STATEMENT OF ADDITIONAL INFORMATION December 31, 1997
as Supplemented
February 20, 1998
FMI FUNDS, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the prospectus of FMI Funds, Inc.,
dated December 31, 1997. Requests for copies of the Prospectus should be
made by writing to FMI Funds, Inc., 225 East Mason Street, Milwaukee,
Wisconsin 53202, Attention: Secretary or by calling (414) 226-4555.
<PAGE>
FMI FUNDS, INC.
Table of Contents
Page No.
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . 3
DIRECTORS AND OFFICERS OF THE CORPORATION . . . . . . . . . . . . . . 8
PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 11
INVESTMENT ADVISER AND ADMINISTRATOR . . . . . . . . . . . . . . . . 12
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE . . . . . . . . . . 13
DISTRIBUTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . 14
ALLOCATION OF PORTFOLIO BROKERAGE . . . . . . . . . . . . . . . . . . 15
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
STOCKHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . 18
DESCRIPTION OF SECURITIES RATINGS . . . . . . . . . . . . . . . . . . 19
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . 20
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 21
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 December 31, 1997 and, if
given or made, such information or representations may not be relied upon
as having been authorized by FMI Funds, Inc.
This Statement of Additional Information does not constitute an
offer to sell securities.
INVESTMENT RESTRICTIONS
As set forth in the Prospectus dated December 31, 1997 of FMI
Funds, Inc. (the "Corporation") under the caption "Investment Objective
and Policies", the investment objective of FMI Focus Fund (the "Fund") is
capital appreciation. Consistent with its 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 stockholders 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 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. 3; (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.
2. The Fund may sell securities short and write put and call
options to the extent permitted by the Investment Company Act of 1940 (the
"Act").
3. The Fund may borrow money or issue senior securities to the
extent permitted by the Act.
4. The Fund may pledge or hypothecate its assets to secure its
borrowings.
5. The Fund will not lend money (except by purchasing publicly
distributed debt securities, purchasing securities of a type normally
acquired by institutional investors or entering into repurchase
agreements) and will not lend its portfolio securities.
6. The Fund will not make investments for the purpose of
exercising control or management of any company.
7. The Fund will not purchase securities of any issuer (other
than the United States or an instrumentality of the United States) if, as
a result of such purchase, the Fund would hold more than 10% of any class
of securities, including voting securities, of such issuer or more than 5%
of the Fund's assets, taken at current value, would be invested in
securities of such issuer, except that up to 50% of the Fund's total
assets may be invested without regard to these limitations.
8. The Fund will not invest 25% or more of the value of its
total assets, determined at the time an investment is made, exclusive of
U.S. government securities, in securities issued by companies primarily
engaged in the same industry.
9. 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 its
investment adviser.
10. 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 (the "Securities Act"), in the
disposition of restricted securities).
11. The Fund will not purchase any interest in any oil, gas or
other mineral leases or any interest in any oil, gas or any other mineral
exploration or development program.
12. The Fund will not purchase or sell real estate or real
estate mortgage loans or real estate limited partnerships.
13. 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.
The Fund has adopted certain other investment restrictions which
are not fundamental policies and which may be changed by the Corporation's
Board of Directors without stockholder approval. These additional
restrictions are as follows:
1. The Fund will not invest more than 15% of the value of its
net assets in illiquid securities.
2. 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.
3. 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 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 (other than those relating to borrowing of
money or issuing senior securities) 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
Corporation 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.
Futures Contracts and Options Thereon
The Fund may purchase and write (sell) stock index futures
contracts as a substitute for a comparable market position in the
underlying securities. A futures contract obligates the seller to deliver
(and the purchaser to take delivery of) the specified commodity on the
expiration date of the contract. A stock index futures contract obligates
the seller to deliver (and the purchaser to take) an amount of cash equal
to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract
and the price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made. It is the practice of holders of
futures contracts to close out their positions on or before the expiration
date by use of offsetting contract positions and physical delivery is
thereby avoided.
The Fund may purchase put and call options and write call
options on stock index futures contracts. When the Fund purchases a put
or call option on a futures contract, the Fund pays a premium for the
right to sell or purchase the underlying futures contract for a specified
price upon exercise at any time during the options period. By writing a
call option on a futures contract, the Fund receives a premium in return
for granting to the purchaser of the option the right to buy from the Fund
the underlying futures contract for a specified price upon exercise at any
time during the option period.
Some futures and options strategies tend to hedge the Fund's
equity positions against price fluctuations, while other strategies tend
to increase market exposure. Whether the Fund realizes a gain or loss
from futures activities depends generally upon movements in the underlying
stock index. The extent of the Fund's loss from an unhedged short
position in futures contracts or call options on futures contracts is
potentially unlimited. The Fund may engage in related closing
transactions with respect to options on futures contracts. The Funds will
purchase or write options only on futures contracts that are traded on a
United States exchange or board of trade.
The Fund may purchase and sell futures contracts and options
thereon only to the extent that such activities would be consistent with
the requirements of Section 4.5 of the regulations under the Commodity
Exchange Act promulgated by the Commodity Futures Trading Commission (the
"CFTC Regulations"), under which the Fund would be excluded from the
definition of a "commodity pool operator." Under Section 4.5 of the CFTC
Regulations, the Fund may engage in futures transactions, either for "bona
fide hedging" purposes, as this term is defined in the CFTC Regulations,
or for non-hedging purposes to the extent that the aggregate initial
margins and premiums required to establish such non-hedging positions do
not exceed 5% of the liquidation value of the Fund's portfolio. In the
case of an option on a futures contract that is "in-the-money" at the time
of purchase (i.e., the amount by which the exercise price of the put
option exceeds the current market value of the underlying instrument or
the amount by which the current market value of the underlying instrument
exceeds the exercise price of the call option), the in-the-money amount
may be excluded in calculating this 5% limitation.
When the Fund purchases or sells a stock index futures contract,
the Fund "covers" its position. To cover its position, the Fund may
maintain with its custodian bank (and mark-to-market on a daily basis) a
segregated account consisting of cash or liquid securities that, when
added to any amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract or otherwise
cover its position. If the Fund continues to engage in the described
securities trading practices and properly segregates assets, the
segregated account will function as a practical limit on the amount of
leverage which the Fund may undertake and on the potential increase in the
speculative character of the Fund's outstanding portfolio securities.
Additionally, such segregated accounts will assure the availability of
adequate funds to meet the obligations of the Fund arising from such
investment activities.
The Fund may cover its long position in a futures contract by
purchasing a put option on the same futures contract with a strike price
(i.e., an exercise price) as high or higher than the price of the futures
contract, or, if the strike price of the put is less than the price of the
futures contract, the Fund will maintain in a segregated account cash or
high-grade liquid debt securities equal in value to the difference between
the strike price of the put and the price of the futures contract. The
Fund may also cover its long position in a futures contract by taking a
short position in the instruments underlying the futures contract, or by
taking positions in instruments the prices of which are expected to move
relatively consistently with the futures contract. The Fund may cover its
short position in a futures contract by taking a long position in the
instruments underlying the futures contract, or by taking positions in
instruments the prices of which are expected to move relatively
consistently with the futures contract.
The Fund may cover its sale of a call option on a futures
contract by taking a long position in the underlying futures contract at a
price less than or equal to the strike price of the call option, or, if
the long position in the underlying futures contract is established at a
price greater than the strike price of the written call, the Fund will
maintain in a segregated account cash or high-grade liquid debt securities
equal in value to the difference between the strike price of the call and
the price of the futures contract. The Fund may also cover its sale of a
call option by taking positions in instruments the prices of which are
expected to move relatively consistently with the call option.
Although the Fund intends to sell futures contracts only if
there is an active market for such contracts, no assurance can be given
that a liquid market will exist for any particular contract at any
particular time. Many futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit or
trading may be suspended for specified periods during the day. Futures
contract prices could move to the limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and potentially subjecting the Fund to substantial
losses. If trading is not possible, or the Fund determines not to close a
futures position in anticipation of adverse price movements, the Fund will
be required to make daily cash payments of variation margin. The risk
that the Fund will be unable to close out a futures position will be
minimized by entering into such transactions on a national exchange with
an active and liquid secondary market.
Index Options Transactions
The Fund may purchase put and call options and write call
options on stock indexes. A stock index fluctuates with changes in the
market values of the stock included in the index. Options on stock
indexes give the holder the right to receive an amount of cash upon
exercise of the options. Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being
greater than (in the case of a call) or less than (in the case of a put)
the exercise price of the option. The amount of cash received, if any,
will be the difference between the closing price of the index and the
exercise price of the option, multiplied by a specified dollar multiple.
The writer (seller) of the option is obligated, in return for the premiums
received from the purchaser of the option, to make delivery of this amount
to the purchaser. Unlike the options on securities discussed below, all
settlements of index options transactions are in cash.
Some stock index options are based on a broad market index such
as the S&P 500 Index, the NYSE Composite Index or the AMEX Major Market
Index, or on a narrower index such as the Philadelphia Stock Exchange
Over-the-Counter Index. Options currently are traded on the Chicago Board
of Options Exchange, the AMEX and other exchanges. Over-the-counter index
options, purchased over-the-counter options and the cover for any written
over-the-counter options would be subject to the Fund's 15% limitation on
investment in illiquid securities. See "Illiquid Securities."
Each of the exchanges has established limitations governing the
maximum number of call or put options on the same index which may be
bought or written (sold) by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written on one or more accounts
or through one or more brokers). Under these limitations, options
positions of certain other accounts advised by the same investment adviser
are combined for purposes of these limits. Pursuant to these limitations,
an exchange may order the liquidation of positions and may impose other
sanctions or restrictions. These position limits may restrict the number
of listed options which the Fund may buy or sell; however, the Adviser
intends to comply with all limitations.
Index options are subject to substantial risks, including the
risk of imperfect correlation between the option price and the value of
the underlying securities comprising the stock index selected and the risk
that there might not be a liquid secondary market for the option. Because
the value of an index option depends upon movements in the level of the
index rather than the price of a particular stock, whether the Fund will
realize a gain or loss from the purchase of writing of options on an index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry or market
segment, rather than upon movements in the price of a particular stock.
Trading in index options requires different skills and techniques than are
required for predicting changes in the prices of individual stocks. The
Fund will not enter into an option position that exposes the Fund to an
obligation to another party, unless the Fund either (i) owns an offsetting
position in securities or other options; and/or (ii) maintains with the
Fund's custodian bank (and marks-to-market, on a daily basis) a segregated
account consisting of cash or liquid securities that, when added to the
premiums deposited with respect to the option, are equal to the market
value of the underlying stock index not otherwise covered.
The Adviser may utilize index options as a technique to leverage
the portfolio of the Fund. If the Adviser is correct in its assessment of
the future direction of stock prices, the share price of the Fund will be
enhanced. If the Adviser has the Fund take a position in options and
stock prices move in a direction contrary to the Adviser's forecast
however, the Fund would incur losses greater than the Fund would have
incurred without the options position.
Options on Securities
The Fund may buy put and call options and write (sell) call
options on securities. By writing a call option and receiving a premium,
the Fund may become obligated during the term of the option to deliver the
securities underlying the option at the exercise price if the option is
exercised. By buying a put option, the Fund has the right, in return for
a premium paid during the term of the option, to sell the securities
underlying the option at the exercise price. By buying a call option, the
Fund has the right, in return for a premium paid during the term of the
option, to purchase the securities underlying the option at the exercise
price. Options on securities written by the Fund will be traded on
recognized securities exchanges.
When writing call options on securities, the Fund may cover its
position by owning the underlying security on which the option is written.
Alternatively, the Fund may cover its position by owning a call option on
the underlying security, on a share for share basis, which is deliverable
under the option contract at a price no higher than the exercise price of
the call option written by the Fund or, if higher, by owning such call
option and depositing and maintaining in a segregated account cash or
liquid securities equal in value to the difference between the two
exercise prices. In addition, the Fund may cover its position by
depositing and maintaining in a segregated account cash or liquid
securities equal in value to the exercise price of the call option written
by the Fund. The principal reason for the Fund to write call options on
stocks held by the Fund is to attempt to realize, through the receipt of
premiums, a greater return than would be realized on the underlying
securities alone.
When the Fund wishes to terminate the Fund's obligation with
respect to an option it has written, the Fund may effect a "closing
purchase transaction." The Fund accomplishes this by buying an option of
the same series as the option previously written by the Fund. The effect
of the purchase is that the writer's position will be canceled. However,
a writer may not effect a closing purchase transaction after the writer
has been notified of the exercise of an option. When the Fund is the
holder of an option, it may liquidate its position by effecting a "closing
sale transaction." The Fund accomplishes this by selling an option of the
same series as the option previously purchased by the Fund. There is no
guarantee that either a closing purchase or a closing sale transaction can
be effected. If any call or put option is not exercised or sold, the
option will become worthless on its expiration date.
The Fund will realize a gain (or a loss) on a closing purchase
transaction with respect to a call option previously written by the Fund
if the premium, plus commission costs, paid by the Fund to purchase the
call option is less (or greater) than the premium, less commission costs,
received by the Fund on the sale of the call option. The Fund also will
realize a gain if a call option which the Fund has written lapses
unexercised, because the Fund would retain the premium.
The Fund will realize a gain (or a loss) on a closing sale
transaction with respect to a call or a put option previously purchased by
the Fund if the premium, less commission costs, received by the Fund on
the sale of the call or the put option is greater (or less) than the
premium, plus commission costs, paid by the Fund to purchase the call or
the put option. If a put or a call option which the Fund has purchased
expires out-of-the-money, the option will become worthless on the
expiration date, and the Fund will realize a loss in the amount of the
premium paid, plus commission costs.
Although certain securities exchanges attempt to provide
continuously liquid markets in which holders and writers of options can
close out their positions at any time prior to the expiration of the
option, no assurance can be given that a market will exist at all times
for all outstanding options purchased or sold by the Fund. In such event,
the Fund would be unable to realize its profits or limit its losses until
the Fund would exercise options it holds and the Fund would remain
obligated until options it wrote were exercised or expired.
Because option premiums paid or received by the Fund are small
in relation to the market value of the investments underlying the options,
buying and selling put and call options can be more speculative than
investing directly in common stocks.
DIRECTORS AND OFFICERS OF THE CORPORATION
The name, address principal occupations during the past five
years and other information with respect to each of the directors and
offices of the Fund are as follows:
BARRY K. ALLEN Age 49
30 South Wacker Drive
Suite 3800
Chicago, IL 60606
(A DIRECTOR OF THE FUND)
Mr. Allen is Executive Vice President, Consumer & Business
Services, Ameritech, Chicago, Illinois and has served in that capacity
since August, 1995. From September, 1993 to August 1995, Mr. Allen was
President and Chief Operating Officer of Marquette Electronics, Inc., a
manufacturer of medical electronic equipment and systems, Milwaukee,
Wisconsin. From July, 1993 to September, 1993, Mr. Allen was President
and Chief Executive Officer of Ameritech Illinois and from July, 1989 to
July, 1993, Mr. Allen was President and Chief Executive Officer of
Wisconsin Bell. Mr. Allen is a director of Harley-Davidson Inc. Mr.
Allen is also a director of Fiduciary Capital Growth Fund, Inc., an
investment company for which the Adviser serves as investment adviser.
GEORGE D. DALTON Age 69
255 Fiserv Drive
Brookfield, WI 53045
(A DIRECTOR OF THE FUND)
Mr. Dalton is Chairman of the Board, Chief Executive Officer and
a director of Fiserv, Inc., a provider of financial data processing
services to financial institutions, and has served in that capacity since
1984. Mr. Dalton is also a member of the Board of Directors of ARI
Network Services, Inc., a provider of standard-based Internet-enabled
electronic commerce services, and APAC TeleServices, Inc., a provider of
out-sourced telephone-based marketing, sales and customer management
solutions.
PATRICK ENGLISH* Age 37
225 East Mason Street
Milwaukee, Wisconsin
(VICE PRESIDENT AND A DIRECTOR OF THE FUND)
Mr. English is Senior Vice President of Fiduciary Management,
Inc. and has been employed by such firm in various capacities since
December, 1986. Mr. English is also Vice President of Fiduciary Capital
Growth Fund, Inc.
TED D. KELLNER* Age 51
225 East Mason Street
Milwaukee, Wisconsin
(PRESIDENT, TREASURER AND A DIRECTOR OF THE FUND)
Mr. Kellner is Chairman of the Board and Chief Executive Officer
of Fiduciary Management, Inc., an investment advisory firm, which he
co-founded with Mr. Donald S. Wilson in 1980. Mr. Kellner is also
President, Treasurer and a director of Fiduciary Capital Growth Fund, Inc.
THOMAS W. MOUNT Age 66
401 Pine Terrace
Oconomowoc, Wisconsin
(A DIRECTOR OF THE FUND)
Mr. Mount is retired Chairman and a director of Stokely
USA, Inc., a canned and frozen food processor and was employed by such
firm in various capacities since 1957. Mr. Mount is also a director of
Fiduciary Capital Growth Fund, Inc.
DONALD S. WILSON* Age 54
225 East Mason Street
Milwaukee, Wisconsin
(VICE PRESIDENT, SECRETARY AND A DIRECTOR OF THE FUND)
Mr. Wilson is President and Treasurer of Fiduciary Management,
Inc. Mr. Wilson is also Vice President, Secretary and a director of
Fiduciary Capital Growth Fund, Inc.
GARY G. WAGNER Age 54
225 East Mason Street
Milwaukee, Wisconsin
(VICE PRESIDENT AND ASSISTANT SECRETARY OF THE FUND)
Mr. Wagner has been Executive Vice President of Fiduciary
Management, Inc. since July 1, 1987. Mr. Wagner is also Vice President
and Assistant Secretary of Fiduciary Capital Growth Fund, Inc.
____________________
* Messrs. English, Kellner and Wilson are directors who are "interested
persons" of the Fund as that term is defined in the Investment Company Act
of 1940.
The Corporation was organized on September 5, 1996. The
Corporation's standard method of compensating directors is to pay each
director who is not an officer of the Corporation a fee of $150 for each
meeting of the Board of Directors attended. The table below sets forth
the compensation paid by the Corporation to each of the directors of the
Corporation during the fiscal year ending September 30, 1997:
COMPENSATION TABLE
Total
Pension or Compensation
Retirement from
Benefits Estimated Corporation
Aggregate Accrued as Annual and Fund
Compensation Part of Benefits Complex
Name of from Fund Upon Paid to
Person Corporation Expenses Retirement Directors(1)
Barry K. Allen $0 0 0 $600
Ted D. Kellner 0 0 0 0
Thomas W. Mount $0 0 0 $600
Donald S. Wilson 0 0 0 0
____________________
(1) Fiduciary Capital Growth Fund, Inc. and the Corporation are the only
investment companies in the Fund Complex.
PRINCIPAL STOCKHOLDERS
Set forth below are the names and addresses of all holders of
the Fund's Common Stock who as of November 28, 1997 beneficially owned
more than 5% of the then outstanding shares of the Fund's Common Stock as
well as the number of shares of the Fund's Common Stock beneficially owned
by Ted D. Kellner, Donald S. Wilson and all officers and directors of the
Fund as a group, indicating in each case whether the person has sole or
shared power to vote or dispose of such shares.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership Class
Sole Power Shared Power Aggregate
<S> <C> <C> <C> <C>
Ted D. Kellner
225 East Mason Street
Milwaukee, WI 53202 7,589* 214,157* 221,746* 41.05%*
Donald S. Wilson
225 East Mason Street
Milwaukee, WI 53202 2,849 186,378* 189,227* 35.03%*
Peter Griffith
Investments
57 Down Heath Circle
Littleton, CO 80127 32,042 85,579 117,561 21.76%
H.M. Baskerville, Jr.
c/o Riverway Co.
7703 Normandale Road
Minneapolis, MN 55435 32,895 9,868* 42,763* 7.92%*
Ronald F. Krantz
2315 Evergreen Road
Middleton, WI 53562 0 34,714* 34,714* 6.43%*
Officers & Directors as
a group (7 persons) -- -- 226,874* 42.00%*
_______________
* Includes 186,378 shares owned by the Adviser, retirement plans of the Adviser and
clients of the Adviser (including H.M. Baskerville, Jr. and Ronald F. Krantz) for
whom the Adviser exercises investment discretion. Messrs. Kellner and Wilson share
the power to vote and dispose of the same 186,378 shares.
</TABLE>
By virtue of their stock ownership, Messrs. Kellner and Wilson
are deemed to "control," as that term is defined in the Act, the Fund and
the Corporation. The Corporation does not control any person.
INVESTMENT ADVISER AND ADMINISTRATOR
As set forth in the Prospectus under the caption "Management of
the Fund" the investment adviser and administrator to the Fund is
Fiduciary Management, Inc. (the "Adviser"). The Adviser is controlled by
Ted D. Kellner and Donald S. Wilson. The Adviser's executive officers
include Messrs. Kellner, Wilson, Wagner, English, Ms. Maria Blanco, Senior
Vice President and Secretary, Mr. John Brandser, Vice President - Fixed
Income, Ms. Camille Wildes, Vice President and Ms. Jody Reckard, Vice
President. The directors of the Adviser are Messrs. Kellner and Wilson.
Pursuant to an investment advisory agreement between the Fund
and the Adviser (the "Advisory Agreement"), the Adviser furnishes
continuous investment advisory services to the Fund. The Fund did not
begin operations until December 16, 1996. During the period from December
16, 1996 through September 30, 1997, the Fund paid the Adviser advisory
fees of $10,941. During such period the Advisory Agreement provided for
the Adviser to be paid annual advisory fees equal to 1.0% of the average
daily net assets of the Fund.
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
extraordinary items, exceed that percentage of the daily 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 its shares are
qualified for sale or, if the states in which its shares are qualified for
sale impose no such restrictions, 2.75%. As of the date of this Statement
of Additional Information, the shares of the Fund are not qualified for
sale in any state which imposes an expense limitation. Accordingly, the
percentage applicable to the Fund is 2.75%. 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, 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 16, 1996 through
September 30, 1997, the Adviser reimbursed the Fund $39,748 for excess
expenses.
As set forth in the Prospectus under the caption "Management of
the Fund" the Adviser is also the administrator to the Fund. Pursuant to
an administration agreement (the "Administration Agreement") between the
Fund and the Adviser, the Adviser supervises all aspects of the Fund's
operations except those performed by it as investment adviser. In
connection with such supervision the Adviser prepares and maintains the
books, accounts and other documents required by the Investment Company Act
of 1940 (the "Act"), calculates the Fund's net asset value, responds to
stockholder inquiries, prepares the Fund's financial statements and excise
tax returns, prepares 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
accounts and records and generally assists in all respects of the Fund's
operations. During the period from December 16, 1996 through September
30, 1997, the Fund paid the Adviser fees of $3,718 pursuant to the
Administration Agreement.
The Advisory Agreement will remain in effect as long as its
continuance is specifically approved at least annually, by (i) 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 Corporation 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
Administration Agreement will remain in effect as long as its continuance
is specifically approved at least annually by the Board of Directors of
the Corporation. Both the Advisory Agreement and the Administration
Agreement provide that they may be terminated at any time without the
payment of any penalty, by the Board of Directors of the Corporation or by
vote of a majority of the Fund's stockholders, on sixty days' written
notice to the Adviser, and by the Adviser on the same notice to the
Corporation and that they shall be automatically terminated if they are
assigned.
The Advisory Agreement and the Administration Agreement provide
that the Adviser shall not be liable to the Fund or its stockholders for
anything other than willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations or duties. The Advisory Agreement
and the Administration Agreement also provide 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.
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
As set forth in the Prospectus under the caption "Determination
of Net Asset Value" the net asset value of the Fund will be determined as
of the close of regular trading (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, if 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.
Any total rate of return quotation for the Fund will be for a period
of three or more months and will assume the reinvestment of all dividends
and capital gains distributions which were made by the Fund during that
period. Any period total rate of return quotation of the Fund will be
calculated by dividing the net change in value of a hypothetical
shareholder account established by an initial payment of $1,000 at the
beginning of the period by 1,000. The net change in the value of a
shareholder account is determined by subtracting $1,000 from the product
obtained by multiplying the net asset value per share at the end of the
period by the sum obtained by adding (A) the number of shares purchased at
the beginning of the period plus (B) the number of shares purchased during
the period with reinvested dividends and distributions. Any average
annual compounded total rate of return quotation of the Fund will be
calculated by dividing the redeemable value at the end of the period
(i.e., the product referred to in the preceding sentence) by $1,000. A
root equal to the period, measured in years, in question is then
determined and 1 is subtracted from such root to determine the average
annual compounded total rate of return.
The foregoing computation may also be expressed by the following
formula:
n
P(1 + T) = ERV
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made
at the beginning of the stated
period at the end of the stated
period
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 expense ratio and
providing the Adviser with 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. Allen, Dalton and Mount 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 stockholders of the 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. The Fund has not
incurred any distribution costs as of the date of this Statement of
Additional Information.
ALLOCATION OF PORTFOLIO BROKERAGE
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
paragraph. 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 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 are generally
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. 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 it exercises investment discretion. During the
period from December 16, 1996 through September 30, 1997, the Fund paid
brokerage commissions of $12,156 on transactions having a total value of
$5,340,120. All of the brokers to whom the Fund paid commissions provided
research services to the Adviser.
CUSTODIAN
Firstar Trust Company, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as custodian for the Fund. As such, Firstar Trust
Company holds all securities and cash of the Fund, delivers and receives
payment for securities sold, receives and pays for securities purchased,
collects income from investments and performs other duties, all as
directed by officers of the Fund. Firstar Trust Company does not exercise
any supervisory function over the management of the Fund, the purchase and
sale of securities or the payment of distributions to stockholders.
Firstar Trust Company also acts as the Fund's transfer agent and dividend
disbursing agent.
TAXES
As set forth in the Prospectus under the caption "Dividends,
Distributions and 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").
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 capital
gain to the Fund. If such an option is closed by the Fund, any gain or
loss realized by the Fund as a result of the closing transaction will be
short-term capital gain or loss. 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 will utilize options on stock indexes. Options on
"broadbased" stock indexes are generally 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 regulated 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") for determining the character of the distributions. In
addition, nonequity options 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. The realized gain or loss on the ultimate disposition of the option
will be increased or decreased to take into consideration the prior marked
to market gains and losses. 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 short-term or long-
term holding period of such instruments for distributions
characterization.
The Fund may acquire put options. Under the Code, put options
on stock are taxed similar to short sales. If the Fund exercises or fails
to exercise a put option the Fund will be considered to have closed a
short sale. If the Fund owns the underlying stock or acquires the
underlying stock before closing the short sale, the Straddle Rules may
apply and the option positions may be subject to certain modified short
sale rules. The Fund will generally have a short-term gain or loss on the
closing of a short sale. The determination of the length of the holding
period is dependent on the holding period of the stock used to exercise
the put option. If the Fund sells the put option without exercising it,
its holding period will be the holding period of the option.
The Fund intends to distribute substantially all of its net
investment income and net capital gain each fiscal year. Dividends from
net investment income are taxable to investors as ordinary income, while
distributions of net capital gain are taxable as long-term capital gain
regardless of the stockholder's holding period for the shares. The Code
provides for a three-tiered tax rate structure for long-term capital gains
dependent upon the Fund's holding period of the underlying financial
instrument or capital asset. Distributions from the Fund are taxable to
investors, whether received in cash or in additional shares of the Fund.
A portion of the Fund's income distributions may be eligible for the 70%
dividends-received deduction for domestic corporate stockholders.
Any dividend or capital gain distribution paid shortly after a
purchase of shares of the Fund, 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 shares of the
Fund 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 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.
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 he is not subject to backup
withholding due to the under reporting of income. The certification form
is included as part of the share purchase application and should be
completed when the account is opened.
This section is not intended to be a full discussion of present
or proposed federal income tax laws and the effect of such laws on an
investor. Investors are urged to consult with their respective tax
advisers for a complete review of the tax ramifications of an investment
in the Fund.
STOCKHOLDER MEETINGS
The Maryland Business 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 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 upon by the 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.
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 served as the independent accountants for
the Fund since the Fund's inception. 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 audited financial statements are incorporated by
reference herein to the Corporation's Annual Report, dated September 30,
1997, (File No. 811-7831), as filed with the Securities and Exchange
Commission through the EDGAR System on November 12, 1997.
- Report of Independent Accountants
- Statement of Assets and Liabilities as of September 30,
1997
- Schedule of Investments as of September 30, 1997
- Statement of Operations for the period from December 16,
1996 (commencement of operations) to September 30, 1997
- Statement of Changes in Net Assets for the period from
December 16, 1996 (commencement of operations) to September
30, 1997
- Financial Highlights for the period from December 16, 1996
(commencement of operations) to September 30, 1997
- Notes to Financial Statements
