Securities Act Registration No. 33-96634
Investment Company Act Reg. No. 811-9094
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 5 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 6 |X|
(Check appropriate box or boxes.)
-----------------------------------
LEUTHOLD FUNDS, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
100 North Sixth Street, Suite 700A
Minneapolis, Minnesota 55403
--------------------------------------- ---------
(Address of Principal Executive Offices) (ZIP Code)
(612) 332-9141
----------------------------------------------------
(Registrant's Telephone Number, including Area Code)
Copy to:
Steven C. Leuthold
Leuthold & Anderson, Inc. Richard L. Teigen
100 North Sixth Street Foley & Lardner
Suite 700A 777 East Wisconsin Avenue
Minneapolis, Minnesota 55403 Milwaukee, Wisconsin 53202
- -------------------------------------- --------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
Registration Statement becomes effective.
It is proposed that this filing become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
|X| on January 31, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a) (1)
[ ] on (date) pursuant to paragraph (a) (1)
[ ] 75 days after filing pursuant to paragraph (a) (2)
[ ] on (date) pursuant to paragraph (a) (2) of Rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Prospectus
January 31, 2000
(LEUTHOLD CORE INVESTMENT FUND LOGO)
Leuthold Core Investment Fund seeks capital appreciation and income (or "total
return") in amounts attainable by assuming only prudent investment risk over the
long term. The Fund's definition of long term investment success is making it
AND keeping it.
Please read this Prospectus and keep it for future reference. It contains
important information, including information on how the Leuthold Core Investment
Fund invests and the services it offers to shareholders.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
An investment in the Leuthold Core Investment Fund is not a deposit of a bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
Leuthold Core Investment Fund
100 North Sixth Street
Suite 700A
Minneapolis, Minnesota 55403
(612) 332-9141
TABLE OF CONTENTS
Questions Every Investor Should Ask
Before Investing in the Leuthold Core
Investment Fund 1
Fees and Expenses 3
Investment Objective, Strategies and Risks 4
Management of the Fund 6
The Fund's Share Price 8
Purchasing Shares 8
Redeeming Shares 10
Dividends, Distributions and Taxes 12
Financial Highlights 13
QUESTIONS EVERY INVESTOR SHOULD ASK BEFORE INVESTING IN THE LEUTHOLD CORE
INVESTMENT FUND
1. WHAT ARE THE FUND'S GOALS?
Leuthold Core Investment Fund seeks capital appreciation and income (or "total
return") in amounts attainable by assuming only prudent investment risk over the
long term.
2. WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
Leuthold Core Investment Fund is a "flexible" fund, meaning that it allocates
its investments among:
o Common stocks and other equity securities (including common stocks and
other securities sold short)
o Bonds and other debt securities (other than money market instruments)
o Money market instruments
in proportions which reflect the Adviser's judgment of the potential returns and
risks of each asset class. The Adviser considers a number of factors when
making these allocations, including economic conditions and monetary factors,
inflation and interest rate levels and trends, investor confidence and technical
stock market measures. The Fund expects that normally:
o 30% to 70% of its assets will be invested in common stocks and other equity
securities
o 30% to 70% of its assets will be invested in bonds and other debt
securities (other than money market instruments)
o up to 20% of its assets will be invested in money market instruments.
The Fund's investments in common stocks and other equity securities may consist
of:
o Large, mid or small capitalization common stocks
o Growth stocks, value stocks or cyclical stocks
o Aggressive stocks or defensive stocks
o Stocks in any industry or sector
o Equity mutual funds
o Common stocks of foreign issuers
o Options.
The Fund's investments in bonds and other debt securities normally will consist
of U.S. Treasury Notes and Bonds, although the Fund may also invest in
investment grade corporate debt securities and debt securities of foreign
issuers. The Fund may also invest in mutual funds that invest in high yield
securities commonly known as "junk bonds." The Fund selects individual
securities based on fundamental factors (such as price/earnings ratios or growth
rates) and technical factors (such as price movements). The Fund may engage in
short sales of index-related and other equity securities to reduce its equity
exposure or to profit from an anticipated decline in the price of the security
sold short.
3. WHAT ARE THE PRINCIPAL RISKS IN INVESTING IN THE FUND?
Investors in the Fund may lose money. There are risks associated with
investments in each of the asset classes in which the Fund invests. These risks
include:
o MARKET RISK: The prices of the securities, particularly the common stocks,
in which the Fund invests may decline for a number of reasons. The price
declines of common stocks, in particular, may be steep, sudden and/or
prolonged.
o INTEREST RATE RISK: In general, the value of bonds and other debt
securities rises when interest rates fall and falls when interest rates
rise. Longer term obligations are usually more sensitive to interest rate
changes than shorter term obligations. While bonds and other debt
securities normally fluctuate less in price than common stocks, there have
been extended periods of increases in interest rates that have caused
significant declines in bond prices.
o CREDIT RISK: The issuers of the bonds and other debt securities held by
the Fund may not be able to make interest or principal payments. Even if
these issuers are able to make interest or principal payments, they may
suffer adverse changes in financial condition that would lower the credit
quality of the security, leading to greater volatility in the price of the
security.
o CURRENCY RISK: The U.S. dollar value of foreign securities traded in
foreign currencies (and any dividends and interest earned) held by the Fund
or by mutual funds in which the Fund invests may be affected favorably or
unfavorably by changes in foreign currency exchange rates. An increase in
the U.S. dollar relative to these other currencies will adversely affect
the Fund.
o RISKS ASSOCIATED WITH SHORT SALES: The Fund's investment performance will
suffer if a security for which the Fund has effected a short sale
appreciates in value. The Fund's investment performance may also suffer if
the Fund is required to close out a short position earlier than it had
intended. This would occur if the securities lender requires it to
deliver the securities the Fund borrowed at the commencement of the short
sale and the Fund was unable to borrow such securities from other
securities lenders.
The Fund's performance will also be affected by the Adviser's ability to
anticipate correctly the relative potential returns and risks of the asset
classes in which the Fund invests. For example, the Fund's relative investment
performance would suffer if only a small portion of the Fund's assets were
allocated to stocks during a significant stock market advance, and its absolute
investment performance would suffer if a major portion of its assets were
allocated to stocks during a market decline. Finally, since the Fund intends
to assume only prudent investment risk, there will be periods in which the Fund
underperforms mutual funds that are willing to assume greater risk.
As a result the Fund is a suitable investment only for those investors who have
medium to long-term investment goals. Prospective investors who are
uncomfortable with an investment that will increase and decrease in value
should not invest in the Fund. The Adviser does not intend the Fund to be a
fixed balanced investment program. Rather, as its name implies, the Fund is
intended to be a flexible core investment suitable for any long-term investor.
Long-term investors may wish to supplement an investment in the Fund with other
investments to satisfy their short-term financial needs and to diversify their
exposure to various markets and asset classes.
4. HOW HAS THE FUND PERFORMED?
The bar chart and table that follow provide some indication of the risks of
investing in the Fund by showing changes in the Fund's performance from year to
year and how its average annual returns over various periods compare to those of
the Standard & Poor's Composite Index of 500 Stocks (S&P 500), a Combined Index
(consisting of an unmanaged portfolio of 45% common stocks, 45% bonds and 10%
money market instruments) and the Lipper Flexible Fund Index. Please remember
that the Fund's past performance is not necessarily an indication of its future
performance. It may perform better or worse in the future.
TOTAL RETURN
(per calendar year)
1996 9.32%
1997 17.25%
1998 11.60%
1999 9.57%
Note: During the four year period shown on the bar chart, the Fund's highest
total return for a quarter was 8.79% (quarter ended September 30, 1997) and the
lowest total return for a quarter was -1.92% (quarter ended March 31, 1997).
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending December 31, 1999)
SINCE THE INCEPTION
DATE OF THE FUND
PAST YEAR (NOVEMBER 20, 1995)
--------- -------------------
LEUTHOLD CORE
INVESTMENT FUND 9.57% 12.11%
S&P 500*<F1> 21.02% 26.63%
Combined Index**<F2> 8.21% 12.24%
Lipper Flexible
Fund Index***<F3> 9.80% 15.04%
*<F1> The S&P 500 is a widely recognized unmanaged index of stock prices.
**<F2> The Combined Index consists of an unmanaged portfolio of 45% common
stocks represented by the S&P 500 (15%), the Standard & Poor's 400
Mid-Cap Index (15%) and the Russell 2000 Index (15%); 45% bonds
represented by the Lehman Brothers Government/Corporate Bond Index;
and 10% money market instruments represented by 90-day United States
Treasury Bills.
***<F3> The Lipper Flexible Fund Index is an index of mutual funds having an
investment objective similar to the Fund's investment objective.
FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering price) No Sales Charge
Maximum Deferred Sales
Charge (Load) No Deferred
Sales Charge
Maximum Sales Charge (Load)
Imposed on Reinvested
Dividends and Distributions No Sales Charge
Redemption Fee None*<F4>
Exchange Fee None
Maximum Account Fee No Account Fee
*<F4> Our transfer agent charges a fee of $12.00 for each wire redemption.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
BEFORE
FEE WAIVERS*<F5>
----------------
Management Fees 0.90%
Distribution and/
or Service (12b-1)
Fees None
Other Expenses
Dividends on Short Positions 0.10%
All other Other Expenses 0.42%
Total Other Expenses 0.52%
Total Annual Fund
Operating Expenses 1.42%
*<F5> Since inception the Adviser has waived its advisory fee to the extent
necessary to ensure that Total Annual Fund Operating Expenses (excluding
dividends on short positions) do not exceed 1.25% of average daily net
assets. It may discontinue these waivers at any time.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of these periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$145 $449 $776 $1,702
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
The Fund seeks capital appreciation and income (or "total return") in amounts
attainable by assuming only prudent investment risk over the long term. The
Fund's definition of long term investment success is making it AND keeping it.
The Adviser believes that maintaining profits when markets decline is as
important as earning profits when markets rise. Although it has no intention of
doing so, the Fund may change its investment objective without obtaining
shareholder approval. Please remember that an investment objective is not a
guarantee. An investment in the Fund might not appreciate and investors could
lose money.
HOW WE ALLOCATE OUR ASSETS
The Adviser allocates the Fund's investments among the three asset classes as
follows:
FIRST, the Adviser analyzes the U.S. government bond market with the goal of
determining the risks and returns that U.S. Treasury securities present over the
next one to five years.
NEXT, the Adviser assesses the probability that common stocks as an asset class
will perform better than U.S. Treasury securities. In doing so, it considers
The Leuthold Group's Major Trend Index. This proprietary index comprises over
170 individual components that The Leuthold Group evaluates weekly.
FINALLY, the Adviser implements the asset allocation strategy. In doing so, the
Adviser may purchase put or call options on stock indexes or engage in short
sales of index-related and other securities to rapidly change the Fund's equity
exposure.
HOW WE MAKE INDIVIDUAL SECURITY SELECTIONS
After the Adviser has determined the appropriate allocations among asset
classes, it selects individual investments as follows:
For investments in bonds and debt securities (other than money market
instruments) the Adviser will first compare the anticipated returns and risks of
U.S. Treasury Notes and Bonds, foreign government debt securities (without
limitation as to rating) and corporate fixed-income securities (without
limitation as to rating) and determine how much to invest in each sector. Next
the Adviser will consider interest rate trends and economic indicators to
determine the desired maturity of the Fund's portfolio of debt securities. The
Fund may invest indirectly in fixed-income securities by investing in mutual
funds or closed-end investment companies which invest in such securities. The
Fund may do so to obtain a diversified exposure to high yield or "junk" bonds.
For investments in common stocks and other equity securities, the Adviser uses
the following approach.
The Adviser develops a broad sector strategy and determines what percentage of
its equity investments to allocate among large capitalization stocks ($4 billion
or more), mid-capitalization stocks ($1 to $4 billion) and small capitalization
stocks (less than $1 billion), and among "growth stocks" (stocks with high
price/earnings ratios), "value" stocks (stocks with low price/earnings ratios)
and "cyclical" stocks (stocks which are economically sensitive).
Also, the Adviser develops a more narrow sector strategy and determines what
percentage of each broad sector's investments to allocate among individual
sector categories using both traditional industrial sectors such as "housing,"
"energy" or "food," as well as conceptual themes such as "global energy."
Finally, the Adviser selects individual stocks after ranking each stock by
fundamental factors (such as price/earnings ratios or growth rates) and
technical factors (such as price movements) in the individual sector category.
In addition to investing in individual stocks, the Fund may invest in mutual
funds, unit investment trusts or closed-end investment companies which invest in
a specific category of common stocks. The Funds may do so to obtain (a)
exposure to international equity markets by investing in international funds,
(b) increased exposure to a particular industry by investing in a sector fund,
or (c) a broad exposure to small capitalization stocks by investing in small cap
funds.
The Fund may, in response to adverse market, economic, political or other
conditions, take temporary defensive positions. This means the Fund may invest
more than 20% of its assets in money market instruments (like U.S. Treasury
Bills, commercial paper or repurchase agreements). The Fund will not seek
capital appreciation to the extent that it invests in money market instruments
since these securities earn interest but do not appreciate in value. When the
Fund is not taking a temporary defensive position, it still may hold some cash
and money market instruments so that it can pay its expenses, satisfy redemption
requests, take advantage of investment opportunities, or as part of its normal
asset allocation process.
PORTFOLIO TURNOVER
The Fund's annual portfolio turnover rate usually will not exceed 100%, but may
in some years. (Generally speaking, a turnover rate of 100% occurs when the
Fund replaces securities valued at 100% of its average net assets within a one
year period.) Higher portfolio turnover (100% or more) will result in the Fund
incurring more transaction costs such as brokerage commissions or mark-ups or
mark-downs. Payment of these transaction costs reduces total return. Higher
portfolio turnover could result in the payment by the Fund's shareholders of
increased taxes on realized gains. Distributions to the Fund's shareholders, to
the extent they are short-term capital gains, will be taxed at ordinary income
rates for federal income tax purposes, rather than at lower capital gains rates.
RISKS
There are a number of risks associated with the various securities in which the
Fund will at times invest. These include:
RISKS ASSOCIATED WITH ZERO COUPON U.S. TREASURY SECURITIES. Zero coupon U.S.
Treasury securities are U.S. Treasury Notes and Bonds that have been stripped of
their unmatured interest coupons by the U.S. Department of Treasury. Zero
coupon U.S. Treasury securities are generally subject to greater fluctuation in
value in response to changing interest rates than debt obligations that pay
interest currently.
RISKS ASSOCIATED WITH SMALL CAP STOCKS. Stocks of smaller capitalization
companies tend to be riskier investments than stocks of larger capitalization
companies. Smaller capitalization companies may have limited product lines,
markets, market share and financial resources or they may be dependent on a
small or inexperienced management team. Stocks of smaller capitalization
companies may trade less frequently and in more limited volume and may be
subject to greater and more abrupt price swings than stocks of larger companies.
RISKS ASSOCIATED WITH FOREIGN SECURITIES. In addition to currency risk there is
often less information publicly available about foreign issuers than U.S.
issuers. The securities of foreign issuers may be less liquid and more volatile
than securities of comparable U.S. issuers. The costs associated with
securities transactions are often higher in foreign countries than in the U.S.
Foreign governments and foreign economies often are less stable than the U.S.
government and the U.S. economy.
RISKS ASSOCIATED WITH HIGH YIELD SECURITIES. The Fund may invest directly, or
indirectly in high yield securities. High yield securities (or "junk bonds")
provide greater income and opportunity for gains than higher-rated securities
but entail greater risk of loss of principal. High yield securities are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. The market
for high yield securities is generally less active than the market for higher
quality securities. This may limit the ability of the Fund, or investment
companies in which the Fund invests, to sell high yield securities at the price
at which it is being valued for purposes of calculating net asset value.
RISKS ASSOCIATED WITH PURCHASING PUT AND CALL OPTIONS. If the Fund purchases a
put or call option and does not exercise or sell it prior to the option's
expiration date, the Fund will realize a loss in the amount of the entire
premium paid, plus commission costs. It is possible, although not likely, that
there may be times when a market for the Fund's outstanding options does not
exist.
ADDITIONAL COSTS ASSOCIATED WITH REGISTERED INVESTMENT COMPANIES. When the Fund
invests in a registered investment company, the Fund's shareholders bear not
only their proportionate share of the expenses of the Fund (such as operating
costs and investment advisory fees) but also, indirectly, similar expenses of
the registered investment companies in which the Fund invests.
MANAGEMENT OF
THE FUND
LEUTHOLD & ANDERSON, INC. MANAGES
THE FUND'S INVESTMENTS
Leuthold & Anderson, Inc. (the "Adviser") is the Fund's investment adviser. The
Adviser's address is:
100 North Sixth Street
Suite 700A
Minneapolis, MN 55403
The Adviser has been in business since 1987 and has been the Fund's only
investment adviser. As the investment adviser to the Fund, the Adviser manages
the investment portfolio for the Fund. It makes the decisions as to which
securities to buy and which securities to sell. The Fund pays the Adviser an
annual investment advisory fee equal to 0.90% of its average net assets.
Steven C. Leuthold is primarily responsible for the day-to-day management of the
Fund's portfolio. He is the Fund's portfolio manager. Mr. Leuthold has been
Chairman and Portfolio Manager of the Adviser since its organization in 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. Prior to founding The Leuthold Group, Mr. Leuthold was employed by
Criterion Investment Management as a portfolio manager for The Pilot Fund and
Industries Trend Fund.
THE ADVISER HAS EXPERIENCE MANAGING ACCOUNTS WITH THE SAME INVESTMENT OBJECTIVE
AS THE FUND
We are providing historical performance data of investment advisory accounts
managed by the Adviser. The data illustrates the investment performance of all
portfolios similar to the Fund and compares the performance to specified market
indices. The Leuthold & Anderson, Inc. Composite includes all active accounts
of the Adviser (including the Fund) invested in the Adviser's Conventional
portfolio. The Composite does not include all of the Adviser's assets under
management, but does include all accounts having the same investment objective
as the Fund. It may not accurately reflect the performance of all accounts
managed by the Adviser. The accounts included in the Composite had the same
investment objective as the Fund and were managed using substantially similar,
though not in all cases identical, investment strategies and techniques as those
used by the Fund. All performance data is historical and investors should not
consider this performance data as an indication of the future performance of the
Fund or the results an individual investor might achieve by investing in the
Fund. Investors should not rely on the historical performance of the Adviser
when making an investment decision.
All returns are time-weighted total rates of return and include the reinvestment
of dividends and interest. The performance information for the Composite is net
of the advisory fees charged by the Adviser to the accounts comprising the
Composite and all other expenses (except custody and related expenses). The
performance information for the Composite does not reflect the assessment of the
Fund's advisory fee or other expenses equivalent to the Fund's operating
expenses. The fees and expenses of the Composite were less than the annual
expenses of the Fund. The performance of the Composite would have been lower
had the Composite incurred higher fees and expenses. The net effect of the
deduction of the Fund's advisory fee and other operating expenses on annualized
performance, including the compounded effect over time, may be substantial. The
Composite was not subject to certain investment limitations, diversification
requirements and other restrictions imposed by the Investment Company Act of
1940 and the Internal Revenue Code. If it were, its performance may have been
adversely affected.
The performance information of the Composite, the S&P 500 Index, the Combined
Index and the Lipper Flexible Fund Index is based on data supplied by the
Adviser or from statistical services, reports or other sources which the Adviser
believes are reliable. This performance information has not been verified by
any third party and is unaudited.
<TABLE>
ANNUAL RATES OF RETURN(1)<F6>
YEARS ENDED
DECEMBER 31, 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LEUTHOLD CORE
INVESTMENT FUND N/A N/A N/A N/A N/A N/A 9.32% 17.25% 11.60% 9.57%
Leuthold & Anderson,
Inc. Composite 1.56% 17.93% 1.39% 14.57% (4.13)% 18.36% 9.94 18.11 12.13 10.49
S&P 500 Index (3.17) 30.38 7.72 10.01 1.22 37.47 23.00 33.30 28.57 21.02
Combined Index(2)<F7> (0.29) 25.71 9.09 11.08 (2.23) 22.14 10.10 17.46 12.10 8.21
Lipper Flexible
Fund Index 0.94 26.98 5.67 12.74 (2.67) 23.59 14.05 18.68 15.55 9.80
</TABLE>
<TABLE>
COMPOUNDED ANNUAL RATES OF RETURN(1)<F6>
(FOR THE PERIOD ENDED DECEMBER 31, 1999) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
LEUTHOLD CORE INVESTMENT FUND 9.57% 12.42% N/A N/A
Leuthold & Anderson, Inc. Composite 10.49 13.53 13.74% 9.77%
S&P 500 Index 21.02 27.53 28.52 18.17
Combined Index(2)<F7> 8.21 12.52 13.89 11.02
Lipper Flexible Fund Index 9.80 14.95 16.45 12.27
</TABLE>
(1)<F6> The calculation of the rates of return was performed in accordance
with the principles set forth in the Performance Presentation
Standards endorsed by the Association for Investment Management and
Research ("AIMR"). Other performance calculation methods, including
the SEC method, may produce different results. The AIMR performance
presentation criteria require the presentation of at least a ten-year
performance record or performance for the period since inception, if
shorter.
Total annual rate of return is the change in redemption value of
units, assuming the reinvestment of dividends. Compounded annual rate
of return represents the level annual rate which, if earned for each
year in a multiple year period, would produce the cumulative rate of
return over that period.
(2)<F7> The Combined Index is an unmanaged portfolio composed of 45% common
stocks represented by the S&P 500 (15%), the Standard & Poor's 400
Mid-Cap Index (15%) and the Russell 2000 Index (15%); 45% bonds
represented by the Lehman Bros. Government/Corporate Bond Index; and
10% cash represented by 90-day United States Treasury Bills.
Please remember that past performance is not necessarily an indication of future
performance. Investors should also be aware that other performance calculation
methods may produce different results, and that comparisons of investment
results should consider qualitative circumstances and should be made only for
portfolios with generally similar investment objectives.
THE FUND'S SHARE PRICE
The price at which investors purchase shares of the Fund and at which
shareholders redeem shares of the Fund is called its net asset value. The Fund
calculates its net asset value as of the close of regular trading on the New
York Stock Exchange (normally 4:00 p.m. Eastern Time) on each day the New York
Stock Exchange is open for trading. The New York Stock Exchange is closed on
holidays and weekends. The Fund calculates its net asset value based on the
market prices of the securities (other than money market instruments) it holds.
It values most money market instruments it holds at their amortized cost. The
Fund will process purchase orders that it receives and accepts and redemption
orders that it receives prior to the close of regular trading on a day in which
the New York Stock Exchange is open at the net asset value determined LATER THAT
DAY. It will process purchase orders that it receives and accepts and
redemption orders that it receives AFTER the close of regular trading at the net
asset value determined at the close of regular trading on the NEXT DAY the New
York Stock Exchange is open.
The Fund's net asset value can be found daily in the mutual fund listings of
many major newspapers under the heading "LeutholdCI". The Fund's NASDAQ symbol
is "LCORX".
PURCHASING SHARES
HOW TO PURCHASE SHARES FROM THE FUND
o Read this Prospectus carefully.
o Determine how much you want to invest, keeping in mind the following
minimums:
NEW ACCOUNTS
Individual Retirement
Accounts $ 1,000
All other accounts $10,000*<F8>
*<F8> The Fund may, but is not required to, accept initial investments of
not less than $1,000 from investors who are related to, or
affiliated with, shareholders who have invested $10,000 in the
Fund.
EXISTING ACCOUNTS
Dividend reinvestment No Minimum
Automatic
Investment Plan $ 50
All other accounts $100
o Complete the Purchase Application accompanying this Prospectus, carefully
following the instructions. For additional investments, complete the
Additional Investment Form attached to your Fund's confirmation statements.
(The Fund has additional Purchase Applications and Additional Investment
Forms if you need them.) If you have any questions, please call 1-800-273-
6886.
o Make your check payable to "Leuthold Core Investment Fund." All checks must
be drawn on U.S. banks. The Fund will not accept cash or third party
checks. FIRSTAR MUTUAL FUND SERVICES, LLC, THE FUND'S TRANSFER AGENT, WILL
CHARGE A $25 FEE AGAINST A SHAREHOLDER'S ACCOUNT FOR ANY PAYMENT CHECK
RETURNED FOR INSUFFICIENT FUNDS. THE SHAREHOLDER WILL ALSO BE RESPONSIBLE
FOR ANY LOSSES SUFFERED BY THE FUND AS A RESULT.
Send the application and check to:
FOR FIRST CLASS MAIL
Leuthold Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
FOR OVERNIGHT DELIVERY SERVICE
OR REGISTERED MAIL
Leuthold Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 East Michigan Street, 3rd Floor
Milwaukee, WI 53202-5207
PLEASE DO NOT MAIL LETTERS BY OVERNIGHT DELIVERY SERVICE OR REGISTERED MAIL TO
THE POST OFFICE BOX ADDRESS.
If you wish to open an account by wire, please call 1-800-273-6886 prior to
wiring funds in order to obtain a confirmation number and to ensure prompt and
accurate handling of funds. FUNDS SHOULD BE WIRED TO:
Firstar Bank, N.A.
777 East Wisconsin Avenue
Milwaukee, WI 53202
ABA #075000022
CREDIT:
Firstar Mutual Fund Services, LLC
Account #112-952-137
FURTHER CREDIT:
Leuthold Core Investment Fund
(shareholder registration)
(shareholder account number, if known)
You should then send a properly signed Purchase Application marked "FOLLOW-UP"
to either of the addresses listed above. PLEASE REMEMBER THAT FIRSTAR BANK,
N.A. MUST RECEIVE YOUR WIRED FUNDS PRIOR TO THE CLOSE OF REGULAR TRADING ON THE
NEW YORK STOCK EXCHANGE FOR YOU TO RECEIVE SAME DAY PRICING. THE FUND AND
FIRSTAR BANK, N.A. ARE NOT RESPONSIBLE FOR THE CONSEQUENCES OF DELAYS RESULTING
FROM THE BANKING OR FEDERAL RESERVE WIRE SYSTEM, OR FROM INCOMPLETE WIRING
INSTRUCTIONS.
PURCHASING SHARES FROM BROKER-DEALERS, FINANCIAL INSTITUTIONS AND OTHERS
Some broker-dealers may sell shares of the Fund. These broker-dealers may
charge investors a fee either at the time of purchase or redemption. The fee,
if charged, is retained by the broker-dealer and not remitted to the Fund or the
Adviser. Some broker-dealers may purchase and redeem shares on a three day
settlement basis.
The Fund may enter into agreements with broker-dealers, financial institutions
or other service providers ("Servicing Agents") that may
include the Fund as an investment alternative in the programs they offer or
administer. Servicing agents may:
o Become shareholders of record of the Fund. This means all requests to
purchase additional shares and all redemption requests must be sent through
the Servicing Agent. This also means that purchases made through Servicing
Agents are not subject to the Fund's minimum purchase requirement.
o Use procedures and impose restrictions that may be in addition to, or
different from, those applicable to investors purchasing shares directly
from the Fund.
o Charge fees to their customers for the services they provide them. Also,
the Fund and/or the Adviser may pay fees to Servicing Agents to compensate
them for the services they provide their customers.
o Be allowed to purchase shares by telephone with payment to follow the next
day. If the telephone purchase is made prior to the close of regular
trading on the New York Stock Exchange, it will receive same day pricing.
o Be authorized to accept purchase orders on the Fund's behalf. This means
that the Fund will process the purchase order at the net asset value which
is determined following the Servicing Agent's acceptance of the customer's
order.
If you decide to purchase shares through Servicing Agents, please carefully
review the program materials provided to you by the Servicing Agent. When you
purchase shares of the Fund through a Servicing Agent, it is the responsibility
of the Servicing Agent to place your order with the Fund on a timely basis. If
the Servicing Agent does not, or if it does not pay the purchase price to the
Fund within the period specified in its agreement with the Fund, it may be held
liable for any resulting fees or losses.
OTHER INFORMATION ABOUT PURCHASING
SHARES OF THE FUND
The Fund may reject any share purchase applications for any reason. The Fund
will not accept initial purchase orders made by telephone, unless they are from
a Servicing Agent which has an agreement with the Fund.
The Fund will issue certificates evidencing shares purchased only upon request.
The Fund will send investors a written confirmation for all purchases of shares.
The Fund offers an automatic investment plan allowing shareholders to make
purchases on a regular and convenient basis. The Fund also offers a telephone
purchase option permitting shareholders to make additional purchases by
telephone. The Fund offers the following retirement plans:
TRADITIONAL IRA
ROTH IRA
Investors can obtain further information about the automatic investment plan,
the telephone purchase plan and the IRAs by calling 1-800-273-6886. The Fund
recommends that investors consult with a competent financial and tax advisor
regarding the IRAs before investing through them.
REDEEMING SHARES
HOW TO REDEEM (SELL) SHARES BY MAIL
Prepare a letter of instruction containing:
o account number(s)
o the amount of money or number of shares being redeemed
o the name(s) on the account
o daytime phone number
o additional information that the Fund may require for redemptions by
corporations, executors, administrators, trustees, guardians, or others who
hold shares in a fiduciary or representative capacity. Please contact the
Fund's transfer agent, Firstar Mutual Fund Services, LLC, in advance, at
1-800-273-6886 if you have any questions.
Sign the letter of instruction exactly as the shares are registered. Joint
ownership accounts must be signed by all owners.
Have the signatures guaranteed by a commercial bank or trust company in the
United States, a member firm of the New York Stock Exchange or other eligible
guarantor institution IN THE FOLLOWING SITUATIONS:
o The redemption proceeds are to be sent to a person other than the person in
whose name the shares are registered
o The redemption proceeds are to be sent to an address other than the address
of record
o The redemption request is received within 30 days after an address change.
A NOTARIZED SIGNATURE IS NOT AN ACCEPTABLE SUBSTITUTE FOR A SIGNATURE GUARANTEE.
Send the letter of instruction to:
FOR FIRST CLASS MAIL
Leuthold Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
FOR OVERNIGHT DELIVERY SERVICE
OR REGISTERED MAIL
Leuthold Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
615 East Michigan Street, 3rd Floor
Milwaukee, WI 53202-5207
PLEASE DO NOT MAIL LETTERS BY OVERNIGHT DELIVERY SERVICE OR REGISTERED MAIL TO
THE POST OFFICE BOX ADDRESS.
HOW TO REDEEM (SELL) SHARES BY TELEPHONE
Instruct Firstar Mutual Fund Services, LLC that you want the option of redeeming
shares by telephone. This can be done by completing the appropriate section on
the Purchase Application. Shares held in IRAs cannot be redeemed by telephone.
Assemble the same information that you would include in the letter of
instruction for a written redemption request.
Call Firstar Mutual Fund Services, LLC at 1-800-273-6886. PLEASE DO NOT CALL
THE FUND OR THE ADVISER.
HOW TO REDEEM (SELL) SHARES THROUGH SERVICING AGENTS
If your shares are held by a Servicing Agent, you must redeem your shares
through the Servicing Agent. Contact the Servicing Agent for instructions on
how to do so.
REDEMPTION PRICE
The redemption price per share you receive for redemption requests is the next
determined net asset value after:
o Firstar Mutual Fund Services, LLC receives your written request in proper
form with all required information.
o Firstar Mutual Fund Services, LLC receives your authorized telephone
request with all required information.
o A Servicing Agent that has been authorized to accept redemption requests on
behalf of the Fund receives your request in accordance with its procedures.
PAYMENT OF REDEMPTION PROCEEDS
o For those shareholders who redeem shares by mail, Firstar Mutual Fund
Services, LLC will mail a check in the amount of the redemption proceeds no
later than the seventh day after it receives the written request in proper
form with all required information.
o For those shareholders who redeem by telephone, Firstar Mutual Fund
Services, LLC will either mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the redemption
request, or transfer the redemption proceeds to your designated bank
account if you have elected to receive redemption proceeds by either
Electronic Funds Transfer or wire. An Electronic Funds Transfer generally
takes up to 3 business days to reach the shareholder's account whereas
Firstar Mutual Fund Services, LLC generally wires redemption proceeds on
the business day following the calculation of the redemption price.
However, the Fund may direct Firstar Mutual Fund Services, LLC to pay the
proceeds of a telephone redemption on a date no later than the seventh day
after the redemption request.
o Those shareholders who redeem shares through Servicing Agents will receive
their redemption proceeds in accordance with the procedures established by
the Servicing Agent.
OTHER REDEMPTION CONSIDERATIONS
When redeeming shares of the Fund, shareholders should consider the following:
o The redemption may result in a taxable gain.
o Shareholders who redeem shares held in an IRA must indicate on their
redemption request whether or not to withhold federal income taxes. If
not, these redemptions will be subject to federal income tax withholding.
o The Fund may delay the payment of redemption proceeds for up to seven days
in all cases.
o If you purchased shares by check, the Fund may delay the payment of
redemption proceeds until it is reasonably satisfied the check has cleared
(which may take up to 15 days from the date of purchase).
o Firstar Mutual Fund Services, LLC will send the proceeds of telephone
redemptions to an address or account other than that shown on its records
only if the shareholder has sent in a written request with signatures
guaranteed.
o Firstar Mutual Fund Services, LLC will not accept telephone redemption
requests made within 30 days after an address change.
o The Fund reserves the right to refuse a telephone redemption request if it
believes it is advisable to do so. Both the Fund and Firstar Mutual Fund
Services, LLC may modify or terminate its procedures for telephone
redemptions at any time. Neither the Fund nor Firstar Mutual Fund
Services, LLC will be liable for following instructions for telephone
redemption transactions that they reasonably believe to be genuine,
provided they use reasonable procedures to confirm the genuineness of the
telephone instructions. They may be liable for unauthorized transactions
if they fail to follow such procedures. These procedures include requiring
some form of personal identification prior to acting upon the telephone
instructions and recording all telephone calls. During periods of
substantial economic or market change, telephone redemptions may be
difficult to implement. If a shareholder cannot contact Firstar Mutual
Fund Services, LLC by telephone, he or she should make a redemption request
in writing in the manner described earlier.
o Firstar Mutual Fund Services, LLC currently charges a fee of $12 when
transferring redemption proceeds to your designated bank account by wire
but does not charge a fee when transferring redemption proceeds by
Electronic Funds Transfer.
o If your account balance falls below $1,000 because you redeem shares, you
will be given 60 days to make additional investments so that your account
balance is $1,000 or more. If you do not, the Fund may close your account
and mail the redemption proceeds to you.
DIVIDENDS, DISTRIBUTIONS
AND TAXES
The Fund distributes substantially all of its net investment income quarterly
and substantially all of its capital gains annually. You have three
distribution options:
AUTOMATIC REINVESTMENT OPTION - Both dividend and capital gains distributions
will be reinvested in additional Fund Shares.
CASH DIVIDEND OPTION - Dividends will be paid in cash and capital gains will be
reinvested in additional Fund shares.
ALL CASH OPTION - Both dividend and capital gains distributions will be paid in
cash.
You may make this election on the Purchase Application. You may change your
election by writing to Firstar Mutual Fund Services, LLC or by calling 1-800-
273-6886.
The Fund's distributions, whether received in cash or additional shares of the
Fund, may be subject to federal and state income tax. These distributions may
be taxed as ordinary income and capital gains (which may be taxed at different
rates depending on the length of time the Fund holds the assets generating the
capital gains). The Fund expects that normally its distributions will consist
of both ordinary income and long-term capital gains. In managing the Fund, our
Adviser considers the tax effects of its investment decisions to be of secondary
importance.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the period of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Arthur Andersen LLP, whose
report, along with the Fund's financial statements, are included in the Annual
Report which is available upon request.
<TABLE>
FOR THE YEARS ENDED NOV. 20, 1995(1)<F9>
9/30/99 9/30/98 9/30/97 THROUGH SEPT. 30, 1996
------- ------- ------- ----------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $11.97 $11.17 $10.18 $10.00
Income from investment operations:
Net investment income (4)<F12> 0.45 0.40 0.44 0.38
Net realized and unrealized gains
on investments 0.28 1.16 1.32 0.16
------ ------ ------ ------
Total from investment operations 0.73 1.56 1.76 0.54
------ ------ ------ ------
Less distributions:
From net investment income (0.44) (0.40) (0.46) (0.36)
From net realized gains (1.14) (0.36) (0.26) --
In excess of net investment income -- -- (0.05) --
------ ------ ------ ------
Total distributions (1.58) (0.76) (0.77) (0.36)
------ ------ ------ ------
Net asset value, end of period $11.12 $11.97 $11.17 $10.18
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN 6.59% 14.45% 17.96% 5.43%(2)<F10>
RATIO/SUPPLEMENTAL DATA:
Net assets, end of period (in 000s) $58,420 $46,267 $30,560 $31,740
Ratio of expenses to average net assets:
Before expense reimbursement 1.32%(5)<F13> 1.41% 1.47% 1.55%(3)<F11>
After expense reimbursement 1.25%(5)<F13> 1.25% 1.25% 1.25%(3)<F11>
Ratio of net investment income to
average net assets:
Before expense reimbursement 3.93% 3.50% 4.05% 4.14%(3)<F11>
After expense reimbursement 4.00%(6)<F14> 3.66% 4.27% 4.44%(3)<F11>
Portfolio turnover rate 159.02% 73.43% 35.62% 103.30%
</TABLE>
(1)<F9> Commencement of operations.
(2)<F10> Not annualized.
(3)<F11> Annualized.
(4)<F12> Net investment income per share is calculated using ending balances
prior to consideration of adjustments for permanent book and tax
differences.
(5)<F13> The operating expense ratios exclude dividends on short positions.
The before expense reimbursement and after expense reimbursement
ratios including dividends on short positions were 1.42% and 1.35%,
respectively, for the year ended September 30, 1999.
(6)<F14> The net investment income ratio includes dividends on short positions.
The ratio excluding dividends on short positions was 4.10% for the
year ended September 30, 1999.
To learn more about Leuthold Core Investment Fund, you may want to read Leuthold
Core Investment Fund's Statement of Additional Information (or "SAI") which
contains additional information about the Fund. Leuthold Core Investment Fund
has incorporated by reference, the SAI into the Prospectus. This means that you
should consider the contents of the SAI to be part of the Prospectus.
You also may learn more about Leuthold Core Investment Fund's investments by
reading the Fund's annual and semi-annual reports to shareholders. The annual
report includes a discussion of the market conditions and investment strategies
that significantly affected the performance of Leuthold Core Investment Fund
during its last fiscal year.
The SAI and the annual and semi-annual reports are all available to shareholders
and prospective investors without charge, simply by calling Firstar Mutual Fund
Services, LLC at 1-800-273-6886.
Prospective investors and shareholders who have questions about Leuthold Core
Investment Fund may also call the following number or write to the following
address.
Leuthold Core Investment Fund
100 North Sixth Street
Suite 700A
Minneapolis, MN 55403
1-888-200-0409
The general public can review and copy information about Leuthold Core
Investment Fund (including the SAI) at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. (Please call 1-202-942-8090 for
information on the operations of the Public Reference Room.) Reports and other
information about Leuthold Core Investment Fund are also available on the EDGAR
Database at the Securities and Exchange Commission's Internet site at
http://www.sec.gov and copies of this information may be obtained, upon payment
of a duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
Please refer to Leuthold Core Investment Fund's Investment Company Act File No.
811-09094 when seeking information about the Fund from the Securities and
Exchange Commission.
STATEMENT OF ADDITIONAL INFORMATION JANUARY 31, 2000
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, 2000. 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, 1999, of Leuthold Funds, Inc. (File No.
811-9094) as filed with the Securities and Exchange Commission on December 7,
1999:
Report of Independent Public Accountants
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Asset
Financial Highlights
Schedule of Investments
Schedule of Securities Sold Short
Notes to the Financial Statements
<PAGE>
Leuthold Funds, Inc.
TABLE OF CONTENTS
-----------------
Page No.
--------
FUND HISTORY AND CLASSIFICATION................................................1
INVESTMENT RESTRICTIONS........................................................1
INVESTMENT CONSIDERATIONS......................................................3
DIRECTORS AND OFFICERS OF THE CORPORATION.....................................14
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, 2000, 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)
<PAGE>
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 (the "Act"). 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).
<PAGE>
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.
-2-
<PAGE>
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
-3-
<PAGE>
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.
-4-
<PAGE>
Money Market Instruments
The money market instruments in which the Fund invests include
conservative fixed-income securities, such as U.S. 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
-5-
<PAGE>
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 of 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
-6-
<PAGE>
margin requirements, until the short position is closed. Until a Fund closes its
short position or replaces the borrowed security, the Fund will: (a) maintain
cash or liquid securities at such a level that the amount so maintained 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 are
-7-
<PAGE>
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
-8-
<PAGE>
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
-9-
<PAGE>
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.
-10-
<PAGE>
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.
Portfolio Turnover
The Fund's annual portfolio turnover rate indicates changes in the
Fund's portfolio and is calculated by dividing the lesser of purchases or sales
of securities (excluding
-13-
<PAGE>
securities having maturities at acquisition of one year or less) for the fiscal
year by the monthly average of the value of the portfolio securities (excluding
securities having maturities at acquisition of one year or less) owned by the
Fund during the fiscal year. The Fund's annual portfolio turnover rate was
substantially higher in the fiscal year ended September 30, 1999 than the two
prior fiscal years. The annual portfolio turnover rate was higher in the fiscal
year ended September 30, 1999 because the Fund commenced effecting short sales
of securities during such fiscal year. Short selling typically involves higher
portfolio turnover than a "buy and hold" investment approach.
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, 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:
*Steven C. Leuthold -- Director, President and Treasurer. Mr.
Leuthold, 62, has been Chairman and Portfolio Manager for Leuthold & Anderson,
Inc. (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, 54, 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, 73, 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, 65, 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
- ---------------
*Messrs. Leuthold and Zender are "interested persons" of the Corporation
(as defined in the Act).
-14-
<PAGE>
Scientific Corp. Prior to such merger, Mr. Horsch served in various capacities
with SCIMED. 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, 56, 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.
Edward C. Favreau - Vice President. Mr. Favreau, 48, has been Manager
of Marketing and Sales of the Adviser since July, 1999. Prior to joining the
Adviser, Mr. Favreau served as Vice President and Sales Manager of U.S. Bancorp
Investments Inc. (formerly First Bank Investment Services) from June, 1993 until
July, 1999. Prior to that time Mr. Favreau served in various capacities for U.S.
Bank from July, 1988 until June, 1993. Mr. Favreau graduated from Mankato State
University with a B.S. in Business Administration in 1977. His address is c/o
Leuthold & Anderson, Inc. 100 North Sixth Street, Suite 700A, Minneapolis, MN
55403.
David R. Cragg - Vice President and Secretary. Mr. Cragg, 30, has been
Manager of Compliance of the Adviser since January, 1999. Prior to joining the
Adviser, Mr. Cragg served as Operations Manager of Piper Trust Company from
November, 1997 until January, 1999. Prior to that time, Mr. Cragg served in
various capacities for Piper Trust Company from February, 1993 until November,
1997. Mr. Cragg graduated from Westmont College in 1991 with a B.A. in
Economics. His 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, 1999:
-15-
<PAGE>
<TABLE>
COMPENSATION TABLE
<CAPTION>
Total
Compensation
Estimated from Corporation
Aggregate Pension or Retirement Annual and Fund
Name of Compensation Benefits Accrued As Benefits Upon Complex Paid to
Person from Corporation Part of Fund Expenses Retirement Directors
------ ---------------- --------------------- ---------- ---------
<S> <C> <C> <C> <C>
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>
The Corporation and the Adviser have adopted a code of ethics pursuant
to Rule 17j-1 under the Act. This code of ethics permits personnel subject
thereto to invest in securities, including securities that may be purchased or
held by the Fund. This code of ethics prohibits, among other things, persons
subject thereto from purchasing or selling securities if they know at the time
of such purchase or sale that the security is being considered for purchase or
sale by the Fund or is being purchased or sold by the Fund.
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 November 30, 1999 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
------------------- ---------------- ----------------
Charles Schwab & Co., Inc. (1)
101 Montgomery Street
San Francisco, CA 94104-4122 756,118 14.43%
National Investor Services Corp. (1)
55 Water Street
32nd Floor
New York, NY 10041-3299 427,366 8.15%
Fidelity Investments (1)
Institutional Operations Co.
100 Magellan Way
Covington, KY 41015-1987 424,466 8.10%
-16-
<PAGE>
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 414,837 7.92%
Officers and Directors as a Group (8 persons) 135,522(2)(3) 2.59%
- -----------------------------
(1) The shares held by Charles Schwab & Co., Inc., National Investor
Services Corp. and Fidelity Investments were owned of record only.
(2) Includes 16,810 shares held in the Leuthold & Anderson, Inc.
Retirement Plan.
(3) Includes 78,357 shares held by the Steven Leuthold Trust, for which
Albert Andrews, Jr. serves as sole trustee, and 13,816 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
-17-
<PAGE>
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 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.
During the fiscal years ended September 30, 1999, 1998 and 1997, the
Fund incurred advisory fees payable to the Adviser of $483,572, $329,152 and
$269,461, 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, reimbursement payments to
securities lenders for dividend and interest payments on securities sold short,
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 fiscal years ended
September 30, 1999, 1998 and 1997, the Adviser reimbursed the Fund $36,678,
$59,492 and $65,500, 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
-18-
<PAGE>
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.
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 Act, 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 .06% of the first $200,000,000 of the Fund's average net assets,
.05% of the next $500,000,000 of the Fund's average net assets, and .03% of the
Fund's average net assets in excess of $700,000,000. Notwithstanding the
foregoing, the minimum annual fee payable to the Administrator is $43,000.
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. During the fiscal years ended September 30, 1999, 1998 and 1997,
the Fund incurred fees of $41,625, $29,277 and $31,718, 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.
-19-
<PAGE>
The Custodian
Firstar Bank, 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, 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, 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 $25,000 for the
first $40 million in average net assets of the Fund, .02% on the next $200
million of average net assets, and .01% 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 fiscal years ended
September 30, 1999, 1998 and 1997, the Fund incurred fees of $35,763, $20,648
and $24,906, 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 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
-20-
<PAGE>
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, including investments
in open-end investment companies, 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.
-21-
<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
-22-
<PAGE>
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-
-23-
<PAGE>
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. 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. 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
$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). During the fiscal year ended September 30, 1999, the Fund paid
brokerage commissions of $184,850, on transactions having a total market value
of $110,374,350. During the same period, the Fund paid Weeden brokerage
commissions of $163,027 (or 88.2% of the total commissions paid) on transactions
having a total market value
-24-
<PAGE>
of $93,839,065 (or 85.0% 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 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.
-25-
<PAGE>
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 Act.
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 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.
-26-
<PAGE>
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.
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:
-27-
<PAGE>
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, 1999 was 11.34% and for the one year period ended September 30, 1999 was
6.59%. 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, 1999 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 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
-28-
<PAGE>
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 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.
-29-
<PAGE>
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.
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
-30-
<PAGE>
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.
- 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.
-31-
<PAGE>
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.
-32-
<PAGE>
PART C
OTHER INFORMATION
Item 23 Exhibits
(a) Registrant's Articles of Incorporation (1)
(b) Registrant's Bylaws (1)
(c) None
(d) Investment Advisory Agreement with Leuthold & Anderson, Inc.(1)
(e) None
(f) None
(g) Custodian Agreement with Firstar Trust Company (predecessor to
Firstar Bank, N.A.) (1)
(h)(1) Fund Administration Servicing Agreement with Firstar Trust
Company (predecessor to Firstar Mutual Fund Services, LLC)(1)
(h)(2) Transfer Agent Agreement with Firstar Trust Company (predecessor
to Firstar Mutual Fund Services, LLC)(1)
(h)(3) Fund Accounting Servicing Agreement with Firstar Trust Company
(predecessor to Firstar Mutual Fund Services, LLC)(1)
(i) Opinion of Foley & Lardner, counsel for Registrant.
(j) Consent of Arthur Andersen LLP
(k) None
(l) Subscription Agreement(1)
(m) None
(n) None
(p) Code of Ethics of Leuthold Funds, Inc. and Leuthold & Anderson,
Inc.
- ------------------
(1) Previously filed as an exhibit to Post-Effective Amendment No. 3 to the
Registration Statement and incorporated by reference thereto.
Post-Effective Amendment No. 3 was filed on January 23, 1998 and its
accession number is 0000897069-98-000011.
S-1
<PAGE>
Item 24 Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Registrant is not controlled by any person. Registrant neither
controls any person nor is under common control with any other person.
Item 25 Indemnification
---------------
Pursuant to the authority of the Maryland General Corporation Law,
particularly Section 2-418 thereof, Registrant's Board of Directors has adopted
the following bylaw which is in full force and effect and has not been modified
or cancelled:
Article VII
GENERAL PROVISIONS
Section 7. Indemnification.
- --------- ---------------
A. The Corporation shall indemnify all of its corporate
representatives against expenses, including attorneys fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by them in
connection with the defense of any action, suit or proceeding, or threat or
claim of such action, suit or proceeding, whether civil, criminal,
administrative, or legislative, no matter by whom brought, or in any appeal in
which they or any of them are made parties or a party by reason of being or
having been a corporate representative, if the corporate representative acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interests of the corporation and with respect to any criminal proceeding,
if he had no reasonable cause to believe his conduct was unlawful provided that
the corporation shall not indemnify corporate representatives in relation to
matters as to which any such corporate representative shall be adjudged in such
action, suit or proceeding to be liable for gross negligence, willful
misfeasance, bad faith, reckless disregard of the duties and obligations
involved in the conduct of his office, or when indemnification is otherwise not
permitted by the Maryland General Corporation Law.
B. In the absence of an adjudication which expressly absolves the
corporate representative, or in the event of a settlement, each corporate
representative shall be indemnified hereunder only if there has been a
reasonable determination based on a review of the facts that indemnification of
the corporate representative is proper because he has met the applicable
standard of conduct set forth in paragraph A. Such determination shall be made:
(i) by the board of directors, by a majority vote of a quorum which consists of
directors who were not parties to the action, suit or proceeding, or if such a
quorum cannot be obtained, then by a majority vote of a committee of the board
consisting solely of two or more directors, not, at the time, parties to the
action, suit or proceeding and who were duly designated to act in the matter by
the full board in which the designated directors who are parties to the action,
suit or proceeding may participate; or (ii) by special legal counsel selected by
the board of directors or a committee of the board by vote as set forth in (i)
of this paragraph, or, if the requisite quorum of the full board cannot be
obtained therefor and the committee cannot be established,
S-2
<PAGE>
by a majority vote of the full board in which directors who are parties to the
action, suit or proceeding may participate.
C. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall create a rebuttable presumption that the person was guilty of
willful misfeasance, bad faith, gross negligence or reckless disregard to the
duties and obligations involved in the conduct of his or her office, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his or her conduct was unlawful.
D. Expenses, including attorneys' fees, incurred in the preparation of
and/or presentation of the defense of a civil or criminal action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding as authorized in the manner provided in Section
2-418(F) of the Maryland General Corporation Law upon receipt of: (i) an
undertaking by or on behalf of the corporate representative to repay such amount
unless it shall ultimately be determined that he or she is entitled to be
indemnified by the corporation as authorized in this bylaw; and (ii) a written
affirmation by the corporate representative of the corporate representative's
good faith belief that the standard of conduct necessary for indemnification by
the corporation has been met.
E. The indemnification provided by this bylaw shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
these bylaws, any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person subject
to the limitations imposed from time to time by the Investment Company Act of
1940, as amended.
F. This corporation shall have power to purchase and maintain
insurance on behalf of any corporate representative against any liability
asserted against him or her and incurred by him or her in such capacity or
arising out of his or her status as such, whether or not the corporation would
have the power to indemnify him or her against such liability under this bylaw
provided that no insurance may be purchased or maintained to protect any
corporate representative against liability for gross negligence, willful
misfeasance, bad faith or reckless disregard of the duties and obligations
involved in the conduct of his or her office.
G. "Corporate Representative" means an individual who is or was a
director, officer, agent or employee of the corporation or who serves or served
another corporation, partnership, joint venture, trust or other enterprise in
one of these capacities at the request of the corporation and who, by reason of
his or her position, is, was, or is threatened to be made, a party to a
proceeding described herein.
Insofar as indemnification for and with respect to liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of Registrant pursuant to the foregoing provisions or
otherwise, Registrant has been advised that
S-3
<PAGE>
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by Registrant of expenses incurred or paid by a director,
officer or controlling person or Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Item 26 Business and Other Connections of Investment Adviser
----------------------------------------------------
Incorporated by reference to pages 13 through 15 of the Statement of
Additional Information pursuant to Rule 411 under the Securities Act of 1933.
Item 27 Principal Underwriters
----------------------
Not Applicable.
Item 28 Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the physical possession of Registrant
and Registrant's Administrator as follows: the documents required to be
maintained by paragraphs (5), (6), (7), (10) and (11) of Rule 31a-1(b) will be
maintained by the Registrant at 100 North Sixth Street, Suite 700A, Minneapolis,
Minnesota; and all other records will be maintained by the Registrant's
Administrator, Firstar Mutual Fund Services, LLC, 615 East Michigan Street,
Milwaukee, Wisconsin.
Item 29 Management Services
-------------------
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
Item 30 Undertakings
------------
Registrant undertakes to furnish each person to whom a prospectus is
delivered a copy of Registrant's latest annual report to shareholders, upon
request and without charge.
S-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund certifies that it meets all of the
requirements for effectiveness of this Amended Registration Statement under Rule
485(b) under the Securities Act and has duly caused this Amended Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis and State of Minnesota on the 19th day of
January, 2000.
LEUTHOLD FUNDS, INC.
(Registrant)
By: /s/ Steven C. Leuthold
-------------------------------
Steven C. Leuthold, President
Pursuant to the requirements of the Securities Act of 1933, this
Amended Registration Statement has been signed below by the following persons in
the capacities and on the date(s) indicated.
Name Title Date
---- ----- ----
/s/ Steven C. Leuthold President and Treasurer January 19, 2000
- --------------------------- (Principal Executive,
Steven C. Leuthold Financial and Accounting
Officer) and a Director
/s/ Charles D. Zender Director January 19, 2000
- ---------------------------
Charles D. Zender
Director January 19, 2000
- ---------------------------
John S. Chipman
Director January 19, 2000
- ---------------------------
Lawrence L. Horsch
/s/ Paul M. Kelnberger Director January 19, 2000
- ---------------------------
Paul M. Kelnberger
S-5
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit Page No.
---------- ------- -------
(a)(1) Registrant's Articles of Incorporation*
(b) Registrant's Bylaws*
(c) None
(d) Investment Advisory Agreement with Leuthold and
Anderson, Inc.*
(e) None
(f) None
(g) Custodian Agreement with Firstar Trust Company
(predecessor to Firstar Bank, N.A.)*
(h)(1) Fund Administration Servicing Agreement with
Firstar Trust Company (predecessor to Firstar Bank
Milwaukee, N.A.)*
(h)(2) Transfer Agent Agreement with Firstar Trust
Company (predecessor to Firstar Bank Milwaukee,
N.A.)*
(h)(3) Fund Accounting Servicing Agreement with Firstar
Trust Company (predecessor to Firstar Bank
Milwaukee, N.A.)*
(i) Opinion of Foley & Lardner, counsel for Registrant
(j) Consent of Arthur Andersen LLP
(k) None
(l) Subscription Agreement*
(m) None
(n) None
(p) Code of Ethics of Leuthold Funds, Inc. and
Leuthold & Anderson, Inc.
FOLEY & LARDNER
ATTORNEYS AT LAW
CHICAGO FIRSTAR CENTER SACRAMENTO
DENVER 777 EAST WISCONSIN AVENUE SAN DIEGO
JACKSONVILLE MILWAUKEE, WISCONSIN 53202-5367 SAN FRANCISCO
LOS ANGELES TELEPHONE (414) 271-2400 TALLAHASSEE
MADISON FACSIMILE (414) 297-4900 TAMPA
MILWAUKEE WASHINGTON, D.C.
ORLANDO WEST PALM BEACH
WRITER'S DIRECT LINE
414/297-5660
January 31, 2000
Leuthold Funds, Inc.
100 North Sixth Street
Suite 700A
Minneapolis, MN 55403
Ladies & Gentlemen:
We have acted as counsel for you in connection with the preparation of
an Amended Registration Statement on Form N-1A relating to the sale by you of an
indefinite amount of Leuthold Funds, Inc. Common Stock (such Common Stock being
hereinafter referred to as the "Stock") in the manner set forth in the Amended
Registration Statement to which reference is made. In this connection we have
examined: (a) the Amended Registration Statement on Form N-1A; (b) your Articles
of Incorporation and Bylaws, as amended to date; (c) corporate proceedings
relative to the authorization for issuance of the Stock; and (d) such other
proceedings, documents and records as we have deemed necessary to enable us to
render this opinion.
Based upon the foregoing, we are of the opinion that the shares of
Stock when sold as contemplated in the Amended Registration Statement will be
legally issued, fully paid and nonassessable
We hereby consent to the use of this opinion as an exhibit to the
Amended Registration Statement on Form N-1A. In giving this consent, we do not
admit that we are experts within the meaning of Section 11 of the Securities Act
of 1933, as amended, or within the category of persons whose consent is required
by Section 7 of said Act.
Very truly yours,
/s/ FOLEY & LARDNER
Foley & Lardner
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this Form N-1A
Registration Statement for Leuthold Funds.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 28, 2000
LEUTHOLD FUNDS, INC.
and
LEUTHOLD & ANDERSON, INC.
Code of Ethics
Amended effective as of November 8, 1999
I. DEFINITIONS
-----------
A. "Access person" means any director, officer or advisory person of the
Fund or of the Adviser.
B. "Act" means the Investment Company Act of 1940, as amended.
C. "Adviser" means Leuthold & Anderson, Inc.
D. "Advisory person" means: (i) any employee of the Fund or Adviser or of
any company in a control relationship to the Fund or Adviser, who, in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale
of Covered Securities by the Fund, or whose functions relate to the
making of any recommendations with respect to such purchases or sales;
and (ii) any natural person in a control relationship to the Fund or
Adviser who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of Covered Securities by the
Fund.
E. A Covered Security is "being considered for purchase or sale" when a
recommendation to purchase or sell the Covered Security has been made
and communicated and, with respect to the person making the
recommendation, when such person seriously considers making such a
recommendation.
F. "Beneficial ownership" shall be interpreted in the same manner as it
would be under Rule 16a-1(a)(2) under the Securities Exchange Act of
1934 in determining whether a person is the beneficial owner of a
security for purposes as such Act and the rules and regulations
promulgated thereunder.
G. "Control" has the same meaning as that set forth in Section 2(a)(9) of
the Act.
H. "Covered Security" means a security as defined in Section 2(a)(36) of
the Act, except that it does not include:
(i) Direct obligations of the Government of the United States;
<PAGE>
(ii) Bankers' acceptances, bank certificates of deposit, commercial
paper and high quality short-term debt instruments, including
repurchase agreements; and
(iii) Shares issued by open-end registered investment companies.
I. "Disinterested director" means a director of the Fund who is not an
"interested person" of the Fund within the meaning of Section 2(a)(19)
of the Act and the rules and regulations promulgated thereunder.
J. "Fund" means Leuthold Funds, Inc.
K. "Initial Public Offering" means an offering of securities registered
under the Securities Act of 1933, the issuer of which, immediately
before the registration, was not subject to the reporting requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934.
L. "Investment personnel" means: (i) any employee of the Fund or Adviser
or of any company in a control relationship to the Fund or Adviser
who, in connection with his or her regular functions or duties, makes
or participates in making recommendations regarding the purchase or
sale of securities by the Fund; and (ii) any natural person who
controls the Fund or Adviser and who obtains information concerning
recommendations made to the Fund regarding the purchase or sale of
securities by the Fund.
M. A "Limited Offering" means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2)
or Section 4(6) thereof or pursuant to Rule 504, Rule 505 or Rule 506
thereunder.
N. "Purchase or sale of a Covered Security" includes, among other things,
the writing of an option to purchase or sell a Covered Security.
II. APPROVAL OF CODE OF ETHICS
--------------------------
A. The Board of Directors of the Fund, including a majority of the
Disinterested directors, shall approve this Code of Ethics and any
material changes thereto. Prior to approving this Code of Ethics and
any material changes thereto, the Board of Directors must determine
that this Code of Ethics contains provisions reasonably necessary to
prevent access persons from violating Rule 17j-1(b) of the Act and
shall receive a certification from the Adviser that it has adopted
such procedures as are reasonably necessary to prevent access persons
of the Adviser from violating this Code of Ethics.
B. No less frequently than annually, the officers of the Fund and the
officers of the Adviser shall furnish a report to the Board of
Directors of the Fund:
2
<PAGE>
1. Describing issues arising under the Code of Ethics since the last
report to the Board of Directors, including, but not limited to,
information about material violations of the Code of Ethics and
sanctions imposed in response to such material violations. Such
report shall also include a list of access persons under the Code
of Ethics.
2. Certifying that the Fund and Adviser have adopted such procedures
as are reasonably necessary to prevent access persons from
violating the Code of Ethics.
C. This Code of Ethics, the certifications required by Sections II.A. and
II.B.(2), and the reports required by Sections II.B.(1) and II.C shall
be maintained by the Fund's Administrator. The reports required by
Section V shall be maintained by the Fund's President or designee.
III. EXEMPTED TRANSACTIONS
---------------------
The prohibitions of Section IV of this Code of Ethics shall not apply to:
(a) Purchases or sales effected in any account over which the access
person has no direct or indirect influence or control.
(b) Purchases or sales of Covered Securities which are not eligible
for purchase or sale by any Fund; provided, however, that the
prohibitions of Section IV.B of this Code of Ethics shall apply
to such purchases and sales.
(c) Purchases or sales which are non-volitional on the part of either
the access person or the Fund.
(d) Purchases which are part of an automatic dividend reinvestment
plan.
(e) Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities, to
the extent such rights were acquired from such issuer, and sales
of such rights so acquired.
(f) Purchases or sales which receive the prior approval of the Board
of Directors of the Fund because they are only remotely
potentially harmful to the Fund because they would be very
unlikely to affect a highly institutional market, or because they
clearly are not related economically to the securities to be
purchased, sold or held by the Fund.
IV. PROHIBITED PURCHASES AND SALES
------------------------------
A. Except in a transaction exempted by Section III of this Code, no
access person shall purchase or sell, directly or indirectly, any
Covered Security in which he has, or by reason of such transaction
acquires, any direct or indirect beneficial
3
<PAGE>
ownership and which to his actual knowledge at the time of such
purchase or sale is being considered for purchase or sale by the Fund
or is being purchased or sold by the Fund.
B. Except in a transaction exempted by Section III of this Code of
Ethics, Investment Personnel (other than the Fund's President) must
obtain approval from the Fund's President before directly or
indirectly acquiring beneficial ownership in any securities in an
Initial Public Offering or in a Limited Offering. The Fund's President
must obtain approval from a majority of the Disinterested directors
before directly or indirectly acquiring beneficial ownership in any
securities in an Initial Public Offering or in a Limited Offering.
Prior approval shall not be given if the Fund's President or the
Disinterested directors, as applicable, believe(s) that the investment
opportunity should be reserved for the Fund or is being offered to the
individual by reason of his or her position with the Fund.
C. Except in a transaction exempted by Section III of this Code of
Ethics, no access person shall purchase or sell, directly or
indirectly, any security in which he has, or by reason of such
transaction acquires, any direct or indirect beneficial ownership on a
day during which the Fund has a pending "buy" or "sell" order in the
same security until that order is executed or withdrawn.
Notwithstanding the foregoing, Disinterested directors are not subject
to this prohibition unless he or she knows or should have known at the
time of such purchase or sale that the Fund has such a pending "buy"
or "sell" order in the same security.
D. Investment Personnel shall not receive any gift or other thing of more
than de minimis value from any person or entity that does business
with or on behalf of the Fund. The annual receipt of gifts from the
same source valued at $100 or less shall be considered de minimis.
Additionally, the receipt of an occasional dinner, a ticket to a
sporting event or the theater, or comparable entertainment also shall
be considered to be of de minimis value.
E. Except for service which began prior to October 30, 1995, Investment
Personnel shall not serve on the board of directors of publicly traded
companies absent prior authorization of the Board of Directors of the
Fund. The Board of Directors of the Fund may so authorize such board
service only if it determines that such board service is consistent
with the interests of the Fund and its shareholders.
V. REPORTING AND COMPLIANCE PROCEDURES
-----------------------------------
A. Except as provided in Section V.B. of this Code of Ethics, every
access person shall report to the Fund the information described in
Section V.C., Section V.D. and Section V.E. of this Code of Ethics.
All reports shall be filed with the Fund's President or designee.
4
<PAGE>
B. 1. A Disinterested director of the Fund need not make a report
pursuant to Section V.C. and V.E. of this Code of Ethics and need
only report a transaction in a Covered Security pursuant to
Section V.D. of this Code of Ethics if such Disinterested
director, at the time of such transaction, knew or, in the
ordinary course of fulfilling his official duties as a director
of the Fund, should have known that, during the 15-day period
immediately preceding the date of the transaction by the
director, such Covered Security was purchased or sold by the Fund
or was being considered by the Fund or the Adviser for purchase
or sale by the Fund.
2. An access person need not make a report with respect to
transactions effected for, and Covered Securities held in, any
account over which the person has no direct or indirect influence
or control.
3. An access person need not make a quarterly transaction report
pursuant to Section V.D. of this Code of Ethics if the report
would duplicate information contained in broker trade
confirmations or account statements received by the Fund's
President or designee with respect to the access person in the
time period required by Section V.D., provided that all of the
information required by Section V.D. is contained in the broker
trade confirmations or account statements or in the records of
the Fund. Every access person, except Disinterested directors,
shall direct their brokers to supply to the Fund's President or
designee, on a timely basis, duplicate copies of all month-end
account statements reflecting all personal securities
transactions for all securities accounts.
C. Every access person shall, no later than ten (10) days after the
person becomes an access person, file an initial holdings report
containing the following information:
1. The title, number of shares and principal amount of each Covered
Security in which the access person had any direct or indirect
beneficial ownership when the person becomes an access person;
2. The name of any broker, dealer or bank with whom the access
person maintained an account in which any securities were held
for the direct or indirect benefit of the access person; and
3. The date that the report is submitted by the access person.
D. Every access person shall, no later than ten (10) days after the end
of a calendar quarter, file a quarterly transaction report containing
the following information:
1. With respect to any transaction during the quarter in a Covered
Security in which the access person had any direct or indirect
beneficial ownership:
5
<PAGE>
(a) The date of the transaction, the title and the number of
shares, and the principal amount of each security involved;
(b) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(c) The price of the Covered Security at which the transaction
was effected;
(d) The name of the broker, dealer or bank with or through whom
the transaction was effected; and
(e) The date that the report is submitted by the access person.
2. With respect to any account established by the access person in
which any securities were held during the quarter for the direct
or indirect benefit of the access person:
(a) The name of the broker, dealer or bank with whom the access
person established the account;
(b) The date the account was established; and
(c) The date that the report is submitted by the access person.
E. Every access person shall, no later than January 30 each year, file an
annual holdings report containing the following information as of the
preceding December 31:
1. The title, number of shares and principal amount of each Covered
Security in which the access person had any direct or indirect
beneficial ownership;
2. The name of any broker, dealer or bank with whom the access
person maintains an account in which any securities are held for
the direct or indirect benefit of the access person; and
3. The date that the report is submitted by the access person.
F. Any report filed pursuant to Section V.C., Section V.D. or Section
V.E. of this Code of Ethics may contain a statement that the report
shall not be construed as an admission by the person making such
report that he has any direct or indirect beneficial ownership in the
security to which the report relates.
G. The Fund's President or designee shall review all reports filed
pursuant to Section V.C., Section V.D. or Section V.E. of this Code of
Ethics. The Fund's President or designee shall identify all access
persons who are required to file
6
<PAGE>
reports pursuant to this Section V of this Code of Ethics and must
inform such access persons of their reporting obligation.
H. Each year access persons shall certify to the Fund that (i) they have
read and understand this Code of Ethics and recognize that they are
subject thereto, and (ii) they have complied with the requirements of
this Code of Ethics and that they have disclosed or reported all
personal securities transactions required to be disclosed or reported
pursuant to the requirements of this Code of Ethics.
I. Compliance with this Code of Ethics does not relieve access persons of
their obligations under any other code of ethics.
VI. SANCTIONS
---------
Upon discovering a violation of this Code of Ethics, the Board of Directors of
the Fund or the Adviser, as applicable, may impose such sanctions as it deems
appropriate, including inter alia, issuing a letter of censure, or suspension or
termination of employment.
7
