STATEMENT OF ADDITIONAL INFORMATION JANUARY 31, 1999
for LEUTHOLD CORE INVESTMENT FUND
LEUTHOLD FUNDS, INC.
100 North Sixth Street
Suite 700A
Minneapolis, Minnesota 55403
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of Leuthold Core Investment
Fund dated January 31, 1999. Requests for copies of the Prospectus should be
made by writing to Leuthold Funds, Inc., 100 North Sixth Street, Suite 700A,
Minneapolis, Minnesota 55403, Attention: Corporate Secretary, or by calling
1-800-273-6886.
The following financial statements are incorporated by reference to
the Annual Report, dated September 30, 1998, of Leuthold Funds, Inc. (File No.
811-9094) as filed with the Securities and Exchange Commission on November 30,
1998:
Report of Independent Public Accountants
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Asset
Financial Highlights
Schedule of Investments
Notes to the Financial Statements
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Leuthold Funds, Inc.
TABLE OF CONTENTS
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Page No.
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FUND HISTORY AND CLASSIFICATION ......................................... 1
INVESTMENT RESTRICTIONS ................................................. 1
INVESTMENT CONSIDERATIONS ............................................... 3
DIRECTORS AND OFFICERS OF THE CORPORATION ............................... 13
OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS ...................... 16
INVESTMENT ADVISER, ADMINISTRATOR, CUSTODIAN, TRANSFER
AGENT AND ACCOUNT SERVICES AGENT ............................... 17
DETERMINATION OF NET ASSET VALUE ........................................ 20
REDEMPTION OF SHARES .................................................... 22
SYSTEMATIC WITHDRAWAL PLAN .............................................. 22
AUTOMATIC INVESTMENT PLAN AND TELEPHONE PURCHASES ....................... 23
ALLOCATION OF PORTFOLIO BROKERAGE ....................................... 23
TAXES ................................................................... 25
STOCKHOLDER MEETINGS .................................................... 26
CAPITAL STRUCTURE ....................................................... 27
PERFORMANCE INFORMATION ................................................. 27
DESCRIPTION OF SECURITIES RATINGS ....................................... 28
INDEPENDENT ACCOUNTANTS ................................................. 32
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated January 31, 1999, and, if given or made,
such information or representations may not be relied upon as having been
authorized by Leuthold Funds, Inc.
This Statement of Additional Information does not constitute an offer
to sell securities.
(i)
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FUND HISTORY AND CLASSIFICATION
Leuthold Funds, Inc. (the "Corporation") is an open-end management
investment company consisting of a single diversified portfolio, the Leuthold
Core Investment Fund. Leuthold Funds, Inc. is registered under the Investment
Company Act of 1940. Leuthold Funds, Inc. was incorporated as a Maryland
corporation on August 30, 1995. (Prior to January 30, 1998 Leuthold Core
Investment Fund was called "Leuthold Asset Allocation Fund.")
INVESTMENT RESTRICTIONS
Leuthold Core Investment Fund (the "Fund") has adopted the following
investment restrictions which are matters of fundamental policy and cannot be
changed without approval of the holders of the lesser of: (i) 67% of the Fund's
shares present or represented at a stockholder's meeting at which the holders of
more than 50% of such shares are present or represented; or (ii) more than 50%
of the outstanding shares of the Fund.
1. The Fund will diversify its assets in different companies and will
not purchase securities of any issuer if, as a result of such purchase, the
Fund would own more than 10% of the outstanding voting securities of such
issuer or more than 5% of the Fund's assets would be invested in securities
of such issuer (except that up to 25% of the value of the Fund's total
assets may be invested without regard to this limitation). This restriction
does not apply to obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities.
2. The Fund will not buy securities on margin or write put or call
options.
3. The Fund will not borrow money or issue senior securities, except
for temporary bank borrowings (not exceeding 10% of the value of the Fund's
total assets) or for emergency or extraordinary purposes. The Fund will not
borrow money for the purpose of investing in securities, and the Fund will
not purchase any portfolio securities for so long as any borrowed amounts
remain outstanding.
4. The Fund will not pledge or hypothecate its assets, except to
secure borrowings for temporary or emergency purposes. For purposes of this
investment restriction assets held in a segregated account or by a broker
in connection with short sales effected by the Fund are not considered to
be pledged or hypothecated.
5. The Fund will not act as an underwriter or distributor of
securities other than shares of the Fund (except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933, as amended, in the disposition of restricted
securities).
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6. The Fund will not make loans, except it may enter into repurchase
agreements or acquire debt securities from the issuer or others which are
publicly distributed or are of a type normally acquired by institutional
investors and except that it may make loans of portfolio securities if any
such loans are secured continuously by collateral at least equal to the
market value of the securities loaned in the form of cash and/or securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and provided that no such loan will be made if upon the
making of that loan more than 30% of the value of the Fund's total assets
would be the subject of such loans
7. The Fund will not concentrate more than 25% of its total assets in
securities of any one industry. This restriction does not apply to
obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities.
8. The Fund will not make investments for the purpose of exercising
control or management of any company.
9. The Fund will not purchase or sell real estate or real estate
mortgage loans and will not make any investments in real estate limited
partnerships.
10. The Fund will not purchase or sell commodities or commodity
contracts, including futures contracts.
11. The Fund will not purchase or sell any interest in any oil, gas or
other mineral exploration or development program, including any oil, gas or
mineral leases.
The Fund has adopted certain other investment restrictions which are
not fundamental policies and which may be changed by the Fund's Board of
Directors without stockholder approval. These additional restrictions are as
follows:
1. The Fund will not acquire or retain any security issued by a
company, an officer or director of which is an officer or director of the
Fund or an officer, director or other affiliated person of the Fund's
investment adviser.
2. The Fund will not invest more than 5% of the Fund's total assets in
securities of any issuer which has a record of less than three (3) years of
continuous operation, including the operation of any predecessor business
of a company which came into existence as a result of a merger,
consolidation, reorganization or purchase of substantially all of the
assets of such predecessor business.
3. The Fund will not purchase illiquid securities if, as a result of
such purchase, more than 5% of the total value of its total assets would be
invested in such securities.
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4. The Fund's investments in warrants will be limited to 5% of the
Fund's net assets. Included within such 5%, but not to exceed 2% of the
value of the Fund's net assets, may be warrants which are not listed on
either the New York Stock Exchange or the American Stock Exchange.
5. The Fund may purchase put or call options provided that the Fund's
investments in such put or call options will be limited to 5% of the Fund's
net assets.
6. The Fund will not purchase the securities of other investment
companies except: (a) as part of a plan of merger, consolidation or
reorganization approved by the stockholders of the Fund; (b) securities of
registered open-end investment companies; or (c) securities of registered
closed-end investment companies on the open market where no commission
results, other than the usual and customary broker's commission. No
purchases described in (b) and (c) will be made if as a result of such
purchases (i) the Fund and its affiliated persons would hold more than 3%
of any class of securities, including voting securities, of any registered
investment company; (ii) more than 5% of the Fund's net assets would be
invested in shares of any one registered investment company; and (iii) more
than 25% of the Fund's net assets would be invested in shares of registered
investment companies.
The aforementioned percentage restrictions on investment or
utilization of assets refer to the percentage at the time an investment is made.
If these restrictions are adhered to at the time an investment is made, and such
percentage subsequently changes as a result of changing market values or some
similar event, no violation of the Fund's fundamental restrictions will be
deemed to have occurred. Any changes in the Fund's investment restrictions made
by the Board of Directors will be communicated to stockholders prior to their
implementation.
INVESTMENT CONSIDERATIONS
Warrants and Put and Call Options
The Fund may purchase warrants and put and call options on securities.
By purchasing a put option, the Fund obtains the right (but not the
obligation) to sell the option's underlying security at a fixed strike price. In
return for this right, the Fund pays the current market price for the option
(known as the option premium). The Fund may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the option. If
the option is allowed to expire, the Fund will lose the entire premium it paid.
If the Fund exercises the option, it completes the sale of the underlying
security at the strike price. The Fund may also terminate a put option position
by closing it out in the secondary market at its current price, if a liquid
secondary market exists. The buyer of a put option can expect to realize a gain
if security prices fall substantially. However, if the underlying security's
price does not fall enough to offset the cost of purchasing the option, a put
buyer
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can expect to suffer a loss (limited to the amount of the premium paid, plus
related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying security at the option's strike
price. A call buyer attempts to participate in potential price increases of the
underlying security with risk limited to the cost of the option if security
prices fall. At the same time, the buyer can expect to suffer a loss if security
prices do not rise sufficiently to offset the cost of the option.
Warrants are similar to call options in that the purchaser of a
warrant has the right (but not the obligation) to purchase the underlying
security at a fixed price. Warrants are issued by the issuer of the underlying
security whereas options are not. Warrants typically have exercise periods in
excess of those of call options. Warrants do not carry the right to receive
dividends or vote with respect to the securities they entitle the holder to
purchase, and they have no rights to the assets of the issuer. Warrants are more
speculative than the underlying investment. A warrant ceases to have value if it
is not exercised prior to its expiration date.
Preferred Stocks
The Fund may invest in preferred stocks. Preferred stock has a
preference over common stock in liquidation (and generally dividends as well)
but is subordinated to the liabilities of the issuer in all respects. As a
general rule the market value of preferred stock with a fixed dividend rate and
no conversion element varies inversely with interest rates and perceived credit
risk, while the market price of convertible preferred stock generally also
reflects some element of conversion value. Because preferred stock is junior to
debt securities and other obligations of the issuer, deterioration in the credit
quality of the issuer will cause greater changes in the value of a preferred
stock than in a senior debt security with similar stated yield characteristics.
Unlike interest payments on debt securities, preferred stock dividends are
payable only if declared by the issuer's board of directors. Preferred stock
also may be subject to optional or mandatory redemption provisions.
Zero Coupon U.S. Treasury Securities
The Fund may also invest in zero coupon U.S. Treasury securities which
consist of U.S. Treasury Notes and Bonds that have been stripped of their
unmatured interest coupons by the U.S. Department of Treasury. A zero coupon
U.S. Treasury security pays no interest to its holders during its life and its
value to an investor consists of the difference between its face value at the
time of maturity and the price for which it was acquired, which is generally an
amount much less than its face value. Zero coupon U.S. securities are generally
subject to greater fluctuations in value in response to changing interest rates
than debt obligations that pay interest currently.
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Money Market Instruments
The money market instruments in which the Fund invests include
conservative fixed-income securities, such as United States Treasury Bills,
commercial paper rated A-1 by Standard & Poor's Corporation ("S&P"), or Prime-1
by Moody's Investors Service, Inc. ("Moody's"), commercial paper master notes
and repurchase agreements. Commercial paper master notes are unsecured
promissory notes issued by corporations to finance short-term credit needs. They
permit a series of short-term borrowings under a single note. Borrowings under
commercial paper master notes are payable in whole or in part at any time upon
demand, may be prepaid in whole or in part at any time, and bear interest at
rates which are fixed to known lending rates and automatically adjusted when
such known lending rates change. There is no secondary market for commercial
paper master notes. The Fund's investment adviser will monitor the
creditworthiness of the issuer of the commercial paper master notes while any
borrowings are outstanding.
Repurchase agreements are agreements under which the seller of a
security agrees at the time of sale to repurchase the security at an agreed time
and price. The Fund will not enter into repurchase agreements with entities
other than banks or invest over 5% of its net assets in repurchase agreements
with maturities of more than seven days. If a seller of a repurchase agreement
defaults and does not repurchase the security subject to the agreement, the Fund
will look to the collateral security underlying the seller's repurchase
agreement, including the securities subject to the repurchase agreement, for
satisfaction of the seller's obligation to the Fund. In such event, the Fund
might incur disposition costs in liquidating the collateral and might suffer a
loss if the value of the collateral declines. In addition, if bankruptcy
proceedings are instituted against a seller of a repurchase agreement,
realization upon the collateral may be delayed or limited.
Foreign Securities
The Fund may invest in securities of foreign issuers. In addition, a
registered investment company in which the Fund may invest may invest up to 100%
of its assets in securities of foreign issuers. Investments in foreign
securities involve special risks and considerations that are not present when
the Fund invests in domestic securities.
There is often less information publicly available about a foreign
issuer than about a U.S. issuer. Foreign issuers generally are not subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the United States. The securities of some foreign issuers are less
liquid and at times more volatile than securities of comparable U.S. issuers.
This is particularly true of securities in emerging markets which can be
extremely volatile. Foreign brokerage commissions, custodial expenses and other
fees are also generally higher than for securities traded in the United States.
There may also be difficulties in enforcing legal rights outside the United
States. There may be a possibility of nationalization or expropriation of
assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, and diplomatic developments which could
affect the value of investments in certain foreign countries. Legal remedies
available to investors may be more limited than those available with respect to
investments in the United
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States or in other foreign countries. Income received from foreign investments
may be reduced by withholding and other taxes imposed by such countries.
Individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth or gross national product, inflation
rate, capital reinvestment, resource self-sufficiency and balance of payment
positions. The economies of countries with emerging markets may be predominately
based on only a few industries, may be highly vulnerable to changes in global
trade conditions, and may suffer from extreme and volatile debt or inflation
rates. Debt obligations of issuers located in, or of, developing countries
involve a high degree of risk and may be in default or present the risk of
default.
Since the Fund or a registered investment company in which the Fund
may invest may purchase securities denominated in foreign currencies, changes in
foreign currency exchange rates will affect, either directly or indirectly, the
value of the Fund's assets from the perspective of U.S. investors. Certain
registered investment companies, but not the Fund, may seek to protect
themselves against the adverse effects of currency exchange rate fluctuations by
entering into currency forward, futures or options contracts. Hedging
transactions may not, however, always be fully effective in protecting against
adverse exchange rate fluctuations. Furthermore, hedging transactions involve
transaction costs and the risk that the registered investment company might lose
money; either because exchange rates move in an unexpected direction, because
another party to a hedging contract defaults or for other reasons. Hedging
transactions also limit any potential gain which might result if exchange rates
moved in a favorable direction. The value of foreign investments and the
investment income derived from them may also be affected (either favorably or
unfavorably) by exchange control regulations. In addition, the value of foreign
fixed-income investments will fluctuate in response to changes in U.S. and
foreign interest rates.
The Fund may hold securities of U.S. and foreign issuers in the form
of American Depository Receipts ("ADRs") or American Depository Shares ("ADSs").
These securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. ADRs and ADSs typically are issued
by an American bank or trust company and evidence ownership of underlying
securities issued by a foreign corporation. Generally, ADRs and ADSs in
registered form are designed for use in U.S. securities markets.
Short Sales
The Fund may seek to realize additional gains through effecting short
sales in securities. Short selling involves the sale of borrowed securities. At
the time a short sale is effected, the Fund incurs an obligation to replace the
security borrowed at whatever its price may be at the time the Fund purchases it
for delivery to the lender. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to pay the lender amounts equal to any dividend
or interest which accrue during the period of the loan. To borrow the security,
the Fund also may be required to pay a premium, which would increase the cost of
the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed. Until a Fund closes its short position
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or replaces the borrowed security, the Fund will: (a) maintain a segregated
account containing cash or liquid securities at such a level that the amount
deposited in the account plus the amount deposited with the broker as collateral
will equal the current value of the security sold short; or (b) otherwise cover
the Fund's short position.
High Yield and Other Securities
The Fund may invest in corporate debt securities, including bonds and
debentures (which are long-term) and notes (which may be short or long-term). A
registered investment company in which the Fund invests may also invest in such
debt securities. These debt securities may be rated investment grade by S&P or
Moody's. Securities rated BBB by S&P or Baa by Moody's, although investment
grade, exhibit speculative characteristics and are more sensitive than higher
rated securities to changes in economic conditions. The Fund (and registered
investment companies in which the Fund may, at times, invest) may also invest in
securities that are rated below investment grade. Investments in high yield
securities (i.e., less than investment grade), while providing greater income
and opportunity for gain than investments in higher-rated securities, entail
relatively greater risk of loss of income or principal. Lower-grade obligations
are commonly referred to as "junk bonds". Market prices of high-yield,
lower-grade obligations may fluctuate more than market prices of higher-rated
securities. Lower grade, fixed income securities tend to reflect short-term
corporate and market developments to a greater extent than higher-rated
obligations which, assuming no change in their fundamental quality, react
primarily to fluctuations in the general level of interest rates.
The high yield market at times is subject to substantial volatility.
An economic downturn or increase in interest rates may have a more significant
effect on the high yield securities in an underlying registered investment
company's portfolio and their markets, as well as on the ability of securities'
issuers to repay principal and interest. Issuers of high yield securities may be
of low creditworthiness and the high yield securities may be subordinated to the
claims of senior lenders. During periods of economic downturn or rising interest
rates the issuers of high yield securities may have greater potential for
insolvency and a higher incidence of high yield bond defaults may be
experienced.
The prices of high yield securities have been found to be less
sensitive to interest rate changes than higher-rated investments but are more
sensitive to adverse economic changes or individual corporate developments.
During an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress which would adversely
affect their ability to service their principal and interest payment
obligations, to meet projected business goals, and to obtain additional
financing. If the issuer of a high yield security owned by the Fund (or by a
registered investment company in which the Fund invests) defaults, the Fund (or
such registered investment company) may incur additional expenses in seeking
recovery. Periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield securities and the Fund's
net asset value. Yields on high yield securities will fluctuate over time.
Furthermore, in the case of high yield securities structured as zero coupon or
pay-in-kind securities, their market prices
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are affected to a greater extent by interest rate changes and therefor tend to
be more volatile than the market prices of securities which pay interest
periodically and in cash.
Certain securities held by the Fund (or a registered investment
company in which the Fund invests), including high yield securities, may contain
redemption or call provisions. If an issuer exercises these provisions in a
declining interest rate market, the Fund (or such registered investment company)
would have to replace the security with a lower yielding security, resulting in
a decreased return for the investor. Conversely, a high yield security's value
will decrease in a rising interest rate market, as will the value of the Fund's
(or the underlying registered investment company's) net assets.
The secondary market for high yield securities may at times become
less liquid or respond to adverse publicity or investor perceptions making it
more difficult for the Fund (or a registered investment company in which the
Fund invests) to value accurately high yield securities or dispose of them. To
the extent the Fund (or a registered investment company in which the Fund
invests) owns or may acquire illiquid or restricted high yield securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity difficulties, and judgment will play a greater role in
valuation because there is less reliable and objective data available.
Special tax considerations are associated with investing in high yield
bonds structured as zero coupon or pay-in-kind securities. The Fund (or a
registered investment company in which the Fund invests) will report the
interest on these securities as income even though it receives no cash interest
until the security's maturity or payment date. Further, the Fund (or a
registered investment company in which the Fund invests) must distribute
substantially all of its income to its shareholders to qualify for pass-through
treatment under the tax law. Accordingly, the Fund (or a registered investment
company in which the Fund invests) may have to dispose of its portfolio
securities under disadvantageous circumstances to generate cash or may have to
borrow to satisfy distribution requirements.
Credit ratings evaluate the safety of principal and interest payments,
not the market value risk of high yield securities. Since credit rating agencies
may fail to timely change the credit ratings to reflect subsequent events, the
investment adviser to the Fund (or a registered investment company in which the
Fund invests) should monitor the issuers of high yield securities in the
portfolio to determine if the issuers will have sufficient cash flow and profits
to meet required principal and interest payments, and to attempt to assure the
securities' liquidity so the fund can meet redemption requests. To the extent
that the Fund (or a registered investment company in which the Fund invests)
invests in high yield securities, the achievement of its investment objective
may be more dependent on its own credit analysis than is the case for higher
quality bonds. The Fund (or a registered investment company in which the Fund
invests) may retain a portfolio security whose rating has been changed.
Registered Investment Companies
The Fund may invest up to 25% of its net assets in shares of
registered investment companies. The Fund will not purchase or otherwise acquire
shares of any
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registered investment company (except as part of a plan of merger, consolidation
or reorganization approved by the stockholders of the Fund) if (a) the Fund and
its affiliated persons would own more than 3% of any class of securities of such
registered investment company or (b) more than 5% of its net assets would be
invested in the shares of any one registered investment company. If the Fund
purchases more than 1% of any class of security of a registered open-end
investment company, such investment will be considered an illiquid investment.
Any investment in a registered investment company involves investment
risk. Additionally an investor could invest directly in the registered
investment companies in which the Fund invests. By investing indirectly through
the Fund, an investor bears not only his or her proportionate share of the
expenses of the Fund (including operating costs and investment advisory fees)
but also indirect similar expenses of the registered investment companies in
which the Fund invests. An investor may also indirectly bear expenses paid by
registered investment companies in which the Fund invests related to the
distribution of such registered investment company's shares.
Under certain circumstances an open-end investment company in which
the Fund invests may determine to make payment of a redemption by the Fund
(wholly or in part) by a distribution in kind of securities from its portfolio,
instead of in cash. As a result, the Fund may hold such securities until the
Adviser determines it appropriate to dispose of them. Such disposition will
impose additional costs on the Fund.
Investment decisions by the investment advisers to the registered
investment companies in which the Fund invests are made independently of the
Fund and the Adviser. At any particular time, one registered investment company
in which the Fund invests may be purchasing shares of an issuer whose shares are
being sold by another registered investment company in which the Fund invests.
As a result, the Fund would incur certain transactional costs without
accomplishing any investment purpose.
Although the Fund will not concentrate its investments, registered
investment companies in which the Fund invests may concentrate their investments
within one industry (i.e. sector funds). Since the investment alternatives
within an industry are limited, the value of the shares of such a registered
investment company may be subject to greater market fluctuation than a
registered investment company which invests in a broader range of securities.
Futures Contracts
A registered investment company in which the Fund invests may enter
into futures contracts for the purchase or sale of debt securities and stock
indexes. A futures contract is an agreement between two parties to buy and sell
a security or an index for a set price on a future date. Futures contracts are
traded on designated "contract markets" which, through their clearing
corporations, guarantee performance of the contracts.
A financial futures contract sale creates an obligation by the seller
to deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated
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price. A financial futures contract purchase creates an obligation by the
purchaser to take delivery of the type of financial instrument called for in the
contract in a specified delivery month at a stated price. The specific
instruments delivered or taken, respectively, at settlement date are not
determined until on or near such date. The determination is made in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made. Futures contracts are traded in the United States only on commodity
exchanges or boards of trade -- known as "contract markets" -- approved for such
trading by the Commodity Futures Trading Commission (the "CFTC"), and must be
executed through a futures commission merchant or brokerage firm which is a
member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or
acceptance of commodities or securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out a futures contract sale is effected by purchasing a futures contract for the
same aggregate amount of the specific type of financial instrument or commodity
with the same delivery date. If the price of the initial sale of the futures
contract exceeds the price of the offsetting purchase, the seller is paid the
difference and realizes a gain. On the other hand, if the price of the
offsetting purchase exceeds the price of the initial sale, the seller realizes a
loss. The closing out of a futures contract purchase is effected by the
purchaser's entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the purchaser realizes a gain, and if the purchase
price exceeds the offsetting sale price, the purchaser realizes a loss.
A registered investment company in which the Fund invests may sell
financial futures contracts in anticipation of an increase in the general level
of interest rates. Generally, as interest rates rise, the market value of the
securities held by an underlying registered investment company will fall, thus
reducing its net asset value. This interest rate risk may be reduced without the
use of futures as a hedge by selling such securities and either reinvesting the
proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs in the form of
dealer spreads and brokerage commissions and would typically reduce the
registered investment company's average yield as a result of the shortening of
maturities.
The sale of financial futures contracts serves as a means of hedging
against rising interest rates. As interest rates increase, the value of an
underlying registered investment company's short position in the futures
contracts will also tend to increase, thus offsetting all or a portion of the
depreciation in the market value of the investments being hedged. While a
registered investment company in which the Fund invests will incur commission
expenses in selling and closing out futures positions (by taking an opposite
position in the futures contract), commissions on futures transactions tend to
be lower than transaction costs incurred in the purchase and sale of portfolio
securities.
A registered investment company in which the Fund invests may purchase
interest rate futures contracts in anticipation of a decline in interest rates
when it is not fully invested. As such purchases are made, an underlying
registered investment company would probably expect that an equivalent amount of
futures contracts will be closed out.
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Unlike when a registered investment company in which the Fund invests
purchases or sells a security, no price is paid or received by the registered
investment company upon the purchase or sale of a futures contract. Upon
entering into a contract, the underlying registered investment company is
required to deposit with its custodian in a segregated account in the name of
the futures broker an amount of cash and/or U.S. Government securities. This is
known as "initial margin." Initial margin is similar to a performance bond or
good faith deposit which is returned to an underlying registered investment
company upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin" or "maintenance
margin", to and from the broker (or the custodian) are made on a daily basis as
the price of the underlying security or commodity fluctuates, making the long
and short positions in the futures contract more or less valuable. This is known
as "marking to the market."
A registered investment company in which the Fund invests may elect to
close some or all of its futures positions at any time prior to their expiration
in order to reduce or eliminate a hedge position then currently held by the
registered investment company. The underlying registered investment company may
close its positions by taking opposite positions which will operate to terminate
its position in the futures contracts. Final determinations of variation margin
are then made, additional cash is required to be paid by or released to the
underlying registered investment company, and it realizes a loss or a gain. Such
closing transactions involve additional commission costs.
A stock index futures contract may be used to hedge an underlying
registered investment company's portfolio with regard to market risk as
distinguished from risk related to a specific security. A stock index futures
contract is a contract to buy or sell units of an index at a specified future
date at a price agreed upon when the contract is made. A stock index futures
contract does not require the physical delivery of securities, but merely
provides for profits and losses resulting from changes in the market value of
the contract to be credited or debited at the close of each trading day to the
respective accounts of the parties to the contract. On the contract's expiration
date, a final cash settlement occurs. Changes in the market value of a
particular stock index futures contract reflect changes in the specified index
of equity securities on which the future is based.
In the event of an imperfect correlation between the futures contract
and the portfolio position which is intended to be protected, the desired
protection may not be obtained and the registered investment company may be
exposed to risk of loss. Further, unanticipated changes in interest rates or
stock price movements may result in a poorer overall performance for the
registered investment company than if it had not entered into futures contracts
on debt securities or stock indexes.
The market prices of futures contracts may also be affected by certain
factors. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, participants may close futures contracts through
offsetting transactions which could distort the normal
-11-
<PAGE>
relationship between the securities and futures markets. Second, the deposit
requirements in the futures market are less stringent than margin requirements
in the securities market. Accordingly, increased participation by speculators in
the futures market may also cause temporary price distortions.
Positions in futures contracts may be closed out only on an exchange
or board of trade providing a secondary market for such futures. There is no
assurance that a liquid secondary market on an exchange or board of trade will
exist for any particular contract or at any particular time.
In order to assure that registered investment companies have
sufficient assets to satisfy their obligations under their futures contracts,
the registered investment companies in which the Fund invests are required to
establish segregated accounts with their custodians. Such segregated accounts
are required to contain an amount of cash or liquid securities equal in value to
the current value of the underlying instrument less the margin deposit.
The risk to an underlying registered investment company from investing
in futures is potentially unlimited. Gains and losses on investments in futures
depend upon the underlying registered investment company's investment adviser's
ability to predict correctly the direction of stock prices, interest rates and
other economic factors.
Options on Futures Contracts
A registered investment company in which the Fund invests may also
purchase and sell listed put and call options on futures contracts. An option on
a futures contract gives the purchaser the right in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put), at a specified exercise price
at any time during the option period. When an option on a futures contract is
exercised, delivery of the futures position is accompanied by cash representing
the difference between the current market price of the futures contract and the
exercise price of the option. The underlying registered investment company may
also purchase put options on futures contracts in lieu of, and for the same
purpose as, a sale of a futures contract. A registered investment company in
which the Fund invests may also purchase such put options in order to hedge a
long position in the underlying futures contract in the same manner as it
purchases "protective puts" on securities.
The holder of an option may terminate the position by selling an
option of the same series. There is, however, no guarantee that such a closing
transaction can be effected. An underlying registered investment company is
required to deposit initial and maintenance margin with respect to put and call
options on futures contracts written by it pursuant to brokers' requirements
similar to those applicable to futures contracts described above and, in
addition, net option premiums received will be included as initial margin
deposits.
In addition to the risks which apply to all options transactions,
there are several risks relating to options on futures contracts. The ability to
establish and close out positions on such options is subject to the development
and maintenance of a liquid secondary market. It is not certain that this market
will develop. In comparison with the use of futures contracts,
-12-
<PAGE>
the purchase of options on futures contracts involves less potential risk to a
registered investment company because the maximum amount of risk is the premium
paid for the option (plus transaction costs). There may, however, be
circumstances when the use of an option on a futures contract would result in a
loss to a registered investment company in which the Fund invests when the use
of a futures contract would not, such as when there is no movement in the prices
of the underlying securities. Writing an option on a futures contract involves
risks similar to those arising in the sale of futures contracts, as described
above.
Illiquid Securities
The Fund may invest up to 5% of its net assets in securities for which
there is no readily available market ("illiquid securities"). The 5% limitation
includes securities whose disposition would be subject to legal restrictions
("restricted securities"). Illiquid and restricted securities often have a
market value lower than the market price of unrestricted securities of the same
issuer and are not readily marketable without some time delay. This could result
in the Fund being unable to realize a favorable price upon disposition of such
securities and in some cases might make disposition of such securities at the
time desired by the Fund impossible.
Lending Portfolio Securities
In order to generate additional income, the Fund may lend portfolio
securities constituting up to 30% of its total assets to unaffiliated
broker-dealers, banks or other recognized institutional borrowers of securities,
provided that the borrower at all times maintains cash, U.S. government
securities or equivalent collateral or provides an irrevocable letter of credit
in favor of the Fund equal in value to at least 100% of the value of the
securities loaned. During the time portfolio securities are on loan, the
borrower pays the Fund an amount equivalent to any dividends or interest paid on
such securities, and the Fund may receive an agreed-upon amount of interest
income from the borrower who delivered equivalent collateral or provided a
letter of credit. Loans are subject to termination at the option of the Fund or
the borrower. The Fund may pay reasonable administrative and custodial fees in
connection with a loan of portfolio securities and may pay a negotiated portion
of the interest earned on the cash or equivalent collateral to the borrower or
placing broker. The Fund does not have the right to vote securities on loan, but
could terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
The primary risk in securities lending is a default by the borrower
during a sharp rise in price of the borrowed security resulting in a deficiency
in the collateral posted by the borrower. The Fund will seek to minimize this
risk by requiring that the value of the securities loaned will be computed each
day and additional collateral be furnished each day if required.
DIRECTORS AND OFFICERS OF THE CORPORATION
As a Maryland corporation, the business and affairs of the Corporation
are managed by its officers under the direction of its Board of Directors. The
name, age, address,
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<PAGE>
principal occupation(s) during the past five years, and other information with
respect to each of the directors and officers of the Corporation are as follows:
*Thomas F. Elsen -- Director and Vice President. Mr. Elsen, 42, has
been Managing Director and Chief Operating Officer of Leuthold & Anderson, Inc.
(the "Adviser") since March 1, 1997. Prior to joining the Adviser, Mr. Elsen was
the sole proprietor of T. Elsen Marketing, a financial services marketing
consulting firm, from May, 1991 until February, 1997. Prior to founding T. Elsen
Marketing, Mr. Elsen was employed by the Trust & Investments department of
Norwest Bank, Minnesota, N.A., in Minneapolis as the Marketing Director from
December, 1986 until May, 1991. Mr. Elsen graduated from Macalester College with
a B.A. in Economics in 1978. His address is c/o Leuthold & Anderson, Inc., 100
North Sixth Street, Suite 700A, Minneapolis, MN 55403.
*Steven C. Leuthold -- Director, President and Treasurer. Mr.
Leuthold, 61, has been Chairman and Portfolio Manager for the Adviser since
August, 1987. He has also been a Portfolio Manager for Leuthold, Weeden &
Associates, L.P. since January, 1991 and Chairman of The Leuthold Group since
November, 1981. Mr. Leuthold graduated from the University of Minnesota with a
B.S. in History in 1960. His address is c/o Leuthold & Anderson, Inc., 100 North
Sixth Street, Suite 700A, Minneapolis, MN 55403.
*Charles D. Zender -- Director. Mr. Zender, 53, has been Managing
Director of The Leuthold Group since January, 1991. Prior to such time, he
served as a marketing/sales executive of The Leuthold Group since May, 1988. Mr.
Zender graduated from the University of Northern Iowa with a B.A. in
Accounting/Business Administration in 1970. His address is c/o Leuthold &
Anderson, Inc., 100 North Sixth Street, Suite 700A, Minneapolis, MN 55403.
John S. Chipman -- Director. Mr. Chipman, 72, has been Regent's
Professor of Economics at the University of Minnesota since 1981. He was a Guest
Professor at the University of Konstanz, Germany from 1986 to 1991 and was
awarded an honorary doctorate from such institution in 1991. Mr. Chipman
received his Ph.D in Economics from Johns Hopkins University in 1950. His
address is c/o Leuthold & Anderson, Inc., 100 North Sixth Street, Suite 700A,
Minneapolis, MN 55403.
Lawrence L. Horsch -- Director. Mr. Horsch, 64, has been a member of
the Board of Directors of Boston Scientific Corp., a public company engaged in
developing, producing and marketing medical devices, since February, 1995, when
SCIMED Life Systems, Inc., a medical products company he helped organize in
1971, merged with Boston Scientific Corp. Prior to such merger, Mr. Horsch
served in various capacities with SCIMED
- ----------------------
*Messrs. Leuthold, Elsen and Zender are "interested persons" of the
Corporation (as defined in the Act).
* Messrs. Leuthold, Elsen and Zender are "interested persons" of the
Corporation (as defined in the Investment Company Act of 1940).
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<PAGE>
Life Systems, Inc., including Acting Chief Financial Officer from 1994 to 1995,
Chairman of the Board from 1977 to 1994, and as a director from 1977 to 1995. He
has also served as Chairman of Eagle Management & Financial Corp., a management
consulting firm, since 1990. Mr. Horsch attended the College of St. Thomas and
Northwestern University, where he received an M.B.A. in Finance in 1958. His
address is c/o Leuthold & Anderson, Inc., 100 North Sixth Street, Suite 700A,
Minneapolis, MN 55403.
Paul M. Kelnberger -- Director. Mr. Kelnberger, 55, joined Johnson,
West & Co., PLC, a public accounting firm, in 1969 and has been a partner since
1975. He is also a director of Video Update, Inc., a public company engaged in
owning, operating and franchising video rental superstores. Mr. Kelnberger is a
Certified Public Accountant (CPA). His address is c/o Johnson, West & Co., PLC,
336 Robert Street North, Suite 1400, St. Paul, MN 55101.
Kristen Voigtsberger -- Vice President and Secretary. Ms.
Voigtsberger, 35, has been Account Administrator of the Adviser since 1990 and
Manager of Administration & Client Services since January, 1997. Ms.
Voigtsberger graduated from Pennsylvania State University in 1985 with a B.A. in
Russian. Her address is c/o Leuthold & Anderson, Inc., 100 North Sixth Street,
Suite 700A, Minneapolis, MN 55403.
The Corporation's standard method of compensating directors is to pay
each director who is not an interested person of the Corporation a fee of $500
for each meeting of the Board of Directors attended. The Corporation also may
reimburse its directors for travel expenses incurred in order to attend meetings
of the Board of Directors.
The table below sets forth the compensation paid by the Corporation to
each of the directors of the Corporation during the fiscal year ended September
30, 1998:
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<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Compensation
from Corporation
Pension or Retirement Estimated Annual and Fund
Name of Aggregate Compensation Benefits Accrued As Benefits Upon Complex Paid to
Person from Corporation Part of Fund Expenses Retirement Directors
------ ---------------------- --------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Thomas F. Elsen $0 $0 $0 $0
Steven C. Leuthold $0 $0 $0 $0
Charles D. Zender $0 $0 $0 $0
John S. Chipman $2,000 $0 $0 $2,000
Lawrence L. Horsch $2,000 $0 $0 $2,000
Paul M. Kelnberger $2,000 $0 $0 $2,000
</TABLE>
OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Set forth below are the names and addresses of all holders of the Fund's
shares who as of October 31, 1998 owned of record or to the knowledge of the
Fund, beneficially owned more than 5% of the Fund's then outstanding shares, as
well as the number of shares of the Fund beneficially owned by all officers and
directors of the Fund as a group.
Name and Address
of Beneficial Owner Number of Shares Percent of Class
------------------- ---------------- ----------------
American Express Trust Company, Trustee
Gray, Plant, Mooty, Mooty & Bennett
Retirement Savings Plan
33 South Sixth Street
Suite 3400
Minneapolis, MN 55402-3796 412,519 10.20%
Donaldson Lufkin & Jenrette (1)
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303-2052 372,211 9.20%
Charles Schwab & Co., Inc. (1)
101 Montgomery Street
San Francisco, CA 94104-4122 313,051 7.74%
Norwest Bank Minnesota, Trustee
Fairview 401(k) Plan
U/A dated 6/1/84
733 Marquette Avenue, #0036
Minneapolis, MN 55479-0001 222,101 5.49%
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<PAGE>
Name and Address
of Beneficial Owner Number of Shares Percent of Class
------------------- ---------------- ----------------
Officers and Directors as a Group
(8 persons) 128,693(2)(3) 3.19%
- -----------------------------
(1) The shares held by Donaldson Lufkin & Jenrette Securities Corp. and
Charles Schwab & Co., Inc. were owned of record only.
(2) Includes 11,285 shares held in the Leuthold & Anderson Retirement Plan
(3) Includes 73,291 shares held by the Steven Leuthold Trust, for which
Albert Andrews, Jr. serves as sole trustee, and 11,891 shares held by
the Steven C. Leuthold Family Foundation, a charitable trust
controlled by Steven C. Leuthold.
INVESTMENT ADVISER, ADMINISTRATOR, CUSTODIAN,
TRANSFER AGENT AND ACCOUNT SERVICES AGENT
The Adviser
The investment adviser to the Fund is Leuthold & Anderson, Inc., 100
North Sixth Street, Suite 700A, Minneapolis, Minnesota 55403 (the "Adviser").
Pursuant to the investment advisory agreement entered into between the
Corporation and the Adviser with respect to the Fund (the "Advisory Agreement"),
the Adviser furnishes continuous investment advisory services to the Fund. The
Adviser is controlled by Steven C. Leuthold, its Chairman and principal
shareholder. The Adviser supervises and manages the investment portfolio of the
Fund and, subject to such policies as the Board of Directors of the Fund may
determine, directs the purchase or sale of investment securities in the
day-to-day management of the Fund's investment portfolio. Under the Advisory
Agreement, the Adviser, at its own expense and without reimbursement from the
Fund, furnishes office space and all necessary office facilities, equipment and
executive personnel for managing the investments of the Fund and pays salaries
and fees of all officers and directors of the Fund (except the fees paid to
directors who are not interested persons of the Adviser). For the foregoing, the
Adviser receives a monthly fee based on the Fund's average daily net assets at
the annual rate of 0.90%.
The Fund pays all of its expenses not assumed by the Adviser
including, but not limited to, the costs of preparing and printing its
registration statements required under the Securities Act of 1933 and the
Investment Company Act of 1940 and any amendments thereto, the expenses of
registering its shares with the Securities and Exchange Commission and in the
various states, the printing and distribution cost of prospectuses mailed to
existing stockholders, the cost of director and officer liability insurance,
reports to stockholders, reports to government authorities and proxy statements,
interest charges, brokerage commissions, and expenses incurred in connection
with portfolio transactions. The Fund also pays the fees of directors who are
not officers of the Fund, salaries of administrative and
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<PAGE>
clerical personnel association membership dues, auditing and accounting
services, fees and expenses of any custodian or trustees having custody of Fund
assets, expenses of calculating the net asset value and repurchasing and
redeeming shares, and charges and expenses of dividend disbursing agents,
registrars, and share transfer agents, including the cost of keeping all
necessary stockholder records and accounts and handling any problems relating
thereto.
The Fund did not commence operations until November 20, 1995. During
the period from November 20, 1995 through September 30, 1996, the fiscal year
ended September 30, 1997, and the fiscal year ended September 30, 1998, the Fund
incurred advisory fees payable to the Adviser of $236,333, $269,461 and
$329,152, respectively
The Adviser has undertaken to reimburse the Fund to the extent that
the aggregate annual operating expenses, including the investment advisory fee
and the administration fee but excluding interest, taxes, brokerage commissions
and other costs incurred in connection with the purchase or sale of portfolio
securities, and extraordinary items, exceed that percentage of the average net
assets of the Fund for such year, as determined by valuations made as of the
close of each business day of the year, which is the most restrictive percentage
provided by the state laws of the various states in which the shares of the Fund
are qualified for sale or, if the states in which the shares of the Fund are
qualified for sale impose no such restrictions, 2%. As of the date hereof, no
such state law provision was applicable to the Fund. Additionally, the Adviser
has voluntarily agreed to reimburse the Fund to the extent aggregate annual
operating expenses as described above exceed 1.25% of the Fund's daily net
assets. The Fund monitors its expense ratio on a monthly basis. If the accrued
amount of the expenses of the Fund exceeds the expense limitation, the Fund
creates an account receivable from the Adviser for the amount of such excess. In
such a situation the monthly payment of the Adviser's fee will be reduced by the
amount of such excess (and if the amount of such excess in any month is greater
than the monthly payment of the Adviser's fee, the Adviser will pay the Fund the
amount of such difference), subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below this
limit. During the period from November 20, 1995 (commencement of operations)
through September 30, 1996, the fiscal year ended September 30, 1997, and the
fiscal year ended September 30, 1998, the Adviser reimbursed the Fund $77,769,
$65,500 and $59,492, respectively, for excess expenses.
The Advisory Agreement will remain in effect as long as its
continuance is specifically approved at least annually (i) by the Board of
Directors of the Corporation or by the vote of a majority (as defined in the
Act) of the outstanding shares of the Fund, and (ii) by the vote of a majority
of the directors of the Fund who are not parties to the Advisory Agreement or
interested persons of the Adviser, cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement provides that it may
be terminated at any time without the payment of any penalty, by the Board of
Directors of the Corporation or by vote of the majority of the Fund's
stockholders on sixty (60) days' written notice to the Adviser, and by the
Adviser on the same notice to the Corporation, and that it shall be
automatically terminated if it is assigned.
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<PAGE>
The Advisory Agreement provides that the Adviser shall not be liable
to the Corporation or its stockholders for anything other than willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties. The Advisory Agreement also provides that the Adviser and
its officers, directors and employees may engage in other businesses, devote
time and attention to any other business whether of a similar or dissimilar
nature, and render services to others.
The Administrator
The administrator to the Corporation is Firstar Mutual Fund Services,
LLC, 615 East Michigan Street, Milwaukee, Wisconsin 53202 (the "Administrator").
Under the Fund Administration Servicing Agreement entered into between the
Corporation and the Administrator (the "Administration Agreement"), the
Administrator prepared and maintains the books, accounts and other documents
required by the Investment Company Act of 1940, responds to stockholder
inquiries, prepares the Fund's financial statements and tax returns, prepares
certain reports and filings with the Securities and Exchange Commission and with
state blue Sky authorities, furnishes statistical and research data, clerical,
accounting and bookkeeping services and stationery and office supplies, keeps
and maintains the Fund's financial and accounting records and generally assists
in all aspects of the Fund's operations. The Administrator, at its own expense
and without reimbursement from the Fund, furnishes office space and all
necessary office facilities, equipment and executive personnel for performing
the services required to be performed by it under the Administration Agreement.
For the foregoing, the Administrator receives from the Fund a fee, paid monthly
at an annual rate of .05% of the first $100,000,000 of the Fund's average net
assets, .04% of the next $400,000,000 of the Fund's average net assets, and .03%
of the Fund's average net assets in excess of $500,000,000. Notwithstanding the
foregoing, the minimum annual fee payable to the Administrator is $35,000.
The Administration Agreement will remain in effect until terminated by
either party. The Administration Agreement may be terminated at any time,
without the payment of any penalty, by the Board of Directors of the Corporation
upon the giving of ninety (90) days' written notice to the Administrator, or by
the Administrator upon the giving of ninety (90) days' written notice to the
Corporation. The Fund did not commence operations until November 20, 1995.
During the period from November 20, 1995 through September 30, 1996, the fiscal
year ended September 30, 1997, and the fiscal year ended September 30,1998 the
Fund incurred fees of $24,689, $31,718 and $29,277, respectively, payable to the
Administrator pursuant to the Administration Agreement.
Under the Administration Agreement, the Administrator shall exercise
reasonable care and is not liable for any error or judgment or mistake of law or
for any loss suffered by the Corporation in connection with the performance of
the Administration Agreement, except a loss resulting from willful misfeasance,
bad faith or negligence on the part of the Administrator in the performance of
its duties under the Administration Agreement.
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<PAGE>
The Custodian
Firstar Bank Milwaukee, N.A., an affiliate of Firstar Mutual Fund
Services, LLC, serves as custodian of the Corporation's assets pursuant to a
Custody Agreement. Under the Custody Agreement, Firstar Bank Milwaukee, N.A. has
agreed to (i) maintain a separate account in the name of the Fund, (ii) make
receipts and disbursements of money on behalf of the Fund, (iii) collect and
receive all income and other payments and distributions on account of the Fund's
portfolio investments, (iv) respond to correspondence from stockholders,
security brokers and others relating to its duties and (v) make periodic reports
to the Fund concerning the Fund's operations. Firstar Bank Milwaukee, N.A. does
not exercise any supervisory function over the purchase and sale of securities.
The Transfer Agent
Firstar Mutual Fund Services, LLC serves as transfer agent and
dividend disbursing agent for the Fund under a Shareholder Servicing Agent
Agreement. As transfer and dividend disbursing agent, Firstar Mutual Fund
Services, LLC has agreed to (i) issue and redeem shares of the Fund, (ii) make
dividend and other distributions to stockholders of the Fund, (iii) respond to
correspondence by Fund stockholders and others relating to its duties, (iv)
maintain stockholder accounts, and (v) make periodic reports to the Fund.
The Accounting Servicing Agent
In addition the Corporation has entered into a Fund Accounting
Servicing Agreement with Firstar Mutual Fund Services, LLC pursuant to which
Firstar Mutual Fund Services, LLC has agreed to maintain the financial accounts
and records of the Fund and provide other accounting services to the Fund. For
its accounting services, Firstar Mutual Fund Services, LLC is entitled to
receive fees, payable monthly, based on the total annual rate of $22,000 for the
first $40 million in average net assets of the Fund, .01% on the next $200
million of average net assets, and .005% on average net assets exceeding $240
million. Firstar Mutual Fund Services, LLC is also entitled to certain out of
pocket expenses, including pricing expenses. During the period from November 20,
1995 (commencement of operations) through September 30, 1996, the fiscal year
ended September 30, 1997, and the fiscal year ended September 30, 1998, the Fund
incurred fees of $20,751, $24,906 and $20,648, respectively, payable to Firstar
Mutual Fund Services, LLC pursuant to the Fund Accounting Servicing Agreement.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Fund is determined as of the close of
regular trading (currently 4:00 p.m. Eastern time) on each day the New York
Stock Exchange is open for trading. The New York Stock Exchange is open for
trading Monday through Friday except New Year's Day, Dr. Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, when any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when any such holiday falls on a
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<PAGE>
Sunday, the New York Stock Exchange will not be open for trading on the
succeeding Monday, unless unusual business conditions exist, such as the ending
of a monthly or the yearly accounting period. The New York Stock Exchange also
may be closed on national days of mourning.
Common stocks that are listed on a securities exchange are valued at
the last quoted sales price on the day he valuation is made. Price information
on listed stocks is taken from the exchange where the security is primarily
traded. Options and securities which are listed on an exchange but which are not
traded on the valuation date are valued at the most recent bid prices. Unlisted
securities for which market quotations are readily available are valued at the
latest quoted bid price. Debt securities are valued at the latest bid prices
furnished by independent pricing services. Other assets and securities for which
no quotations are readily available are valued at fair value as determined in
good faith by the Directors. Short-term instruments (those with remaining
maturities of 60 days or less) are valued at amortized cost, which approximates
market.
The Fund prices foreign securities in terms of U.S. dollars at the
official exchange rate. Alternatively, it may price these securities at the
average of the current bid and asked price of such currencies against the dollar
last quoted by a major bank that is a regular participant in the foreign
exchange market, or on the basis of a pricing service that takes into account
the quotes provided by a number of such major banks. If the Fund does not have
either of these alternatives available to it or the alternatives do not provide
a suitable method for converting a foreign currency into U.S. dollars, the Board
of Directors in good faith will establish a conversion rate for such currency.
Generally, U.S. government securities and other fixed income
securities complete trading at various times prior to the close of the New York
Stock Exchange. For purposes of computing net asset value, the Fund uses the
market value of such securities as of the time their trading day ends.
Occasionally, events affecting the value of such securities may occur between
such times and the close of the New York Stock Exchange, which events will not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of the Fund's securities occur during such a
period, then these securities may be valued at their fair value as determined in
good faith by the Directors.
Foreign securities trading may not take place on all days when the New
York Stock Exchange is open, or may take place on Saturdays and other days when
the New York Stock Exchange is not open and the Fund's net asset value is not
calculated. When determining net asset value, the Fund values foreign securities
primarily listed and/or traded in foreign markets at their market value as of
the close of the last primary market where the securities traded. Securities
trading in European countries and Pacific Rim countries is normally completed
well before 3:00 P.M. Central Time. Events affecting the valuation of Fund
securities occurring between the time its net asset value is determined and the
close of the New York Stock Exchange are not reflected in such net asset value.
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<PAGE>
REDEMPTION OF SHARES
The Fund reserves the right to suspend or postpone redemptions during
any period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the Securities and Exchange Commission, or that the Exchange is
closed for other than customary weekend and holiday closings; (b) the Securities
and Exchange Commission has by order permitted such suspension; (c) an
emergency, as determined by the Securities and Exchange Commission, exists,
making disposal of portfolio securities or valuation of net assets of the Fund
not reasonably practicable.
The Fund has adopted procedures pursuant to Rule 17a-7 under the
Investment Company Act of 1940 pursuant to which the Fund may effect a purchase
and sale transaction with an affiliated person of the Fund (or an affiliated
person of such an affiliated person) in which the Fund issues its shares in
exchange for securities of a type which are permitted investments for the Fund.
For purposes of determining the number of shares to be issued, the securities to
be exchanged will be valued in accordance with the requirements of Rule 17a-7.
SYSTEMATIC WITHDRAWAL PLAN
An investor who owns Fund shares worth at least $10,000 at the current
net asset value may, by completing an application which may be obtained from the
Fund or Firstar Mutual Fund Services, LLC, create a Systematic Withdrawal Plan
from which a fixed sum will be paid to the investor at regular intervals. To
establish the Systematic Withdrawal Plan, the investor deposits Fund shares with
the Corporation and appoints it as agent to effect redemptions of Fund shares
held in the account for the purpose of making monthly or quarterly withdrawal
payments of a fixed amount to the investor out of the account. Fund shares
deposited by the investor in the account need not be endorsed or accompanied by
a stock power if registered in the same name as the account; otherwise, a
properly executed endorsement or stock power, obtained from any bank,
broker-dealer or the Corporation is required. The investor's signature should be
guaranteed by a bank, a member firm of a national stock exchange or other
eligible guarantor.
The minimum amount of a withdrawal payment is $100. These payments
will be made from the proceeds of periodic redemptions of shares in the account
at net asset value. Redemptions will be made in accordance with the schedule
(e.g., monthly, bimonthly [every other month], quarterly or yearly, but in no
event more than monthly) selected by the investor. If a scheduled redemption day
is a weekend day or a holiday, such redemption will be made on the next
preceding business day. Establishment of a Systematic Withdrawal Plan
constitutes an election by the investor to reinvest in additional Fund shares,
at net asset value, all income dividends and capital gains distributions payable
by the Fund on shares held in such account, and shares so acquired will be added
to such account. The investor may deposit additional Fund shares in his account
at any time.
Withdrawal payments cannot be considered as yield or income on the
investor's investment, since portions of each payment will normally consist of a
return of capital. Depending on the size or the frequency of the disbursements
requested, and the fluctuation in
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the value of the Fund's portfolio, redemptions for the purpose of making such
disbursements may reduce or even exhaust the investor's account.
The investor may vary the amount or frequency of withdrawal payments,
temporarily discontinue them, or change the designated payee or payee's address,
by notifying Firstar Mutual Fund Services, LLC in writing thirty (30) days prior
to the next payment.
AUTOMATIC INVESTMENT PLAN AND TELEPHONE PURCHASES
The Fund offers an automatic investment option pursuant to which money
will be moved from a stockholder's bank account to the stockholder's Fund
account on the schedule (e.g., monthly, bimonthly [every other month], quarterly
or yearly) the stockholder selects. The minimum transaction amount is $50.
The Fund offers a telephone purchase option pursuant to which money
will be moved from the stockholder's bank account to the stockholder's Fund
account upon request. Only bank accounts held at domestic financial institutions
that are automated Clearing House (ACH) members can be used for telephone
transactions. To have Fund shares purchased at the net asset value determined as
of the close of regular trading on a given date, Firstar Mutual Fund Services,
LLC must receive both the purchase order and payment by Electronic Funds
Transfer through the ACH System before the close of regular trading on such
date. Most transfers are completed within 3 business days. The minimum amount
that can be transferred by telephone is $100.
ALLOCATION OF PORTFOLIO BROKERAGE
The Fund's securities trading and brokerage policies and procedures
are reviewed by and subject to the supervision of the Corporation's Board of
Directors. Decisions to buy and sell securities for the Fund are made by the
Adviser subject to review by the Corporation's Board of Directors. In placing
purchase and sale orders for portfolio securities for the Fund, it is the policy
of the Adviser to seek the best execution of orders at the most favorable price
in light of the overall quality of brokerage and research services provided, as
described in this and the following paragraphs. Many of these transactions
involve payment of a brokerage commission by the Fund. In some cases,
transactions are with firms who act as principals of their own accounts. In
selecting brokers to effect portfolio transactions, the determination of what is
expected to result in best execution at the most favorable price involves a
number of largely judgmental considerations. Among these are the Adviser's
evaluation of the broker's efficiency in executing and clearing transactions,
block trading capability (including the broker's willingness to position
securities) and the broker's reputation, financial strength and stability. The
most favorable price to the Fund means the best net price without regard to the
mix between purchase or sale price and commission, if any. Over-the-counter
securities may be purchased and sold directly with principal market makers who
retain the difference in their cost in the security and its selling price. In
some instances, the Adviser feels that better prices are available from
non-principal market makers who are paid commissions directly. Although the Fund
does not initially intend to market its shares through intermediary
broker-dealers, the Fund may place portfolio orders with broker-
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dealers who recommend the purchase of Fund shares to clients (if the Adviser
believes the commissions and transaction quality are comparable to that
available from other brokers) and may allocate portfolio brokerage on that
basis.
The Adviser may allocate brokerage to Weeden & Co., L.P. ("Weeden")
but only if the Adviser reasonably believes the commission and transaction
quality are comparable to that available from other qualified brokers. Steven C.
Leuthold is a limited partner and director of Weeden. Weeden's institutional
investment research division is designated The Leuthold Group, in which Steven
C. Leuthold has a separate fifty-percent pecuniary interest. Under the Act,
Weeden is prohibited from dealing with the Fund as a principal in the purchase
and sale of securities. Since transactions in the over-the-counter securities
market generally involve transactions with dealers acting as principal for their
own account, Weeden may not serve as the Fund's dealer in connection with such
transactions. Weeden, when acting as a broker for the Fund in any of its
portfolio transactions executed on a securities exchange of which Weeden is a
member, will act in accordance with the requirements of Section 11(a) of the
Securities Exchange Act of 1934 and the rules of such exchanges.
In allocating brokerage business for the Fund, the Adviser also takes
into consideration the research, analytical, statistical and other information
and services provided by the broker, such as general economic reports and
information, reports or analyses of particular companies or industry groups,
market timing and technical information, and the availability of the brokerage
firm's analysts for consultation. While the Adviser believes these services have
substantial value, they are considered supplemental to the Adviser's own efforts
in the performance of its duties under the Advisory Agreement. Other clients of
the Adviser may indirectly benefit from the availability of these services to
the Adviser, and the Fund may indirectly benefit from services available to the
Adviser as a result of transactions for other clients. The Advisory Agreement
provides that the Adviser may cause the Fund to pay a broker which provides
brokerage and research services to the Adviser a commission for effecting a
securities transaction in excess of the amount another broker would have charged
for effecting the transaction, if the Adviser determines in good faith that such
amount of commission is reasonable in relation to the value of brokerage and
research services provided by the executing broker viewed in terms of either the
particular transaction or the Adviser's overall responsibilities with respect to
the Fund and the other accounts as to which he exercises investment discretion.
Weeden will not receive higher commissions because of research services
provided. The Fund did not commence operations until November 20, 1995. During
the period from November 20, 1995 through September 30, 1996, the Fund paid
brokerage commissions of $45,325 on transactions having a total market value of
$121,323,358. During the same period, the Fund paid Weeden brokerage commissions
of $27,821 (or 61.4% of the total commissions paid) on transactions having a
total market value of $104,631,000 (or 86.2% of the Fund's aggregate amount of
transactions). During the fiscal year ended September 30, 1997, the Fund paid
brokerage commissions of $33,952 on transactions having a total market value of
$18,038,053. During the same period, the Fund paid Weeden brokerage commissions
of $18,636 (or 54.9% of the total commissions paid) on transactions having a
total market value of $9,746,418 (or 54.0% of the Fund's aggregate amount of
transactions). During the fiscal year ended September 30, 1998, the Fund paid
brokerage commissions of $57,801 on transactions having a total market value of
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$31,829,425. During the same period, the Fund paid Weeden brokerage commissions
of $35,665 (or 61.7% of the total commissions paid) on transactions having a
total market value of $15,341,956 or (48.2% of the Fund's aggregate amount of
transactions). All of the brokers to whom commissions were paid provided
research services to the Adviser.
TAXES
The Fund annually will endeavor to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended. The
Fund has so qualified in each of its fiscal years. If the Fund fails to qualify
as a registered investment company under Subchapter M in any fiscal year, it
will be treated as a corporation for federal income tax purposes. As such the
Fund would be required to pay income taxes on its net investment income and net
realized capital gains, if any, at the rates generally applicable to
corporations. Stockholders of the Fund would not be liable for income tax on the
Fund's net investment income or net realized capital gains in their individual
capacities. Distributions to stockholders, whether from the Fund's net
investment income or net realized capital gains, would be treated as taxable
dividends to the extent of current or accumulated earnings and profits of the
Fund.
Dividends from the Fund's net investment income and distributions from
the Fund's net realized short-term capital gains are taxable to stockholders as
ordinary income, whereas distributions from the Fund's net realized long-term
capital gains are taxable as long-term capital gain regardless of the
stockholder's holding period for the shares. Such dividends and distributions
are taxable to stockholders whether received in cash or in additional shares.
The 70% dividends-received deduction for corporations will apply to dividends
from the Fund's net investment income, subject to proportionate reductions if
the aggregate dividends received by the Fund from domestic corporations in any
year are less than 100% of the net investment company taxable income
distributions made by the Fund.
Any dividend or capital gains distribution paid shortly after a
purchase of Fund shares will have the effect of reducing the per share net asset
value of such shares by the amount of the dividend or distribution. Furthermore,
if the net asset value of the Fund shares immediately after a dividend or
distribution is less than the cost of such shares to the stockholder, the
dividend or distribution will be taxable to the stockholder even though it
results in a return of capital to him.
Redemption of shares will generally result in a capital gain or loss
for income tax purposes. Such capital gain or loss will be long term or short
term, depending upon the holding period. However, if a loss is realized on
shares held for six months or less, and the investor received a distribution of
net long-term capital gains during that period, then such loss is treated as a
long-term capital loss to the extent of the capital gain distribution received.
The Fund may be required to withhold Federal income tax at a rate of
31% ("backup withholding") from dividend payments and redemption proceeds if a
stockholder fails to furnish the Fund with his social security or other tax
identification number and certify under penalty of perjury that such number is
correct and that such stockholder is not subject to
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backup withholding due to the underreporting of income. The certification form
is included as part of the Purchase Application and should be completed when the
account is opened.
This section is not intended to be a full discussion of present or
proposed federal income tax laws and the effect of such laws on an investor.
Investors are urged to consult with their respective tax advisers for a complete
review of the tax ramifications of an investment in the Fund.
STOCKHOLDER MEETINGS
The Maryland General Corporation Law permits registered investment
companies, such as the Fund, to operate without an annual meeting of
stockholders under specified circumstances if an annual meeting is not required
by the Investment Company Act of 1940. The Fund has adopted the appropriate
provisions in its Bylaws and may, at its discretion, not hold an annual meeting
in any year in which the election of directors is not required to be acted on by
stockholders under the Investment Company Act of 1940.
The Fund's Bylaws also contain procedures for the removal of directors
by its stockholders. At any meeting of stockholders, duly called and at which a
quorum is present, the stockholders may, by the affirmative vote of the holders
of a majority of the votes entitled to be cast thereon, remove any director or
directors from office and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of removed directors.
Upon the written request of the holders of shares entitled to not less
than ten percent (10%) of all the votes entitled to be cast at such meeting, the
Secretary of the Fund shall promptly call a special meeting of stockholders for
the purpose of voting upon the question of removal of any director. Whenever ten
or more stockholders of record who have been such for at least six months
preceding the date of application, and who hold in the aggregate either shares
having a net asset value of at least $25,000 or at least one percent (1%) of the
total outstanding shares, whichever is less, shall apply to the Fund's Secretary
in writing, stating that they wish to communicate with other stockholders with a
view to obtaining signatures to a request for a meeting as described above and
accompanied by a form of communication and request which they wish to transmit,
the Secretary shall within five business days after such application either: (1)
afford to such applicants access to a list of the names and addresses of all
stockholders as recorded on the books of the Fund; or (2) inform such applicants
as to the approximate number of stockholders of record and the approximate cost
of mailing to them the proposed communication and form of request.
If the Secretary elects to follow the course specified in clause (2)
of the last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all stockholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
shall mail to such applicants and file with the Securities and Exchange
Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Board of Directors to the effect
that in their opinion either
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such material contains untrue statements of fact or omits to state facts
necessary to make the statements contained therein not misleading, or would be
in violation of applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the Securities and Exchange Commission may, and if
demanded by the Board of Directors or by such applicants shall, enter an order
either sustaining one or more of such objections or refusing to sustain any of
them. If the Securities and Exchange Commission shall enter an order refusing to
sustain any of such objections, or if, after the entry of an order sustaining
one or more of such objections, the Securities and Exchange Commission shall
find, after notice and opportunity for hearing, that all objections so sustained
have been met, and shall enter an order so declaring, the Secretary shall mail
copies of such material to all stockholders with reasonable promptness after the
entry of such order and the renewal of such tender.
CAPITAL STRUCTURE
The Fund's Articles of Incorporation permit the Directors to issue
500,000,000 shares of common stock, with a $.0001 par value. The Board of
Directors has the power to designate one or more classes ("series") of shares of
common stock and to classify or reclassify any unissued shares with respect to
such series. Currently the Fund is offering one class of shares.
The shares of the Fund are fully paid and non-assessable; have no
preference as to conversion, exchange, dividends, retirement or other features;
and have no preemptive rights. Such shares have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares voting for the election
of Directors can elect 100% of the Directors if they so choose.
PERFORMANCE INFORMATION
The Fund may provide from time to time in advertisements,
reports to stockholders and other communications with stockholders its average
annual compounded rate of return as well as its total return and cumulative
total return. An average annual compounded rate of return refers to the rate of
return which, if applied to an initial investment at the beginning of a stated
period and compounded over the period, would result in the redeemable value of
the investment at the end of the stated period assuming reinvestment of all
dividends and distributions and reflecting the effect of all recurring fees.
Total return and cumulative total return similarly reflect net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments of the Fund for a stated period,
assuming the reinvestment of all dividends and distributions and reflecting the
effect of all recurring fees. Total return figures are not annualized or
compounded and represent the aggregate percentage of dollar value change over
the period in question. Cumulative total return reflects the Fund's total return
since inception.
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The Fund's average annual compounded rate of return figures are
computed in accordance with the standardized method prescribed by the Securities
and Exchange Commission by determining the average annual compounded rates of
return over the periods indicated, that would equate the initial amount invested
to the ending redeemable value, according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of
the period of a hypothetical $1,000
payment made at the beginning of such
period
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectus, and (ii) deducts all recurring fees, such as advisory fees, charged
as expenses to all investor accounts.
The Fund's average annual compounded rate of return for the period
from the Fund's commencement of operations (November 20, 1995) through September
30, 1998 was 13.04% and for the one year period ended September 30, 1998 was
14.45%. The foregoing performance results are based on historical earnings and
should not be considered as representative of the performance of the Fund in the
future. Such performance results also reflect reimbursements made by the Adviser
during the period from November 20, 1995 through September 30, 1998 to keep
aggregate annual operating expenses at or below 1.25% of daily net assets. An
investment in the Fund will fluctuate in value and at redemption its value may
be more or less than the initial investment.
The Fund may compare its performance to other mutual funds with
similar investment objectives and to the industry as a whole, as represented by
Lipper Analytical Services, Inc., Morningstar, Inc., Money, Forbes, Business
Week and Barron's magazines and The Wall Street Journal. (Lipper Analytical
Services, Inc. and Morningstar, Inc. are independent fund ranking services that
rank mutual funds based upon total return performance.) The Fund also may
compare its performance to the Standard & Poor's Composite Index of 500 Stocks,
the Lehman Brothers Government/Corporate Bond Index, U.S. Treasury Bills and to
various combinations thereof.
DESCRIPTION OF SECURITIES RATINGS
The Fund (or a registered investment company in which the Fund
invests) may invest in bonds and debentures assigned ratings of either Standard
& Poor's Corporation ("Standard & Poor's") or Moody's Investors Service, Inc.
("Moody's"). As also set forth therein, the Fund may invest in commercial paper
and commercial paper master notes rated by
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Standard & Poor's or Moody's. A brief description of the ratings symbols and
their meanings follows.
Standard & Poor's Debt Ratings. A Standard & Poor's corporate or
municipal debt rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform any audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
AAA - Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in the higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debts in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay
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principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
Moody's Bond Ratings.
Aaa - Bonds which are rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large, or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude, or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered to be medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
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C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
Standard & Poor's Commercial Paper Ratings. A Standard & Poor's
commercial paper rating is a current assessment of the likelihood of timely
payment of debt considered short-term in the relevant market. Ratings are graded
into several categories, ranging from A-1 for the highest quality obligations to
D for the lowest. The categories rated A-3 or higher are as follows:
A-1. This highest category indicates that the degree of safety
regarding timely payment is strong. Those issuers determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However the relative degree of safety is not as high as for
issuers designed "A-1".
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designation.
Moody's Short-Term Debt Ratings. Moody's short-term debt ratings are
opinions of the ability of issuers to repay punctually senior debt obligations
which have an original maturity not exceeding one year. Obligations relying upon
support mechanisms such as letters-of-credit and bonds of indemnity are excluded
unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
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- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, serves as the independent accountants for the Fund.
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