STATEMENT OF ADDITIONAL INFORMATION January 31, 2000
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
January 31, 2000. Requests for copies of the Prospectus should be made by
writing to FMI Funds, Inc., 225 East Mason Street, Milwaukee, Wisconsin 53202,
Attention: Corporate Secretary or by calling
(414) 226-4555.
The following financial statements are incorporated by reference to the
Annual Report, dated September 30, 1999, of FMI Funds, Inc. (File No. 811-7831)
as filed with the Securities and Exchange Commission on November 19, 1999:
Report of Independent Accountants
Statement of Assets and Liabilities
Schedule of Investments
Statement of Operations
Statements of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
Shareholders may obtain a copy of the Annual Report, without charge, by calling
1-800-811-5311.
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FMI FUNDS, INC.
Table of Contents
Page No.
FUND HISTORY AND CLASSIFICATION .....................................1
INVESTMENT RESTRICTIONS .............................................1
INVESTMENT CONSIDERATIONS ...........................................3
DIRECTORS AND OFFICERS OF THE CORPORATION ..........................12
PRINCIPAL SHAREHOLDERS .............................................15
INVESTMENT ADVISER AND ADMINISTRATOR ...............................16
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE ...................18
DISTRIBUTION OF SHARES .............................................21
RETIREMENT PLANS ...................................................22
AUTOMATIC INVESTMENT PLAN ..........................................25
REDEMPTION OF SHARES ...............................................25
SYSTEMATIC WITHDRAWAL PLAN .........................................25
ALLOCATION OF PORTFOLIO BROKERAGE ..................................26
CUSTODIAN ..........................................................27
TAXES ..............................................................27
SHAREHOLDER MEETINGS ...............................................28
CAPITAL STRUCTURE ..................................................29
DESCRIPTION OF SECURITIES RATINGS...................................30
INDEPENDENT ACCOUNTANTS ............................................31
No person has been authorized to give any information or to make
any representations other than those contained in this Statement of Additional
Information and the Prospectus dated January 31, 2000 and, if given or made,
such information or representations may not be relied upon as having been
authorized by FMI Funds, Inc.
This Statement of Additional Information does not constitute an
offer to sell securities.
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FUND HISTORY AND CLASSIFICATION
FMI Funds, Inc., a Maryland corporation incorporated on September
5, 1996 (the "Corporation"), is an open-end management investment company
consisting of one non-diversified portfolio, FMI Focus Fund (the "Fund"). The
Corporation is registered under the Investment Company Act of 1940 (the "Act").
INVESTMENT RESTRICTIONS
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 shareholders 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 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.
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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 shareholder 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 shareholders 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 fundamental and non-fundamental 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, illiquid securities 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
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changes in the Fund's investment restrictions made by the Board of Directors
will be communicated to shareholders prior to their implementation.
INVESTMENT CONSIDERATIONS
The Fund's prospectus describes its principal investment
strategies and risks. This section expands upon that discussion and also
discusses non-principal investment strategies and risks.
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. Rule 144A permits certain qualified institutional buyers
to trade in privately placed securities not registered under the Securities Act.
Institutional markets for restricted securities have developed as a result of
Rule 144A, providing both readily ascertainable market values for Rule 144A
securities and the ability to liquidate these securities to satisfy redemption
requests. However an insufficient number of qualified institutional buyers
interested in purchasing Rule 144A securities held by the Fund could adversely
affect their marketability, causing the Fund to sell securities at unfavorable
prices. 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 privately 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
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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
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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
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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
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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.
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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.
Short Sales
The Fund may seek to realize additional gains through short sale
transactions in securities listed on one or more national securities exchanges,
or in unlisted securities. Short selling involves the sale of borrowed
securities. At the time a short sale is effected, the Fund incurs an obligation
to replace the security borrowed at whatever its price may be at the time the
Fund purchases it for delivery to the lender. The price at such time may be more
or less than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to pay the lender amounts equal to
any dividend or interest which accrue during the period of the loan. To borrow
the security, the Fund also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed.
Until a Fund closes its short position or replaces the borrowed
security, the Fund will: (a) maintain a segregated account containing cash or
liquid securities at such a level that the amount deposited in the account plus
the amount deposited with the broker as collateral will equal the current value
of the security sold short; or (b) otherwise cover the Fund's short position.
U.S. Treasury Securities
The Fund may invest in U.S. Treasury Securities as "cover" for
the investment techniques the Fund employs. The Fund may also invest in U.S.
Treasury Securities as part of a cash reserve or for liquidity purposes. U.S.
Treasury Securities are backed by the full faith and credit of the U.S.
Treasury. U.S. Treasury Securities differ only in their interest rates,
maturities and dates of issuance. Treasury Bills have maturities of one year or
less.
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Treasury Notes have maturities of one to ten years and Treasury Bonds generally
have maturities of greater than ten years at the date of issuance. Yields on
short-, intermediate- and long-term U.S. Treasury Securities are dependent on a
variety of factors, including the general conditions of the money and bond
markets, the size of a particular offering and the maturity of the obligation.
Debt securities with longer maturities tend to produce higher yields and are
generally subject to potentially greater capital appreciation and depreciation
than obligations with shorter maturities and lower yields. The market value of
U.S. Treasury Securities generally varies inversely with changes in market
interest rates. An increase in interest rates, therefore, would generally reduce
the market value of the Fund's portfolio investments in U.S. Treasury
Securities, while a decline in interest rates would generally increase the
market value of the Fund's portfolio investments in these securities.
U.S. Treasury Securities may be purchased at a discount. Such
securities, when retired, may include an element of capital gain. Capital gains
or losses also may be realized upon the sale of U.S. Treasury Securities.
Borrowing
The Fund may borrow money for investment purposes. Borrowing for
investment purposes is known as leveraging. Leveraging investments, by
purchasing securities with borrowed money, 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, when it leverages its investments, will increase more when the
Fund's portfolio assets increase in value and decrease more when the portfolio
assets decrease in value than would otherwise be the case. Interest costs on
borrowings 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. As required by the Act, the Fund must maintain continuous
asset coverage (total assets, including assets acquired with borrowed funds,
less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If,
at any time, the value of the Fund's assets should fail to meet this 300%
coverage test, the Fund within three business days will reduce the amount of the
Fund's borrowings to the extent necessary to meet this 300% coverage.
Maintenance of this percentage limitation may result in the sale of portfolio
securities as a time when investment considerations otherwise indicate that it
would be disadvantageous to do so.
In addition to borrowing for investment purposes, the Fund is
authorized to borrow money from banks as a temporary measure for extraordinary
or emergency purposes in amounts not in excess of 5% of the value of the Fund's
total assets. For example the Fund may borrow money to facilitate management of
the Fund's portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio investments would be inconvenient or disadvantageous.
Such borrowings will be promptly repaid and are not subject to the foregoing
300% asset coverage requirement.
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Foreign Securities and American Depository Receipts
The Fund may invest in common stocks of foreign issuers which are
publicly traded on U.S. exchanges or in the U.S. over-the-counter market either
directly or in the form of American Depository Receipts ("ADRs"). ADRs are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. ADR prices are denominated in
United States dollars; the underlying security may be denominated in a foreign
currency. Investments in such securities also involve certain inherent risks,
such as political or economic instability of the issuer or the country of issue,
the difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. Such securities may also be subject to greater
fluctuations in price than securities of domestic corporations. In addition,
there may be less publicly available information about a foreign company than
about a domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. Dividends and interest on foreign securities
may be subject to foreign withholding taxes. To the extent such taxes are not
offset by credits or deductions allowed to investors under U.S. federal income
tax laws, such taxes may reduce the net return to shareholders. Although the
Fund intends to invest in securities of foreign issuers domiciled in nations
which the Adviser considers as having stable and friendly governments, there is
the possibility of expropriation, confiscation, taxation, currency blockage or
political or social instability which could affect investments of foreign
issuers domiciled in such nations.
The Fund will invest only in ADRs which are "sponsored".
Sponsored facilities are based on an agreement with the issuer that sets out
rights and duties of the issuer, the depository and the ADR holder. This
agreement also allocates fees among the parties. Most sponsored agreements also
provide that the depository will distribute shareholder notices, voting
instruments and other communications.
Warrants
The Fund may purchase rights and warrants to purchase equity
securities. Investments in rights and warrants are pure speculation in that they
have no voting rights, pay no dividends and have no rights with respect to the
assets of the corporation issuing them. Rights and warrants basically are
options to purchase equity securities at a specific price valid for a specific
period of time. They do not represent ownership of the securities, but only the
right to buy them. Rights and warrants differ from call options in that rights
and warrants are issued by the issuer of the security which may be purchased on
their exercise, whereas call options may be written or issued by anyone. The
prices of rights (if traded independently) and warrants do not necessarily move
parallel to the prices of the underlying securities. Rights and warrants involve
the risk that a Fund could lose the purchase value of the warrant if the warrant
is not exercised prior to its expiration. They also involve the risk that the
effective price paid for the warrant added to the subscription price of the
related security may be greater than the value of the subscribed security's
market price.
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Money Market Instruments
The Fund may invest in cash and money market securities. The Fund
may do so to "cover" investment techniques, when taking a temporary defensive
position or to have assets available to pay expenses, satisfy redemption
requests or take advantage of investment opportunities. The money market
securities in which the Fund invests include U.S. Treasury Bills, commercial
paper, commercial paper master notes and repurchase agreements.
The Fund may invest in commercial paper or commercial paper
master notes rated, at the time of purchase, A-1 or A-2 by Standard & Poor's
Corporation or Prime-1 or Prime-2 by Moody's Investors Service, Inc. Commercial
paper master notes are demand instruments without a fixed maturity bearing
interest at rates that are fixed to known lending rates and automatically
adjusted when such lending rates change.
Under a repurchase agreement, the Fund purchases a debt security
and simultaneously agrees to sell the security back to the seller at a mutually
agreed-upon future price and date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an agreed-upon
market interest rate during the purchaser's holding period. While the maturities
of the underlying securities in repurchase transactions may be more than one
year, the term of each repurchase agreement will always be less than one year.
The Fund will enter into repurchase agreements only with member banks of the
Federal Reserve system or primary dealers of U.S. Government Securities. The
Adviser will monitor the creditworthiness of each of the firms which is a party
to a repurchase agreement with the Fund. In the event of a default or bankruptcy
by the seller, the Fund will liquidate those securities (whose market value,
including accrued interest, must be at least equal to 100% of the dollar amount
invested by the Fund in each repurchase agreement) held under the applicable
repurchase agreement, which securities constitute collateral for the seller's
obligation to pay. However, liquidation could involve costs or delays and, to
the extent proceeds from the sale of these securities were less than the
agreed-upon repurchase price the Fund would suffer a loss. The Fund also may
experience difficulties and incur certain costs in exercising its rights to the
collateral and may lose the interest the Fund expected to receive under the
repurchase agreement. Repurchase agreements usually are for short periods, such
as one week or less, but may be longer. It is the current policy of the Fund to
treat repurchase agreements that do not mature within seven days as illiquid for
the purposes of its investments policies.
The Fund may also invest in securities issued by other investment
companies that invest in high quality, short-term debt securities (i.e., money
market instruments). In addition to the advisory fees and other expenses the
Fund bears directly in connection with its own operations, as a shareholder of
another investment company, the Fund would bear its pro rata portion of the
other investment company's advisory fees and other expenses, and such fees and
other expenses will be borne indirectly by the Fund's shareholders.
11
<PAGE>
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. 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. 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 may have a significant portion
of its assets in short-term options and futures contracts which generally are
excluded for purposes of calculating portfolio turnover.
Additional Risks
As a result of the investment techniques used by the Fund, the
Fund may have a significant portion (up to 100%) of its assets held in a
segregated account as "cover" for the investment techniques the Fund employs.
The securities maintained in the segregated account of the Fund will be liquid
securities. These assets may not be sold while the position in the corresponding
instrument or transaction (e.g. short sale, option or futures contract) is open
unless they are replaced by similar assets. As a result, the commitment of a
large portion of the Fund's assets to "cover" investment techniques could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
DIRECTORS AND OFFICERS OF THE CORPORATION
As a Maryland corporation, the business and affairs of the
Corporation are managed by its officers under the direction of its Board of
Directors. The name, address and principal occupations during the past five
years and other information with respect to each of the directors and officers
of the Corporation are as follows:
BARRY K. ALLEN Age 51
30 South Wacker Drive
Suite 3800
Chicago, IL 60606
(A DIRECTOR OF THE FUND)
Mr. Allen is President of Ameritech, Chicago, Illinois and has
served as an officer of Ameritech since August, 1995. From September, 1993 to
August 1995, Mr. Allen was President and Chief Operating Officer of Marquette
Medical Systems, Inc., a manufacturer of medical electronic equipment and
systems, Milwaukee, Wisconsin. Mr.
12
<PAGE>
Allen is a director of Harley-Davidson Inc. and First Business Bank-Milwaukee.
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 71
255 Fiserv Drive
Brookfield, WI 53045
(A DIRECTOR OF THE FUND)
Mr. Dalton is Chairman of the Board 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, Inc., a provider of standard-based
Internet-enabled electronic commerce services, APAC TeleServices, Inc., a
provider of out-sourced telephone-based marketing, sales and customer management
solutions, Clark/Bardes Inc., a distributor of life insurance/compensation
programs, and Wisconsin Wireless, Inc. Mr. Dalton is also a director of
Fiduciary Capital Growth Fund, Inc.
PATRICK ENGLISH* Age 39
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 and a director of Fiduciary Capital
Growth Fund, Inc.
TED D. KELLNER* Age 53
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. 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.
13
<PAGE>
THOMAS W. MOUNT Age 68
401 Pine Terrace
Oconomowoc, Wisconsin
(A DIRECTOR OF THE FUND)
Mr. Mount is retired Chairman of Stokely USA, Inc., a canned and
frozen food processor, and was employed by such firm in various capacities from
1957 to 1993. Mr. Mount is also a director of Fiduciary Capital Growth Fund,
Inc.
DONALD S. WILSON* Age 56
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 56
225 East Mason Street
Milwaukee, Wisconsin
(VICE PRESIDENT AND ASSISTANT SECRETARY OF THE FUND)
Mr. Wagner is Executive Vice President of Fiduciary Management,
Inc.
CAMILLE F. WILDES Age 47
225 East Mason Street
Milwaukee, Wisconsin
(VICE PRESIDENT AND ASSISTANT TREASURER OF THE FUND)
Ms. Wildes is a Vice President of Fiduciary Management, 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.
During the fiscal year ended September 30, 1999, the Corporation
paid $450 in director's fees. For the fiscal year ending September 30, 2000 the
Corporation's standard method of compensating directors is to pay each director
who is not an officer of the Corporation a fee of $350 for each meeting of the
Board of Directors attended.
14
<PAGE>
<TABLE>
COMPENSATION TABLE
<CAPTION>
Total
Compensation
Aggregate Pension or from Corporation
Compensation Retirement Benefits Estimated and Fund Complex
from Accrued as Part of Annual Benefits Paid to
Name of Person Corporation Fund Expenses Upon Retirement Directors(1)
-------------- ----------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
Barry K. Allen $150 0 0 $750
George D. Dalton $150 0 0 $750
Patrick J. English 0 0 0 0
Ted D. Kellner 0 0 0 0
Thomas W. Mount $150 0 0 $750
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.
</TABLE>
The Corporation and the Adviser have adopted separate codes of
ethics pursuant to Rule 17j-1 under the Act. Each code of ethics permits
personnel subject thereto to invest in securities, including securities that may
be purchased or held by the Fund. Each code of ethics prohibits, among other
things, persons subject thereto from purchasing or selling securities if they
know at the time of such purchase or sale that the security is being considered
for purchase or sale by the Fund or is being purchased or sold by the Fund.
PRINCIPAL SHAREHOLDERS
Set forth below are the names and addresses of all holders of the
Fund's Common Stock who as of October 31, 1999 owned of record or 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
of Beneficial Owner Beneficial Ownership Percent
Sole Power Shared Power Aggregate of Class
<S> <C> <C> <C> <C>
Ted D. Kellner 11,810 304,662(1)(2)(3) 316,472(1)(2)(3)(4) 16.56%
225 East Mason Street
Milwaukee, WI 53202
Donald S. Wilson 3,475 230,108(3)(4) 202,929(3)(4) 12.23%
225 East Mason Street
Milwaukee, WI 53202
Charles Schwab & Co. Inc. -- 202,929 202,929 10.62%
101 Montgomery Street
San Francisco, CA 94111
15
<PAGE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent
Sole Power Shared Power Aggregate of Class
<S> <C> <C> <C> <C>
H. M. Baskerville, Jr. 104,069 --- 104,069 5.45%
6889 Rowland Road, Suite 200
Eden Prairie, MN 55344
Officers & Directors as -- -- 325,267(1)(2)(3)(4) 17.02%
a group (8 persons)
- ---------------
(1) Includes 31,268 shares held by two investment partnerships over which
Mr. Kellner has voting and investment authority.
(2) Includes 37,191 shares held in trust for which Mr. Kellner is a
co-trustee and co-beneficiary and 6,095 shares held in partnership of
which Mr. Kellner is a partner.
(3) Includes 230,108 shares owned by the Adviser, retirement plans of the
Adviser and clients (other than H. M. Baskerville, Jr.) of the Adviser
for whom the Adviser exercises investment discretion.
(4) Messrs. Kellner and Wilson share the power to vote and dispose of the
same 230,108 shares.
</TABLE>
No person is deemed to "control," as that term is defined in the
Act, the Fund and the Corporation. The Corporation does not control any person.
The shares owned by Charles Schwab & Co., Inc. were owned of record only.
INVESTMENT ADVISER AND ADMINISTRATOR
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, Ms. Jody Reckard, Vice President and Richard E. Lane, 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 Adviser supervises and manages the
investment portfolio of the Fund and subject to such policies as the Board of
Directors may determine, directs the purchase or sale of investment securities
in the day-to-day management of the Fund's investment portfolio. Under the
Advisory Agreement, the Adviser, at its own expense and without reimbursement
from the Fund, furnishes office space, and all necessary office facilities,
equipment and executive personnel for managing the Fund's investments, and bears
all sales and promotional expenses of the Fund, other than distribution expenses
paid by the Fund pursuant to the Fund's Service and Distribution Plan, if any,
and expenses incurred in complying with laws regulating the issue or sale of
securities. During the fiscal years ended September 30, 1999 and September 30,
1998 and during the period from December 16, 1996
16
<PAGE>
(commencement of operations) through September 30, 1997, the Fund paid the
Adviser advisory fees of $386,611, $172,533 and $10,941, respectively.1
The Fund pays all of its expenses not assumed by the Adviser
pursuant to the Advisory Agreement or the Administration Agreement described
below including, but not limited to, the professional costs of preparing and the
cost of printing its registration statements required under the Securities Act
of 1933 and the Act and any amendments thereto, the expense of registering its
shares with the Securities and Exchange Commission and in the various states,
the printing and distribution cost of prospectuses mailed to existing
shareholders, director and officer liability insurance, reports to shareholders,
reports to government authorities and proxy statements, interest charges, and
brokerage commissions and expenses in connection with portfolio transactions.
The Fund also pays the fees of directors who are not interested persons of the
Adviser or officers or employees of the Fund, salaries of administrative and
clerical personnel, association membership dues, auditing and accounting
services, fees and expenses of any custodian or trustees having custody of Fund
assets, expenses of repurchasing and redeeming shares, printing and mailing
expenses, charges and expenses of dividend disbursing agents, registrars and
stock transfer agents, including the cost of keeping all necessary shareholder
records and accounts and handling any problems related thereto.
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 fiscal years ended
September 30, 1999 and September 30, 1998 no expense reimbursement was required.
During the period from December 16, 1996 (commencement of operations) through
September 30, 1997, the Adviser reimbursed the Fund $39,748 for excess expenses.
The Adviser is also the administrator to the Fund. Pursuant to an
administration agreement (the "Administration Agreement") between the Fund and
the
- --------
1 For the foregoing, the Adviser receives an annual fee of 1.25% of the
average daily net assets of the Fund. Prior to January 1, 1998, the Adviser
received an annual fee of 1.00% of the average daily net assets of the Fund.
17
<PAGE>
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 Act, calculates the Fund's net asset value, responds to
shareholder 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. For the
foregoing the Adviser receives an annual fee of 0.2% on the first $30,000,000 of
the average daily net assets of the Fund, 0.1% on the next $70,000,000 of the
average daily net assets of the Fund, and 0.05% on the average daily net assets
of the Fund in excess of $100,000,000. During the fiscal years ended September
30, 1999 and September 30, 1998 and during the period from December 16, 1996
(commencement of operations) through September 30, 1997, the Fund paid the
Adviser fees of $59,027, $28,354 and $3,718, respectively, 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 shareholders, 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 shareholders 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
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
18
<PAGE>
unusual business conditions exist, such as the ending of a monthly or the yearly
accounting period.
The Fund's net asset value per share is determined by dividing
the total value of its investments and other assets, less any liabilities, by
the number of its outstanding shares. Common stocks and securities sold short
that are listed on any national stock exchange or quoted on the Nasdaq Stock
Market are valued at the last sale price on the date of valuation is made. Price
information on listed securities is taken from the exchange where the security
is primarily traded. Common stocks which are listed on any national stock
exchange or quoted on the Nasdaq Stock Market but which are not traded on the
valuation date are valued at the most recent bid price. Securities sold short
which are listed on any national stock exchange or quoted on the Nasdaq Stock
Market but which are not traded on the valuation date are valued at the most
recent asked price. Unlisted equity securities for which market quotations are
readily available are valued at the most recent bid price. Options purchased or
written by the Fund are valued at the average of the current bid and actual
prices. The value of a futures contract equals the unrealized gain or loss on
the contract that is determined by marking the contract to the current
settlement price for a like contract acquired on the day on which the futures
contract is being valued. A settlement price may not be moved if the market
makes a limited move, in which event the futures contract will be valued at its
fair value as determined by the Adviser in accordance with procedures approved
by the Board of Directors. Debt securities are valued at the latest bid prices
furnished by independent pricing services. Any securities for which there are no
readily available market quotations and other assets are valued at their fair
value as determined by the Adviser in accordance with procedures approved by the
Board of Directors.
The Fund may provide from time to time in advertisements, reports
to shareholders and other communications with shareholders its average annual
total return. An average annual total return refers to the rate of return which,
if applied to an initial investment in the Fund at the beginning of a stated
period and compounded over the period, would result in the redeemable value of
the investment in the Fund at the end of the stated period assuming reinvestment
of all dividends and distributions and reflecting the effect of all recurring
fees. The Fund may also provide "aggregate" total return information for various
periods, representing the cumulative change in value of an investment in the
Fund for a specific period (again reflecting changes in share price and assuming
reinvestment of dividends and distributions).
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 $10,000 at the beginning of the period by
10,000. The net change in the value of a shareholder account is determined by
subtracting $10,000 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
19
<PAGE>
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 $10,000. 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 $10,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $10,000 payment made at
the beginning of the stated period
at the end of the stated period
The Fund's average annual compounded returns for the one-year
period ended September 30, 1999 and for the period from the Fund's commencement
of operations (December 16, 1996) through September 30, 1999 were 47.93% and
41.58%, respectively.
The results below show the value of an assumed initial investment
of $10,000 made on December 16, 1996 through December 31, 1999, assuming the
reinvestment of all dividends and distributions.
Value of Cumulative
December 31 $10,000 Investment % Change
----------- ------------------ ---------
1996 $10,245 + 2.45%
1997 17,391 + 73.91
1998 23,557 +135.57
1999 36,304 +263.04
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. An investment in the Fund will fluctuate in value and at
redemption its value may be more or less than the initial investment. The Fund
may compare its performance to other mutual funds with similar investment
objectives and to the industry as a whole, as reported by Lipper Analytical
Services, Inc., Money, Forbes, Business Week and Barron's magazines and The Wall
Street Journal. (Lipper Analytical Services, Inc. is an independent service that
ranks over 1,000 mutual funds based upon total return performance.) The Fund may
also compare its performance to the Dow Jones Industrial Average, Nasdaq
Composite Index, Nasdaq Industrials Index, Value Line Composite Index, the
Standard & Poor's 500 Stock Index, Russell 2000 Index, and the Consumer Price
Index. Such comparisons may be made in advertisements, shareholder reports or
other communications to shareholders.
20
<PAGE>
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 authorizes payments by the Fund
in connection with the distribution of its shares at an annual rate, as
determined from time to time by the Board of Directors, of up to 0.25% of the
Fund's average daily net assets. Payments made pursuant to the Plan may only be
used to pay distribution expenses in the year incurred. Amounts paid under the
Plan by the Fund may be spent by the Fund on any activities or expenses
primarily intended to result in the sale of shares of the Fund, including but
not limited to, advertising, compensation for sales and marketing activities of
financial institutions and others such as dealers and distributors, shareholder
account servicing, the printing and mailing of prospectuses to other than
current shareholders and the printing and mailing of sales literature. The Plan
permits the Fund to employ a distributor of its shares, in which event payments
under the Plan will be made to the distributor and may be spent by the
distributor on any activities or expenses primarily intended to result in the
sale of shares of the Fund, including but not limited to, compensation to, and
expenses (including overhead and telephone expenses) of, employees of the
distributor who engage in or support distribution of the Fund's shares, printing
of prospectuses and reports for other than existing shareholders, advertising
and preparation and distribution of sales literature. Allocation of overhead
(rent, utilities, etc.) and salaries will be based on the percentage of
utilization in, and time devoted to, distribution activities. If a distributor
is employed by the Fund, the distributor will directly bear all sales and
promotional expenses of the Fund, other than expenses incurred in complying with
laws regulating the issue or sale of securities. (In such event, the Fund will
indirectly bear sales and promotional expenses to the extent it makes payments
under the Plan.) The Fund has no present plans to employ a distributor. Pending
the employment of a distributor, the Fund's distribution expenses will be
authorized by the officers of the Corporation. To the extent any activity is one
which the Fund may finance without a plan pursuant to Rule 12b-1, the Fund may
also make payments to finance such activity outside of the Plan and not subject
to its limitations.
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 shareholders 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
21
<PAGE>
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.
RETIREMENT PLANS
The Fund offers the following retirement plans that may be funded
with purchases of shares of the Fund and may allow investors to reduce their
income taxes:
Individual Retirement Accounts
Individual shareholders may establish their own Individual
Retirement Account ("IRA"). The Fund currently offers a Traditional IRA, a Roth
IRA and an Education IRA, that can be adopted by executing the appropriate
Internal Revenue Service ("IRS") Form.
Traditional IRA. In a Traditional IRA, amounts contributed to the
IRA may be tax deductible at the time of contribution depending on whether the
shareholder is an "active participant" in an employer-sponsored retirement plan
and the shareholder's income. Distributions from a Traditional IRA will be taxed
at distribution except to the extent that the distribution represents a return
of the shareholder's own contributions for which the shareholder did not claim
(or was not eligible to claim) a deduction. Distributions prior to age 59-1/2
may be subject to an additional 10% tax applicable to certain premature
distributions. Distributions must commence by April 1 following the calendar
year in which the shareholder attains age 70-l/2. Failure to begin distributions
by this date (or distributions that do not equal certain minimum thresholds) may
result in adverse tax consequences.
Roth IRA. In a Roth IRA, amounts contributed to the IRA are taxed
at the time of contribution, but distributions from the IRA are not subject to
tax if the shareholder has held the IRA for certain minimum periods of time
(generally, until age 59-1/2). Shareholders whose incomes exceed certain limits
are ineligible to contribute to a Roth IRA. Distributions that do not satisfy
the requirements for tax-free withdrawal are subject to income taxes (and
possibly penalty taxes) to the extent that the distribution exceeds the
shareholder's contributions to the IRA. The minimum distribution rules
applicable to Traditional IRAs do not apply during the lifetime of the
shareholder. Following the death of the shareholder, certain minimum
distribution rules apply.
For Traditional and Roth IRAs, the maximum annual contribution
generally is equal to the lesser of $2,000 or 100% of the shareholder's
compensation (earned income). An individual may also contribute to a Traditional
IRA or Roth IRA on behalf of his or her spouse provided that the individual has
sufficient compensation (earned income). Contributions to a Traditional IRA
reduce the allowable contribution under a Roth IRA, and contributions to a Roth
IRA reduce the allowable contribution to a Traditional IRA.
Education IRA. In an Education IRA, contributions are made to an
IRA maintained on behalf of a beneficiary under age 18. The maximum annual
contribution is $500 per beneficiary. The contributions are not tax deductible
when made. However, if amounts are used for certain educational purposes,
neither the contributor nor the beneficiary of the IRA are taxed upon
distribution. The beneficiary is subject to income (and possibly
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penalty taxes) on amounts withdrawn from an Education IRA that are not used for
qualified educational purposes. Shareholders whose income exceeds certain limits
are ineligible to contribute to an Education IRA.
Under current IRS regulations, an IRA applicant must be furnished
a disclosure statement containing information specified by the IRS. The
applicant generally has the right to revoke his account within seven days after
receiving the disclosure statement and obtain a full refund of his
contributions. The custodian may, in its discretion, hold the initial
contribution uninvested until the expiration of the seven-day revocation period.
The custodian does not anticipate that it will exercise its discretion but
reserves the right to do so.
Simplified Employee Pension Plan
A Traditional IRA may also be used in conjunction with a
Simplified Employee Pension Plan ("SEP-IRA"). A SEP-IRA is established through
execution of Form 5305-SEP together with a Traditional IRA established for each
eligible employee. Generally, a SEP-IRA allows an employer (including a
self-employed individual) to purchase shares with tax deductible contributions,
not exceeding annually for any one participant, 15% of compensation
(disregarding for this purpose compensation in excess of $170,000 per year). The
$170,000 compensation limit applies for 2000 and is adjusted periodically for
cost of living increases. A number of special rules apply to SEP Plans,
including a requirement that contributions generally be made on behalf of all
employees of the employer (including for this purpose a sole proprietorship or
partnership) who satisfy certain minimum participation requirements.
SIMPLE IRA
An IRA may also be used in connection with a SIMPLE Plan
established by the shareholder's employer (or by a self-employed individual).
When this is done, the IRA is known as a SIMPLE IRA, although it is similar to a
Traditional IRA with the exceptions described below. Under a SIMPLE Plan, the
shareholder may elect to have his or her employer make salary reduction
contributions of up to $6,000 per year to the SIMPLE IRA. The $6,000 limit
applies for 2000 and is adjusted periodically for cost of living increases. In
addition, the employer will contribute certain amounts to the shareholder's
SIMPLE IRA, either as a matching contribution to those participants who make
salary reduction contributions or as a non-elective contribution to all eligible
participants whether or not making salary reduction contributions. A number of
special rules apply to SIMPLE Plans, including (1) a SIMPLE Plan generally is
available only to employers with fewer than 100 employees; (2) contributions
must be made on behalf of all employees of the employer (other than bargaining
unit employees) who satisfy certain minimum participation requirements; (3)
contributions are made to a special SIMPLE IRA that is separate and apart from
the other IRAs of employees; (4) the distribution excise tax (if otherwise
applicable) is increased to 25% on withdrawals during the first two years of
participation in a SIMPLE IRA; and (5) amounts withdrawn during the first two
years of participation may be rolled over tax-free only into another SIMPLE IRA
(and not to a Traditional IRA or to a Roth IRA). A SIMPLE IRA is established by
executing Form 5304-SIMPLE together with an IRA established for each eligible
employee.
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403(b)(7) Custodial Account
A 403(b)(7) Custodial Account is available for use in conjunction
with the 403(b)(7) program established by certain educational organizations and
other organizations that are exempt from tax under 501(c)(3) of the Internal
Revenue Code, as amended (the "Code"). Amounts contributed to the custodial
account in accordance with the employer's 403(b)(7) program will be invested on
a tax-deductible basis in shares of the Fund. Various contribution limits apply
with respect to 403(b)(7) arrangements.
Defined Contribution Retirement Plan (401(k))
A prototype defined contribution plan is available for employers
who wish to purchase shares of any Fund with tax deductible contributions. The
plan consists of both profit sharing and money purchase pension components. The
profit sharing component includes a Section 401(k) cash or deferred arrangement
for employers who wish to allow eligible employees to elect to reduce their
compensation and have such amounts contributed to the plan. The limit on
employee salary reduction contributions is $10,500 annually (as adjusted for
cost-of-living increases) although lower limits may apply as a result of
non-discrimination requirements incorporated into the plan. The Corporation has
received an opinion letter from the IRS holding that the form of the prototype
defined contribution retirement plan is acceptable under Section 401 of the
Code. The maximum annual contribution that may be allocated to the account of
any participant is generally the lesser of $30,000 or 25% of compensation
(earned income). Compensation in excess of $170,000 (as periodically indexed for
cost-of-living increases) is disregarded for this purpose. The maximum amount
that is deductible by the employer depends upon whether the employer adopts both
the profit sharing and money purchase components of the plan, or only one
component.
Retirement Plan Fees
Firstar Bank Milwaukee, N.A., Milwaukee, Wisconsin, serves as
trustee or custodian of the retirement plans. Firstar Bank Milwaukee, N.A.
invests all cash contributions, dividends and capital gains distributions in
shares of the Fund. For such services, the following fees are charged against
the accounts of participants; $12.50 annual maintenance fee per participant
account; $15 for transferring to a successor trustee or custodian; $15 for
distribution(s) to a participant; and $15 for refunding any contribution in
excess of the deductible limit. The fee schedule of Firstar Bank Milwaukee, N.A.
may be changed upon written notice.
Requests for information and forms concerning the retirement
plans should be directed to the Corporation. Because a retirement program may
involve commitments covering future years, it is important that the investment
objective of the Fund be consistent with the participant's retirement
objectives. Premature withdrawal from a retirement plan will result in adverse
tax consequences. Consultation with a competent financial and tax adviser
regarding the retirement plans is recommended.
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AUTOMATIC INVESTMENT PLAN
Shareholders wishing to invest fixed dollar amounts in the Fund
monthly or quarterly can make automatic purchases in amounts of $50 or more on
any day they choose by using the Corporation's Automatic Investment Plan. If
such day is a weekend or holiday, such purchase shall be made on the next
business day. There is no service fee for participating in this Plan. To use
this service, the shareholder must authorize the transfer of funds from their
checking account or savings account by completing the Automatic Investment Plan
application included as part of the share purchase application. Additional
application forms may be obtained by calling the Corporation's office at (414)
226-4555. The Automatic Investment Plan must be implemented with a financial
institution that is a member of the Automated Clearing House. The Corporation
reserves the right to suspend, modify or terminate the Automatic Investment Plan
without notice.
The Automatic Investment Plan is designed to be a method to
implement dollar cost averaging. Dollar cost averaging is an investment approach
providing for the investment of a specific dollar amount on a regular basis
thereby precluding emotions dictating investment decisions. Dollar cost
averaging does not insure a profit nor protect against a loss.
REDEMPTION OF SHARES
The right to redeem shares of the Fund will be suspended for any
period during which the New York Stock Exchange is closed because of financial
conditions or any other extraordinary reason and may be suspended for any period
during which (a) trading on the New York Stock Exchange is restricted pursuant
to rules and regulations of the Securities and Exchange Commission, (b) the
Securities and Exchange commission has by order permitted such suspension, or
(c) an emergency, as defined by rules and regulations of the Securities and
Exchange Commission, exists as a result of which it is not reasonably
practicable for the Fund to dispose of its securities or fairly to determine the
value of its net assets.
SYSTEMATIC WITHDRAWAL PLAN
The Corporation has available to shareholders a Systematic
Withdrawal Plan, pursuant to which a shareholder who owns shares of the Fund
worth at least $10,000 at current net asset value may provide that a fixed sum
will be distributed to him or her at regular intervals. To participate in the
Systematic Withdrawal Plan, a shareholder deposits his or her shares with the
Corporation and appoints it as his or her agent to effect redemptions of shares
held in his or her account for the purpose of making monthly or quarterly
withdrawal payments of a fixed amount to him or her out of the account. To
utilize the Systematic Withdrawal Plan, the shares cannot be held in certificate
form. The Systematic Withdrawal Plan does not apply to shares of the Fund held
in Individual Retirement Accounts or retirement plans. An application for
participation in the Systematic Withdrawal Plan is included as part of the share
purchase application. Additional application forms may be obtained by calling
the Corporation's office at (414) 226-4555.
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The minimum amount of a withdrawal payment is $100. These
payments will be made from the proceeds of periodic redemption of Fund shares in
the account at net asset value. Redemptions will be made on such day (no more
than monthly) as a shareholder chooses or, if that day is a weekend or holiday,
on the next business day. Participation in the Systematic Withdrawal Plan
constitutes an election by the shareholder to reinvest in additional Fund
shares, at net asset value, all income dividends and capital gains distributions
payable by the Corporation on shares held in such account, and shares so
acquired will be added to such account. The shareholder may deposit additional
shares in his or her account at any time.
Withdrawal payments cannot be considered as yield or income on
the shareholder'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 shareholder's account.
The shareholder may vary the amount or frequency of withdrawal
payments, temporarily discontinue them, or change the designated payee or
payee's address, by notifying Firstar Mutual Fund Services, LLC, the Funds'
transfer agent.
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 (i.e. "markups" when the market maker sells a
security and "markdowns" when the market maker purchases a security). 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
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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 fiscal years
ended September 30, 1999 and September 30, 1998 and during the period from
December 16, 1996 (commencement of operations) through September 30, 1997, the
Fund paid brokerage commissions of $207,052 on transactions having a total value
of $87,496,155, $187,923 on transactions having a total value of $89,945,537,
and $12,156 on transactions having a total value of $5,340,120, respectively.
All of the brokers to whom the Fund paid commissions provided research services
to the Adviser.
CUSTODIAN
Firstar Bank, N.A., 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as custodian for the Fund. As such, Firstar Bank, N.A.
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 Bank, N.A. does not exercise any supervisory function over the
management of the Fund, the purchase and sale of securities or the payment of
distributions to shareholders. Firstar Mutual Fund Services, LLC, an affiliate
of Firstar Bank, N.A., acts as the Fund's transfer agent and dividend disbursing
agent.
TAXES
The Fund intends to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Code. The
Fund has so qualified in each of its fiscal years. If the Fund fails to qualify
as a regulated investment company under Subchapter M in any fiscal year, it will
be treated as a corporation for federal income tax purposes. As such the Fund
would be required to pay income taxes on its net investment income and net
realized capital gains, if any, at the rates generally applicable to
corporations. Shareholders of the Fund would not be liable for income tax on the
Fund's net investment income or net realized capital gains in their individual
capacities. Distributions to shareholders, whether from the Fund's net
investment income or net realized capital gains, would be treated as taxable
dividends to the extent of current or accumulated earnings and profits of the
Fund.
The Fund intends to distribute substantially all of its net
investment income and net capital gain each fiscal year. Dividends from net
investment income and short-term capital
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gains are taxable to investors as ordinary income, while distributions of net
long-term capital gains are taxable as long-term capital gain regardless of the
shareholder's holding period for the shares. 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 shareholders.
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
shareholder, the dividend or distribution will be taxable to the shareholder
even though it results in a return of capital to him.
The 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 shareholder 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 complete 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.
SHAREHOLDER MEETINGS
The Maryland Business Corporation Law permits registered
investment companies, such as the Corporation, to operate without an annual
meeting of shareholders 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
shareholders under the Act.
The Corporation's bylaws also contain procedures for the removal
of directors by its shareholders. At any meeting of shareholders, duly called
and at which a quorum is present, the shareholders 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.
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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 shareholders for the purpose of voting upon the question of removal of any
director. Whenever ten or more shareholders 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 shareholders 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 shareholders as recorded on the books of
the Corporation; or (2) inform such applicants as to the approximate number of
shareholders 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 shareholders 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 shareholders with
reasonable promptness after the entry of such order and the renewal of such
tender.
CAPITAL STRUCTURE
The Corporation's Articles of Incorporation permit the Board of
Directors to issue 500,000,000 shares of common stock. The Board of Directors
has the power to designate one or more classes ("series") of shares of common
stock and to classify or reclassify any unissued shares with respect to such
series. Currently the shares of the Fund are the only class of shares being
offered by the Corporation. Shareholders are entitled: (i) to
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one vote per full share; (ii) to such distributions as may be declared by the
Corporation's Board of Directors out of funds legally available; and (iii) upon
liquidation, to participate ratably in the assets available for distribution.
There are no conversion or sinking fund provisions applicable to the shares, and
the holders have no preemptive rights and may not cumulate their votes in the
election of directors. Consequently the holders of more than 50% of the shares
of the Fund voting for the election of directors can elect the entire Board of
Directors and in such event the holders of the remaining shares voting for the
election of directors will not be able to elect any person or persons to the
Board of Directors.
The shares are redeemable and are transferable. All shares issued
and sold by the Fund will be fully paid and nonassessable. Fractional shares
entitle the holder to the same rights as whole shares. The Fund will not issue
certificates evidencing shares. Instead the shareholder's account will be
credited with the number of shares purchased, relieving shareholders of
responsibility for safekeeping of certificates and the need to deliver them upon
redemption. Written confirmations are issued for all purchases of shares.
DESCRIPTION OF SECURITIES RATINGS
The Fund may invest in commercial paper and commercial paper
master notes assigned ratings of A-1 or A-2 by Standard & Poor's Corporation
("Standard & Poor's") or Prime-1 or Prime-2 by 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.
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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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance
on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
o 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
PricewaterhouseCoopers 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 PricewaterhouseCoopers LLP performs
an audit of the Fund's financial statements and considers the Fund's internal
controls.
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