to achieve its investment objective.
VALUATION
On a daily basis, the Fund’s administrator, Gemini Fund Services, LLC (“Gemini”), will calculate the Fund’s NAV, using the fair market valuation methodology approved by the Board and
in consultation with
an independent valuation firm. Gemini will compute the NAV based on fair market value data for each of the notes that the Fund holds, interest rate and expense accruals, any additional securities that the Fund holds, and cash held in custody. The Fund’s Adviser will approve the NAV calculation on a daily basis.
Pursuant to the valuation policies and procedures approved by the Board, t
Specifically,
pursuant to the Board’s valuation policies and procedures,
the valuation firm will:
·
analyze, design and test the valuation model;
·
design and implement the process for determining the Fund’s NAV per share on an ongoing basis;
·
provide review services on a regular basis to confirm and update the underlying assumptions, revise the valuation model based on actual performance and other economic factors, and provide quarterly financial valuation reports regarding the fair value of assets to the board and the auditors; and
·
update the underlying assumptions to the valuation model and interact with the audit committee/fair value committee to revise and expand as needed.
In calculating the value of total assets, the Fund will value investments for which market quotations are readily available at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available will be valued at fair value (defined as the price at which the Fund believes the security could be sold in an arm’s length transaction) as determined in good faith by the Fund’s Board. As a general rule, consumer notes or debt securities will not be valued above cost. The value may be less to reflect market factors or the issuer’s payment history. Because the Fund expects that there will not be a readily available market value for most of the investments in the portfolio, it expects to value substantially all of its portfolio investments at fair value as determined in good faith by the Board under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may differ significantly from the values that would have been used had a ready market existed for such investments, and the differences could be material.
The Board will review valuations quarterly and will approve the fair value of each investment in the Fund’s portfolio in good faith based on the input of the Adviser, independent valuation firms and the audit committee. The valuation firm is paid a flat annual fee, subject to annual re-pricing, which is not based on the NAV of the Fund.
With respect to investments for which market quotations are not readily available, the Board will undertake a multi-step review of the Fund’s valuation process each quarter, as described below:
·
The quarterly valuation review will begin with each portfolio company or investment being initially valued by the Adviser responsible for the portfolio investment;
·
Preliminary valuation conclusions will then be documented and discussed with the management of the Adviser;
·
Independent valuation firms engaged by the Board will conduct independent appraisals and review management’s preliminary valuations and their own independent assessment;
·
The audit committee of the Board will review the preliminary valuation of the Adviser and that of the independent valuation firms and respond and supplement the valuation recommendation of the independent valuation firm to reflect any comments; and
·
The Board will discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Adviser, the respective independent valuation firms and the audit committee.
Determination of fair value involves subjective judgments and estimates not susceptible to substantiation by auditing procedures. Accordingly, under current auditing standards, the notes to our financial statements will refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.
In determining fair value (i.e, the price at which the Fund believes the security could be sold in an arm’s length transaction), the Fund will consider both a discounted cash flow methodology applied on a per loan basis and the value of the notes if they were sold as part of a larger portfolio in the secondary market.
The Fund will value each consumer note based on the specifics features of that note including:
Original note size: For many loan products, the original size of the note directly effect the size of the contractual monthly borrower payments--the higher the original size, the higher the contractual monthly payment. A higher monthly payment may create additional risk for borrowers with similar credit characteristics
Current balance: The current balance is the remaining balance due through the life of the note and determines the expected finance charges to be collected in the future.
Interest rate: The interest rate determines the assessed finance charges due on the note.
Contract payment schedule: The contract payment schedule determines the duration of the note (e.g. one year). Notes that have identical features may nonetheless have different fair values if they are at different points in the contractual schedule.
Delinquency status: Notes that are delinquent have missed one or more contractual payments in a row. Delinquent notes are at risk of default and the longer a note is delinquent, the higher the risk of default (e.g., notes two months delinquent are typically riskier than notes one month delinquent).
Default status: A default on a note could be caused by excessive delinquency, consumer bankruptcy or consumer death. Notes that have defaulted will be valued based on expected recoveries after default.
Original credit information: The credit information that a loan originator collects when a loan is made will determine expected cash flows at the point of origination. The Fund may use this information over the life of the note to help determine ongoing expected cash flows.
Any updated credit information: Updated credit information could provide insights into future collectability of the note. The Fund may use updated credit information when available to assess expected cash flows over the life of a note.
Current risk free rates: The Fund will use daily Treasury yield curve rates to update the discount rates used in the discounted cash flow methodology on a per note basis.
Current risk premiums: The Fund will use risk premiums with the current risk free rates to update the discount rates in the discounted cash flow methodology on a per note basis. Current risk premiums are effected by current market pricing to consumers for similar notes.
Expected prepayment rates: Prepayment rates effect the expected duration of the note. The Fund expects that some notes will be paid off by the consumer prior to the end of the contractual period, which will impact expected cash flows.
Expected future default/delinquency rates: Individual note performance and macroeconomic trends could effect expected increases or decreases in future delinquency and default rates. The Fund will analyze the consumer note portfolio and external data to determine any changes in expected delinquency and default rates. Changes could impact expected cash flows for individual notes.
Recovery rates: Recovery rates are the expected cash flows following loan default.
Collection and servicing costs: Collection and servicing costs will reduce expected cash flows from the notes.
Quoted sale prices: The Fund will use externally reported sale prices of consumer notes whenever available to compare against the individual note discounted cash flow analysis.
This valuation process, which will be approved, implemented, and monitored by the Board, includes performing a discounted cash flow analysis for each note based on the current status with the expected cash flows discounted at current market rates (risk-free and risk premiums). The expected cash flows will be determined based on contract payment amounts and assumptions regarding expected prepayment rates, default/delinquency rates, recovery rates, collection costs, and general economic conditions.
The Fund will disclose,
in its
periodic
Net Asset Value
The NAV per share of the Fund’s shares is calculated as of the close of regular trading on the NYSE, normally 4:00 p.m., Eastern time, every day that the NYSE is open for business,. The NAV per share is computed by dividing the value of the Fund’s net assets (i.e., the value of its securities and other assets less its liabilities, including expenses payable or accrued but excluding capital stock and surplus) attributable to the class of shares by the total number of shares of the class outstanding at the time the determination is made. The Fund will always sell its shares at NAV. The price of the Fund’s shares for the purpose of purchases will be based upon the calculation of NAV per share of the Fund next made after the purchase order is received in good form. NAV will not be determined on days when the NYSE is closed unless, in the judgment of the Board, the NAV should be determined on any such day, in which case the determination will be made at 4:00 p.m., Eastern time. The value of the Fund’s assets is based on the current fair value of its investments. See discussion of Valuation above.
ORGANIZATION AND MANAGEMENT
Corporate Information
The Fund was established in the State of Delaware
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, NE 68137
Management of the Trust
The Board is responsible for governing the Fund and overseeing the Adviser of the Trust, Fulcrum Advisory Services, Inc. The Adviser provides investment research and management with respect to all securities, instruments, cash and cash equivalents. The address of the Adviser is 12010 Sunset Hills Road, Reston, Virginia 20190. Fulcrum Advisory Services, Inc. was founded in 2003 as an independent broker dealer and registered investment advisory firm. Fulcrum offers a comprehensive range of investment services to both individual and institutional investors. As of July 8, 2008, the Adviser had assets under management of approximately $60,000,000.
The Fund’s Adviser will have the ability to monitor the consumer note portfolio of the Fund and will have the ability, as it deems appropriate, to track consumer notes and assess performance on a note by note basis. The Adviser will also receive, on an ongoing basis, portfolio performance reports from the loan originators as well as the valuation firm to provide further insights into the credit quality of the consumer notes portfolio.
The Fund’s investment advisory contract provides for payment to the Adviser of an annual investment advisory fee of 0.30% of the Fund’s average daily net assets. The Adviser has contractually agreed to reduce its advisory fee, at least until 12 months to the date of this Prospectus, to ensure that the advisory fee will not exceed 0.10% of the Fund’s average daily net assets.
J. Patrick Kearns has been the Fund’s portfolio manager since the Fund’s inception date on
The Fund’s SAI provides additional information about the Portfolio Manager’s compensation, management of other accounts, ownership of securities in the Fund and conflicts of interest. To the extent that the same investment opportunities might be desirable for more than one account, possible conflicts could arise in determining how to allocate them.
A discussion of the Board’s review of the Fund’s investment advisory contract will be available in the Fund’s first Annual Report.
Custodian, Fund Accountant and Transfer Agent
The Custodian of the assets of the Fund is Fifth Third Bank. The Custodian performs all custodial duties. Gemini Fund Services, LLC will serve as the Fund’s transfer agent and Dividend Disbursing Agent (“Transfer Agent”), and provide fund accounting and portfolio accounting services. Loan documentation and information will be retained by the Fund’s Custodian.
PURCHASES AND PERIODIC REPURCHASES OF SHARES
Shares of the Fund may be purchased directly from the Fund, or through an account maintained with a securities broker or other financial institution (“financial intermediary”). Investors may be charged a fee by the financial intermediary if they effect transactions through a financial intermediary.
All purchases must be made in U.S. dollars via electronic funds transfer through an automated clearing house “ACH” account drawn on a U.S. bank. No cash or check will be accepted, although the Fund reserves the right to accept a check where ACH is not available. A $25 fee may be charged against an investor’s account for any payment returned to the Transfer Agent for insufficient funds, stop payment, closed account or other reasons. The investor will also be responsible for any losses suffered by the Fund as a result. The Fund reserves the right to reject any purchase order for Fund shares. No share certificates will be issued.
How to Buy Shares
Shares of the Fund are purchased and periodically repurchased
through the Fund’s website,
Outlined below are various methods for buying shares of the Fund:
Procedure for Purchasing Fund Shares
| | |
| To Open an Account:
| To Add to an Account:
|
By Internet:
| You may open an account through the Fund’s website.
Electronic Funds Transfer, via automated clearing house (‘‘ACH”)(1) is required.
| You can purchase shares in an existing account through the Fund’s website.
To establish Internet transaction privileges, you must enroll through the web site. You automatically have the ability to establish Internet transaction privileges unless you decline the privileges on the New Account Application or IRA Application.
|
By Telephone:
| Telephone transactions may not be used for initial purchases.
| Call toll-free 1- 877-295-6275 to initiate an electronic transfer via ACH. Pre- established bank account information will be required.
|
Automatic Investment Plan:
| You may make monthly or quarterly investments automatically from your bank account to your Fund account. You may select a pre-authorized amount to be sent via electronic funds transfer through ACH. For this feature, please call the Fund at 877-295-6275 or visit the Fund’s website.
| |
Purchases through the Internet - To establish Internet transaction privileges you must enroll through the web site. You automatically have the ability to establish Internet transaction privileges unless you decline the privileges on your New Account Application or IRA Application. You will be required to enter into a user’s agreement through the web site in order to enroll in these privileges. In order to conduct Internet transactions, you must have telephone transaction privileges. To purchase shares through the web site you must also have ACH instructions on your account.
If you open your account through the web site, then any repurchase proceeds will only be sent to you via ACH or wire to the account from which the initial proceeds were drawn. Otherwise, repurchase proceeds may be sent to you by check, or, if your account has bank information, by wire or ACH.
Only bank accounts held at domestic financial institutions that are ACH members can be used for transactions through the Fund’s web site. The Fund imposes a limit of $50,000 on repurchase transactions through the web site. There is no purchase limit on transactions through the web site. Transactions through the web site are subject to the same minimums as other transaction methods.
You should be aware that the Internet is an unsecured, unstable, unregulated and unpredictable environment. Your ability to use the web site for transactions is dependent upon the Internet and equipment, software, systems, data and services provided by various vendors and third parties. While the Fund and its service providers have established certain security procedures, the Fund, its distributor and its Transfer Agent cannot assure you that trading information will be completely secure.
There may also be delays, malfunctions, or other inconveniences generally associated with this medium. There also may be times when the web site is unavailable for Fund transactions or other purposes. Should this happen, you should consider purchasing or repurchasing shares by another method. Neither the Fund nor its Transfer Agent, distributor or Adviser will be liable for any such delays or malfunctions or unauthorized interception or access to communications or account information.
The Fund also has authorized the Transfer Agent to receive purchase and repurchase orders directly on behalf of the Fund. Shareholders will be able to purchase shares of the Fund through the Transfer Agent on any day that the NYSE is open for business. The Transfer Agent can help each investor establish an investment account, buy shares, and monitor investments. A qualified custodian (“Custodian”) maintains the account for the benefit of the shareholder. The Fund will be deemed to have received an order when a shareholder enters an order and the Transfer Agent or its authorized designee receives the order in “good order.” “Good order” means that you place your order with the Transfer Agent or its authorized designee and your payment (made in accordance with any of the methods set forth in the table below) has been received and your application is complete, including all necessary electronic signatures and documentation. Customer orders will be priced at the Fund’s NAV next computed after they are received by the Transfer Agent or its authorized designee.
The USA Patriot Act requires the Fund, the Transfer Agent or its authorized designee to obtain certain personal information from each shareholder, which will be used to verify identity. If the shareholder does not provide the information, it may not be possible to open an account. If the Fund, the Transfer Agent or authorized designee is unable to verify an investor’s customer information, it reserves the right to close the account or to take such other steps as it deems reasonable.
Purchases Through Financial Service Agents - If you are investing through a Financial Service Agent, please refer to their program materials for any additional special provisions or fees that may be different from those described in this Prospectus. Certain Financial Service Agents may receive compensation from the Fund. Your shares will be purchased at the NAV determined as of the close of regular trading on the date that the Financial Services Agent receives your request in good order. The Financial Service Agent must send to the Transfer Agent immediately available funds in the amount of the purchase price within one business day from the date of the trade.
Purchases by Telephone - Only bank accounts held at domestic financial institutions that are Automated Clearing House (ACH) members can be used for telephone transactions. Telephone transactions may not be used for initial purchases. Your account must already have banking information established prior to initiating telephone transactions. Your shares will be purchased at the NAV determined as of the close of regular trading on the date that the Transfer Agent receives your request in good order. Most telephone transactions are completed within three business days after you call to place the order. To preserve flexibility, the Fund may revise or remove the ability to purchase shares by phone, or may charge a fee for such service, although currently, the Fund does not expect to charge a fee.
The Fund will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Such procedures may include requiring some form of personal identification prior to acting upon telephone instructions, providing written confirmations of all such transactions, and/or tape recording all telephone instructions. Assuming procedures such as the above have been followed, the Fund will not be liable for any loss, cost or expense for acting upon an investor’s telephone instructions or for any unauthorized telephone repurchase. As a result of this policy, the investor will bear the risk of any loss unless the Fund has failed to follow such procedure(s).
Automatic Investment Plan - The Fund offers an Automatic Investment Plan whereby an investor may automatically purchase shares of the Fund on a monthly or quarterly basis ($100 minimum per transaction). Applications to establish the Automatic Investment Plan are available from the Fund.
Minimum Investment
|
Initial Investment $1,000
Subsequent Investments $100
Automatic Investment Plan $100
|
The Fund reserves the right to change the investment minimum. The Fund also reserves the right to refuse a purchase order for any reason, including if it believes that doing so would be in the best interests of the Fund and its shareholders.
Periodic Repurchase Offers
The Fund’s shares are not listed on a securities exchange and are not publicly traded, such that there is no secondary market for the shares. However, the Fund is an “interval fund” and provides some liquidity to shareholders by making periodic repurchase offers for a portion of the shares. The Board has adopted share repurchase policies as fundamental policies. These policies, which may not be changed without the vote of the holders of a majority of the Fund’s outstanding voting securities (as defined in the 1940 Act), provide that each calendar quarter, the Fund intends to make a Repurchase Offer to repurchase a portion of the outstanding shares from shareholders who request repurchases. The repurchase price of the shares will be the NAV last calculated as of the close of regular trading on the NYSE on the Repurchase Pricing Date. Because the fees received by the Adviser are based on the total managed assets of the Fund, the Adviser has a financial incentive for the Fund to utilize borrowings, which may create a conflict of interest between the Adviser, on the one hand, and the holders of the Fund’s shares, on the other.
Repurchase Procedure
The Fund will
The Board may establish other policies for repurchases of shares that are consistent with the 1940 Act and other pertinent laws. Shares tendered for repurchase by shareholders by any Repurchase Request Deadline will be repurchased subject to the aggregate repurchase amounts established for that Repurchase Request Deadline. Repurchase proceeds will be paid to shareholders in cash prior to the Repurchase Payment Deadline.
Repurchase Offers and the need to fund repurchase obligations may affect the ability of the Fund to be fully invested, which may reduce returns. A portion of the Fund’s portfolio will be held in cash, cash equivalents, and other liquid assets to enable the Fund to meet its repurchase obligations, and as a result, these assets will not be invested in higher yielding notes, which may in turn result in lower portfolio returns. Moreover, diminution in the size of the Fund through repurchases without offsetting new sales may result in untimely sales of Senior Loans and a higher expense ratio and may limit the ability of the Fund to participate in new investment opportunities. The Fund may borrow to meet repurchase obligations, which entails risks and costs. The Fund may also sell Senior Loans to meet repurchase obligations which may adversely affect the market for Senior Loans and reduce the Fund’s value.
Repurchase Amounts
The Board, or a committee thereof, in its sole discretion, will determine the number of shares that the Fund will offer to repurchase (the “Repurchase Offer Amount”) for a given Repurchase Request Deadline. However, the Repurchase Offer Amount will be at least 5% and no more than 25% of the total number of shares outstanding on the Repurchase Request Deadline.
Early Repurchase Fee
For one year following your purchase, shares may be repurchased by the Fund as described above, at a price equal to the current NAV per share less a 2% early repurchase fee, as described below.
The 2% early repurchase fee, directly affects the amount a shareholder who is subject to the fee receives upon repurchase. This early repurchase fee is intended to encourage long-term investments in the Fund, to offset transaction and other Fund expenses caused by short-term repurchase, and to facilitate portfolio management (e.g., by decreasing the likelihood that the Fund will need to sell portfolio securities at an inopportune time, or maintain a larger cash position, in order to meet short-term repurchase requests). There are no assurances that the early repurchase fee will deter short-term repurchases, as intended. The early repurchase fee will be deducted from the repurchase proceeds and retained by the Fund. It is not a sales charge, is not paid to the Adviser or its affiliates, and is not subject to waiver or reduction except as described in this section. The Fund reserves the right to modify the terms of or terminate this fee at any time. For purposes of computing this early repurchase fee, shares will be deemed to be repurchased on a first in, first out basis (i.e., shares held the longest will be deemed to be repurchased first).
If shareholders tender for repurchase more than the Repurchase Offer Amount for a given Repurchase Offer, the Fund may repurchase an additional amount of shares of up to 5% of the shares outstanding on the Repurchase Request Deadline. If the Fund determines not to repurchase more than the Repurchase Offer Amount, or if the Fund determines to repurchase the additional 5% of the shares outstanding, but Fund shareholders tender shares for repurchase in excess of that amount, the Fund will repurchase the shares on a pro rata basis. In the event there is an oversubscription of a Repurchase Offer, shareholders may be unable to liquidate all or a given percentage of their investment in the Fund during the Repurchase Offer.
Notices to Shareholders
Notice of each quarterly Repurchase Offer (and any additional discretionary repurchase offers) will be given to each beneficial owner of shares between twenty-one (21) and forty-two (42) days before each Repurchase Request Deadline. The notice will contain information shareholders should consider in deciding whether or not to tender their shares for repurchase. The notice will also include detailed instructions on how to tender shares for repurchase. The notice will state the Repurchase Offer Amount. The notice will also identify the dates of the Repurchase Request Deadline, scheduled Repurchase Pricing Date, and scheduled Repurchase Payment Deadline. The notice will describe the risk of fluctuation in the NAV between the Repurchase Request Deadline and the Repurchase Pricing Date, if such dates do not coincide, and the possibility that the Fund may use an earlier Repurchase Pricing Date than the scheduled Repurchase Pricing Date, the exact date to be specified (if the scheduled Repurchase Pricing Date is not the Repurchase Request Deadline). The notice will describe (i) the procedures for shareholders to tender their shares for repurchase, (ii) the procedures for the Fund to repurchase shares on a pro rata basis, (iii) the circumstances in which the Fund may suspend or postpone a Repurchase Offer, and (iv) the procedures that will enable shareholders to withdraw or modify their tenders of shares for repurchase until the Repurchase Request Deadline. The notice will set forth the NAV of the shares to be repurchased no more than seven days before the date of notification, and how shareholders may ascertain the NAV after the notification date.
Medallion Signature Guarantees. A medallion signature guarantee of each owner is required to repurchase shares in the following situations (i) if you change ownership on your account; (ii) when you want the repurchase proceeds sent to a different street or bank address from that registered on the account; (iii) if the proceeds are to be made payable to someone other than the account’s owner(s); (iv) any repurchase transmitted by federal wire transfer to your bank; and (v) if a change of address request has been received by the Fund or the Transfer Agent within the last 30 days. In addition, medallion signature guarantees are required for all repurchases in excess of $50,000 from any shareholder account.
Medallion signature guarantees are designed to protect both you and the Fund from fraud. Medallion signature guarantees can be obtained from most banks, credit unions or savings associations, or from broker/dealers, national securities exchanges, registered securities associations or clearing agencies deemed eligible by the SEC. Notaries cannot provide medallion signature guarantees.
Repurchase Price
The repurchase price of the shares will be the NAV last calculated as of the close of regular trading on the NYSE on the Repurchase Pricing Date. You may call 1- 877-295-6275to learn the NAV per share. The notice of the Repurchase Offer will also provide information concerning the NAV per share, such as the NAV as of a recent date or a sampling of recent NAVs, and a toll-free number for information regarding the Repurchase Offer.
Suspension or Postponement of Repurchase Offer
The Fund may suspend or postpone a Repurchase Offer only: (a) if making or effecting the Repurchase Offer would cause the Fund to lose its status as a regulated investment company under the Code; (b) for any period during which the NYSE or any market on which the securities owned by the Fund are principally traded is closed, other than customary weekend and holiday closings, or during which trading in such market is restricted; (c) for any period during which an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable, or during which it is not reasonably practicable for the Fund to fairly determine the value of its net assets; or (d) for such other periods as the SEC may by order permit for the protection of shareholders of the Fund.
Liquidity Requirements
The Fund must maintain liquid assets equal to the Repurchase Offer Amount from the time that the notice is sent to shareholders until the Repurchase Pricing Date. The Fund will ensure that a percentage of its net assets equal to at least 100% of the Repurchase Offer Amount consists of assets (a) that can be sold or disposed of in the ordinary course of business at approximately the price at which the Fund has valued the investment within the time period between the Repurchase Request Deadline and the Repurchase Payment Deadline; or (b) that mature by the Repurchase Payment Deadline. The Board has adopted procedures that are reasonably designed to ensure that the Fund’s assets are sufficiently liquid so that the Fund can comply with the Repurchase Offer and the liquidity requirements described above. However, since a significant amount of the Fund’s assets will be illiquid, there is a risk that the Fund will not have sufficient liquidity to repurchase its shares.
DIVIDENDS AND DISTRIBUTIONS
Income dividends, if any, are declared and paid quarterly on the last business day of each quarter. Capital gains, if any, are distributed at least annually, usually in December. Shares accrue dividends as long as they are issued and outstanding (i.e., from the date the payment for the purchase order is received to the day before the repurchase settles). Dividend payments are not guaranteed and may vary with each payment. The Fund does not pay “interest” or guarantee any fixed rate of return. If you do not indicate on your application your preferences for handling distributions, the Fund will automatically reinvest all distributions in additional shares of the Fund. You can choose one of the following options for distributions when you open your account: (1) reinvest all distributions in additional shares of the Fund; (2) receive dividends in cash and reinvest capital gains; or (3) receive all distributions in cash. If you elect to receive dividends and or capital gains distributions in cash, you will receive such payments through your ACH account. In the event that the ACH account payment does not go through or for other reasons, the Fund reserves the right to pay such dividends and/or distributions by check. If said check is returned as undeliverable, or if you do not cash the distribution check within six months of the check date, the distribution will be reinvested in additional shares. Under these circumstances, the investor would have to pay the $25.00 per cancelled check fee to have the money reinvested into the Fund. The Fund is authorized to borrow money subject to certain restrictions. Under the 1940 Act, a fund may not declare any dividend or other distribution on its shares unless the fund has, at the time of declaration, asset coverage of at least 300% of its aggregate indebtedness, after deducting the amount of the distribution. This limitation may impair the Fund’s ability to maintain their qualification for taxation as a regulated investment company.
DISTRIBUTION OF SHARES
Northern Lights Distributors, LLC, located at 4020 South 147th Street, Omaha, Nebraska 68137 (the “Distributor”) serves as the principal underwriter and national distributor for the shares of the Fund pursuant to an Underwriting Agreement with the Fund (the “Underwriting Agreement”). The Distributor is registered as a broker-dealer under the Securities Exchange Act of 1934 and each state’s securities laws and is a member of the NASD. The offering of the Fund’s shares is continuous. The Underwriting Agreement provides that the Distributor, as agent in connection with the distribution of Fund shares, will use its best efforts to distribute the Fund’s shares. Andrew Rogers is an affiliated person of the Distributor.
The Underwriting Agreement provides that, unless sooner terminated, it will continue in effect for two years initially and thereafter shall continue from year to year, subject to annual approval by (a) the Board or a vote of a majority of the outstanding shares, and (b) by a majority of the Board who are not interested persons of the Fund or of the Distributor by vote cast in person at a meeting called for the purpose of voting on such approval.
The Underwriting Agreement may be terminated by the Fund at any time, without the payment of any penalty, by vote of a majority of the entire Board or by vote of a majority of the outstanding shares of the Fund on 60 days' written notice to the Distributor, or by the Distributor at any time, without the payment of any penalty, on 60 days' written notice to the Fund. The Underwriting Agreement will automatically terminate in the event of its assignment.
The Distributor may enter into selling agreements with broker-dealers that solicit orders for the sale of shares of the Fund and may allow concessions to dealers that sell shares of the Fund.
Andrew Rogers, Emile R. Molineaux and Michael J. Wagner are affiliated persons of the Distributor. Gemini Fund Services, LLC (“GFS”), an affiliate of the Distributor, is the Fund’s Transfer Agent, Fund Accountant and Administrator. In addition, Northern Lights Compliance Services, LLC (“NLCS”), also an affiliate of the Distributor, provides CCO and compliance services to the Fund. The Fund has entered into agreements with GFS and NLCS to serve in the aforementioned respective capacities for the Fund. Compensation paid under said agreements is
included in the amount disclosed
DISTRIBUTION AND SHAREHOLDER SERVICES PLAN
The Fund has adopted a Distribution and Shareholder Services Plan and Agreement (the “Plan”). The Plan allows the Fund to use part of its assets for the sale and distribution of Shares, including advertising, marketing and other promotional activities. The Plan also allows the Fund to pay the Distributor for certain services provided to the Fund and shareholders or to pay other service providers that have entered into agreements with the Distributor to provide these services.
Under the Plan, the Fund may incur expenses on an annual basis equal to 0.25% of its average net assets. Because the Fund pays these fees out of assets on an ongoing basis, over time these fees may cost you more than other types of sales charges. A registered representative will not receive additional inducements to sell the securities of the Fund outside of the provisions of the Distribution and Shareholder Services Plan and Agreement.
ORGANIZATION AND DESCRIPTION OF FUND SHARES
The Fund is a Delaware business trust established under an Agreement and Declaration of Trust (“Declaration of Trust”) dated February 29, 2008, which provides that each shareholder shall be deemed to have agreed to be bound by the terms thereof. The Declaration of Trust may be amended by a vote of either the Fund’s shareholders or its Board.
Under Delaware law, shareholders of a Delaware business trust such as the Fund could, in some circumstances, be held personally liable for unsatisfied obligations of the Trust. However, the Declaration of Trust provides that persons extending credit to, contracting with, or having any claim against the Fund shall look only to its assets for payment under such credit, contract or claim, and that the shareholders, Board and officers of the Fund shall have no personal liability therefore. The Declaration of Trust requires that notice of such disclaimer of liability be given in each contract, instrument or undertaking executed or made on behalf of the Fund. Further, the Declaration of Trust provides for indemnification of any shareholder against any loss and expense arising from personal liability solely by reason of being or having been a shareholder. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is believed to be remote, because it would be limited to circumstances in which the disclaimer was inoperative and the Fund was unable to meet its obligations.
The shares are not, and are not expected to be, listed for trading on any national securities exchange nor, to the Adviser’s knowledge, is there, or is there expected to be, any secondary trading market in the shares.
Dividends, Voting and Liquidation Rights
Each common share of beneficial interest of the Fund has one vote and shares equally with other shares of its class in dividends and distributions when and if declared by the Fund and in the Fund’s net assets upon liquidation. All shares, when issued, are fully paid and are non-assessable by the Fund. There are no preemptive or conversion rights applicable to any of the common shares except for such conversion rights that may be established by the Board in connection with the designation of a class of shares.
Anti-Takeover Provisions in the Declaration of Trust
The Declaration of Trust includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund. In addition, in the event a secondary market were to develop in the shares, such provisions could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices.
FEDERAL TAX MATTERS
This section summarizes some of the main U.S. Federal income tax consequences of owning shares of the Fund. This section is current as of the date of this Prospectus. Tax laws and interpretations change frequently, and these summaries do not describe all of the tax consequences to all taxpayers. For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker/dealer, or other investor with special circumstances. In addition, this section does not describe your state, local or foreign tax consequences.
This federal income tax summary is based in part on the advice of counsel to the Fund. The Internal Revenue Service could disagree with any conclusions set forth in this section. In addition, our counsel was not asked to review, and has not reached a conclusion with respect to the federal income tax treatment of the assets to be deposited in the Fund. This may not be sufficient for you to use for the purpose of avoiding penalties under federal tax law.
As with any investment, you should seek advice based on your individual circumstances from your own tax advisor.
Fund Status.
The Fund intends to qualify as a “regulated investment company” under the federal tax laws. With respect to diversification for federal tax purposes, the Fund will consider the issuer to be the obligor on the consumer note. If the Fund qualifies as a “regulated investment company” and distributes all of its income in the time and manner as required by the tax law, the Fund generally will not pay federal income taxes. There is a risk that the Fund may not qualify as a “regulated investment company” under federal tax laws. If the Fund fails to qualify as a “regulated investment company”, income generated from the securities in which the Fund invests will be taxed at corporate tax rates and the net returns to shareholders will therefore decline significantly.
Dividends Received Deduction. A corporation that owns shares generally will not be entitled to the dividends received deduction with respect to many dividends received from the Fund because the dividends received deduction is generally not available for distributions from regulated investment companies. However, certain ordinary income dividends on shares that are attributable to qualifying dividends received by the Fund from certain corporations may be designated by the Fund as being eligible for the dividends received deduction, but this amount is not expected to be significant.
Sale or Repurchase of Shares. If you sell or your shares are repurchased, you will generally recognize a taxable gain or loss. To determine the amount of this gain or loss, you must subtract your tax basis in your shares from the amount you receive in the transaction. Your tax basis in your shares is generally equal to the cost of your shares, generally including sales charges. In some cases, however, you may have to adjust your tax basis after you purchase your shares.
Capital Gains and Losses and Certain Ordinary Income Dividends. If you are an individual, the maximum marginal federal tax rate for net capital gain is generally 15% (generally 5% for certain taxpayers in the 10% and 15% tax brackets). These lower capital gains rates are generally effective for taxable years beginning before January 1, 2011. For later periods, unless Congress extends the application of the current rates, if you are an individual, the maximum marginal federal tax rate for net capital gain generally will be 20% (10% for certain taxpayers in the 10% and 15% tax brackets), subject to a reduction of the 20% rate to 18% and the 10% rate to 8% for long-term capital gains from most property acquired after December 31, 2000 with a holding period of more than five years.
Net capital gain is the excess, if any, of net long-term capital gain over net short-term capital loss for the taxable year. Capital gain or loss is long-term if the holding period for the asset is more than one year and is short-term if the holding period for the asset is one year or less. You must exclude the date you purchase your shares to determine your holding period. However, if you receive a capital gain dividend from the Fund and sell your share at a loss after holding it for six months or less, the loss will be recharacterized as long-term capital loss to the extent of the capital gain dividend received. The tax rates for capital gains realized from assets held for one year or less are generally the same as for ordinary income. The Internal Revenue Code treats certain capital gains as ordinary income in special situations.
Certain ordinary income dividends received by an individual shareholder from a regulated investment company such as the Fund that are specifically designated by the Fund may constitute qualified dividend income that is generally taxed at the same rates that apply to net capital gain (as discussed above), provided certain holding period requirements are satisfied and provided the dividends are attributable to qualifying dividends received by the Fund itself. These special rules relating to the taxation of ordinary income dividends from regulated investment companies generally apply to taxable years beginning before January 1, 2011. The Fund will provide notice to its shareholders of the amount of any distribution which may be taken into account as a dividend which is eligible for the lower capital gains tax rates.
Deductibility of Fund Expenses. Expenses incurred and deducted by the Fund will generally not be treated as income taxable to you.
Alternative Minimum Tax. As with any taxable investment, investors may be subject to the federal alternative minimum tax on their income (including taxable income from the Fund), depending on their individual circumstances.
Further Information. The SAI summarizes further federal income tax considerations that may apply to the Fund and its shareholders and may qualify the considerations discussed herein.
Information Reporting and Backup Withholding
Information with respect to payments on the notes and proceeds from the taxable disposition of a note generally will be required to be furnished to you and the IRS. Backup withholding also may apply to these payments if you are not otherwise exempt and: (i) you fail to provide your taxpayer identification number; (ii) you provide an incorrect taxpayer identification number; (iii) the Fund is notified by the IRS that you are subject to backup withholding because you have failed to report properly payments of interest or dividends; or (iv) you fail to certify, under penalties of perjury, that you have provided your correct taxpayer identification number and that the IRS has not notified you that you are subject to backup withholding.
You should consult your tax advisor regarding qualification for an exemption from backup withholding and the procedures for obtaining an exemption, if applicable. Backup withholding is not an additional tax. Taxpayers may use amounts withheld as credit against their U.S. federal income tax liability or may claim a refund if they timely provide certain information to the IRS.
The U.S. federal income tax discussion set forth above may not be applicable depending upon your particular tax situation, and does not purport to address the issues described with the degree of specificity that may be provided by your own tax advisor. Accordingly, we suggest that you consult your own tax advisors regarding the tax consequences to you of the purchase, ownership and disposition of the Shares.
LEGAL OPINIONS
Alston & Bird LLP, passes upon certain legal matters in connection with shares offered by the Fund, and also acts as counsel to the Fund.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
THE TRUST
INVESTMENT POLICIES AND STRATEGIES
INVESTMENT LIMITATIONS
REPURCHASE OFFER POLICY
MANAGEMENT
INVESTMENT ADVISORY SERVICES
INFORMATION REGARDING PORTFOLIO MANAGER
PORTFOLIO HOLDINGS INFORMATION
ADMINISTRATOR
FUND ACCOUNTING SERVICES
TRANSFER AGENT
CUSTODIAN
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PORTFOLIO TRANSACTIONS AND BROKERAGE
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
ADDITIONAL INCOME TAX CONSIDERATIONS
FINANCIAL STATEMENTS
INVESTMENT RATINGS
ADDRESSES
STATEMENT OF ADDITIONAL INFORMATION
NATIONAL RETAIL FUND III
(Registrant)
PERTUITY, INC.
(Co-Registrant)
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, NE 68137
(877) 295-6275
This Statement of Additional Information (“SAI”) is not a prospectus but provides additional information that should be read in conjunction with the Prospectus for the National Retail Fund III, dated __________, 2008, and any supplements thereto.
A copy of the Fund’s Prospectus is available by calling the Fund at (877) 295-6275, visiting the Fund’s website or writing to the Fund at 4020 S. 147th Street, Omaha, NE 68137.
TABLE OF CONTENTS
THE TRUST
INVESTMENT POLICIES AND STRATEGIES
INVESTMENT LIMITATIONS
REPURCHASE OFFER POLICY
MANAGEMENT
INVESTMENT ADVISORY SERVICES
INFORMATION REGARDING PORTFOLIO MANAGER
PORTFOLIO HOLDINGS INFORMATION
ADMINISTRATOR
FUND ACCOUNTING SERVICES
TRANSFER AGENT
CUSTODIAN
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PORTFOLIO TRANSACTIONS AND BROKERAGE
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
REGULATORY RISKS
ADDITIONAL INCOME TAX CONSIDERATIONS
FINANCIAL STATEMENTS
INVESTMENT RATINGS
ADDRESSES
APPENDIX A — PROXY VOTING POLICY
THE TRUST
National Retail Fund III, a Delaware statutory trust (the “Fund”), is a non-diversified, closed-end management investment company. Pertuity, Inc. is the Co-Registrant of this offering and is not affiliated with the Fund.
The Fund is engaged in a continuous public offering of its shares. The Fund makes repurchase offers on a quarterly basis to repurchase between 5% and 25% of its outstanding shares at the then current net asset value (“NAV”) of the shares.
The Fund’s investment adviser is Fulcrum Advisory Services, Inc. (Adviser). The Adviser provides investment advisory and certain administrative services to the Fund.
INVESTMENT POLICIES AND STRATEGIES
The following information supplements the discussion of the investment objective and policies of the Fund described in the Prospectus. In pursuing its objective, the Fund will invest as described in the Prospectus and as described below with respect to the following non-principal investments and strategies. The investment objective of the Fund is a non-fundamental policy and may be changed by the Fund’s Board without the approval of a “majority of the outstanding voting securities” of the Fund. A “majority of the outstanding voting securities” means the lesser of (i) 67% or more of the shares at a meeting if the holders of more than 50% of the outstanding shares are present or represented by proxy or (ii) more than 50% of the outstanding shares.
Lending of Portfolio Holdings
The Fund may seek to increase its income by lending financial instruments in its portfolio in accordance with present regulatory policies, including those of the Board of Governors of the Federal Reserve System and the Securities and Exchange Commission (“SEC”). Such loans may be made, without limit, to brokers, dealers, banks or other recognized institutional borrowers of financial instruments and would be required to be secured continuously by collateral, including cash, cash equivalents or U.S. Treasury bills maintained on a current basis at an amount at least equal to the market value of the financial instruments loaned. The Fund would have the right to call a loan and obtain the financial instruments loaned at any time on five days’ notice. For the duration of a loan, the Fund would continue to receive the equivalent of the interest paid by the issuer on the financial instruments loaned and also would receive compensation from the investment of the collateral. The Fund would not have the right to vote any financial instruments having voting rights during the existence of the loan, but the Fund could call the loan in anticipation of an important vote to be taken among holders of the financial instrument or in anticipation of the giving or withholding of their consent on a material matter affecting the financial instrument. As with other extensions of credit, such loans entail risks of delay in recovery or even loss of rights in the collateral should the borrower of the financial instruments fail financially. However, the loans would be made only to borrowers deemed by the Adviser to be of good standing and when, in the judgment of the Adviser, the consideration that can be earned at that time from loans of this type justifies the attendant risk. The creditworthiness of firms to which the Fund lends its portfolio holdings will be monitored on an ongoing basis by the Adviser pursuant to procedures adopted and reviewed, on an ongoing basis, by the Fund’s Board of Trustees (“Board” or “Trustees”). The Fund may lend up to 331/3% of its total assets.
INVESTMENT LIMITATIONS
The Fund operates under the following fundamental investment restrictions. The Fund may:
·
with respect to securities comprising 75% of the value of its total assets, not purchase securities of any one issuer (other than cash; cash items; securities issued or guaranteed by the government of the United States or its agencies or instrumentalities and repurchase agreements collateralized by such U.S. government securities; and securities of other investment companies) if, as a result, more than 5% of the value of its total assets would be invested in the securities of that issuer, or the Fund would own more than 10% of the outstanding voting securities of that issuer;
·
issue senior securities or borrow money, directly or indirectly, to the extent permitted by the Investment Company Act of 1940 (“1940 Act) purchase and sell futures contracts and related options;
·
underwrite securities issued by others only when engaging in transactions involving the acquisition, disposition or resale of its portfolio securities, under circumstances where it may be considered to be an underwriter under the Securities Act of 1933;
·
make loans through lending of securities1, through the purchase of debt instruments or similar evidence of indebtedness typically sold to financial institutions and through repurchase agreements;
·
not purchase or sell real estate. The Fund may only own real estate acquired as a result of owning securities;
·
not purchase or sell commodities or commodities contracts, except that, consistent with its investment policies, the Fund may purchase and sell financial futures contracts and options and may enter into swap agreements, foreign exchange contracts and other financial transactions not requiring the delivery of physical commodities;
·
not concentrate more than 25% of its total assets in any one industry or group of industries; provided that this limitation shall not apply with respect to obligations issued or guaranteed by the U.S. government or by its agencies or instrumentalities; and provided further that the Fund will invest more than 25% and may invest up to 100% of its assets in securities of issuers in the industry group consisting of diversified financials. Diversified financials include large financial services companies like banks, credit card companies and specialty finance companies. For purposes of this restriction, the term “issuer” includes the Borrower (as defined under “Prospectus Summary” in the Prospectus); and Obligations from one borrower or group of affiliated borrowers will not represent 10% or more of the Fund’s assets;
·
not invest in consumer notes from borrowers with credit scores below 660 under any circumstances.
1 The 1940 Act and current interpretations thereunder limit the lending of portfolio securities to 33⅓% of the value of a fund’s total assets (taken at market value at the time of such loans).
The above restrictions are fundamental policies and may not be changed without the approval of a “majority of the outstanding voting securities” of the Fund, as defined under “Investment Policies and Strategies” above. Except with respect to borrowing money, the restrictions and other limitations set forth above will apply only at the time of purchase of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of an acquisition of securities.
The following limitations, however, may be changed by the Board without shareholder approval. Shareholders will be notified before any material change in these limitations becomes effective.
The 1940 Act generally requires a registered closed-end company to have 300% asset coverage for the issuance of senior securities representing indebtedness or borrowing money, and 200% asset coverage for the issuance of senior securities in the form of preferred shares. For purposes of the borrowing policy, the Fund will not borrow money except from banks as a temporary measure for extraordinary or emergency purposes and then: (1) only in amounts not in excess of 5% of the value of its total assets; or (2) in an amount up to one-third of the value of its total assets, including the amount borrowed, in order to meet repurchase requests without immediately selling any portfolio instruments. If the Fund borrows, as a temporary measure for extraordinary or emergency purposes, 5% of the value of its total assets, it will not buy more securities. In addition, the Fund may enter into reverse repurchase agreements and otherwise borrow up to one-third of the value of its total assets, including the amount borrowed, in order to meet repurchase requests without immediately selling any portfolio instruments. The use of repurchase agreements and the borrowing provision in (2) above, is not for investment leverage but solely to facilitate management of the portfolio by enabling the Fund to meet repurchase requests when the liquidation of portfolio instruments is deemed to be inconvenient or disadvantageous. Interest paid on borrowed funds will not be available for investment and will reduce net income. The Fund will liquidate any such borrowings as soon as possible and may not purchase any portfolio securities while the borrowings are outstanding. However, during the period any reverse repurchase agreements are outstanding, but only to the extent necessary to assure completion of the reverse repurchase agreements, the Fund will restrict the purchase of portfolio instruments to money market instruments maturing on or before the expiration date of the reverse repurchase agreements.
The Fund will not purchase securities on margin, provided that the Fund may obtain short-term credits necessary for the clearance of purchases and sales of securities and further provided that the Fund may make margin deposits in connection with its use of financial options and futures, forward and spot currency contracts, swap transactions and other financial contracts or derivative instruments. The Fund will create segregated accounts for each of these transactions.
The Fund will not mortgage, pledge, or hypothecate more than one-third of its assets, provided that this shall not apply to the transfer of securities in connection with any permissible borrowing or to collateral arrangements in connection with permissible activities.
Because the Fund refers to retail loans to consumers in its name, it will notify shareholders at least 60 days in advance of any change in its investment policies that would enable the Fund to normally invest less than 80% of its assets in retail loans to consumers.
REPURCHASE OFFER POLICY
The Board has adopted a resolution setting forth the Fund’s fundamental policy that it will conduct quarterly Repurchase Offers (the “Repurchase Offer Policy”). The Repurchase Offer Policy sets the interval between each Repurchase Offer at one quarter and provides that the Fund shall conduct a Repurchase Offer each quarter (unless suspended or postponed in accordance with regulatory requirements). The Repurchase Request Deadline will be established by the Fund and will be based on factors such as market conditions, liquidity of the Fund’s assets and shareholder servicing conditions. The Repurchase Offer Policy also provides that the repurchase pricing shall occur not later than the 14th day after the Repurchase Request Deadline or the next business day if the 14th day is not a business day. The Fund’s Repurchase Offer Policy is fundamental and cannot be changed without shareholder approval.
MANAGEMENT
The Board is responsible for managing the Trust’s business affairs and for exercising all the Trust’s powers except those reserved for the shareholders. The following tables give information about each Board member and the officers of the Fund. Where required, the tables separately list Board members who are “interested persons” of the Fund (i.e., “Interested” Board members) and those who are not (i.e., “Independent” Board members). Unless otherwise noted, each Officer is elected annually. Each Board member oversees the Trust and serves for an indefinite term. The names and ages of the Trustees and officers of the Fund, the year each was first elected or appointed to office, their principal business occupations during the last five years, and other directorships or trusteeships they hold are shown below. The business address for each Trustee of the Fund is c/o Gemini Fund Services, LLC, 4020 S. 147th Street
Omaha, NE 68137.
INDEPENDENT TRUSTEES
| | |
Name
Age
Address
Positions Held with Fund
Date Service Began
| Principal Occupation(s) for Past Five Years,
Other Directorships Held and Previous Position(s)
| Total Compensation
From Fund
(past fiscal year)+
|
John B. Christie-Searles
Age: 43
TRUSTEE
Began serving: July 2008
| Principal Occupation: Officer, Allegheny College.
Other Directorships Held: Trustee, Winchester Thurston School; Trustee, Adagio Health, Inc.; Director, Crawford County School Board.
Previous Positions: Global Procurement Services Market Intelligence Manager, Alcoa, Inc.; Senior leader with PNC Advisors, Director, Capital Markets (Investment Bank) on the Derivatives and Foreign Exchange desks, PNC Financial Services Corporation.
| Not Applicable
|
Charles A. Schliebs
Age: 57
TRUSTEE
Began serving: July 2008
| Principal Occupation: Co-founder and Managing Director, iNetworks Advisors, Inc.
Other Directorships Held: None.
Previous Positions: Partner, Jones Day (international law firm).
| Not Applicable
|
+ Because the Fund is a new registrant, Trustee compensation has not yet been earned and will be reported following the Fund’s next fiscal year.
INTERESTED TRUSTEE
| | |
Name
Age
Address
Positions Held with Fund
Date Service Began
| Principal Occupation(s) for Past Five Years,
Other Directorships Held and Previous Position(s)
| Total Compensation
From Fund
(past fiscal year)+
|
Andrew Rogers*
Age: 38
4020 S. 147th Street
Omaha, NE
CHIEF FINANCIAL OFFICER, TREASURER, TRUSTEE
Began Serving: July 2008
| Principal Occupation: President and Manager, Gemini Fund Services, LLC.
Previous Position: Senior Vice President and Director of Administration (2001 - 2005); Manager, Fund Compliance Services, LLC (since 3/2006); Manager (since 3/2006) and President (since 2004), GemCom LLC.
| Not Applicable
|
*Andrew Rogers is deemed an interested Trustee due to the positions he holds with Gemini Fund Services, LLC, the Fund’s administrator, and transfer and dividend dispersing agent.
FUND OFFICERS
| |
Name
Age
Address
Position(s) Held with Fund
Date Service Began
| Principal Occupation(s) and Previous Position(s)
|
J. Patrick Kearns
Age: 54
12010 Sunset Hills Road, Reston, VA
PRESIDENT
Began serving: July 2008
| Principal Occupation: Portfolio Manager of the Fund; President, CEO and Managing Director of the Adviser.
Previous Positions: Founding member, OFK, Inc., a boutique investment bank and consulting firm; Registered Representative, Westminster Financial Securities, Inc.; Registered Representative, O’Meara Capital; Branch manager and Financial Consultant, Prudential Securities Incorporated.
|
Emile Molineaux
Age: 45
4020 S. 147th Street
Omaha, NE
SECRETARY
Began serving: July 2008
| Principal Occupation: General Counsel, CCO and Senior Vice President, Gemini Fund Services, LLC, Vice President, Fund Compliance Services, LLC; (2003 – Present).
Previous Position: In-house Counsel, The Dreyfus Funds (1999 – 2003).
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Michael J. Wagner
Age 53
450 Wireless Blvd.
Hauppauge, NY 11788
CHIEF COMPLIANCE OFFICER
Began serving: July 2008
| Principal Occupation: President (2006 – Present) and Senior Vice President (2004 – 2006), Northern Lights Compliance Services, LLC (formerly known as Fund Compliance Services, LLC) (provides CCO services to mutual funds); Vice President, GenCom, LLC (2004 – Present) (provides Edgar services to mutual funds).
Previous Positions: President (2004 – 2006) and Chief Operating Officer (2003 – 2006), Gemini Fund Services, LLC (provides administration, transfer agency, and fund accounting services to mutual funds); Senior Vice President – Fund Accounting, Orbitex Fund Services (2001 – 2002) (predecessor to Gemini Fund Services, LLC; provides administration, transfer agency, and fund accounting services to mutual funds).
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Excluding the Fund’s Chief Compliance Officer, the officers of the Fund do not receive compensation from the Fund.
As of December 2, 2008, the following shareholders owned of record, beneficially, or both, 5% or more of outstanding Shares of Pertuity, Inc.: Kim Muhota
Role of the Board of Trustees
The Trustees of the Fund are responsible for the overall management and supervision of the Fund’s affairs and for protecting the interests of the shareholders. The Trustees meet periodically throughout the year to oversee the Fund’s activities, review contractual arrangements with service providers for the Fund and review the Fund’s performance. The Board has three committees, the Compensation Committee, Audit Committee, and the Nominating Committee, each of which is composed of the Independent Trustees.
Compensation Committee. The purposes of the Compensation Committee are to oversee matters relating to compensation of the Independent Trustees of the Trust and such other duties as the Board may from time to time direct.
Audit Committee. The purposes of the Audit Committee are to oversee the accounting and financial reporting process of the Fund, the Fund’s internal control over financial reporting, and the quality, integrity and independent audit of the Fund’s financial statements. The Committee also oversees or assists the Board with the oversight of compliance with legal requirements relating to those matters, approves the engagement and reviews the qualifications, independence and performance of the Fund’s independent registered public accountants, acts as a liaison between the independent registered public accountants and the Board and reviews the Fund’s internal audit function.
Nominating Committee. The Nominating Committee, whose members consist of all independent Trustees, selects and nominates persons for election to the Fund’s Board when vacancies occur. The Committee will consider candidates recommended by shareholders, Independent Trustees, officers or employees of any of the Fund’s agents or service providers and counsel to the Fund. Any shareholder who desires to have an individual considered for nomination by the Committee must submit a recommendation in writing to the Secretary of the Fund, at the Fund’s address appearing on the back cover of this SAI. The recommendation should include the name and address of both the shareholder and the candidate and detailed information concerning the candidate’s qualifications and experience. In identifying and evaluating candidates for consideration, the Committee shall consider such factors as it deems appropriate. Those factors will ordinarily include: integrity, intelligence, collegiality, judgment, diversity, skill, business and other experience, qualification as an “Independent Trustee,” the existence of material relationships which may create the appearance of a lack of independence, financial or accounting knowledge and experience, and dedication and willingness to devote the time and attention necessary to fulfill Board responsibilities. The Nominating Committee is composed of the following: John B. Christie-Searles, Charles A. Schliebs, J. Patrick Kearns, Emile Molineaux, Andrew Rogers, Kevin Wolf and Michael J. Wagner.
The Fund’s Fair Value Committee will consist of a member of the Audit Committee of the Board, a representative of the Fund’s’ Adviser, and the Treasurer of the Fund. The Fair Value Committee will consult with the Fund’s valuation firm as well as the Fund’s administrator, Gemini Fund Services, LLC, (“Administrator”) which will be computing NAV on a daily basis. The responsibility of the Treasurer and representative of the Fund’s Adviser will be to work directly with the valuation firm on an ongoing basis to review assumptions regarding risk premiums and review credit performance of the note portfolio of the Fund. The Fair Value Committee’s role will be to review, on a monthly basis, all reports generated by the Fund’s valuation firm (e.g. expected versus actual portfolio cash flow reports, delinquency and default reports) and will have the authority to oversee any changes in loan level valuation assumptions. No single member of the Fair Value Committee will have the authority to implement loan level valuation assumptions unless the member obtains the approval and consent from one of the other two members of the Committee. The members of the Fair Value Committee will not have the authority to change the valuation procedures without the consent of the Board. The Fair Value Committee will make presentations to the Board on a quarterly basis to review performance of the portfolio and to discuss and loan level valuation assumptions. It will be the responsibility of the Fair Value Committee to determine whether changes need to be made to the Valuation Procedures or a Fund’s NAV. In this event, the Fair Value Committee will not be authorized to make any such changes unless and until it has obtained the approval of the Board.
Share Ownership of the Fund
The following table shows the dollar range of equity securities beneficially owned by the Fund’s Trustees as of July10, 2008.
Name of
Dollar Range of Equity Securities
Trustee
Owned in the Fund
John B. Christie-Searles
None
Charles A. Schliebs
None
Andrew Rogers
None
Code of Ethics Restrictions
As required by SEC rules, the Fund and the Adviser have adopted codes of ethics. These codes govern securities trading activities of investment personnel, Trustees, and certain other employees. Although they do permit these people to trade in securities, including those that the Fund could buy, they also contain significant safeguards designed to protect the Fund and its shareholders from abuses in this area, such as requirements to obtain prior approval for, and to report, particular transactions.
Anti-Money Laundering Compliance
The Fund or its service providers may be required to comply with various anti-money laundering laws and regulations. Consequently, the Fund or its service providers may request additional information from you to verify your identity. If at any time a Fund believes a shareholder may be involved in suspicious activity or if certain account information matches information on government lists of suspicious persons, the Fund may choose not to establish a new account or may be required to “freeze” a shareholder’s account. The Fund or its service providers also may be required to provide a governmental agency with information about transactions that have occurred in a shareholder’s account or to transfer monies received to establish a new account, transfer an existing account or transfer the proceeds of an existing account to a governmental agency. In some circumstances, it may not be permitted to inform the shareholder that it has taken the actions described above.
Proxy Voting Policies
The Board has delegated voting of proxies in respect of the Fund’s portfolio holdings to the Adviser, to vote the Fund’s proxies in accordance with the Adviser’s Proxy Voting Policy. Under this policy, the Adviser will vote proxies related to Fund securities in the best interests of a Fund and its shareholders. The Adviser’s Proxy Voting Policy is attached as Appendix A to this SAI and may be changed from time to time by the Adviser with the approval of the Board.
A Fund’s proxy voting record for the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (877) 295-6275 or (2) on the SEC’s website (http://www.sec.gov). Information as of June 30 each year will generally be available by the following August 31 on the SEC’s website under Form N-PX.
INVESTMENT ADVISORY SERVICES
Fulcrum Advisory Services, Inc., (“Fulcrum”) located at 12010 Sunset Hills Road, Reston, Virginia 20190 serves as the Fund’s investment adviser pursuant to an Investment Management Agreement with the Fund (“Advisory Agreement”). Fulcrum provides portfolio management services to the Fund for a monthly management fee, computed and accrued daily, which includes both advisory fees and certain administration fees charged to the Fund.
Under the Advisory Agreement, Fulcrum, among other things: (i) continuously furnishes an investment program for the Fund; (ii) places orders for the purchase and sale of securities for the accounts of the Fund; (iii) provides for certain facilities and administrative services; (iv) arranges for the provision and maintenance of an insurance bond against larceny and embezzlement by officers and employees of the Fund; and (v) generally manages, supervises and conducts the affairs and business of the Fund.
Fulcrum carries out its duties under the Advisory Agreement at its own expense. The Fund pays its own ordinary operating and activity expenses, such as legal and auditing fees, management fees, administrative fees, custodial fees, transfer agency fees, chief compliance officer fees, the cost of communicating with shareholders and registration fees, as well as other operating expenses such as interest, taxes, brokerage, insurance, bonding, compensation of Independent Trustees of the Board and extraordinary expenses.
The Advisory Agreement provides that in the absence of willful misfeasance, bad faith or gross negligence in the performance (or reckless disregard) of its obligations or duties thereunder on the part of Fulcrum, Fulcrum shall not be subject to liability to a Fund or to any shareholder of a Fund for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which the Advisory Agreement relates.
Fulcrum and/or its general partner, limited partners, officers, affiliates and employees provide investment advice to other parties and manage other accounts and private investment vehicles similar to the Fund. In connection with such other investment management activities, the Adviser and/or its general partner, limited partners, officers, affiliates and employees may decide to invest the funds of one or more other accounts or recommend the investment of funds by other parties, rather than the Fund’s monies, in a particular security or strategy. In addition, the Adviser and such other persons will determine the allocation of funds from the Fund and such other accounts to investment strategies and techniques on whatever basis they consider appropriate or desirable in their sole and absolute discretion. See “Information Regarding Portfolio Managers—Conflicts of Interest.”
INFORMATION REGARDING PORTFOLIO MANAGER
The Fund’s portfolio manager is J. Patrick Kearns. The following information about the Fund’s Portfolio Manager is provided as of the end of July 8, 2008. As of this date, Mr. Kearns does not manage any other registered investment companies, besides the Fund, or other pooled investment vehicles.
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Other Accounts Managed by
J. Patrick Kearns
| Total Number of Other Accounts
Managed/Total Assets*
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Other Accounts
| 251-500 Accounts/$60 million
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* None of the Accounts has an advisory fee that is based on the performance of the account.
Dollar value range of shares owned by Mr. Kearns in the Fund: None.
Conflicts of Interests
As a general matter, certain conflicts of interest may arise in connection with a portfolio manager’s management of a fund’s investments, on the one hand, and the investments of other accounts for which the portfolio manager is responsible, on the other. For example, it is possible that the various accounts managed could have different investment strategies that, at times, might conflict with one another to the possible detriment of the Fund. Alternatively, to the extent that the same investment opportunities might be desirable for more than one account, possible conflicts could arise in determining how to allocate them. Other potential conflicts might include conflicts created by specific portfolio manager compensation arrangements, and conflicts relating to selection of brokers or dealers to execute fund portfolio trades and/or specific uses of commissions from Fund portfolio trades (for example, research, or “soft dollars”). The Adviser has adopted policies and procedures and has structured the portfolio managers’ compensation in a manner reasonably designed to safeguard the Fund from being negatively affected as a result of any
such potential conflicts.
Compensation
J. Patrick Kearns is paid a fixed base salary and a variable annual incentive based on the performance of Fulcrum Advisory Services, Inc. Base salary is determined within a market competitive position-specific salary range, based on the portfolio manager’s experience and performance. As noted above, J. Patrick Kearns is also the portfolio manager for other accounts in addition to the Fund. Such other accounts may have different benchmarks.
PORTFOLIO HOLDINGS INFORMATION
Information concerning the Fund’s portfolio holdings is available on the Fund’s website at (http://www.nationalretailfund.com). A complete listing of the Fund’s portfolio holdings as of the end of each calendar quarter is posted on the website 30 days (or the next business day) after the end of the quarter and remains posted until replaced by the information for the succeeding quarter. Summary portfolio composition information as of the close of each month (except for recent purchase and sale transaction information, which is updated quarterly) is posted on the website 15 days (or the next business day) after month-end and remains until replaced by the information for the succeeding month. The summary portfolio composition information may include recent purchase and sale transactions and percentage breakdowns of the portfolio by sector and credit quality.
ADMINISTRATOR
Gemini Fund Services, LLC(, provides administrative personnel and services (including certain legal and financial reporting services) necessary to operate the Fund. The Administrator provides these at the following annual rates, based on the average aggregate daily net assets of the Fund. Certain discounts apply in the first year of Fund operations.
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AVERAGE AGGREGATE
DAILY NET ASSETS OF THE FUND
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ADMINISTRATIVE FEE
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.10%
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Up to the first $100 million
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.08%
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$100 million to $250 million
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.06%
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Greater than $250 million
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The administrative fee received during any fiscal year shall be at least $40,000 per portfolio, plus out-of-pocket expenses.
FUND ACCOUNTING SERVICES
Gemini Fund Services, LLC provides accounting services to the Fund pursuant to an accounting services agreement and receives a monthly accounting services fee from the Fund, computed and accrued daily and based upon a percentage of the Fund’s average daily net assets.
Distribution and Shareholder Service Fees
Shares of the Fund are authorized under a Distribution and Shareholder Services Plan (the “Plan”) to use the assets attributable to such class to finance certain activities relating to the distribution of shares to investors. The Plan requires the payment of a monthly service fee at an annual rate not to exceed 0.25% of the average daily net assets attributable to shares of the Fund.
TRANSFER AGENT
Gemini Fund Services, LLC provides transfer agency and dividend disbursing agent services for the Fund. As part of these services, the transfer agent maintains records pertaining to the sale, repurchase, and transfer of Fund shares and distributes the Fund’s cash distributions to shareholders.
CHIEF COMPLIANCE OFFICER SERVICES
Northern Lights Compliance Services, LLC (“NLCS”), an affiliate of the Administrator, Transfer Agent and the Distributor, provides a Chief Compliance Officer to the Fund as well as related compliance services pursuant to a consulting agreement between NLCS and the Fund.
CUSTODIAN
Fifth Third Bank is the custodian for the Fund’s U.S. securities and cash, but it does not participate in the Fund’s investment decisions. Portfolio securities purchased in the U.S. are maintained in the custody of the bank and may be entered into the Federal Reserve Book Entry System, or the security depository system of the Depository Trust Corporation, or any central depository system allowed by federal law.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
McElravy, Kinchen & Associates, P.C. is the independent registered public accounting firm to the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Selection of Broker-Dealers; Order Placement
Subject to the overall review of the Fund’s Board, the Adviser is responsible for decisions to buy and sell securities and other portfolio holdings of the Fund. The Adviser may purchase securities through financial intermediaries or directly from the originator. In the case of consumer notes, the Fund will purchase notes directly from the originator or from an intermediary such as a a loan broker or other financial institution which makes notes available to the market place. The Fund or the Adviser may purchase notes from one or more originators and/or intermediaries; the notes which fall within the investment strategy of the Fund. The Adviser will review notes available to determine whether they meet the parameters set forth herein. The Adviser will also determine whether the price paid for portfolio securities is appropriate taking into account relevant market conditions. To the extent permitted by law and in accordance with the procedures established by Board, the Fund may engage in brokerage transactions with brokers that are affiliates of the Adviser or of the Fund, with brokers who are affiliates of such brokers, or with unaffiliated brokers who trade or clear through affiliates of the Adviser or the Fund. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid.
The Adviser and its affiliates manage other accounts, including private funds and individual accounts that invest in senior loans and Fund investments. Although investment decisions for the Fund are made independently from those of such other accounts, investments of the type the Fund may make also may be made on behalf of such other accounts. When the Fund and one or more other accounts is prepared to invest in, or desires to dispose of, the same investment, available investments or opportunities for each are allocated in a manner believed by the Adviser to be equitable over time. The Adviser may (but is not obligated to) aggregate orders, which may include orders for accounts in which the Adviser or its affiliates have an interest, to purchase and sell securities to obtain favorable execution or lower brokerage commissions, to the extent permitted by applicable laws and regulations. Although the Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should benefit all participating accounts, in some cases these activities may adversely affect the price paid or received or the size of the position obtained by or disposed of for the Fund. Where trades are aggregated, the investments or proceeds, as well as the expenses incurred, will be allocated by the Adviser in a manner designed to be equitable and consistent with the Adviser’s fiduciary duty to the Fund and its other clients (including its duty to seek to obtain best execution of client trades).
Commission Rates; Brokerage and Research Services
In placing orders for a Fund’s portfolio, the Adviser is required to give primary consideration to obtaining the most favorable price and efficient execution. This means that the Adviser will seek to execute each transaction at a price and commission, if any, which provides the most favorable total cost or proceeds reasonably attainable in the circumstances. In seeking the most favorable price and execution, the Adviser, having in mind the Fund’s best interests, will consider all factors it deems relevant, including, by way of illustration: price; the size, type and difficulty of the transaction; the nature of the market for the security; the amount of the commission; the timing of the transaction taking into account market prices and trends; operational capabilities; the reputation, experience and financial stability of the broker-dealer involved; and the quality of service rendered by the broker-dealer in other transactions. Though the Adviser generally seeks reasonably competitive commissions or spreads, the Fund will not necessarily be paying the lowest commission or spread available. The Adviser may place portfolio transactions, to the extent permitted by law, with brokerage firms participating in a distribution of the Fund’s shares if it reasonably believes that the quality of execution and the commission are comparable to that available from other qualified firms.
The Adviser seeks to obtain “best execution,” considering the execution price and overall commission costs paid and other factors. The Adviser routes its orders to various broker-dealers for execution at its discretion. Factors involved in selecting brokerage firms include the size, type and difficulty of the transaction, the nature of the market for the security, the reputation, experience and financial stability of the broker-dealer involved, the quality of service, the quality of research and investment information provided and the firm’s risk in positioning a block of securities. Within the framework of the policy of obtaining the most favorable price and efficient execution, the Adviser does consider “brokerage and research services” (as defined in the Securities Exchange Act of 1934, as amended) provided by brokers who effect portfolio transactions with the Adviser or the Fund. “Brokerage and research services” are services that brokerage houses customarily provide to institutional investors and include statistical and economic data and research reports on particular issuers and industries.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of_________, 2008, the Trustees and officers of the Fund as a group owned less than 1% of the then outstanding shares of each class of shares of the Fund.
Control persons are presumed to control the Fund for purposes of voting on matters submitted to a vote of shareholders due to their beneficial ownership of 25% or more of the Fund’s outstanding voting securities.
REGULATORY RISKS
Compliance with Consumer Protection Laws: As noted in the Fund’s Prospectus, consumer notes purchased by the Fund are subject to applicable state and federal lending laws. Loan originators and servicing partners are expected to comply with these laws. There is a risk that the consumer notes purchased by the Fund may not always be in compliance with these laws. Failure to comply with these laws by the loan originator or fund servicing partners could limit the Fund’s ability to collect interest and fees due on consumer notes, arrange repayment of the principal amount, collect on delinquent loans, or enforce all or parts of the consumer loan agreement. Applicable consumer protection laws include:
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The Truth In Lending Act which requires a meaningful disclosure of credit terms so that consumers may avoid the uninformed use of credit, and to protect consumers against inaccurate and unfair credit billing practices.
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The Fair Credit Reporting Act which regulates the use and reporting of consumer credit information with regard to the confidentiality, accuracy, relevancy.
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The Equal Credit Opportunity Act which prohibits creditor practices that discriminate with regard to race, color, religion, national origin, sex, marital status, age, receipt of income from public assistance, or the exercise of any right under the Consumer Credit Protection Act.
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The Fair Debt Collection Practices Act which regulates debt collection practices by debt collectors and prohibits certain debt collection practices to protect consumers against debt collection abuses.
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The Electronic Funds Transfer Act which establishes the basic rights, liabilities, and responsibilities of consumers who use electronic fund transfer services and of financial institutions offering these services.
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Additional State Consumer Protection Laws which many states have enacted limiting the interest rates, fees, or debt collection practices associated with the consumer notes.
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The Electronic Signatures in Global and National Commerce Act which imposes special requirements on businesses when using electronic records or signatures in consumer transactions.
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The Gramm Leach Bliley Act which establishes privacy rights for consumers and requirements for financial institutions when collecting or sharing consumer data with third parties.
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The Servicemembers Civil Relief Act which provides additional consumer protections for servicemembers on active military duty.
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The Patriot Act which requires additional recordkeeping and reporting by financial institutions to prevent money-laundering.
ADDITIONAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal income tax considerations affecting the Fund and the purchase, ownership and disposition of the Fund’s shares by U.S. persons. This discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”), the regulations promulgated thereunder and judicial and administrative authorities, all as in effect on the date hereof and all of which are subject to change or differing interpretations by the courts or the Internal Revenue Service (the “IRS”), possibly with retroactive effect. No attempt is made to present a detailed explanation of all U.S. federal tax concerns affecting the Fund and its shareholders (including shareholders owning large positions in the Fund).
The discussions set forth herein and in the Prospectus do not constitute tax advice, and potential investors are urged to consult their own tax advisors to determine the specific U.S. federal, state, local and foreign tax consequences to them of investing in the Fund.
Taxation of the Fund. The Fund intends to elect to be treated and to qualify annually as a regulated investment company under Subchapter M of the Code. Accordingly, the Fund must, among other things, meet the following requirements regarding the source of its income and the diversification of its assets:
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| (i)
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| The Fund must derive in each taxable year at least 90% of its gross income from the following sources: (a) dividends, interest (including tax-exempt interest), payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies; and (b) interests in “qualified publicly traded partnerships” (as defined in the Code).
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| (ii)
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| The Fund must diversify its holdings so that, at the end of each quarter of each taxable year: (a) at least 50% of the market value of the Fund’s total assets is represented by cash and cash items, U.S. government securities, the securities of other regulated investment companies and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Fund’s total assets and not more than 10% of the outstanding voting securities of such issuer and (b) not more than 25% of the market value of the Fund’s total assets is invested in the securities (other than U.S. government securities and the securities of other regulated investment companies) of: (I) any one issuer, (II) any two or more issuers that the Fund controls and that are determined to be engaged in the same business or similar or related trades or businesses or (III) any one or more “qualified publicly traded partnerships” (as defined in the Code).
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As a regulated investment company, a Fund generally will not be subject to U.S. federal income tax on income and gains that the Fund distributes to its shareholders provided that it distributes each taxable year at least the sum of: (i) 90% of the Fund’s investment company taxable income (which includes, among other items, dividends, interest and the excess of any net short-term capital gain over net long-term capital loss and other taxable income, other than any net long-term capital gain, reduced by deductible expenses) determined without regard to the deduction for dividends paid and (ii) 90% of the Fund’s net tax-exempt interest (the excess of its gross tax-exempt interest over certain disallowed deductions). The Fund intends to distribute substantially all of such income each year. The Fund will be subject to income tax at regular corporation rates on any taxable income or gains that it does not distribute to its shareholders.
The Code imposes a 4% nondeductible excise tax on a Fund to the extent that a Fund does not distribute by the end of any calendar year at least the sum of: (i) 98% of its ordinary income (not taking into account any capital gain or loss) for the calendar year and (ii) 98% of its capital gain in excess of its capital loss (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made to use the Fund’s fiscal year). In addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or over-distribution, as the case may be, from the previous year. While the Fund intends to distribute any income and capital gain in the manner necessary to minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund’s taxable income and capital gain will be distributed to avoid entirely the imposition of the excise tax. In that event, a Fund will be liable for the excise tax only on the amount by which it does not meet the foregoing distribution requirement.
If for any taxable year a Fund does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) will be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions will be taxable to the shareholders as ordinary dividends to the extent of the Fund’s current or accumulated earnings and profits. Such dividends, however, would be eligible (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals and (ii) for the dividends-received deduction in the case of shareholders
taxed as corporations. A Fund could be required to recognize unrealized gains, pay taxes and make distributions (which could be subject to interest charges) before requalifying for taxation as a regulated investment company. If a Fund fails to qualify as a regulated investment company in any year, it must pay out its earnings and profits accumulated in that year in order to qualify again as a regulated investment company. If a Fund fails to qualify as a regulated investment company for a period greater than two taxable years, the Fund may be required to recognize and pay tax on any net built-in gains with respect to certain of its assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Fund had been liquidated) or, alternatively, to elect to be subject to taxation on such built-in gain recognized for a period of ten years, in order to qualify as a regulated investment company in a subsequent year.
Certain of the Fund’s investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things: (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gains or “qualified dividend income” into higher taxed short-term capital gains or ordinary income, (iii) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (iv) cause the Fund to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur and (vi) adversely alter the characterization of certain complex financial transactions. These U.S. federal income tax provisions could therefore affect the amount, timing and character of distributions to stockholders. The Fund intends to monitor its transactions and may make certain tax elections, and may be required to borrow money or dispose of securities, to mitigate the effect of these provisions and prevent its disqualification as a regulated investment company.
If the Fund purchases shares in certain foreign investment entities, called passive foreign investment companies (“PFICs”), the Fund may be subject to U.S. federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the Fund to the shareholders. Additional charges in the nature of interest may be imposed on the Fund in respect of deferred taxes arising from such distributions or gains. Elections may be available to the Fund to mitigate the effect of this tax, but such elections generally accelerate the recognition of income prior to the receipt of cash. Dividends paid by PFICs will not be qualified dividend income, as discussed below under “Taxation of Shareholders.”
If the Fund invests in the shares of a PFIC, or any other investment that produces income that is not matched by a corresponding cash distribution to the Fund, the Fund could be required to recognize income that it has not yet received. Any such income would be treated as income earned by the Fund and therefore would be subject to the distribution requirements of the Code. This might prevent the Fund from distributing 90% of its net investment income as is required in order to avoid Fund-level U.S. federal income taxation on all of its income, or might prevent a Fund from distributing enough ordinary income and capital gain net income to avoid completely the imposition of the excise tax. To avoid this result, the Fund may be required to borrow money or dispose of securities to be able to make required distributions to the shareholders.
Dividends, interest and other income received by the Fund from investments outside the United States may be subject to withholding and other taxes imposed by foreign countries. Tax treaties between the United States and other countries may reduce or eliminate such taxes. The Fund does not expect that it will be eligible to elect to treat any foreign taxes it pays as paid by its shareholders, who therefore will not be entitled to credits for such taxes on their own tax returns. Foreign taxes paid by a Fund will reduce the return from the Fund’s investments.
Taxation of Shareholders. The Fund will determine either to distribute or to retain for reinvestment all or part of its net capital gain. If any such gain is retained, the Fund will be subject to a corporate income tax (currently at a maximum rate of 35%) on such retained amount. In that event, the Fund expects to designate the retained amount as undistributed capital gain in a notice to its shareholders, each of whom: (i) will be required to include in income for U.S. federal tax purposes as long-term capital gain its share of such undistributed amounts, (ii) will be entitled to credit its proportionate share of the tax paid by the Fund against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) will increase its basis in its shares of the Fund by an amount equal to 65% of the amount of undistributed capital gain included in such shareholder’s gross income.
Distributions paid to you by the Fund from its net realized long-term capital gains, if any, that the Fund designates as capital gains dividends (“capital gain dividends”) are taxable as long-term capital gains, regardless of how long you have held your shares. All other dividends paid to you by the Fund (including dividends from short-term capital gains) from its current or accumulated earnings and profits (“ordinary income dividends”) are generally subject to tax as ordinary income.
Special rules apply, however, to ordinary income dividends paid to individuals with respect to taxable years beginning on or before December 31, 2010. If you are an individual, any such ordinary income dividend that you receive from the Fund generally will be eligible for taxation at the rates applicable to long-term capital gains (currently at a maximum rate of 15%) to the extent that: (i) the ordinary income dividend is attributable to “qualified dividend income” (i.e., generally dividends paid by U.S. corporations and certain foreign corporations) received by the Fund, (ii) the Fund satisfies certain holding period and other requirements with respect to the stock on which such qualified dividend income was paid and (iii) you satisfy certain holding period and other requirements with respect to your shares. Ordinary income dividends subject to these special rules are not actually treated as capital gains, however, and thus will not be included in the computation of your net capital gain and generally cannot be used to offset any capital losses.
Any distributions you receive that are in excess of the Fund’s current or accumulated earnings and profits will be treated as a tax-free return of capital to the extent of your adjusted tax basis in your shares, and thereafter as capital gain from the sale of shares. The amount of any Fund distribution that is treated as a tax-free return of capital will reduce your adjusted tax basis in your shares, thereby increasing your potential gain or reducing your potential loss on any subsequent sale or other disposition of your shares.
Dividends and other taxable distributions are taxable to you even if they are reinvested in additional shares of the Fund. Dividends and other distributions paid by the Fund are generally treated under the Code as received by you at the time the dividend or distribution is made. If, however, the Fund pays you a dividend in January that was declared in the previous October, November or December and you were the shareholder of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by you on December 31 of the year in which the dividend was declared.
The price of shares purchased at any time may reflect the amount of a forthcoming distribution. If you purchase shares just prior to a distribution, you will receive a distribution that will be taxable to you even though it represents in part a return of your invested capital.
The Fund will send you information after the end of each year setting forth the amount and tax status of any distributions paid to you by the Fund. Ordinary income dividends and capital gain dividends may also be subject to state and local taxes.
If you tender all of your shares for repurchase pursuant to a Repurchase Offer (and you do not own any other shares pursuant to attribution rules contained in the Code), you will realize a taxable gain or loss depending upon your basis in the shares. Such gain or loss realized on the disposition of shares (whether pursuant to a Repurchase Offer or in connection with a sale or other taxable disposition of shares in a secondary market) generally will be treated as long-term capital gain or loss if the shares have been held as a capital asset for more than one year and as short-term capital gain or loss if held as a capital asset for one year or less. If shares are sold at a loss after being held for six months or less, the loss will be treated as long-term instead of short-term capital loss to the extent of any capital gain distributions received on those shares. All or a portion of any loss realized on a sale or exchange of shares of the Fund will be disallowed if you acquire other shares of the Fund (whether through the automatic reinvestment of dividends or otherwise) within 30 days before or after the disposition. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
Different tax consequences may apply to shareholders whose shares are repurchased (other than shareholders who tender all of their shares for repurchase as described in the previous paragraph) and to shareholders who do not tender their shares for repurchase in connection with the Repurchase Offer. For example, if a shareholder tenders for repurchase fewer than all his or her shares, the proceeds received could be treated as a taxable dividend, a return of capital, or capital gain depending on the portion of shares repurchased, the Fund’s earnings and profits, and the shareholder’s basis in the repurchased shares. You should consult your tax advisor prior to tendering your shares for repurchase.
Current law taxes both long-term and short-term capital gain of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, short-term capital gain is currently taxed at rates applicable to ordinary income (currently at a maximum of 35%) while long-term capital gain generally is taxed at a maximum rate of 15%.
Shareholders may be entitled to offset their capital gain dividends with capital loss. The Code contains a number of statutory provisions affecting when capital loss may be offset against capital gain and limiting the use of loss from certain investments and activities. Accordingly, shareholders that have capital losses are urged to consult their tax advisors.
The Fund may be required to withhold, for U.S. federal backup withholding tax purposes, a portion of the dividends, distributions and repurchase proceeds payable to a shareholder who fails to provide the Fund (or its agent) with the shareholder’s correct taxpayer identification number (in the case of an individual, generally, such individual’s social security number) or to make the required certification, or who has been notified by the IRS that such shareholder is subject to backup withholding. Certain shareholders are exempt from backup withholding. Backup withholding is not an additional tax and any amount withheld may be refunded or credited against your U.S. federal income tax liability, if any, provided that you furnish the required information to the IRS.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of National Retail Fund III
And the shareholders of National Retail Fund III
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, Nebraska 68137
We have audited the accompanying statement of assets and liabilities of the National Retail Fund III, a series of shares of the National Retail Fund III Trust, as of September 2, 2008. This financial statement is the responsibility of the Fund’s management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (US). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above presents fairly, in all material respects, the financial position of National Retail Fund III as of September 2, 2008, in conformity with accounting principles generally accepted in the United States of America.
/s/McElravy, Kinchen & Associates, P.C.
www.mkacpas.com
Houston, Texas
September 2, 2008
NATIONAL RETAIL FUND III
STATEMENT OF ASSETS AND LIABILITIES
September 2, 2008
ASSETS
Cash
$100,000
LIABILITIES
Accrued expenses $ -
NET ASSETS $100,000
Shares of beneficial interest, unlimited authorized
without par value 10,000
Net asset value, offering and redemption price per share $10.00
At September 2, 2008 the components of net assets
were as follows:
Paid-in capital $100,000
The accompanying notes are an integral part of these financial statements.
See notes to financial statement.
NATIONAL RETAIL FUND III
NOTES TO FINANCIAL STATEMENT
September 2, 2008
(1)
ORGANIZATION
The National Retail Fund III has applied for registration under the Investment Company Act of 1940, as amended (the “1940 Act”), as a closed-end management investment company and seeks authorization to issue shares of beneficial interest. The National Retail Fund III Trust intends to offer shares of beneficial interest in the National Retail Fund III.
The Fund was formed as a statutory trust on February 29, 2008 under the laws of the State of Delaware. The Fund had no operations from that date to September 2, 2008, other than those relating to organizational matters and the registration of its shares under applicable securities laws. Andrew Rogers purchased the initial shares of the Trust at $10.00 a share on September 2, 2008.
(2)
SIGNIFICANT ACCOUNTING POLICIES
Organization and Prepaid Initial Registration Expenses
The advisor of the fund is Fulcrum Advisory Services, Inc. (the “Adviser”). The Fund and its shareholders will not be responsible for the start-up costs associated with the organization of the Trust. In addition, the Adviser has contractually agreed to reduce its advisory fee, at least until April 30, 2009, to ensure that the advisory fee will not exceed 0.10% of the Fund’s average daily net assets.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the period. Actual results could differ from those estimates.
Federal Income Taxes
The Fund intends to qualify as “regulated investment companies” under Subchapter M of the Internal Revenue Code of 1986, as amended, and, if so qualified, will not be liable for federal income taxes to the extent earnings are distributed to shareholders on a timely basis.
Cash and Equivalents
The Fund considers all highly liquid investments with original maturities from date of purchase of three months or less to be cash equivalents. Cash and equivalents consist of cash on deposit with domestic banks and, at times, may exceed federally insured limits.
Recent Accounting Pronouncements
The Fund does not expect that adoption of recently issued accounting pronouncements will have a material impact on its financial position, results of operations or Cash flows.
(3) INVESTMENT ADVISORY AND OTHER AGREEMENTS
As compensation for its services, the Fund will pay the Adviser a monthly advisory fee at an annual rate of.30% of its average daily net assets. In addition, the Adviser has contractually agreed to reduce its advisory fee, at least until April 30, 2009, to ensure that the advisory fee will not exceed 0.10% of the Fund’s average daily net assets.
Northern Lights Fund Distributors, LLC (“Northern Lights” or “Distributor”), 1005 South 107th Avenue, Suite 201, Omaha, Nebraska 68114, is the distributor for the shares of the Fund. Northern Lights is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Shares of the Fund are offered on a continuous basis.
(4) SHARE CAPITAL
During the period from inception to September 2, 2008 the Fund sold 10,000 shares to one of their organizers for $100,000 cash resulting in the initial capital of the Fund.
INVESTMENT RATINGS
Credit Score Ratings (based on FICO®)
Excellent (760-850): Consumers with excellent ratings have demonstrated the highest ability and willingness to meet financial commitments.
Very Good (720-759): Consumers with very good credit differ only slightly from excellent credit borrowers. They also have a high ability and willingness to meet financial commitments.
Good (660-719): Consumers with good credit may be more susceptible to the adverse effects of changes in their financial situation than higher rated categories. However, their ability and willingness to meet financial commitments is still strong.
Not Good (560-659): Consumers with fair credit may be more susceptible to the effects of changes in their financial situation. Consumers in this category typically have a limited or inconsistent history of paying debt obligations on time. Their ability and willingness to meet financial commitments is moderate.
Bad (300-559): Consumers with bad credit are susceptible to adverse changes in their financial situation. They typically have a limited or inconsistent history of paying debt obligations on time. Their ability and willingness to meet financial commitments is poor.
Corporate Bond Ratings
Moody’s
Long-term
Aaa
Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.
Aa
Obligations rated Aa are judged to be of high quality and subject to very low credit risk.
A
Obligations rated A are considered upper-medium grade and are subject to low credit risk.
Baa
Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
Ba
Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.
B
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.
Ca
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C
Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Prime rating system (short-term)
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
S&P
Long-term
AAA
An obligation rated ‘AAA’ has the highest rating assigned by S&P. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.
AA
An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.
A
An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
BBB
An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, and C
Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant speculative characteristics. ‘BB’ indicates the least degree of speculation and ‘C’ the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.
B
An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.
CCC
An obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC
An obligation rated ‘CC’ is currently highly vulnerable to nonpayment.
C
A subordinated debt or preferred stock obligation rated ‘C’ is currently highly vulnerable to nonpayment. The ‘C’ rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A ‘C’ also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
D
An obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or minus (-)
The ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
N.R.
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular obligation as a matter of policy.
Short-term
A-1
A short-term obligation rated ‘A-1’ is rated in the highest category by S&P. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.
A-2
A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.
A-3
A short-term obligation rated ‘A-3’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B
A short-term obligation rated ‘B’ is regarded as having significant speculative characteristics. Ratings of ‘B-1’, ‘B-2’, and ‘B-3’ may be assigned to indicate finer distinctions within the ‘B’ category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet is financial commitment on the obligation.
B-1.
A short-term obligation rated ‘B-1’ is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-2.
A short-term obligation rated ‘B-2’ is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-3.
A short-term obligation rated ‘B-3’ is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
C
A short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D
A short-term obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
ADDRESSES
National Retail Fund III
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, Nebraska 68137
Distributor
Northern Lights Distributors, LLC
4020 South 147th Street
Omaha, Nebraska 68137
Investment Adviser
Fulcrum Advisory Services, Inc.
12010 Sunset Hills Road
Reston, Virginia 20190
Custodian
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Transfer Agent and Dividend Disbursing Agent
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, Nebraska 68137
Independent Registered Public Accounting Firm
McElravy, Kinchen & Associates, P.C.
13831 Northwest Freeway, Suite 300
Houston, Texas 77040
Appendix A
National Retail Fund III
Proxy Voting Policy
PART C - OTHER INFORMATION.
Item 25.
Financial Statements and Exhibits:
1.
Financial Statements.
Included in Part A: None
Included in Part B: Report of Independent Accountants
Statement of Assets and Liabilities
2.
Exhibits:
(a)
Conformed copy of the Declaration of Trust of the Registrant; (1)
(i) Conformed copy of Certificate of Trust of the Registrant; (1)
(b)
Copy of By-Laws of the Registrant; (1)
(c)
Not applicable;
(d)
Not applicable;
(e)
Not applicable;
(f)
Not applicable;
(g)
(i)
Form of
Investment Advisory Contract between the National Retail Funds and Fulcrum Advisory Services, Inc.;
+
(ii) Conformed copy of Advisory Fee Waiver Agreement; (2)
(h)
(i) Conformed copy of the Distribution Plan and Shareholder Services Agreement between the National Retail Funds and Northern Lights Distributors, LLC; (2)
(ii) Conformed copy of the Underwriting Agreement between the National Retail Funds and Northern Lights Distributors, LLC; (2)
(iii) Conformed copy of Schedules A and B of the Underwriting Agreement between the National Retail Funds and Northern Lights Distributors, LLC; (3)
(iv) Form of copy of Loan Servicing Agreement; +
(i)
Not applicable;
(j)
Conformed copy of Custody Agreement between the National Retail Funds and Fifth Third Bank; (2)
(k)
(i) Conformed copy of Transfer Agency Service Agreement between the National Retail Funds and Gemini Fund Services, LLC; (2)
(ii) Conformed copy of Administration Service Agreement between the National Retail Funds and Gemini Fund Services, LLC; (2)
(iii) Conformed copy of Fund Accounting Service Agreement between the National Retail Funds and Gemini Fund Services, LLC; (2)
(iv) Conformed copy of Consulting Agreement between the National Retail Funds and Northern Lights Compliance Services, LLC,
including Appendix A and Appendix
B
;
+
(l)
Conformed copy of Opinion and Consent of Counsel as to legality of shares being registered;
+
(m) Not applicable;
(n) Conformed copy of Consent of Independent Registered Public Accounting Firm; +
(o) Not applicable;
(p) Form of Initial Capital Understanding (to be filed by amendment);
(q) Not applicable;
(r) (i) Code of Ethics of the Registrant; (3)
(ii) Code of Ethics of the Adviser; (3)
(iii) Code of Ethics of the Distributor; (3)
(s) Conformed copy of Power of Attorney of the Registrant; (2)
+ Exhibit is being filed electronically with registration statement.
1.
Incorporated by reference to Registrant’s Initial Registration Statement on Form N-2, file no. 333-
150171,
filed April 9, 2008.
2.
Incorporated by reference to Registrant’s Pre-Effective Registration Statement on Form N-2, file no. 333-
150171,
filed, August 21, 2008.
3.
Incorporated by reference to Registrant’s Pre-Effective Registration Statement on Form N-2, file no. 333-
150171,
filed, October 17, 2008.
4.
Incorporated by reference to Registrant’s Pre-Effective Registration Statement on Form N-2, file no. 333-15017
1, filed, December 3, 2008.
Item 26. Marketing Arrangements
Not Applicable
Item 27. Other Expenses of Issuance and Distribution
Not Applicable
Item 28. Persons Controlled by or Under Common Control
Not Applicable
Item 29. Number of Holders of Securities
To be filed by Post Effective Amendment
Item 30. Indemnification
Indemnification is provided to Officers and Trustees of the Registrant pursuant to Article V of the Registrant's Declaration of Trust. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to Trustees, Officers, and controlling persons of the Registrant by the Registrant pursuant to the Declaration of Trust or otherwise, the Registrant is aware that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and, therefore, is unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by Trustees), Officers, or controlling persons of the Registrant in connection with the successful defense of any act, suit, or proceeding) is asserted by such Trustees, Officers, or controlling persons in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issues.
Insofar as indemnification for liabilities may be permitted pursuant to Section 17 of the Investment Company Act of 1940 for Trustees, Officers, and controlling persons of the Registrant by the Registrant pursuant to the Declaration of Trust or otherwise, the Registrant is aware of the position of the Securities and Exchange Commission as set forth in Investment Company Act Release No. IC-11330. Therefore, the Registrant undertakes that in addition to complying with the applicable provisions of the Declaration of Trust or otherwise, in the absence of a final decision on the merits by a court or other body before which the proceeding was brought, that an indemnification payment will not be made unless in the absence of such a decision, a reasonable determination based upon factual review has been made (i) by a majority vote of a quorum of non-party Trustees who are not interested persons of the Registrant or (ii) by independent legal counsel in a written opinion that the indemnitee was not liable for an act of willful misfeasance, bad faith, gross negligence, or reckless disregard of duties. The Registrant further undertakes that advancement of expenses incurred in the defense of a proceeding (upon undertaking for repayment unless it is ultimately determined that indemnification is appropriate) against an Officer, Trustee or controlling person of the Registrant will not be absent the fulfillment of at least one of the following conditions: (i) the indemnitee provides security for his undertaking; (ii) the Registrant is insured against losses arising by reason of any lawful advances; or (iii) a majority of a quorum of disinterested non-party Trustees or independent legal counsel in a written opinion makes a factual determination that there is reason to believe the indemnitee will be entitled to indemnification.
Item 31. Business and Other Connections of Investment Adviser
The description of the business of Fulcrum Advisory Services, Inc. (“Fulcrum”) is set forth under the caption “Management of the Fund” in the prospectus forming part of this Registration Statement.
The information as to the partners and officers of Fulcrum set forth in Fulcrum’s Form ADV, as filed with the SEC on July 8, 2008 (File No. 801-65303) and as may be amended from time to time, is incorporated herein by reference.
Item 32. Location of Accounts and Records
All accounts and records required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated thereunder are maintained at one of the following locations:
(“Registrant”)
National Retail Fund II
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, Nebraska 68137
Andrew Rogers
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, Nebraska 68137
(Notices should be sent to the above agent for Service at above address)
(“Co-Registrant”)
Pertuity, Inc.
8603 Westwood Center Drive Suite 200
Vienna VA 22182
(“Distributor”)
Northern Lights Distributors, LLC
4020 South 147th Street
Omaha, Nebraska 68137
("Transfer Agent and Dividend Disbursing Agent")
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, Nebraska 68137
("Administrator")
Gemini Fund Services, LLC
4020 S. 147th Street
Omaha, Nebraska 68137
("Adviser")
Fulcrum Advisory Services, Inc.
12010 Sunset Hills Road
Reston, Virginia 20190
(“Custodian”)
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
Item 33. Management Services
Not Applicable
Item 34. 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.
2.
Not Applicable
3.
Not Applicable
4.
(a) To file, during any period in which offers or sales are being made, a post-effective amendment to the Registration Statement:
(1) To include any prospectus required by Section 10(a)(3) of the 1933 Act;
(2) To reflect in the prospectus any facts or events after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; and
(3) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement.
(b) That, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at that time shall be deemed to be the initial bona fide offering thereof;
(c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; and
(d) That, for the purpose of determining liability under the 1933 Act to any purchaser, if the Registrant is subject to Rule 430C: Each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the 1933 Act as part of a registration statement relating to an offering, other than prospectuses filed in reliance on Rule 430A under the 1933 Act, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness; PROVIDED, HOWEVER, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(e) That, for the purpose of determining liability of the Registrant under the 1933 Act to any purchaser in the initial distribution of securities, the undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser:
(1) any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 497 under the 1933 Act;
(2) the portion of any advertisement pursuant to Rule 482 under the 1933 Act relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and
(3) any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.
5.
If applicable:
(a) For the purpose of determining any liability under the 1933 Act, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to 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.
(b) For the purpose of determining any liability under the 1933 Act, 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 such securities at that time shall be deemed to be the initial bona fide offering thereof.
6.
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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, National Retail Fund II, has duly caused this Initial Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Omaha and state of Nebraska, on the
19th
day of December 2008.
National Retail Fund II
I
/s/ Andrew Rogers
Pursuant to the requirements of the Securities Act of 1933, this Initial Registration Statement has been signed below by the following person in the capacity and on the date indicated:
NAME
TITLE
DATE
/s/ Patrick Kearns
President (Principal Executive Officer)
December
19,
2008
Patrick Kearns
/s/ Andrew Rogers
Treasurer (Principal Financial and
December
19,
2008
Andrew Rogers
Accounting Officer) and Trustee
/s/ John B. Christie-Searles
Trustee
December
19,
2008
John B. Christie-Searles
/s/ Charles A. Schliebs
Trustee
December
19,
2008
Charles A. Schliebs
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Co-Registrant, Pertuity Inc., has duly caused this Pre-effective Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Vienna and state of Virginia, on the
19th
day of December 2008.
Pertuity Inc.
/s/ Kim Muhota
Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Registration Statement has been signed below by the following person in the capacity and on the date indicated:
NAME
TITLE
DATE
/s/ Kim Muhota
Chief Executive Officer and Director
December
19,
2008
Kim Muhota
Principal Executive Officer)
/s/ Tom McNally
Corporate Officer, Senior Vice President,
December
19,
2008
Tom McNally
and Treasurer (Principal Financial and Accounting Officer)
/s/ Fred Schaufeld
Director
December
19,
2008
Fred Schaufeld
EXHIBIT INDEX
| | |
| | |
EXHIBIT
| Exhibit No.
|
Form of Advisory Agreement
| 99(g)(i)
|
Conformed copy of the Consulting Agreement
| 99(k)(iv)
|
Legal Opinion
| 99(l)
|
Audit Consent
| 99(n)
|
![[nrfiiielectronicconsent001.jpg]](nrfiiielectronicconsent001.jpg)