STATEMENT OF ADDITIONAL INFORMATION January 31, 1997,
as Supplemented
April 25, 1997
PRUDENT BEAR FUNDS, INC.
8140 Walnut Hill Lane
Suite 405
Dallas, Texas 75231
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of Prudent Bear Funds,
Inc. dated January 31, 1997. Requests for copies of the Prospectus should
be made by writing to Prudent Bear Funds, Inc., 8140 Walnut Hill Lane,
Suite 405, Dallas, Texas 75231, Attention: Corporate Secretary, or by
calling (214) 696-5474.
<PAGE>
Prudent Bear Funds, Inc.
TABLE OF CONTENTS Page No.
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . 3
DIRECTORS AND OFFICERS OF THE CORPORATION . . . . . . . . . . . . . . 5
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS . . . . . . . . . 6
INVESTMENT ADVISER, ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT AND
ACCOUNTING SERVICES AGENT . . . . . . . . . . . . . . . . . . . 7
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . 10
DISTRIBUTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . 10
SYSTEMATIC WITHDRAWAL PLAN . . . . . . . . . . . . . . . . . . . . . 11
ALLOCATION OF PORTFOLIO BROKERAGE . . . . . . . . . . . . . . . . . . 11
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
STOCKHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . 15
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 16
DESCRIPTION OF SECURITIES RATINGS . . . . . . . . . . . . . . . . . . 17
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . 19
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 19
INVESTMENT RESTRICTIONS
As set forth in the Prospectus dated January 31, 1997 of Prudent
Bear Funds, Inc. (the "Corporation") under the caption "WHAT IS THE FUND'S
INVESTMENT OBJECTIVE?", the investment objective of the Prudent Bear Fund
(the "Fund") is capital appreciation. Consistent with this investment
objective, 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 not purchase securities of any issuer if
the purchase would cause more than 5% of the value of the Fund's
total assets to be invested in securities of such issuer (except
securities of the U.S. government or any agency or
instrumentality thereof), or purchase more than 10% of the
outstanding voting securities of any one issuer, except that up
to 25% of the Fund's total assets may be invested without regard
to these limitations.
2. The Fund may sell securities short to the extent
permitted by the Investment Company Act of 1940 (the "Act").
3. The Fund will not purchase securities on margin
(except for such short term credits as are necessary for the
clearance of transactions); provided, however, that the Fund may
(i) borrow money to the extent set forth in investment
restriction no. 4; (ii) purchase or sell futures contracts and
options on futures contracts; (iii) make initial and variation
margin payments in connection with purchases or sales of futures
contracts or options on futures contracts; and (iv) write or
invest in put or call options.
4. The Fund may borrow money or issue senior securities
to the extent permitted by the Act.
5. The Fund may pledge or hypothecate its assets to
secure its borrowings.
6. 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).
7. The Fund will not make loans, including loans of
securities, except it may acquire debt securities from the
issuer or others which are publicly distributed or are of a type
normally acquired by institutional investors and enter into
repurchase agreements.
8. The Fund will not invest 25% or more of its total
assets at the time of purchase in securities of issuers whose
principal business activities are in the same industry.
9. The Fund will not make investments for the purpose of
exercising control or management of any company.
10. 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.
11. The Fund will not purchase or sell commodities or
commodity contracts, except that the Fund may enter into futures
contracts and options on futures contracts.
12. 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 15% of the total value of
its total assets would be invested in such securities.
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 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, or 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 10% 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
Illiquid Securities
The Fund may invest up to 15% of its net assets in securities
for which there is no readily available market ("illiquid securities").
The 15% limitation includes certain securities whose disposition would be
subject to legal restrictions ("restricted securities"). However certain
restricted securities that may be resold pursuant to Rule 144A under the
Securities Act may be considered liquid. The Board of Directors of the
Fund has delegated to the Adviser the day-to-day determination of the
liquidity of a security although it has retained oversight and ultimate
responsibility for such determinations. Although no definite quality
criteria are used, the Board of Directors has directed the Adviser to
consider such factors as (i) the nature of the market for a security
(including the institutional private resale markets); (ii) the terms of
these securities or other instruments allowing for the disposition to a
third party or the issuer thereof (e.g. certain repurchase obligations and
demand instruments); (iii) the availability of market quotations; and (iv)
other permissible factors.
Restricted securities may be sold in private negotiated or other
exempt transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act. When
registration is required, the Fund may be obligated to pay all or part of
the registration expenses and a considerable time may elapse between the
decision to sell and the sale date. If, during such period, adverse
market conditions were to develop, the Fund might obtain a less favorable
price than the price which prevailed when it decided to sell. Restricted
securities will be priced at fair value as determined in good faith by the
Board of Directors.
Borrowing
Although the Fund's fundamental policies permit it to borrow
money or issue senior securities to the extent permitted by the Act, the
Fund's Prospectus states that the Fund does not presently intend to borrow
for investment purposes. Borrowing for investment, or leveraging, is a
speculative technique which increases investment risk, but also increases
investment opportunity. Since substantially all of the Fund's assets will
fluctuate in value, whereas the interest obligations on borrowings may be
fixed, the net asset value per share of the Fund will increase more when
the Fund's portfolio assets increase in value and decrease more when the
Fund's portfolio assets decrease in value than would otherwise be the
case. Moreover, interest costs on borrowings may fluctuate with changing
market rates of interest and may partially offset or exceed the returns on
the borrowed funds. Under adverse conditions, the Fund might have to sell
portfolio securities to meet interest or principal payments at a time
investment considerations would not favor such sales. The Fund may use
leverage during periods when the Adviser believes that the Fund's
investment objective would be furthered.
Portfolio Turnover
The Fund will generally purchase and sell securities and effect
transactions in futures contracts without regard to the length of time the
security has been held or the futures contract open and, accordingly, it
can be expected that the rate of portfolio turnover may be substantial.
In selling a security or closing a futures contract, the Adviser will
consider that profits from sales of securities held less than three months
must be limited in order to meet the requirements of Subchapter M of the
Internal Revenue Code. Subject to the foregoing, the Fund may sell a
given security or close a futures contract, no matter for how long or
short a period it has been held in the portfolio, and no matter whether
the sale is at a gain or loss, if the Adviser believes that it is not
fulfilling its purpose. Since investment decisions are based on the
anticipated contribution of the security in question to the Fund's
investment objective, the rate of portfolio turnover is irrelevant when
the Adviser believes a change is in order to achieve those objectives, and
the Fund's annual portfolio turnover rate may vary from year to year.
Notwithstanding the foregoing, the Fund's portfolio turnover rate will
generally not exceed 100%. Pursuant to Securities and Exchange Commission
requirements, the portfolio turnover rate of the Fund is calculated
without regard to securities, including short sales, options and futures
contracts, having a maturity of less than one year. The Fund will hold a
significant portion of its assets in assets which are excluded for
purposes of calculating portfolio turnover.
High portfolio turnover in any year will result in the payment
by the Fund of above-average transaction costs and could result in the
payment by shareholders of above-average amounts of taxes on realized
investment gains.
DIRECTORS AND OFFICERS OF THE CORPORATION
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:
* David W. Tice -- Director, President and Treasurer. Mr.
Tice, 42, has been President of David W. Tice & Associates, Inc. (the
"Adviser") since 1993. Between 1988 and 1993 Mr. Tice conducted a
predecessor investment advisory business as a sole proprietorship. Mr.
Tice is also the President and sole shareholder of BTN Research, Inc., a
registered broker-dealer. His address is 8140 Walnut Hill Lane, Suite
405, Dallas, TX 75231.
* Gregg Jahnke -- Director, Vice President and Secretary. Mr.
Jahnke, 38, has been employed by both Mr. Tice and the Adviser as an
investment analyst since 1991. Currently he is an analyst and senior
strategist of the Adviser. From 1987 through 1994 Mr. Jahnke also was a
securities analyst for JKE Equity Research, a Fort Worth, Texas investment
advisory firm. His address is 8140 Walnut Hill Lane, Suite 405, Dallas,
TX 75231.
David Eric Luck -- Director. Mr. Luck, 42, has been President
of Redstone Oil & Gas Company since 1988. His address is 9223 Club Glen
Drive, Dallas, TX 75243.
Jerry Marlin, M.D. -- Director. Dr. Marlin, 42, has been a
self-employed neurosurgeon for more than five years. His address is 3033
Rosedale, Dallas, TX 75205.
Buril Ragsdale -- Director. Mr. Ragsdale, 62, has been employed
by ENSEARCH Corporation has a senior development specialist and senior
economic specialist since 1976. His address is 9149 Emberglow Lane,
Dallas, TX 75243.
*Messrs. Tice and Jahnke are interested persons of the Corporation
(as defined in the Investment Company Act of 1940).
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 $250 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 Corporation was organized on October 25, 1995. The table
below sets forth the compensation paid by the Corporation to each of the
current directors of the Corporation during the fiscal year ended
September 30, 1996:
<TABLE>
COMPENSATION TABLE
<CAPTION>
Total
Compensation
from Corporation
Pension or Retirement Estimated Annual and Fund
Name of Aggregate Compensation Benefits Accrued As Benefits Upon Complex Paid to
Person from Corporation Part of Fund Expenses Retirement Directors
<S> <C> <C> <C> <C>
David W. Tice $0 $0 $0 $0
Gregg Jahnke $0 $0 $0 $0
David Eric Luck $500 $0 $0 $500
Jerry Marlin, M.D. $500 $0 $0 $500
Buril Ragsdale $500 $0 $0 $500
</TABLE>
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Set forth below are the names and addresses of all holders of
the Fund's shares who as of December 31, 1996 held of record more than 5%
of the Fund's then outstanding shares. The Fund knows of no person who
beneficially owns 5% or more of the Fund's outstanding shares. All
officers and directors of the Fund as a group beneficially owned less than
1%.
Name and Address of Beneficial Owner Number of Percent of
Shares Class
Donaldson Lufkin & Jenrette
Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303-2052 256,405 20.52%
National Financial Services Corp.
One World Financial Center
200 Liberty Street
New York, NY 10281-1003 101,353 8.11%
INVESTMENT ADVISER, ADMINISTRATOR, CUSTODIAN,
TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
As set forth in the Prospectus under the caption "MANAGEMENT OF
THE FUND," the investment adviser to the Fund is David W. Tice &
Associates, Inc., 8140 Walnut Hill Lane, Suite 405, Dallas, Texas 75231
(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 David W.
Tice, its President and sole shareholder. During the period from December
28, 1995 (commencement of operations) through September 30, 1996, the Fund
incurred advisory fees of $22,220, all of which were waived by the
Adviser.
The Adviser has undertaken to reimburse the Fund to the extent
that the aggregate annual operating expenses, including the investment
advisory fee and the administration fee but excluding interest, taxes,
brokerage commissions and other costs incurred in connection with the
purchase or sale of portfolio securities, and extraordinary items, exceed
that percentage of the average net assets of the Fund for such year, as
determined by valuations made as of the close of each business day of the
year, which is the most restrictive percentage provided by the state laws
of the various states in which the shares of the Fund are qualified for
sale or, if the states in which the shares of the Fund are qualified for
sale impose no such restrictions, 3%. As of the date of this Statement of
Additional Information, no such state law provision was applicable to the
Fund. The Fund monitors its expense ratio on a monthly basis. If the
accrued amount of the expenses of the Fund exceeds the expense limitation,
the Fund creates an account receivable from the Adviser for the amount of
such excess. In such a situation the monthly payment of the Adviser's fee
will be reduced by the amount of such excess (and if the amount of such
excess in any month is greater than the monthly payment of the Adviser's
fee, the Adviser will pay the Fund the amount of such difference), subject
to adjustment month by month during the balance of the Fund's fiscal year
if accrued expenses thereafter fall below this limit. During the period
from December 28, 1995 (commencement of operations) through September 30,
1996, the Adviser reimbursed the Fund $104,260 for excess expenses, which
amount includes the investment advisory fee waivers discussed above.
The Advisory Agreement will remain in effect as long as its
continuance is specifically approved at least annually (i) by the Board of
Directors of the Corporation or by the vote of a majority (as defined in
the Act) of the outstanding shares of the Fund, and (ii) by the vote of a
majority of the directors of the Fund who are not parties to the Advisory
Agreement or interested persons of the Adviser, cast in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement provides that it may be terminated at any time without the
payment of any penalty, by the Board of Directors of the Corporation or by
vote of the majority of the Fund's stockholders on sixty (60) days'
written notice to the Adviser, and by the Adviser on the same notice to
the Corporation, and that it shall be automatically terminated if it is
assigned.
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.
As set forth in the Prospectus under the caption "WHO MANAGES
THE FUND?", the administrator to the Corporation is Firstar Trust Company,
615 East Michigan Street, Milwaukee, Wisconsin 53202 (the
"Administrator"). The Fund Administration Servicing Agreement entered
into between the Corporation and the Administrator relating to the Fund
(the "Administration Agreement") will remain in effect until terminated by
either party. The Administration Agreement may be terminated at any time,
without the payment of any penalty, by the Board of Directors of the
Corporation upon the giving of ninety (90) days' written notice to the
Administrator, or by the Administrator upon the giving of ninety (90)
days' written notice to the Corporation. The total fees incurred pursuant
to the Administration Agreement for the period from December 28, 1995
(commencement of operations) through September 30, 1996 were $18,721.
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.
Firstar Trust Company also serves as custodian of the
Corporation's assets pursuant to a Custody Agreement. Under the Custody
Agreement, Firstar Trust Company 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 shareholders, security
brokers and others relating to its duties and (v) make periodic reports to
the Fund concerning the Fund's operations. Firstar Trust Company does not
exercise any supervisory function over the purchase and sale of
securities. For its services as custodian, Firstar Trust Company is
entitled to receive a fee, payable monthly, based on the annual rate of
.02% of the net assets of the Fund (subject to a minimum annual $3,000
fee). In addition, Firstar Trust Company, as custodian, is entitled to
certain charges for securities transactions and reimbursement for
expenses.
Firstar Trust Company also serves as transfer agent and dividend
disbursing agent for the Fund under a Shareholder Servicing Agent
Agreement. As transfer and dividend disbursing agent, Firstar Trust
Company has agreed to (i) issue and redeem shares of the Fund, (ii) make
dividend and other distributions to shareholders of the Fund, (iii)
respond to correspondence by Fund shareholders and others relating to its
duties, (iv) maintain shareholder accounts, and (v) make periodic reports
to the Fund. For its transfer agency and dividend disbursing services,
Firstar Trust Company is entitled to receive fees at the rate of $14 per
shareholder account (subject to a minimum annual fee of $21,000). Also,
Firstar Trust Company is entitled to certain other transaction charges and
reimbursement for expenses.
In addition the Corporation has entered into a Fund Accounting
Servicing Agreement with Firstar Trust Company pursuant to which Firstar
Trust Company 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 Trust Company is entitled to receive fees,
payable monthly, based on the total annual rate of $22,000 for the first
$40 million in average net assets of the Fund, .01% on the next $200
million of average net assets, and .005% on average net assets exceeding
$240 million (subject to an annual minimum of $22,000). Firstar Trust
Company is also entitled to certain out of pocket expenses, including
pricing expenses. During the period from December 28, 1995 (commencement
of operations) through September 30, 1996, the Fund incurred $17,894
pursuant to the Fund Accounting Servicing Agreement.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "HOW IS THE
FUND'S SHARE PRICE DETERMINED?", the net asset value of the Fund will be
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, Washington's Birthday, 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
yearly accounting period. The New York Stock Exchange also may be closed
on national days of mourning.
DISTRIBUTION OF SHARES
The Fund has adopted a Service and Distribution Plan (the
"Plan") in anticipation that the Fund will benefit from the Plan through
increased sales of shares, thereby reducing the Fund's greater flexibility
in management. The Plan may be terminated by the Fund at any time by a
vote of the directors of the Corporation who are not interested persons of
the Corporation and who have no direct or indirect financial interest in
the Plan or any agreement related thereto (the "Rule 12b-1 Directors") or
by a vote of a majority of the outstanding shares of the Fund. Messrs.
Luck, Marlin and Ragsdale are currently the Rule 12b-1 Directors. Any
change in the Plan that would materially increase the distribution
expenses of the Fund provided for in the Plan requires approval of the
shareholders of such Fund and the Board of Directors, including the Rule
12b-1 Directors.
While the Plan is in effect, the selection and nomination of
directors who are not interested persons of the Corporation will be
committed to the discretion of the directors of the Corporation who are
not interested persons of the Corporation. The Board of Directors of the
Corporation must review the amount and purposes of expenditures pursuant
to the Plan quarterly as reported to it by a Distributor, if any, or
officers of the Corporation. The Plan will continue in effect for as long
as its continuance is specifically approved at least annually by the Board
of Directors, including the Rule 12b-1 Directors. During the period from
December 28, 1995 (commencement of operations) through September 30, 1996
the Fund incurred fees of $3,633 pursuant to the Plan, all of which were
used to pay costs incurred in printing New Account Applications.
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 Trust Company, 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 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 Trust Company in writing thirty (30)
days prior to the next payment.
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-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.
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. Brokerage
commissions paid by the Fund during the period from December 28, 1995
(commencement of operations) through September 30, 1996 totalled $19,267
on total transactions of $5,988,814. All of the brokers to whom
commissions were paid provided research services to the Adviser.
TAXES
As set forth in the Prospectus under the caption "TAXES," the
Fund will endeavor to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code").
Under the Code, the Fund will not qualify as a regulated
investment company for any taxable year if more than 30% of the Fund's
gross income for that year is derived from gains on the sale of securities
held less than three months (the "30% Test"). These requirements may also
restrict the extent of the Fund's activities in option and other portfolio
transactions. Specifically, the 30% Test will limit the extent to which a
Fund may: (i) sell securities held for less than three months; (ii) write
options which expire in less than three months; (iii) effect closing
transactions with respect to call or put options that have been written or
purchased within the preceding three months; and (iv) effect short sales.
If a call option written by the Fund expires, the amount of the
premium received by the Fund for the option will be short-term or
long-term capital gain to the Fund depending on the Fund's holding period
for the underlying security or underlying futures contract. If such an
option is closed by the Fund, any gain or loss realized by the Fund as a
result of the closing purchase transaction will be short-term or long-term
capital gain or loss depending on the Fund's holding period for the
underlying security or underlying futures contract. If the holder of a
call option exercises the holder's right under the option, any gain or
loss realized by the Fund upon the sale of the underlying security or
underlying futures contract pursuant to such exercise will be short-term
or long-term capital gain or loss to the Fund depending on the Fund's
holding period for the underlying security or underlying futures contract.
With respect to call options purchased by the Fund, the Fund
will realize short-term or long-term capital gain or loss if such option
is sold and will realize short-term or long-term capital loss if the
option is allowed to expire depending on the Fund's holding period for the
call option. If such a call option is exercised, the amount paid by the
Fund for the option will be added to the basis of the stock or futures
contract so acquired.
The Fund has available to it a number of elections under the
Code concerning the treatment of option transactions for tax purposes.
The Fund will utilize the tax treatment that, in the Fund's judgment, will
be most favorable to a majority of investors in the Fund. Taxation of
these transactions will vary according to the elections made by the Fund.
These tax considerations may have an impact on investment decisions made
by the Fund.
The Fund will utilize options on stock indexes. Options on
"broadbased" stock indexes are classified as "nonequity options" under the
Code. Gains and losses resulting from the expiration, exercise or closing
of such nonequity options, as well as gains and losses resulting from
futures contract transactions, will be treated as long-term capital gain
or loss to the extent of 60% thereof and short-term capital gain or loss
to the extent of 40% thereof (hereinafter "blended gain or loss"). In
addition, any nonequity option held by the Fund on the last day of a
fiscal year will be treated as sold for market value on that date, and
gain or loss recognized as a result of such deemed sale will be blended
gain or loss. These tax considerations may have an impact on investment
decisions made by the Fund.
The trading strategies of the Fund involving nonequity options
on stock indexes may constitute "straddle" transactions. "Straddles" may
affect the taxation of such instruments and may cause the postponement of
recognition of losses incurred in certain closing transactions.
Dividends from the Fund's earnings and profits, and
distributions of the Fund's net long-term realized capital gains, are
taxable to investors, whether received in cash or in additional shares of
the Fund. The 70% dividends-received deduction for corporations will
apply only to the proportionate share of the dividend attributable to
dividends received by the Fund from domestic corporations.
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 capital gain distribution during that period, then such loss is treated
as a long-term capital loss to the extent of the capital gain distribution
received.
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 Corporation, to operate without an
annual meeting of stockholders under specified circumstances if an annual
meeting is not required by the Act. The Corporation 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 Corporation'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 Corporation 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 Corporation'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 Corporation; 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.
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.
PERFORMANCE INFORMATION
Average annual total return measures both the net investment
income generated by, and the effect of any realized or unrealized
appreciation or depreciation of, the underlying investments in the Fund's
investment portfolio. The Fund's average annual total return figures are
computed in accordance with the standardized method prescribed by the
Securities and Exchange Commission by determining the average annual
compounded rates of return over the periods indicated, that would equate
the initial amount invested to the ending redeemable value, according to
the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of
the period of a hypothetical $1,000
payment made at the beginning of such
period
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value or 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.
Total return is the cumulative rate of investment growth which
assumes that income dividends and capital gains are reinvested. It is
determined by assuming a hypothetical investment at the net asset value at
the beginning of the period, adding in the reinvestment of all income
dividends and capital gains, calculating the ending value of the
investment at the net asset value as of the end of the specified time
period, subtracting the amount of the original investment, and dividing
this amount by the amount of the original investment. This calculated
amount is then expressed as a percentage by multiplying by 100.
The Fund's total return for the period from the Fund's
commencement of operations (December 28, 1995) through September 30, 1996
was (11.20%). 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 December 28,
1995 through September 30, 1996 to keep aggregate annual operating
expenses at or below 2.75% 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.
DESCRIPTION OF SECURITIES RATINGS
As set forth in the Corporation's Prospectus, the Fund may
invest in commercial paper and commercial paper master notes assigned
ratings of either Standard & Poor's Corporation ("Standard & Poor's") or
Moody's Investors Service, Inc. ("Moody's"). A brief description of the
ratings symbols and their meanings follows.
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.
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
Price Waterhouse LLP, 100 East Wisconsin Avenue, Suite 1500,
Milwaukee, Wisconsin 53202, has been selected as the independent
accountants for the Fund. As such Price Waterhouse LLP performs an audit
of the Fund's financial statements and considers the Fund's internal
control structure.
FINANCIAL STATEMENTS
The following financial statements are incorporated by reference
to the Annual Report, dated September 30, 1996, of the Fund (File No. 811-
9120), as filed with the Securities and Exchange Commission on November
27, 1996:
- Statement of Assets and Liabilities as of September 30,
1996.
- Statement of Operations For the Period From December 28,
1995 (Commencement of Operations) through September 30,
1996.
- Statement of Changes in Net Assets For the Period From
December 28, 1995 through September 30, 1996.
- Financial Highlights For the Period From December 28, 1995
through September 30, 1996.
- Schedule of Investments as of September 30, 1996.
- Schedule of Securities Sold Short as of September 30, 1996.
- Notes to Financial Statements.
- Report of Independent Accountants.
