STATEMENT OF ADDITIONAL INFORMATION August 6, 1997
THE THURLOW FUNDS, INC.
1256 Forest Avenue
Palo Alto, California 94301
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the prospectus of The Thurlow Funds,
Inc., dated August 6, 1997 (the "Prospectus"), for The Thurlow Growth
Fund. Requests for copies of the Prospectus should be made by writing to
The Thurlow Funds, Inc., 1256 Forest Avenue, Palo Alto, California 94301,
Attention: Secretary or by calling 1-888-848-7569.
THE THURLOW FUNDS, INC.
Table of Contents
Page No.
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . 3
DIRECTORS AND OFFICERS OF THE CORPORATION . . . . . . . . . . . . . . 8
PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 10
INVESTMENT ADVISER, ADMINISTRATOR, CUSTODIAN,
TRANSFER AGENT AND ACCOUNTING SERVICES AGENT . . . . . . . . . . . . . 10
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE . . . . . . . . . . 12
DISTRIBUTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . 13
ALLOCATION OF PORTFOLIO BROKERAGE . . . . . . . . . . . . . . . . . . 14
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
STOCKHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . 17
DESCRIPTION OF SECURITIES RATINGS . . . . . . . . . . . . . . . . . . 18
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . 22
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 22
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 August 6, 1997 and, if
given or made, such information or representations may not be relied upon
as having been authorized by The Thurlow Funds, Inc.
This Statement of Additional Information does not constitute an
offer to sell securities.
INVESTMENT RESTRICTIONS
As set forth in the Prospectus dated August 6, 1997 of The
Thurlow Funds, Inc. (the "Corporation") under the caption "Investment
Objectives and Strategy," the primary investment objective of The Thurlow
Growth Fund (the "Fund") is capital appreciation, with current income as a
secondary objective. Consistent with its investment objectives, the Fund
has adopted the following investment restrictions which are matters of
fundamental policy and cannot be changed without approval of the holders
of the lesser of: (i) 67% of the Fund's shares present or represented at
a stockholders meeting at which the holders of more than 50% of such
shares are present or represented; or (ii) more than 50% of the
outstanding shares of the Fund.
1. The Fund will not purchase securities on margin (except for
such short term credits as are necessary for the clearance of
transactions); provided, however, that the Fund may borrow money to the
extent set forth in investment restriction no. 4.
2. The Fund may sell securities short to the extent permitted
by the Investment Company Act of 1940 (the "Act").
3. The Fund may write put and call options to the extent
permitted by the Act.
4. The Fund may borrow money or issue senior securities to the
extent permitted by the Act.
5. The Fund may pledge or hypothecate its assets to secure its
borrowings.
6. The Fund will not 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, unless such loans
are secured continuously by collateral at least equal to the market value
of the securities loaned in the form of cash and/or securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
provided that no such loan will be made if upon making of such loan more
than 30% of the value of the Fund's total assets would be subject to such
loans.
7. The Fund will not make investments for the purpose of
exercising control or management of any company.
8. 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 25% of the Fund's total
assets may be invested without regard to these limitations.
9. 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. In determining industry classifications the
Fund will use the current Directory of Companies Filing Annual Reports
with the Securities and Exchange Commission except to the extent permitted
by the Act.
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 or sell real estate or real
estate mortgage loans or real estate limited partnerships.
12. The Fund will not purchase or sell commodities or commodity
contracts, including futures contracts.
The Fund has adopted certain other investment restrictions which
are not fundamental policies and which may be changed by the Corporation's
Board of Directors without stockholder approval. These additional
restrictions are as follows:
1. The Fund will not invest more than 10% of the value of its
net assets in illiquid securities.
2. The Fund will not purchase the securities of other
investment companies except: (a) as part of a plan of merger,
consolidation or reorganization approved by the stockholders of the Fund;
(b) securities of registered open-end investment companies that invest
exclusively in high quality, short-term debt securities; 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.
3. 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, without authorization of the Corporation's Board of
Directors.
4. 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.
The aforementioned percentage restrictions on investment or
utilization of assets refer to the percentage at the time an investment is
made. If these restrictions (other than those relating to borrowing of
money or issuing senior securities) are adhered to at the time an
investment is made, and such percentage subsequently changes as a result
of changing market values or some similar event, no violation of the
Fund's fundamental restrictions will be deemed to have occurred. Any
changes in the Fund's investment restrictions made by the Board of
Directors will be communicated to stockholders prior to their
implementation.
INVESTMENT CONSIDERATIONS
Illiquid Securities
The Fund may invest up to 10% of its net assets in securities
for which there is no readily available market ("illiquid securities").
The 10% limitation includes certain securities whose disposition would be
subject to legal restrictions ("restricted securities"). However certain
restricted securities that may be resold pursuant to Rule 144A under the
Securities Act may be considered liquid. The Board of Directors of the
Corporation has delegated to the Adviser the day-to-day determination of
the liquidity of a security although it has retained oversight and
ultimate responsibility for such determinations. Although no definite
quality criteria are used, the Board of Directors has directed the Adviser
to consider such factors as (i) the nature of the market for a security
(including the institutional private resale markets); (ii) the terms of
these securities or other instruments allowing for the disposition to a
third party or the issuer thereof (e.g. certain repurchase obligations and
demand instruments); (iii) the availability of market quotations; and (iv)
other permissible factors.
Restricted securities may be sold in private negotiated or other
exempt transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act. When
registration is required, the Fund may be obligated to pay all or part of
the registration expenses and a considerable time may elapse between the
decision to sell and the sale date. If, during such period, adverse
market conditions were to develop, the Fund might obtain a less favorable
price than the price which prevailed when it decided to sell. Restricted
securities, if considered to be illiquid, will be priced at fair value as
determined in good faith by the Board of Directors.
Warrants
The Fund also may invest up to 5% of its net assets in warrants,
which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation
at a specific price during a specified period of time. Warrants have no
dividend or voting rights. The 5% limitation does not include warrants
acquired by the Fund in units or attached to other securities. The Fund
will invest in warrants to participate in an anticipated increase in the
market value of the underlying security without having to purchase the
security to which the warrants relate. The purchase of warrants involves
the risk that the Fund could lose the purchase price of a warrant if the
right to subscribe to additional shares is not exercised prior to the
warrant's expiration. Also, the purchase of warrants involves the risk
that the effective price paid for the warrant added to the subscription
price of the related security may exceed the value of the subscribed
security's market price such as when there is no movement in the level of
the underlying security.
Borrowing to Purchase Securities (Leverage)
The Fund may borrow money, including borrowing for investment
purposes. Borrowing for investment 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 Fund's portfolio assets decrease in
value than would otherwise be the case. Interest costs on borrowings,
which may fluctuate with changing market rates of interest, may partially
offset or exceed the returns on the borrowed funds. Under adverse
conditions, the Fund might have to sell portfolio securities to meet
interest or principal payments at a time investment considerations would
not favor such sales. The Fund intends to use leverage during periods
when the Adviser believes that the Fund's investment objective would be
furthered by increasing the Fund's investments in common stocks, but will
not employ leverage during the fiscal year ending June 30, 1998.
As required by the Act, the Fund may borrow money only from
banks and only if, immediately after the borrowing, the Fund maintains
continuous asset coverage (total assets, including assets acquired with
borrowed funds, less liabilities exclusive of borrowings) of 300% of all
amounts borrowed. If, for any reason, (including adverse market
conditions) the Fund fails to meet the 300% coverage test, the Fund will
be required to reduce the amount of its borrowings within three business
days to the extent necessary to meet this test. This requirement may make
it necessary for the Fund to sell a portion of its portfolio securities at
a time when investment considerations otherwise indicate that it would be
disadvantageous to do so.
In addition to the foregoing, the Fund is authorized to borrow
money from a bank 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. This borrowing is not subject to the foregoing 300% asset
coverage requirement. The Fund is authorized to pledge portfolio
securities as the Adviser deems appropriate in connection with any
borrowings.
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.
No short sale will be effected which will, at the time of making
such short sale transaction and giving effect thereto, cause the aggregate
market value of all securities sold short to exceed 25% of the value of
the Fund's net assets. Until the 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.
The Fund may also engage in short sales when, at the time of the
short sale, the Fund owns or has the right to acquire an equal amount of
the security being sold at no additional cost ("selling short against the
box"). The Fund may make a short sale against the box when the Fund wants
to sell the security the Fund owns at a current attractive price, but also
wishes to defer recognition of a gain or loss for Federal income tax
purposes and for purposes of satisfying certain tests applicable to
regulated investment companies under the Internal Revenue Code. The Fund
will not engage in short sales during the fiscal year ending June 30,
1998.
Lending of Portfolio Securities
In order to generate additional income, the Fund may lend
portfolio securities constituting up to 30% of its total assets to
unaffiliated broker-dealers, banks or other recognized institutional
borrowers of securities, provided that the borrower at all times maintains
cash or equivalent collateral or provides an irrevocable letter of credit
in favor of the Fund equal in value to at least 100% of the value of the
securities loaned. During the time portfolio securities are on loan, the
borrower pays the Fund an amount equivalent to any dividends or interest
paid on such securities, and the Fund may receive an agreed-upon amount of
interest income from the borrower who delivered equivalent collateral or
provided a letter of credit. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable
administrative and custodial fees in connection with a loan of portfolio
securities and may pay a negotiated portion of the interest earned on the
cash or equivalent collateral to the borrower or placing broker. The Fund
does not have the right to vote securities on loan, but could terminate
the loan and regain the right to vote if that were considered important
with respect to the investment.
The primary risk in securities lending is a default by the
borrower during a sharp rise in price of the borrowed security resulting
in a deficiency in the collateral posted by the borrower. The Fund will
seek to minimize this risk by requiring that the value of the securities
loaned be computed each day and additional collateral be furnished each
day if required.
High Yield Convertible Securities
The Fund may invest up to 5% of its net assets in high yield,
high risk, lower-rated convertible securities, commonly known as "junk
bonds." Investments in such securities are subject to the risk factors
outlined below.
The market for high yield convertible securities is subject to
substantial volatility. An economic downturn or increase in interest
rates may have a more significant effect on high yield convertible
securities and their markets, as well as on the ability of securities'
issuers to repay principal and interest, than on higher-rated securities
and their issuers. Issuers of high yield convertible securities may be of
low creditworthiness and the high yield convertible securities may be
subordinated to the claims of senior lenders. During periods of economic
downturn or rising interest rates the issuers of high yield convertible
securities may have greater potential for insolvency and a higher
incidence of high yield bond defaults may be experienced.
The prices of high yield convertible securities have been found
to be less sensitive to interest rate changes than higher-rated
investments but are more sensitive to adverse economic changes or
individual corporate developments. During an economic downturn or
substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest payment obligations, to meet
projected business goals, and to obtain additional financing. If the
issuer of a high yield convertible security owned by the Fund defaults,
the Fund may incur additional expenses in seeking recovery. Periods of
economic uncertainty and changes can be expected to result in increased
volatility of market prices of high yield convertible securities and the
Fund's net asset value. Yields on high yield convertible securities will
fluctuate over time. Furthermore, in the case of high yield convertible
securities structured as zero coupon or pay-in-kind securities, their
market prices are affected to a greater extent by interest rate changes
and thereby tend to be more volatile than market prices of securities
which pay interest periodically and in cash.
The secondary market for high yield convertible securities may
at times become less liquid or respond to adverse publicity or investor
perceptions making it more difficult for the Fund to value accurately high
yield convertible securities or dispose of them. To the extent the Fund
owns or may acquire illiquid or restricted high yield convertible
securities, these securities may involve special registration
responsibilities, liabilities and costs, and liquidity difficulties, and
judgment will play a greater role in valuation because there is less
reliable and objective data available.
Special tax considerations are associated with investing in high
yield bonds structured as zero coupon or pay-in-kind securities. The Fund
will report the interest on these securities as income even though it
receives no cash interest until the security's maturity or payment date.
Further, the Fund must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax law.
Accordingly, the Fund may have to dispose of its portfolio securities
under disadvantageous circumstances to generate cash or may have to borrow
to satisfy distribution requirements.
Credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield convertible securities.
Since credit rating agencies may fail to timely change the credit ratings
to reflect subsequent events, the Adviser should monitor the issuers of
high-yield convertible securities in the portfolio to determine if the
issuers will have sufficient cash flow and profits to meet required
principal and interest payments, and to attempt to assure the securities'
liquidity so the Fund can meet redemption requests. To the extent that
the Fund invests in high yield convertible securities, the achievement of
its investment objective may be more dependent, on its own credit analysis
than is the case for higher quality bonds. The Fund may retain a
portfolio security whose rating has been changed.
Options on Securities and Index Option Transactions
The Fund will not write options during the fiscal year ending
June 30, 1998.
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 Fund will not enter into an index 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.
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.
Exchanges generally have 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.
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. Additionally, trading in index
options requires different skills and techniques than those required for
predicting changes in individual stocks.
DIRECTORS AND OFFICERS OF THE CORPORATION
The name, address principal occupations during the past five
years and other information with respect to each of the directors and
offices of the Corporation are as follows:
MARTINA HEARN* Age 41
101 Metro Drive, Suite 260
San Jose, California 95110
(VICE PRESIDENT, SECRETARY AND A DIRECTOR OF THE CORPORATION)
Ms. Hearn is an associate of the law firm of Thurlow & Hearn, an
association of attorneys. Ms. Hearn has been practicing law since 1989.
Ms. Hearn is the wife of Thomas F. Thurlow.
NATASHA L. MCREE Age 26
6000 Shepherd Mountain Cove #1604
Austin, Texas 78730
(A DIRECTOR OF THE CORPORATION)
Ms. McRee is a marketing consultant with the firm of GSDNM
Advertising and has been employed with them since September 1996. From
August 1995 to August 1996, Ms. McRee was employed with Rives Carlberg
Advertising as a marketing consultant. From September 1993 to August
1995, Ms. McRee was employed in the Marketing Department of Slick 50, a
producer of automotive oils. Prior to September 1993, Ms. McRee was a
college student.
STEPHANIE E. ROSENDAHL* Age 31
4101 Coleridge Street
Houston, Texas 77005
(A DIRECTOR OF THE CORPORATION)
Ms. Rosendahl is an independent management consultant and has
been self-employed since 1993. From 1991 to 1993, Ms. Rosendahl was
employed by the Texas Children's Hospital as a computer network manager.
Ms. Rosendahl is the sister of Thomas F. Thurlow.
BASIL S. SHIBER Age 33
1801 Alameda Avenue, Apt. A
Alameda, California 94501
(A DIRECTOR OF THE CORPORATION)
Mr. Shiber is an attorney and associate of the law firm of
Miller, Starr & Regalia, a professional law corporation. Miller, Starr &
Regalia is not affiliated with the Company or the Adviser. Mr. Shiber has
been practicing law since 1989.
THOMAS F. THURLOW* Age 34
101 Metro Drive, Suite 260
San Jose, California 95110
(PRESIDENT, TREASURER AND A DIRECTOR OF THE CORPORATION)
Mr. Thurlow is an attorney and founder and associate of the law
firm Thurlow & Hearn, an association of attorneys. Mr. Thurlow has been
practicing law since 1989. Mr. Thurlow is also the sole officer, director
and shareholder of Thurlow Capital Management, Inc., an investment
advisory firm, which he founded in 1997. Mr. Thurlow is the husband of
Martina Hearn and the brother of Stephanie Rosendahl.
The Fund will not pay any fees to directors for meetings of the
Board of Directors attended during the fiscal year ending June 30, 1998.
After this date, the Fund plans to pay each director who is not an officer
of the Corporation a fee of $500 for each meeting of the Board of
Directors attended.
____________________
* Mr. Thurlow, Ms. Hearn and Ms. Rosendahl are directors who are
"interested persons" of the Fund as that term is defined in the Investment
Company Act of 1940.
The Corporation was organized on April 3, 1997. The table below
sets forth the compensation anticipated to be paid by the Corporation to
each of the directors of the Corporation during the fiscal year ending
June 30, 1998:
COMPENSATION TABLE
Pension or Total
Retirement Estimated Compensa-
Aggregate Benefits Annual tion from
Compensa- Accrued as Benefits Corporation
Name of tion from Part of Fund Upon Paid to
Person Corporation Expenses Retirement Directors
Martina Hearn 0 0 0 0
Natasha G. McRee 0 0 0 0
Stephanie E. 0 0 0 0
Rosendahl
Basil S. Shiber 0 0 0 0
Thomas F. Thurlow 0 0 0 0
PRINCIPAL STOCKHOLDERS
As of the date hereof, Thomas F. Thurlow and Thomas N. Thurlow,
father of Thomas F. Thurlow, each own 50% of the Fund's outstanding
shares. As of such date they control the Fund and the Corporation and own
sufficient shares of the Fund to approve or disapprove all matters brought
before stockholders of the Corporation, including the election of
directors of the Corporation and the approval of auditors. The
Corporation does not control any person.
INVESTMENT ADVISER, ADMINISTRATOR, CUSTODIAN,
TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
As set forth in the Prospectus under the caption "Management of
the Fund," the investment adviser to the Fund is Thurlow Capital
Management, Inc. (the "Adviser"). Pursuant to the investment advisory
agreement entered into between the Corporation and the Adviser with
respect to the Fund (the "Advisory Agreement"), the Adviser furnishes
continuous investment advisory services to the Fund. The Adviser is
controlled by Thomas F. Thurlow, its sole officer, director and
shareholder.
Pursuant to the Advisory Agreement, the Adviser has undertaken
to reimburse the Fund to the extent that the aggregate annual operating
expenses, including the investment advisory fee and the administration fee
but excluding interest, taxes, brokerage commissions and other costs
incurred in connection with the purchase or sale of portfolio securities,
and extraordinary items, exceed 3.00% of the average net assets of the
Fund for such year, as determined by valuations made as of the close of
each business day of the year. Additionally, for the fiscal year ended
June 30, 1998, the Adviser has agreed to reimburse the Fund for annual
operating expenses in excess of 1.95% of the average net assets for such
year. 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.
The Advisory Agreement will remain in effect as long as its
continuance is specifically approved at least annually (i) by the Board of
Directors of the Corporation or by the vote of a majority (as defined in
the Act) of the outstanding shares of the Fund, and (ii) by the vote of a
majority of the directors of the Fund who are not parties to the Advisory
Agreement or interested persons of the Adviser, cast in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement provides that it may be terminated at any time without the
payment of any penalty, by the Board of Directors of the Corporation or by
vote of the majority of the Fund's stockholders of sixty (60) days'
written notice to the Adviser, and by the Adviser on the same notice to
the Corporation, and that it shall be automatically terminated if it is
assigned.
The Advisory Agreement provides that the Adviser shall not be
liable to the Corporation or its stockholders for anything other than
willful misfeasance, bad faith, gross negligence or reckless disregard of
its obligations or duties. The Advisory Agreement also provides that the
Adviser and its officers, directors and employees may engage in other
businesses, devote time and attention to any other business whether of a
similar or dissimilar nature, and render services to others.
As set forth in the Prospectus under the caption "Management of
the Fund," the administrator to the Corporation is Firstar Trust Company,
615 East Michigan Street, Milwaukee, Wisconsin 53202 (the
"Administrator"). The Fund Administration Servicing Agreement entered
into between the Corporation and the Administrator relating to the Fund
(the "Administration Agreement") will remain in effect until terminated by
either party. The Administration Agreement may be terminated at any time,
without the payment of any penalty, by the Board of Directors of the
Corporation upon the giving of ninety (90) days' written notice to the
Administrator, or by the Administrator upon the giving of ninety (90)
days' written notice to the Corporation.
Under the Administration Agreement, the Administrator shall
exercise reasonable care and is not liable for any error or judgment or
mistake of law or for any loss suffered by the Corporation in connection
with the performance of the Administration Agreement, except a loss
resulting from willful misfeasance, bad faith or negligence on the party
of the Administrator in the performance of its duties under the
Administration Agreement.
Firstar Trust Company also serves as custodian of the
Corporation's assets pursuant to a Custody Agreement. Under the Custody
Agreement, Firstar Trust Company has agreed to (i) maintain a separate
account in the name of the Fund, (ii) make receipts and disbursements of
money on behalf of the Fund, (iii) collect and receive all income and
other payments and distributions on account of the Fund's portfolio
investments, (iv) respond to correspondence from shareholders, security
brokers and others relating to its duties; and (v) make periodic reports
to the Fund concerning the Fund's operations. Firstar Trust Company does
not exercise any supervisory function over the purchase and sale of
securities. Firstar Trust Company also serves as transfer agent and
dividend disbursing agent for the Fund under a Shareholder Servicing Agent
Agreement. As transfer and dividend disbursing agent, Firstar Trust
Company has agreed to (i) issue and redeem shares of the Fund, (ii) make
dividend and other distributions to shareholders of the Fund, (iii)
respond to correspondence by Fund shareholders and others relating to its
duties, (iv) maintain shareholder accounts, and (v) make periodic reports
to the Fund.
In addition, the Corporation has entered into a Fund Accounting
Servicing Agreement with Firstar Trust Company pursuant to which Firstar
Trust Company has agreed to maintain the financial accounts and records of
the Fund and provide other accounting services to the Fund. For its
accounting services, Firstar Trust Company is entitled to receive fees,
payable monthly, based on the total annual rate of $22,000 for the first
$40 million in average net assets of the Fund, .01% on the next $200
million of average net assets, and .005% on average net assets exceeding
$240 million. Firstar Trust Company is also entitled to certain out of
pocket expenses, including pricing expenses.
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
As set forth in the Prospectus under the caption "Determination
of Net Asset Value," the net asset value of the Fund will be determined as
of the close of regular trading (4:00 P.M. Eastern Time) on each day the
New York Stock Exchange is open for trading. The New York Stock Exchange
is open for trading Monday through Friday except New Year's Day,
Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Additionally, if any of the
aforementioned holidays falls on a Saturday, the New York Stock Exchange
will not be open for trading on the preceding Friday and when any such
holiday falls on a Sunday, the New York Stock Exchange will not be open
for trading on the succeeding Monday, unless unusual business conditions
exist, such as the ending of a monthly or the yearly accounting period.
Any total rate of return quotation for the Fund will be for a period
of three or more months and will assume the reinvestment of all dividends
and capital gains distributions which were made by the Fund during that
period. Any period total rate of return quotation of the Fund will be
calculated by dividing the net change in value of a hypothetical
shareholder account established by an initial payment of $1,000 at the
beginning of the period by 1,000. The net change in the value of a
shareholder account is determined by subtracting $1,000 from the product
obtained by multiplying the net asset value per share at the end of the
period by the sum obtained by adding (A) the number of shares purchased at
the beginning of the period plus (B) the number of shares purchased during
the period with reinvested dividends and distributions. Any average
annual compounded total rate of return quotation of the Fund will be
calculated by dividing the redeemable value at the end of the period
(i.e., the product referred to in the preceding sentence) by $1,000. A
root equal to the period, measured in years, in question is then
determined and 1 is subtracted from such root to determine the average
annual compounded total rate of return.
The foregoing computation may also be expressed by the following
formula:
n
P(1 + T) = ERV
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a
hypothetical $1,000 payment made
at the beginning of the stated
periods at the end of the stated
periods
DISTRIBUTION OF SHARES
The Fund has adopted a Service and Distribution Plan (the
"Plan") in anticipation that the Fund will benefit from the Plan through
increased sales of shares, thereby reducing the Fund's expense ratio and
providing the Adviser with greater flexibility in management. The Plan
may be terminated by the Fund at any time by a vote of the directors of
the Corporation who are not interested persons of the Corporation and who
have no direct or indirect financial interest in the Plan or any agreement
related thereto (the "Rule 12b-1 Directors") or by a vote of a majority of
the outstanding shares of the Fund. Ms. McRee and Mr. Shiber are
currently the Rule 12b-1 Directors. Any change in the Plan that would
materially increase the distribution expenses of the Fund provided for in
the Plan requires approval of the stockholders of the Fund and the Board
of Directors, including the Rule 12b-1 Directors.
While the Plan is in effect, the selection and nomination of
directors who are not interested persons of the Corporation will be
committed to the discretion of the directors of the Corporation who are
not interested persons of the Corporation. The Board of Directors of the
Corporation must review the amount and purposes of expenditures pursuant
to the Plan quarterly as reported to it by a Distributor, if any, or
officers of the Corporation. The Plan will continue in effect for as long
as its continuance is specifically approved at least annually by the Board
of Directors, including the Rule 12b-1 Directors. The Fund did not begin
operations until August 6, 1997, and thus, the Fund had not incurred any
distribution costs as of that date.
ALLOCATION OF PORTFOLIO BROKERAGE
Decisions to buy and sell securities for the Fund are made by
the Adviser subject to review by the Corporation's Board of Directors. In
placing purchase and sale orders for portfolio securities for the Fund, it
is the policy of the Adviser to seek the best execution of orders at the
most favorable price in light of the overall quality of brokerage and
research services provided, as described in this and the following
paragraph. In selecting brokers to effect portfolio transactions, the
determination of what is expected to result in best execution at the most
favorable price involves a number of largely judgmental considerations.
Among these are the Adviser's evaluation of the broker's efficiency in
executing and clearing transactions, block trading capability (including
the broker's willingness to position securities and the broker's financial
strength and stability). The most favorable price to the Fund means the
best net price without regard to the mix between purchase or sale price
and commission, if any. Over-the-counter securities are generally
purchased and sold directly with principal market makers who retain the
difference in their cost in the security and its selling price. In some
instances, the Adviser feels that better prices are available from
non-principal market makers who are paid commissions directly. The Fund
may place portfolio orders with broker-dealers who recommend the purchase
of Fund shares to clients if the Adviser believes the commissions and
transaction quality are comparable to that available from other brokers
and may allocate portfolio brokerage on that basis.
In allocating brokerage business for the Fund, the Adviser also
takes into consideration the research, analytical, statistical and other
information and services provided by the broker, such as general economic
reports and information, reports or analyses of particular companies or
industry groups, market timing and technical information, and the
availability of the brokerage firm's analysts for consultation. While the
Adviser believes these services have substantial value, they are
considered supplemental to the Adviser's own efforts in the performance of
its duties under the Advisory Agreement. Other clients of the Adviser may
indirectly benefit from the availability of these services to the Adviser,
and the Fund may indirectly benefit from services available to the Adviser
as a result of transactions for other clients. The Advisory Agreement
provides that the Adviser may cause the Fund to pay a broker which
provides brokerage and research services to the Adviser a commission for
effecting a securities transaction in excess of the amount another broker
would have charged for effecting the transaction, if the Adviser
determines in good faith that such amount of commission is reasonable in
relation to the value of brokerage and research services provided by the
executing broker viewed in terms of either the particular transaction or
the Adviser's overall responsibilities with respect to the Fund and the
other accounts as to which it exercises investment discretion. The Fund
did not commence operations until August 6, 1997.
TAXES
As set forth in the Prospectus under the caption "Dividends,
Distributions and Taxes," the Fund will endeavor to qualify annually for
and elect tax treatment applicable to a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code").
Under the Code, the Fund will not qualify as a regulated
investment company for any taxable year if more than 30% of the Fund's
gross income for that year is derived from gains on the sale of securities
held less than three months (the "30% Test"). Specifically, the 30% Test
will limit the extent to which the Fund may: (i) sell securities held for
less than three months; (ii) write options which expire in less than three
months; (iii) effect closing transactions with respect to call or put
options that have been written or purchased within the preceding three
months; and (iv) effect short sales.
If a call option written by the Fund expires, the amount of the
premium received by the Fund for the option will be short-term capital
gain. If the Fund enters into a closing transaction with respect to the
option, any gain or loss realized by the Fund as a result of the
transaction will be short-term capital gain or loss. If the holder of a
call option exercises the holder's right under the option, any gain or
loss realized by the Fund upon the sale of the underlying security
pursuant to such exercise will be short-term or long-term capital gain or
loss to the Fund depending on the Fund's holding period for the underlying
security.
With respect to call options purchased by the Fund, the Fund
will realize short-term or long-term capital gain or loss if such option
is sold and will realize short-term or long-term capital loss if the
option is allowed to expire depending on the Fund's holding period for the
call option. If such a call option is exercised, the amount paid by the
Fund for the option will be added to the basis of the stock so acquired.
The Fund may purchase or write options on stock indexes.
Options on "broadbased" stock indexes are generally classified as
"nonequity options" under the Code. Gains and losses resulting from the
expiration, exercise or closing of such nonequity options will be treated
as long-term capital gain or loss to the extent of 60% thereof and short-
term capital gain or loss to the extent of 40% thereof (hereinafter
"blended gain or loss") for determining the character of distributions.
In addition, nonequity options held by the Fund on the last day of a
fiscal year will be treated as sold for market value ("marked to market")
on that date, and gain or loss recognized as a result of such deemed sale
will be blended gain or loss. The marked to market gain will not be
considered a gain on the sale of options held less than three months. The
realized gain or loss on the ultimate disposition of the option will be
increased or decreased to take into consideration the prior marked to
market gains and losses. These tax considerations may have an impact on
investment decisions made by the Fund.
The trading strategies of the Fund involving nonequity options
on stock indexes may constitute "straddle" transactions. "Straddles" may
affect the short-term or long-term holding period of such instruments for
distributions characterization, but not for purposes of the 30% Test and
may cause the postponement of recognition of losses incurred in certain
closing transactions.
The Fund may acquire put options. Under the Code, put options
on stocks are taxed similar to short sales. If the Fund owns the
underlying stock or acquires the underlying stock before closing the
option position, the Straddle Rules may apply and the option positions may
be subject to certain modified short sale rules. If the Fund exercises or
fails to exercise a put option the Fund will be considered to have closed
a short sale. The Fund will generally have a short-term gain or loss on
the closing of an option position. The determination of the length of the
holding period is dependent on the holding period of the stock used to
exercise that put option. If the Fund sells the put option without
exercising it, the holding period will be determined by looking at the
holding period of the option.
Dividends from the Fund's net investment income (including any
excess of net short-term capital gain over net long-term capital loss) are
taxable to stockholders as ordinary income, while distributions of net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) are taxable as long-term capital gain regardless of the
stockholder's holding period for the shares. Such dividends and
distributions are taxable to stockholders whether received in cash or in
additional shares. The 70% dividends-received deduction for corporations
will apply to such dividends and distributions, subject to proportionate
reductions if the aggregate dividends received by the Fund from domestic
corporations in any year are less than 100% of the net investment company
income taxable distributions made by the Fund.
Any dividend or capital gain distribution paid shortly after a
purchase of shares of the Fund, will have the effect of reducing the per
share net asset value of such shares by the amount of the dividend or
distribution. Furthermore, if the net asset value of the shares of the
Fund immediately after a dividend or distribution is less than the cost of
such shares to the stockholder, the dividend or distribution will be
taxable to the stockholder even though it results in a return of capital
to him.
Redemption of shares will generally result in a capital gain or
loss for income tax purposes. Such capital gain or loss will be long term
or short term, depending upon the holding period. However, if a loss is
realized on shares held for six months or less, and the investor received
a capital gain distribution during that period, then such loss is treated
as a long-term capital loss to the extent of the capital gain distribution
received.
This section is not intended to be a full discussion of present
or proposed federal income tax laws and the effect of such laws on an
investor. Investors are urged to consult with their respective tax
advisers for a complete review of the tax ramifications of an investment
in the Fund.
STOCKHOLDER MEETINGS
The Maryland Business Corporation Law permits registered
investment companies, such as the Fund, to operate without an annual
meeting of stockholders under specified circumstances if an annual meeting
is not required by the Act. The Corporation has adopted the appropriate
provisions in its bylaws and may, at its discretion, not hold an annual
meeting in any year in which the election of directors is not required to
be acted upon by the stockholders under the Act.
The Corporation's bylaws also contain procedures for the removal
of directors by its stockholders. At any meeting of stockholders, duly
called and at which a quorum is present, the stockholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be
cast thereon, remove any director or directors from office and may elect a
successor or successors to fill any resulting vacancies for the unexpired
terms of removed directors.
Upon the written request of the holders of shares entitled to
not less than ten percent (10%) of all the votes entitled to be cast at
such meeting, the Secretary of the Corporation shall promptly call a
special meeting of stockholders for the purpose of voting upon the
question of removal of any director. Whenever ten or more stockholders of
record who have been such for at least six months preceding the date of
application, and who hold in the aggregate either shares having a net
asset value of at least $25,000 or at least one percent (1%) of the total
outstanding shares, whichever is less, shall apply to the Corporation's
Secretary in writing, stating that they wish to communicate with other
stockholders with a view to obtaining signatures to a request for a
meeting as described above and accompanied by a form of communication and
request which they wish to transmit, the Secretary shall within five
business days after such application either: (1) afford to such
applicants access to a list of the names and addresses of all stockholders
as recorded on the books of the Corporation; or (2) inform such applicants
as to the approximate number of stockholders of record and the approximate
cost of mailing to them the proposed communication and form of request.
If the Secretary elects to follow the course specified in
clause (2) of the last sentence of the preceding paragraph, the Secretary,
upon the written request of such applicants, accompanied by a tender of
the material to be mailed and of the reasonable expenses of mailing,
shall, with reasonable promptness, mail such material to all stockholders
of record at their addresses as recorded on the books unless within five
business days after such tender the Secretary shall mail to such
applicants and file with the Securities and Exchange Commission, together
with a copy of the material to be mailed, a written statement signed by at
least a majority of the Board of Directors to the effect that in their
opinion either such material contains untrue statements of fact or omits
to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the
basis of such opinion.
After opportunity for hearing upon the objections specified in
the written statement so filed, the Securities and Exchange Commission
may, and if demanded by the Board of Directors or by such applicants
shall, enter an order either sustaining one or more of such objections or
refusing to sustain any of them. If the Securities and Exchange
Commission shall enter an order refusing to sustain any of such
objections, or if, after the entry of an order sustaining one or more of
such objections, the Securities and Exchange Commission shall find, after
notice and opportunity for hearing, that all objections so sustained have
been met, and shall enter an order so declaring, the Secretary shall mail
copies of such material to all stockholders with reasonable promptness
after the entry of such order and the renewal of such tender.
DESCRIPTION OF SECURITIES RATINGS
As set forth in the Prospectus under the caption "Investment
Policies and Risk," the Fund may invest in commercial paper master notes
assigned one of the two highest ratings of either Standard & Poor's
Corporation ("Standard & Poor's") or Moody's Investors Services, Inc.
("Moody's"). As also set forth therein, the Fund may invest in
convertible securities assigned at least an investment grade by Standard &
Poor's or Moody's (or unrated but deemed by the Adviser to be of
comparable quality), and up to 5% of the Fund's assets may be invested in
convertible securities rated below investment grade but rated at least B
by Standard & Poor's or Moody's.
Commercial Paper Ratings
A Standard and Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard & Poor's for commercial paper in which the
Funds may invest:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determines to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues
designated "A-1."
Moody's commercial paper ratings are opinions of the ability of
issues to repay punctually promissory obligations not having an original
maturity in excess of nine months. The following summarizes the rating
categories used by Moody's for commercial paper in which the Funds may
invest:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be
evidenced by the following capacities: leading market positions in well-
established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and
ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well-established
access to a range of financial markets and assured sources of alternate
liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term
promissory 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, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is
maintained.
Corporate Long-Term Debt Ratings
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a
current assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment may take into consideration obligors
such as guarantors, insurers, or lessees. The debt rating is not a
recommendation to purchase, sell, or hold a security, inasmuch as it does
not comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with
any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the
obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
Investment Grade
AAA - Debt rated "AAA" has the highest rating assigned by
Standard & Poor's. Capacity to pay interest an repay principal is
extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues only in
small degree.
A - Debt rated "A" has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB - Debt rated "BBB" is regard as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
Speculative Grade
Debt rated "BB," "B," "CCC," "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest. While such debt will likely have some
quality and protective characteristic, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
"BB" - Debt rated "BB" has less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely interest
and principal payments. The "BB" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BBB-
"rating.
"B" - Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay principal.
The "B" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BB" or "BB-"rating.
"CCC" - Debt rated "CCC" has a current identifiable
vulnerability to default, and is dependent upon favorable business,
financial, and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the capacity to pay interest
an repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B" or
"B-" rating.
"CC" - Debt rated "CC" typically is applied to debt subordinated
to senior debt that is assigned an actual or implied "CCC" rating.
"C" - Debt rated "C" typically is applied to debt subordinated
to senior debt which is assigned an actual or implied "CCC-" debt rating.
The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
"CI" - The rating "CI" is reserved for income bonds on which no
interest is being paid.
"D" - Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal payments are not made
on the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made during
such period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Moody's Long-Term Debt Ratings.
"Aaa" - Bonds which are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are protected by
a large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
"Aa" - Bonds which are rated "Aa" are judged to be of high
quality by all standards. Together with the "Aaa" group, they comprise
what are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in
"Aaa" securities or fluctuation or protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risk appear somewhat larger than in "Aaa" securities.
"A" - Bonds which are rated "A" possess many favorable
investment attributes and are to be considered as upper-medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
"Baa" - Bonds which are rated "Baa" are considered as medium-
grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
"Ba" - Bonds which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
"B" - Bonds which are rated "B" generally lack characteristics
of the desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period of
time may be small.
"Caa" - Bonds which are rated "Caa" are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
"Ca" - Bonds which are rated "Ca" represent obligations which
are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
"C" - Bonds which are rated "C" are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, 100 East Wisconsin Avenue, Milwaukee,
Wisconsin 53201-1215 has been selected as the independent accountants for
the Fund. As such Arthur Andersen LLP performs an audit of the Fund's
financial statement and considers the Fund's internal control structure.
FINANCIAL STATEMENTS
The following financial statements for the Fund are attached
hereto:
- Report of Independent Accountants
- Statement of Assets and Liabilities
- Notes to the Financial Statement
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of
Directors of The Thurlow Funds, Inc.:
We have audited the statement of assets and liabilities of the Thurlow
Growth Fund (the "Fund"), a series of The Thurlow Funds, Inc., (a Maryland
corporation) as of July 28, 1997. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the net assets of the Fund as
of July 28, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
July 30, 1997
<PAGE>
THE THURLOW FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
JULY 28, 1997
The Thurlow
Growth Fund
ASSETS:
Cash $100,686
Unamortized organizational costs 19,838
Prepaid registration expenses 2,382
--------
Total Assets 122,906
-------
LIABILITIES:
Payable to Adviser 22,220
-------
Total Liabilities 22,220
-------
NET ASSETS $100,686
=======
Capital stock, $0.0001 par value, 500,000,000
shares authorized; 10,069 shares outstanding $100,686
=======
Offering and redemption price/net asset value per
share (based on 10,069 shares of capital
stock issued and outstanding) $10.00
=======
The accompanying notes to financial statement are an integral part of
this statement.
<PAGE>
THE THURLOW FUNDS, INC.
NOTES TO FINANCIAL STATEMENT
JULY 28, 1997
(1) The Thurlow Funds, Inc. was incorporated under the laws of the state
of Maryland on April 30, 1997 and has had no operations to date other
than those relating to organizational matters and the sale of 10,069
shares of its common stock to its original stockholders, Thomas F.
Thurlow and Thomas N. Thurlow.
(2) The Thurlow Funds, Inc. which consists solely of The Thurlow Growth
Fund (the "Fund"), has an agreement with Thurlow Capital Management,
Inc. (the "Adviser"), with whom certain officers and directors of the
Fund are affiliated, to furnish investment advisory services to the
Fund. Under the terms of this agreement, the Fund will pay the
Adviser a monthly fee based on the Fund's average daily net assets at
the annual rate of 1.25%.
Under the investment advisory agreement, if the aggregate annual
operating expenses (including the investment advisory fee and the
administration fee but excluding interest, taxes, brokerage
commissions and other costs incurred in connection with the purchase
or sale of portfolio securities, and extraordinary items) exceed
3.00%, the Adviser will reimburse the Fund for the amount of such
excess. Additionally, the Adviser has voluntarily agreed to
reimburse the Fund to the extent aggregate annual operating expenses
exceed 1.95% of the average daily net assets of the Fund.
(3) Organizational costs are being deferred and amortized over the period
of benefit, but not to exceed sixty months from the Fund's
commencement of operations. These costs were advanced by the Adviser
and will be reimbursed by the Fund. The proceeds of any redemption
of the initial shares by the original stockholders or any transferee
will be reduced by a pro-rata portion of any then unamortized
organizational expenses in the same proportion as the number of
initial shares being redeemed bears to the number of initial shares
outstanding at the time of such redemption.
