Securities Act Registration No. 333-27581
Investment Company Act Reg. No. 811-08219
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 4 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 5 |X|
(Check appropriate box or boxes.)
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THE THURLOW FUNDS, INC.
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(Exact Name of Registrant as Specified in Charter)
3212 Jefferson Street, #416
Napa, California 94558
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(Address of Principal Executive Offices) (Zip Code)
(888) 848-7569
----------------------------------------------------
(Registrant's Telephone Number, including Area Code)
Copy to:
Thomas F. Thurlow Richard L. Teigen
The Thurlow Funds, Inc. Foley & Lardner
3212 Jefferson Street, #416 777 East Wisconsin Avenue
Napa, California 94558 Milwaukee, Wisconsin 53202
----------------------------------------- --------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
Registration Statement becomes effective.
It is proposed that this filing become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
|X| on October 31, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a) (2) of rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
<PAGE>
THE
THURLOW
GROWTH
FUND
PROSPECTUS
[THURLOW FUNDS LOGO]
<PAGE>
[PHOTO OF THOMAS F. THURLOW] Welcome to The
Thurlow Funds!
Dear Investor,
Thank you for your interest in The Thurlow Growth Fund. The stock market is
entering a very tricky investment period, and individual investors are finding
that it is becoming more difficult to find satisfactory investments without much
research time and even a little luck.
By investing in The Thurlow Growth Fund, you will have a professional money
manager making your investment decisions for you, putting your money to work in
a very diversified list of primarily domestic stocks.
The Thurlow Growth Fund utilizes a middle-downtm approach to investing. In
this approach, the fund invests in stocks that are in undervalued sectors of the
stock market, or in sectors that have strong upward momentum.
The Thurlow Growth Fund is a new, smaller fund. I believe that a smaller,
more agile mutual fund has a distinct advantage over larger, bloated mutual
funds that are too big to take advantage of exciting market opportunities.
This brochure contains everything you need to become an investor in The
Thurlow Growth Fund. Once you read the prospectus, simply fill out the
application and include your initial investment in the enclosed envelope. Other
ways to begin your account are also listed in the prospectus.
Should you have any questions about your investment, please contact one of
our account representatives toll-free at 1-888-HURLOW (848-7569). I am excited
about working with you as an investor in The Thurlow Growth Fund.
Sincerely,
/s/ Thomas F. Thurlow
Thomas F. Thurlow, Portfolio Manager
PS: Don't forget to leave us your e-mail address, so that we can include you in
our list of recipients of my free market letters, which include our near-term
views of the stock market, and commentary on individuals stocks.
not a prospectus page
2
<PAGE>
Prospectus October 31, 2000
THE THURLOW GROWTH FUND
The Thurlow Funds, Inc.
3212 Jefferson Street, #416
Napa, California 94558
1-888-848-7569
An aggressive growth mutual fund seeking capital appreciation.
Please read this Prospectus and keep it for future reference. It contains
important information, including information on how The Thurlow Growth Fund
invests and the services it offers to shareholders.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
3
<PAGE>
TABLE OF CONTENTS
Questions Every Investor Should Ask Before Investing in The
Thurlow Growth Fund......................................................... 3
Fees and Expenses............................................................. 7
Investment Objective and Strategies........................................... 9
Management of the Fund........................................................10
Determining Net Asset Value...................................................10
Purchasing Shares.............................................................11
Redeeming Shares..............................................................14
Dividends, Distributions and Taxes............................................17
Financial Highlights..........................................................18
4
<PAGE>
QUESTIONS EVERY INVESTOR SHOULD
ASK BEFORE INVESTING IN THE
THURLOW GROWTH FUND
1. WHAT IS THE FUND'S GOAL?
The Thurlow Growth Fund seeks capital appreciation.
2. WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
The Fund invests primarily in common stocks of U.S. companies. The Fund invests
in companies of all sizes, including smaller capitalization companies. The Fund
also invests in call options on securities and stock indices. When the Fund
invests in call options, it is with the objective of obtaining capital
appreciation not hedging its portfolio. The Fund generally utilizes a "middle-
down"(TM) approach to selecting stocks. The Fund also considers a number of
technical factors and may, when it believes appropriate, take a temporary
defensive position and invest substantially all of its assets in money market
instruments. The Fund's investment adviser actively trades the Fund's portfolio.
The Fund will sell a stock if it finds a better investment, when taking a
temporary defensive position or if the company's fundamentals deteriorate. The
Fund's annual portfolio turnover rate generally will exceed 100%.
3. WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
Investors in the Fund may lose money. There are risks associated with
investments in the types of securities in which the Fund invests. These risks
include:
o MARKET RISK: The prices of the securities in which the Fund invests
may decline for a number of reasons. The price declines of common
stocks, in particular, may be steep, sudden and/or prolonged.
o OPTION INVESTING RISK: If the Fund purchases an option and the price
of the underlying stock or index moves in the wrong direction, the
Fund will lose most or all of the amount the Fund paid for the option,
plus commission costs. Since the Fund invests in options with the
objective of obtaining capital appreciation not hedging its portfolio,
any losses it incurs when investing in options is unlikely to be
offset by gains elsewhere in its portfolio. Also there may be times
when a market for the Fund's outstanding options does not exist.
o ASSET ALLOCATION RISK: The Fund may take temporary defensive positions
and invest substantially all of its assets in cash. The Fund's
relative performance would suffer if only a small portion of the
Fund's assets were invested in stocks or call options during a
significant stock market advance, and its absolute performance would
suffer if a major portion of its assets were invested in stocks or
call options during a market decline.
o HIGH PORTFOLIO TURNOVER RISK: High portfolio turnover necessarily
results in correspondingly heavier transaction costs (such as
brokerage commissions or markups or markdowns) which the Fund must pay
and increased realized gains (or losses) to investors. Distribution to
shareholders of short-term capital gains are taxed as ordinary income
under federal income tax laws.
o SMALLER CAPITALIZATION COMPANIES RISK: Many of the companies in which
the Fund invests are smaller capitalization companies (i.e., companies
with a market capitalization of $2 billion or less). Smaller
capitalization companies typically have relatively lower revenues,
limited product lines and lack of management depth, and may have a
smaller share of the market for their products or services, than
larger capitalization companies. The stocks of smaller capitalization
companies tend to have less trading volume than stocks of larger
capitalization companies. Less trading volume may make it more
difficult for the Fund's investment adviser to sell securities of
smaller capitalization companies at quoted market prices.
Because of these risks the Fund is a suitable investment only for those
investors who have long-term investment goals. Prospective investors who are
uncomfortable with an investment that will fluctuate in value should not invest
in the Fund.
5
<PAGE>
4. HOW HAS THE FUND PERFORMED?
The bar chart and table that follow provide some indication of the risks of
investing in the Fund by showing changes in the Fund's performance from year to
year and how its average annual returns over various periods compares to the
performance of the Standard & Poor's Composite Index of 500 Stocks and the
Nasdaq Composite Index. Please remember that the Fund's past performance is not
necessarily an indication of its future performance. It may perform better or
worse in the future.
The Thurlow Growth Funds
(Total return per calendar year)
[BAR CHART]
1998 1999
---- ----
43.34% 213.21%
--------------------------------------------------------------------------------
Note: During the two year period shown on the bar chart, the Fund's highest
total return for a quarter was 89.56% (quarter ended December 31, 1999) and
the lowest total return for a quarter was --11.22% (quarter ended September
30, 1998).
The Fund's 2000 year to date total return is -24.83% (January 1, 2000
through the quarter ended September 30, 2000).
Average Annual Total Returns Since the inception
(for the periods ending of the Fund
December 31, 1999) Past Year (August 8, 1997)
--------------------------------------- --------- -------------------
The Thurlow Growth Fund................ 213.21% 71.90%
S&P 500*............................... 19.53% 19.89%
Nasdaq Composite**..................... 85.59% 45.32%
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* The S&P 500 is the Standard & Poor's Composite Index of 500 Stocks, a
widely recognized unmanaged index of common stock prices.
** The Nasdaq Composite Index is a capitalization-weighted index consisting of
stocks trading on the Nasdaq Stock Market. Although it includes many small
capitalization stocks, it is heavily influenced by the 100 largest Nasdaq
stocks.
6
<PAGE>
FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load)
Imposed on Purchases (as a Percentage of offering price) No Sales Charge
Maximum Deferred Sales Charge (Load) No Deferred Sales
Charge
Maximum Sales Charge (Load)
Imposed on Reinvested Dividends and Distributions No Sales Charge
Redemption Fee None*
Exchange Fee None
--------------------------------------------------------------------------------
* Our transfer agent charges a fee of $20.00 for each wire redemption.
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees 1.90%(1)
Distribution and/or Service (12b-1) Fees 0.00%(1)
Other Expenses 0.00%(1)
Total Annual Fund Operating Expenses 1.90%(1)
--------------------------------------------------------------------------------
(1) The expense information has been restated to reflect current fees as if
they had been in effect during the fiscal year ended June 30, 2000.
Effective July 1, 2000 the Fund pays the investment adviser an annual
investment advisory fee equal to 1.90% of the Fund's average net assets,
and the Fund's investment adviser bears all expenses of the Fund except the
investment advisory fee, all federal, state and local taxes, interest,
brokerage commissions, reimbursement payments to securities lenders for
dividend and interest payments on securities sold short and extraordinary
items (including extraordinary litigation expenses). For the fiscal year
ended June 30, 2000 Management Fees, Distribution and/or Service (12b-1)
Fees, Other Expenses and Total Annual Fund Operating Expenses were $1.25%,
0.25%, 2.90% and 4.40%, respectively.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of these
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
1 Year....................................................... $ 193
3 Years...................................................... $ 597
5 Years...................................................... $ 1,026
10 Years..................................................... $ 2,222
7
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGIES
The Fund's investment objective is capital appreciation. The Fund may change its
investment objective without obtaining shareholder approval. Please remember
that an investment objective is not a guarantee. An investment in the Fund might
not appreciate and investors may lose money.
The Fund invests primarily in common stocks of U.S. companies utilizing a
"middle-down" investment approach. In middle-down analysis, the Fund focuses on
a sector of the stock market it believes is either undervalued or is gaining
momentum in the upward share prices of its components. Within such a sector, the
Fund then focuses on company-specific variables such as competitive industry
dynamics, market leadership, proprietary products and services, and management
expertise, as well as on financial characteristics, such as return on sales and
equity, debt/equity ratios, earnings and cash flow. Middle-down investing does
not fit into a "style" box. At different times or even at the same time, it can
lead to the Fund investing in "growth" stocks, "value" stocks and stocks of any
size market capitalization.
The Fund also considers a number of technical factors and may, when it
believes appropriate, take a temporary defensive position. This means the Fund
will invest in money market instruments (like U.S. Treasury Bills, commercial
paper and commercial paper master notes, certificates of deposit of U.S. banks,
repurchase agreements and money market mutual funds). The Fund will not be able
to achieve its investment objective of capital appreciation to the extent that
it invests in money market instruments since these securities do not appreciate
in value. When the Fund is not taking a temporary defensive position, it still
will hold some cash and money market instruments so that it can pay its
expenses, satisfy redemption requests or take advantage of investment
opportunities.
The Fund may buy put and call options on securities (including long- term
options or "LEAPs") and stock indexes. The Fund will more frequently buy call
options than put options. However, when the Fund believes a temporary defensive
position is appropriate, it may buy put options in an effort to realize capital
appreciation in a declining market.
MANAGEMENT OF THE FUND
Thurlow Capital Management, Inc. (the "Adviser") is the investment adviser to
the Fund. The Adviser's address is:
3212 Jefferson Street, #416
Napa, California 94558
The Adviser has been in business since 1997 and has been the Fund's only
investment adviser. The Fund is the Adviser's only client. As the investment
adviser to the Fund, the Adviser manages the investment portfolio for the Fund.
All of the decisions it makes concerning the securities to buy and sell for the
Fund are made by the Fund's portfolio manager, Thomas F. Thurlow. Mr. Thurlow
has been Chairman and Chief Executive Officer of the Adviser since 1997. Mr.
Thurlow is an attorney, former prosecutor and founder and associate of the law
firm of Thurlow & Hearn, an association of attorneys. He has been practicing law
since 1989. The Fund pays the Adviser an annual investment advisory fee equal to
1.90% of its average net assets. In addition to providing investment advisory
services to the Fund, the Advisor bears all expenses of the Fund, except the
investment advisory fee, all federal, state and local taxes, interest, brokerage
commissions, reimbursement payments to securities lenders for dividend and
interest payments on securities sold short and extraordinary items (including
extraordinary litigation expenses).
DETERMINING NET ASSET VALUE
The price at which investors purchase shares of the Fund and at which
shareholders redeem shares of the Fund is called its net asset value. The Fund
calculates its net asset value as of the close of regular trading on the New
York Stock Exchange (normally 4:00 p.m. Eastern Time) on each day the New York
Stock Exchange is open for trading. The Fund calculates its net asset value
based on the market prices of the securities (other than money market
instruments) it holds. The Fund values most money market instruments it holds at
their amortized cost. The Fund will process purchase orders that it receives and
accepts and redemption orders that it receives prior to the close of regular
trading on a day that the New York Stock Exchange is open at the net asset value
determined later that day. It will process purchase orders that it receives and
accepts and redemption orders that it receives after the close of regular
trading at the net asset value determined at the close of regular trading on the
next day the New York Stock Exchange is open.
8
<PAGE>
PURCHASING SHARES
HOW TO PURCHASE SHARES FROM THE FUND
1. Read this Prospectus carefully.
2. Determine how much you want to invest keeping in mind the following
minimums:
a. New accounts
o Automatic Investment Plan.............................. $ 500
o Retirement Accounts.................................... $ 500
o All other accounts..................................... $ 1000
b. Existing accounts
o Dividend reinvestment.................................. No Minimum
o All accounts (by mail)................................. $ 100
o All accounts (by wire transfer)........................ $ 500
3. Complete an Account Application, carefully following the instructions. For
additional investments, complete the remittance form attached to your
individual account statements. If you have any questions or need
applications or forms, please call 1-888-848-7569. (press option "3" for
questions; press option "2" to obtain applications or forms)
4. Make your check payable to The Thurlow Growth Fund. All checks must be
drawn on U.S. banks. The Fund will not accept cash or third party checks.
Mutual Shareholder Services, Inc., the Fund's transfer agent, will charge a
$20 fee against a shareholder's account for any payment check returned for
insufficient funds. The shareholder will also be responsible for any losses
suffered by the Fund as a result.
5. Send the application and check by first class mail, express mail or
overnight delivery service to:
Thurlow Growth Fund
c/o Mutual Shareholder Services
1301 East Ninth Street, Suite 1005
Cleveland, OH 44114-1800
Please call 1-888-848-7569 (and press option "3") prior to wiring funds for
information for setting up an account, if necessary, and in any event, to alert
the Fund that a wire is being sent. You should wire funds to:
Fifth Third Bank, N.A.
ABA #042000314
For credit to: Thurlow Growth Fund
Account #729-74541
For Further Credit to:
Shareholder Account Name:_____________________________________
Shareholder Account Number:____________________________________
Shareholder SSN or TIN:________________________________________
Please remember that Fifth Third Bank, N.A. must receive your wired funds
prior to the close of regular trading on the New York Stock Exchange for you to
receive same day pricing. The Fund and Fifth Third Bank, N.A. are not
responsible for the consequences of delays resulting from the banking or Federal
Reserve Wire system, or from incomplete wiring instructions.
PURCHASING SHARES FROM BROKER-DEALERS, FINANCIAL INSTITUTIONS AND OTHERS
9
<PAGE>
Some broker-dealers may sell shares of the Fund. These broker-dealers may charge
investors a fee either at the time of purchase or redemption. The fee, if
charged, is retained by the broker-dealer and not remitted to the Fund or the
Adviser. Some broker-dealers may purchase and redeem shares on a three day
settlement basis.
The Fund may enter into agreements with broker-dealers, financial
institutions or other service providers ("Servicing Agents") that may include
the Fund as investment alternatives in the programs they offer or administer.
Servicing agents may:
o Become shareholders of record of the Fund. This means all requests to
purchase additional shares and all redemption requests must be sent
through the Servicing Agent. This also means that purchases made
through Servicing Agents are not subject to the Fund's minimum
purchase requirements.
o Use procedures and impose restrictions that may be in addition to, or
different from, those applicable to investors purchasing shares
directly from the Fund.
o Charge fees to their customers for the services they provide them.
Also, the Fund and/or the Adviser may pay fees to Servicing Agents to
compensate them for the services they provide their customers.
o Be allowed to purchase shares by telephone with payment to follow the
next day. If the telephone purchase is made prior to the close of
regular trading on the New York Stock Exchange, it will receive same
day pricing.
o Be authorized to accept purchase orders on behalf of the Fund. This
means that a Fund will process the purchase order at the net asset
value which is determined following the Servicing Agent's acceptance
of the customer's order.
If you decide to purchase shares through Servicing Agents, please carefully
review the program materials provided to you by the Servicing Agent. When you
purchase shares of the Fund through a Servicing Agent, it is the responsibility
of the Servicing Agent to place your order with the Fund on a timely basis. If
the Servicing Agent does not, or if it does not pay the purchase price to the
Fund within the period specified in its agreement with the Fund, it may be held
liable for any resulting fees or losses.
OTHER INFORMATION ABOUT PURCHASING SHARES OF THE FUND
The Fund may reject any Account Application for any reason. The Fund will not
accept purchase orders made by telephone unless they are from a Servicing Agent
which has an agreement with the Fund.
The Fund will not issue certificates evidencing shares purchased, but will
send investors a written confirmation for all purchases of shares.
The Fund offers an automatic investment plan allowing shareholders to make
purchases on a regular and convenient basis. The Fund also offers the following
retirement plans:
o Traditional IRA
o Roth IRA
o Education IRA
o SEP-IRA
Investors can obtain further information about the automatic investment
plan and the retirement plans by calling the Fund at 1-888-848-7569 (and press
option "3"). The Fund recommends that investors consult with a competent
financial and tax advisor regarding the retirement plans before investing
through them.
REDEEMING SHARES
HOW TO REDEEM (SELL) SHARES BY MAIL
10
<PAGE>
1. Prepare a letter of instruction containing:
o account number(s)
o the amount of money or number of shares being redeemed
o the name(s) on the account
o daytime phone number
o additional information that the Fund may require for redemptions by
corporations, executors, administrators, trustees, guardians, or
others who hold shares in a fiduciary or representative capacity.
Please contact the Fund's transfer agent, Mutual Shareholder Services,
in advance, at 1-888-848-7569 (and press option "3") if you have any
questions.
2. Sign the letter of instruction exactly as the shares are registered. Joint
ownership accounts must be signed by all owners.
3. Have the signatures guaranteed by a commercial bank or trust company in the
United States, a member firm of the New York Stock Exchange or other
eligible guarantor institution in the following situations:
o The redemption proceeds are to be sent to a person other than the
person in whose name the shares are registered
o The redemption proceeds are to be sent to an address other than the
address of record
o The redemption request exceeds $25,000
A notarized signature is not an acceptable substitute for a signature
guarantee.
4. Send the letter of instruction by first class mail, express mail or
overnight delivery service to:
Thurlow Growth Fund
c/o Mutual Shareholder Services
1301 East Ninth Street, Suite 1005
Cleveland, OH 44114-1800
HOW TO REDEEM (SELL) SHARES BY TELEPHONE
1. Instruct Mutual Shareholder Services that you want the option of redeeming
shares by telephone. This can be done by completing the appropriate section
on the Account Application. If you have already opened an account, you may
write to Mutual Shareholder Services requesting this option. When you do
so, please sign the request exactly as your account is registered and have
the signatures guaranteed. Shares held in retirement plans cannot be
redeemed by telephone.
2. Assemble the same information that you would include in the letter of
instruction for a written redemption request.
3. Call Mutual Shareholder Services at 1-888-848-7569 (and press option "3").
Please do not call the Fund or the Adviser.
4. Telephone redemptions must be in amounts of $1,000 or more.
HOW TO REDEEM (SELL) SHARES THROUGH SERVICING AGENTS
If your shares are held by a Servicing Agent, you must redeem your shares
through the Servicing Agent. Contact the Servicing Agent for instructions on how
to do so.
REDEMPTION PRICE
11
<PAGE>
The redemption price per share you receive for redemption requests is the next
determined net asset value after:
o Mutual Shareholder Services receives your written request in proper
form with all required information.
o Mutual Shareholder Services receives your authorized telephone request
with all required information.
o A Servicing Agent that has been authorized to accept redemption
requests on behalf of the Fund receives your request in accordance
with its procedures.
PAYMENT OF REDEMPTION PROCEEDS
o For those shareholders who redeem shares by mail, Mutual Shareholder
Services will mail a check in the amount of the redemption proceeds no
later than the seventh day after it receives the redemption request in
proper form with all required information.
o For those shareholders who redeem by telephone, Mutual Shareholder
Services will either mail a check in the amount of the redemption
proceeds no later than the seventh day after it receives the
redemption request, or transfer the redemption proceeds to your
designated bank account if you have elected to receive redemption
proceeds by wire. Mutual Shareholder Services generally wires
redemption proceeds on the business day following the calculation of
the redemption price. However, the Fund may direct Mutual Shareholder
Services to pay the proceeds of a telephone redemption on a date no
later than the seventh day after the redemption request.
o For those shareholders who redeem shares through Servicing Agents, the
Servicing Agent will transmit the redemption proceeds in accordance
with its redemption procedures.
OTHER REDEMPTION CONSIDERATIONS
When redeeming shares of the Fund, shareholders should consider the following:
o The redemption may result in a taxable gain.
o Shareholders who redeem shares held in an IRA must indicate on their
redemption request whether or not to withhold federal income taxes. If
not, these redemptions will be subject to federal income tax
withholding.
o The Fund may delay the payment of redemption proceeds for up to seven
days in all cases.
o If you purchased shares by check, the Fund may delay the payment of
redemption proceeds until it is reasonably satisfied the check has
cleared (which may take up to 15 days from the date of purchase).
o Mutual Shareholder Services will send the proceeds of telephone
redemptions to an address or account other than that shown on its
records only if the shareholder has sent in a written request with
signatures guaranteed.
o The Fund reserves the right to refuse a telephone redemption request
if it believes it is advisable to do so. The Fund and Mutual
Shareholder Services may modify or terminate its procedures for
telephone redemptions at any time. Neither the Fund nor Mutual
Shareholder Services will be liable for following instructions for
telephone redemption transactions that they reasonably believe to be
genuine, provided they use reasonable procedures to confirm the
genuineness of the telephone instructions. They may be liable for
unauthorized transactions if they fail to follow such procedures.
These procedures include requiring some form of personal
identification prior to acting upon the telephone instructions and
recording all telephone calls. During periods of substantial economic
or market change, you may find telephone redemptions difficult to
implement. If a shareholder cannot contact Mutual Shareholder Services
by telephone, he or she should make a redemption request in writing in
the manner described earlier.
o Mutual Shareholder Services currently charges a fee of $20 when
transferring redemption proceeds to your designated bank account by
wire.
12
<PAGE>
o If your account balance falls below $1,000 because you redeem shares,
you will be given 60 days to make additional investments so that your
account balance is $1,000 or more. If you do not, the Fund may close
your account and mail the redemption proceeds to you.
o The Fund may pay redemption requests "in kind." This means that the
Fund may pay redemption requests entirely or partially with liquid
securities rather than with cash.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund distributes substantially all of its net investment income, if
any, quarterly in March, June, September and December, and substantially all of
its capital gains annually in September and/or December. You have two
distribution options:
o Automatic Reinvestment -- Both dividend and capital gains
distributions will be reinvested in additional Fund shares.
o All Cash Option -- Both dividend and capital gains distributions will
be paid in cash.
You may make this election on the Account Application. You may change your
election by writing to Mutual Shareholder Services or by calling 1-888-848-7569
(and press option "3").
The Fund's distributions, whether received in cash or additional shares of
the Fund, may be subject to federal and state income tax. These distributions
may be taxed as ordinary income and capital gains (which may be taxed at
different rates depending on the length of time the Fund holds the assets
generating the capital gains).
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the period of its operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited. The report of Baird, Kurtz &
Dobson, along with the Fund's financial statements, are included in the Annual
Report which is available upon request. Information prior to the fiscal year
ended June 30, 1999 was audited by Arthur Andersen LLP.
<TABLE>
THE THURLOW GROWTH FUND
<CAPTION>
Year Year 8/8/97(1)
Ended Ended Through
6/30/00 6/30/99 6/30/98
--------- --------- ---------
PER SHARE DATA:
<S> <C> <C> <C>
Net asset value, beginning of period............................. $ 20.63 $ 9.09 $ 10.00
Income (loss) from investment operations:
Net investment loss............................................ (0.29) (0.17) (0.07)
Net realized and unrealized gain (loss) on investments......... 5.81 11.71 (0.84)
-------- --------- --------
Total gain (loss) from investment operations..................... 5.52 11.54 (0.91)
-------- --------- --------
Distributions:
Distributions from capital gains............................... (3.29) (0.00) (0.00)
-------- --------- --------
Net asset value, end of period................................... $ 22.86 $ 20.63 $ 9.09
-------- --------- --------
TOTAL INVESTMENT RETURN.......................................... 55.61% 126.95% (9.10)%(2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000s)................................. $ 9,529 $ 2,098 $ 433
Ratio of expenses to average net assets:
Before expense reimbursement................................... 4.40% 12.85% 39.47%(3)
After expense reimbursement.................................... 1.95% 1.95% 1.95%(3)
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement................................... (3.66)% (12.19)% (38.75)%(3)
After expense reimbursement.................................... (1.26)% (1.24)% (1.23)%(3)
Portfolio turnover rate.......................................... 951% 1101% 409%
----------------------------------------------------------------------------------------------------------------
(1) Commencement of Operations
(2) Not annualized
(3) Annualized
</TABLE>
13
<PAGE>
To learn more about The Thurlow Growth Fund you may want to read The
Thurlow Growth Fund's Statement of Additional Information (or "SAI") which
contains additional information about the Fund. The Thurlow Growth Fund has
incorporated by reference the SAI into the Prospectus. This means that you
should consider the contents of the SAI to be part of the Prospectus.
You also may learn more about The Thurlow Growth Fund's investments by
reading The Thurlow Growth Fund's annual and semi-annual reports to
shareholders. The annual report includes a discussion of the market conditions
and investment strategies that significantly affected the performance of The
Thurlow Growth Fund during its last fiscal year.
The SAI and the annual and semi-annual reports are all available to
shareholders and prospective investors without charge, simply by calling
1-888-848-7569 (and press option "2").
Prospective investors and shareholders who have questions about The Thurlow
Growth Fund may also call the above number or write to the following address:
The Thurlow Growth Fund
3212 Jefferson Street, #416
Napa, California 94558
The general public can review and copy information about The Thurlow Growth
Fund (including the SAI) at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. (Please call 1-202-942-8090 for information
on the operations of the Public Reference Room.) Reports and other information
about The Thurlow Growth Fund are also available on the EDGAR Database at the
Securities and Exchange Commission's Internet site at http://www.sec.gov and
copies of this information may be obtained, upon payment of a duplicating fee,
by electronic request at the following E-mail address [email protected]. or by
writing to:
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-6009
Please refer to The Thurlow Growth Fund's Investment Company Act File No.
811-08219 when seeking information about The Thurlow Growth Fund from the
Securities and Exchange Commission.
14
<PAGE>
Investment Advisor and fund Administrator:
Thurlow Capital Management, Inc.
3212 Jefferson Street, #416
Napa, CA 94558
Transfer Agent, Dividend Paying Agent and
Shareholder Servicing Agent:
Mutual Shareholder Services
1301 East Ninth Street, Suite 1005
Cleveland, OH 44114-1800
Custodian:
Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, OH 45263
Legal Counsel:
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, WI 53202-5367
Independent Auditors:
Baird, Kurtz & Dobson
Twelve Wyandotte Plaza
120 West 12th Street
Kansas City, MO 64105-1936
15
<PAGE>
THE THURLOW FUNDS, INC.
c/o Mutual Shareholder Services
1301 East Ninth Street
Suite 1005
Cleveland, OH 44114-1800
[THURLOW FUNDS LOGO]
16
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION October 31, 2000
FOR
THE THURLOW GROWTH FUND
THE THURLOW FUNDS, INC.
3212 Jefferson Street, #416
Napa, California 94558
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the prospectus of The Thurlow Funds, Inc.,
dated October 31, 2000 (the "Prospectus"), for The Thurlow Growth Fund. Requests
for copies of the Prospectus should be made by writing to The Thurlow Funds,
Inc., 3212 Jefferson Street, #416, Napa, California 94558, Attention: Secretary
or by calling 1-888-848-7569.
The following financial statements are incorporated by reference to
the Annual Report, dated June 30, 2000 of The Thurlow Funds, Inc. (File No.
811-08219) for The Thurlow Growth Fund as filed with the Securities and Exchange
Commission on August 31, 2000:
o Statement of Net Assets
o Statement of Assets and Liabilities
o Statement of Operations
o Statements of Changes in Net Assets
o Financial Highlights
o Notes to the Financial Statements
o Independent Accountants' Report
<PAGE>
THE THURLOW FUNDS, INC.
Table of Contents
-----------------
Page No.
-------
GENERAL INFORMATION AND HISTORY..............................................1
INVESTMENT RESTRICTIONS......................................................1
INVESTMENT CONSIDERATIONS....................................................3
DIRECTORS AND OFFICERS OF THE CORPORATION...................................10
PRINCIPAL SHAREHOLDERS......................................................13
INVESTMENT ADVISER, CUSTODIAN, TRANSFER AGENT AND ACCOUNTING
SERVICES AGENT..............................................................13
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE............................17
DISTRIBUTION OF SHARES......................................................19
REDEMPTION OF SHARES........................................................20
ALLOCATION OF PORTFOLIO BROKERAGE...........................................20
TAXES.......................................................................22
SHAREHOLDER MEETINGS........................................................23
CAPITAL STRUCTURE...........................................................24
DESCRIPTION OF SECURITIES RATINGS...........................................25
INDEPENDENT ACCOUNTANTS.....................................................29
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus 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.
-i-
<PAGE>
GENERAL INFORMATION AND HISTORY
The Thurlow Funds, Inc., a Maryland corporation incorporated on April
30, 1997 (the "Corporation"), is an open-end management investment company
consisting of one diversified portfolio, The Thurlow Growth 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 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
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.
<PAGE>
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 shareholders 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
2
<PAGE>
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 shareholders prior to their implementation.
INVESTMENT CONSIDERATIONS
The Prospectus describes the Fund's principal investment strategies
and risks. This section expands upon that discussion and also describes
non-principal investment strategies and risks.
Money Market Instruments
The money market instruments in which the Fund invests include
conservative fixed-income securities, such as United States Treasury Bills,
commercial paper rated A-2 or better by Standard & Poor's Corporation or Prime-2
or better by Moody's Investors Service, Inc., commercial paper master notes,
certificates of deposit of U.S. banks having capital, surplus and undivided
profits, as of the date of its most recently published annual financial
statements, in excess of $100,000,000, money market mutual funds and repurchase
agreements. Commercial paper master notes are unsecured promissory notes issued
by corporations to finance short-term credit needs. They permit a series of
short-term borrowings under a single note. Borrowings under commercial paper
master notes are payable in whole or in part at any time upon demand, may be
prepaid in whole or in part at any time, and bear interest at rates which are
fixed to known lending rates and automatically adjusted when such known lending
rates change. There is no secondary market for commercial paper master notes.
The Fund's investment adviser (the "Adviser") will monitor the creditworthiness
of the issuer of the commercial paper master notes while any borrowings are
outstanding.
Repurchase agreements are agreements under which the seller of a
security agrees at the time of sale to repurchase the security at an agreed time
and price. The Fund will not enter into repurchase agreements with entities
other than banks or invest over 5% of its net assets in repurchase agreements
with maturities of more than seven days. If a seller of a repurchase agreement
defaults and does not repurchase the security subject to the agreement, the Fund
will look to the collateral security underlying the seller's repurchase
agreement, including the securities subject to the repurchase agreement, for
satisfaction of the seller's obligation to the Fund. In such event, the Fund
might incur disposition costs in liquidating the collateral and might suffer a
loss if the value of the collateral declines. In addition, if bankruptcy
proceedings are instituted against a seller of a repurchase agreement,
realization upon the collateral may be delayed or limited.
When the Fund invests in securities of money market mutual funds, in
addition to the advisory fees and other expenses the Fund bears directly in
connection with its operations, as a shareholder of another investment company,
the Fund would bear its pro rata share of the other investment company's
advisory fees and other expenses. Such fees and other expenses will be borne
indirectly by the Fund's shareholders.
3
<PAGE>
U.S. Government Securities
The Fund invests only in U.S. government securities that are backed by
the full faith and credit of the U.S. Treasury. Yields on such 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. The market value of U.S.
government 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 of investments in U.S. government
securities, while a decline in interest rates would generally increase the
market value of the Fund's portfolio of investments in these securities.
Zero Coupon Treasury Securities
The Fund may invest in zero coupon treasury securities which consist
of Treasury Notes and Bonds that have been stripped of their unmatured interest
coupons by the Federal Reserve Bank. A zero coupon treasury security pays no
interest to its holders during its life and its value to an investor consists of
the difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount much less than its face
value. Zero coupon treasury securities are generally subject to greater
fluctuations in value in response to changing interest rates than debt
obligations that pay interest currently. The Fund also may invest in U.S.
treasury securities that have been stripped of their unmatured interest coupons
by dealers. Dealers deposit such stripped U.S. treasury securities with
custodians for safekeeping and then separately sell the principal and interest
payments generated by the security.
Foreign Securities
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
directly or in the form of American Depository Receipts ("ADRs"). The Fund will
only invest in ADRs that are issuer sponsored. Sponsored ADRs typically are
issued by a U.S. bank or trust company and evidence ownership of underlying
securities issued by foreign corporations. Such securities involve risks that
are different from those of domestic issuers. Foreign companies are not subject
to the regulatory requirements of U.S. companies and, as such, there may be less
publicly available information about such issuers than is available in the
reports and ratings published about companies in the United States.
Additionally, foreign companies are not subject to uniform accounting, auditing
and financial reporting standards. 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.
4
<PAGE>
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. Investing in Rule 144A securities could have the effect of
decreasing the liquidity of the Fund to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing these securities. 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
5
<PAGE>
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.
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
6
<PAGE>
position or replaces the borrowed security, the Fund will: (a) maintain cash or
liquid securities at such a level that the amount so maintained plus the amount
deposited with the broker as collateral will equal the current value of the
security sold short; or (b) otherwise cover the Fund's short position.
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 that have been loaned, 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." These
convertible securities may be converted either at a stated price or rate within
a specified period of time into a specified number of shares of common stock. By
investing in convertible securities, the Fund seeks the opportunity, through the
conversion feature, to participate in a portion of the capital appreciation of
the common stock into which the securities are convertible, while earning higher
current income than is available from the common stock. 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
7
<PAGE>
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. However,
the Adviser expects to sell promptly any convertible debt security that falls
below a B rating quality.
8
<PAGE>
Options on Securities and Index Option Transactions
When buying a put option on a security, 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. When buying a call option on a
security, 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. If a put or a call option which the Fund has purchased expires
unexercised, 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.
A stock index fluctuates with changes in the market values of the
stocks included in the index. Options on stock indexes give the holder the right
to receive an amount of cash upon the 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. All
settlements of index option transactions are in cash.
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 maintaining
cash or liquid securities equal in value to the difference between the two
exercise prices. In addition, the Fund may cover its position by maintaining
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) 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
9
<PAGE>
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.
Portfolio Turnover
The Fund's annual portfolio turnover rate was substantially higher
during the fiscal years ended June 30, 2000 and June 30, 1999 than the fiscal
period ended June 30, 1998. The higher portfolio turnover rate was largely due
to the fact the Fund took defensive positions more frequently during the fiscal
years ended June 30, 2000 and 1999. Whether or not the Fund takes defensive
positions is largely dependent on the Adviser's belief as to the best way to
respond to perceived volatility in the stock market.
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, 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:
TAMARA THURLOW FIELD* Age 36
--------------------
200 Yorkview Road
Yorktown, Virginia 23692
(A DIRECTOR OF THE CORPORATION)
Ms. Field is the founder, President and Chief Executive Officer of
Apollo Hosting, a web hosting business. Ms. Field has held these positions since
1996. Prior to 1996, Ms. Field was self-employed. Ms. Field is the sister of Mr.
Thurlow.
------------------
* Mr. Thurlow, Ms. Hearn, Ms. Field and Ms. Rosendahl are directors who are
"interested persons" of the Fund as that term is defined in the Investment
Company Act of 1940.
10
<PAGE>
MARTINA HEARN* Age 44
-------------
3212 Jefferson Street, #416
Napa, California 94558
(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 29
----------------
3105 Grimes Ranch Road
Austin, Texas 78732
(A DIRECTOR OF THE CORPORATION)
Ms. McRee is a marketer with the firm of GSDNM Advertising and has
been employed with this firm since September 1996. From August 1995 to August
1996, Ms. McRee was employed with Rives Carlberg Advertising as a marketing
consultant. Ms. McRee is the wife of Robert C. McRee.
ROBERT C. MCREE Age 29
---------------
3105 Grimes Ranch Road
Austin, Texas 78732
(A DIRECTOR OF THE CORPORATION)
Mr. McRee is a marketer for Cyress Technologies Corporation, Inc. and
has been employed with this firm since 1996. Prior to such time, Mr. McRee was
employed by Slick 50 and attended college. Mr. McRee is the husband of Natasha
L. McRee.
CHRISTINE OWENS Age 35
---------------
965 E. El Camino
Sunnyvale, California 94087
(A DIRECTOR OF THE CORPORATION)
Ms. Owens is a Business Solutions Manager at Interwoven, Inc., a
provider of Web content management solutions. Ms. Owens is also the founder and
principal officer of Market Quest, a market consulting company. From September
1993 to February 1998, Ms. Owens was the senior marketing manager of Sybase, a
data base software company.
------------------
* Mr. Thurlow, Ms. Hearn, Ms. Field and Ms. Rosendahl are directors who are
"interested persons" of the Fund as that term is defined in the Investment
Company Act of 1940.
11
<PAGE>
STEPHANIE E. ROSENDAHL* Age 34
----------------------
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. Ms. Rosendahl is the sister of Thomas F. Thurlow.
THOMAS F. THURLOW* Age 38
------------------
3212 Jefferson Street, #416
Napa, California 94558
(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
Tamara Thurlow Field and Stephanie Rosendahl.
The Corporation's standard method of compensating directors is to pay
each director who is not an "interested person" of the Corporation a fee of $500
for each meeting of the Board of Directors attended.
<TABLE>
COMPENSATION TABLE
<CAPTION>
Pension or Total
Aggregate Retirement Benefits Estimated Annual Compensation
Name of Compensation Accrued as Part of Benefits Upon from Corporation
Person from Corporation Fund Expenses Retirement Paid to Directors
------ ---------------- ------------- ---------- -----------------
<S> <C> <C> <C> <C>
Tamara Thurlow Field(1) $0 $0 $0 $0
Martina Hearn 0 0 0 0
Robert C. McRee 0 0 0 0
Natasha G. McRee 0 0 0 0
Christine Owens(1) 0 0 0 0
Stephanie E. Rosendahl 0 0 0 0
Thomas F. Thurlow 0 0 0 0
</TABLE>
------
(1) Ms. Field and Ms. Owens became directors on March 17, 2000.
------------------
* Mr. Thurlow, Ms. Hearn, Ms. Field and Ms. Rosendahl are directors who are
"interested persons" of the Fund as that term is defined in the Investment
Company Act of 1940.
12
<PAGE>
The Fund and the Adviser have adopted a code of ethics pursuant to
Rule 17j-1 under the Act. This code of ethics permits personnel subject thereto
to invest in securities, including securities that may be purchased or held by
the Fund. This code of ethics generally 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 shares who as of August 31, 2000 beneficially owned more than 5% of the
Fund's then outstanding shares, as well as the number of shares of the Fund
beneficially owned by all officers and directors of the Corporation as a group.
Name and Address of Beneficial
------------------------------
Owner Number of Shares Percent of Class
----- ---------------- ----------------
National Investors Services Corp. 42,526 10.00%
55 Water Street
New York, NY 10041*
Heida L. Thurlow 21,666 5.10%
2030 W. Sam Houston Parkway N.
Houston, TX 77043
Officers and Directors as a Group 11,457 2.70%
(7 persons)
-----------------------------------
*All of the shares owned by National Investors Services Corp. were owned of
record only.
INVESTMENT ADVISER, CUSTODIAN,
TRANSFER AGENT AND ACCOUNTING SERVICES AGENT
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.
The Adviser supervises and manages the investment portfolio of the
Fund and, subject to such policies as the Board of Directors of the Corporation
may determine, directs the purchase or sale of investment securities in the
day-to-day management of the Fund. Under the Advisory Agreement, the Adviser, at
its own expense and without separate 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
13
<PAGE>
expenses of the Fund, except the Adviser's fee, all federal, state and local
taxes, interest, brokerage commissions, reimbursement payments to securities
lenders for dividend and interest payments on securities sold short and
extraordinary items (including extraordinary litigation expenses). For the
foregoing, the Adviser receives a monthly fee of 1/12th of 1.90% (1.90% per
annum) of the daily net assets of the Fund.
For fiscal years ending on or prior to June 30, 2000 the Fund paid the
Adviser a monthly fee of 1/12th of 1.25% (1.25% per annum) of the daily net
assets of the Fund. During such fiscal periods the only expenses of the Fund
borne by the Adviser were sales and promotional expenses of the Fund not paid by
the Fund pursuant to the Fund's Service and Distribution Plan then in effect.
During such fiscal years, the Fund paid all of its expenses not assumed by the
Adviser pursuant to the Advisory Agreement, 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 expenses of registering its shares with the Securities
and Exchange Commission and in the various states, the printing and distribution
cost of prospectuses mailed to existing shareholders, director and officer
liability insurance, reports to shareholders, reports to government authorities
and proxy statements, interest charges, brokerage commissions, and expenses in
connection with portfolio transactions. The Fund also paid the fees of directors
who were 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. Effective July 1, 2000, all of such expenses will be borne by
the Adviser.
Pursuant to the Advisory Agreement in effect prior to July 1, 2000,
the Adviser had undertaken to reimburse the Fund to the extent that the
aggregate annual operating expenses, including the investment advisory fee but
excluding interest, taxes, brokerage commissions and other costs incurred in
connection with the purchase or sale of portfolio securities, and extraordinary
items, exceeded 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 period ended June 30, 1998 and the fiscal years
ended June 30, 1999 and 2000, the Adviser agreed to reimburse the Fund for
annual operating expenses in excess of 1.95% of the Fund's average net assets
for each such period. The Fund monitored its expense ratio on a monthly basis.
If the accrued amount of the expenses of the Fund exceeded the expense
limitation, the Fund created an account receivable from the Adviser for the
amount of such excess. In such a situation the monthly payment of the Adviser's
fee was 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. Effective July 1, 2000, if the Adviser fails
to pay expenses of the Fund that it is obligated to pay, the Fund will create an
account receivable from the Adviser for the amount of such unpaid expenses. In
turn the Adviser's monthly fee will be reduced by the amount of such unpaid
expenses.
14
<PAGE>
For services provided by the Adviser under the Advisory Agreement for
the fiscal period ended June 30, 1998 and the fiscal years ended June 30, 1999
and 2000, the Fund paid the Adviser $3,611, $12,186 and $98,357, respectively.
During the fiscal period ended June 30, 1998 and the fiscal years ended June 30,
1999 and 2000, the Adviser reimbursed the Fund $108,421, $109,985 and $184,631,
respectively, for excess expenses.
The Advisory Agreement will remain in effect as long as its
continuance is specifically approved at least annually (i) by the Board of
Directors of the Corporation or by the vote of a majority (as defined in the
Act) of the outstanding shares of the Fund, and (ii) by the vote of a majority
of the directors of the Fund who are not parties to the Advisory Agreement or
interested persons of the Adviser, cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement provides that it may
be terminated at any time without the payment of any penalty, by the Board of
Directors of the Corporation or by vote of the majority of the Fund's
shareholders on sixty (60) days' written notice to the Adviser, and by the
Adviser on the same notice to the Corporation, and that it shall be
automatically terminated if it is assigned.
The Advisory Agreement provides that the Adviser shall not be liable
to the Corporation or its shareholders 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.
From August 8, 1997 through March 31, 1999, the administrator to the
Corporation was Firstar Mutual Fund Services, LLC, 615 East Michigan Street,
Milwaukee, Wisconsin 53202 (the "Administrator"). Pursuant to a Fund
Administration Servicing Agreement entered into between the Corporation and the
Administrator relating to the Fund (the "Administration Agreement") the
Administrator maintained the books, accounts and other documents required by the
Act, responded to shareholder inquiries, prepared the Fund's financial
statements and tax returns, prepared certain reports and filings with the
Securities and Exchange Commission and with state Blue Sky authorities,
furnished statistical and research data, clerical, accounting and bookkeeping
services and stationery and office supplies, kept and maintained the Fund's
financial and accounting records and generally assisted in all aspects of the
Fund's operations. The Administrator, at its own expense and without
reimbursement from the Fund or the Company, furnished office space and all
necessary office facilities, equipment and executive personnel for performing
the services required to be performed by it under the Administration Agreement.
For the foregoing, the Administrator received from the Fund a fee, paid monthly,
at an annual rate of .06% of the first $200,000,000 of the Fund's average net
assets, .05% of the next $500,000,000 of the Fund's average net assets, and .03%
of the Fund's net assets in excess of $700,000,000. Notwithstanding the
foregoing, the Administrator's minimum annual fee was $30,000. During the fiscal
period ended June 30, 1998 and the period from July 1, 1998 through March 31,
1999, the Fund incurred fees of $27,440 and $22,338, respectively, payable to
the Administrator pursuant to the Administration Agreement. Some of the services
provided by the Administrator pursuant to the Administration Agreement are now
provided by Mutual
15
<PAGE>
Shareholder Services, Inc. ("MSS"), 1301 East Ninth Street, Suite 1005,
Cleveland, Ohio 44114, pursuant to an Accounting Services Agreement discussed
below. To the extent they are not, they are provided by the Adviser.
The Fifth Third Bank, an Ohio banking trust, 38 Fountain Square Plaza,
Cincinnati, Ohio 45263, serves as custodian of the Corporation's assets pursuant
to a Custody Agreement. Under the Custody Agreement, The Fifth Third Bank 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. The Fifth Third Bank does
not exercise any supervisory function over the purchase and sale of securities.
MSS serves as transfer agent and dividend disbursing agent for the
Fund under a Transfer Agent Agreement. As transfer and dividend disbursing
agent, MSS 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.
From August 8, 1997 through March 31, 1999, pursuant to a Fund
Accounting Servicing Agreement with Firstar Mutual Fund Services, LLC, Firstar
Mutual Fund Services, LLC maintained the financial accounts and records of the
Fund and provided other accounting services to the Fund. For its accounting
services, Firstar Mutual Fund Services, LLC received 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 Mutual Fund
Services, LLC was reimbursed for certain out of pocket expenses, including
pricing expenses. During the fiscal period ended June 30, 1998 and the period
from July 1, 1998 through March 31, 1999, the Fund incurred fees of $20,367 and
$17,678, respectively, payable to Firstar Mutual Fund Services, LLC pursuant to
the Fund Accounting Servicing Agreement.
Effective April 1, 1999 the Corporation entered into an Accounting
Services Agreement with MSS. Pursuant to the Accounting Services Agreement, MSS
calculates the daily net asset value of the Fund, maintains the financial
accounts and records of the Fund and provides other accounting services to the
Fund. For its accounting services, MSS receives an annual fee paid in monthly
installments determined as follows:
Fund Net Assets Yearly Fee
--------------- ----------
Less than $25,000,000 $21,000
$25,000,000 to $50,000,000 $30,500
$50,000,000 to $75,000,000 $36,250
16
<PAGE>
Fund Net Assets Yearly Fee
--------------- ----------
$75,000,000 to $100,000,000 $42,000
$100,000,000 to $125,000,000 $47,750
$125,000,000 to $150,000,000 $53,500
Greater than $150,000,000 $59,250
MSS also provides a new client discount during the first year of the Accounting
Services Agreement. During the period April 1, 1999 through June 30, 1999 and
the fiscal year ended June 30, 2000, the Fund incurred fees of $2,738 and
$27,772, respectively, payable to MSS pursuant to the Accounting Services
Agreement.
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
The net asset value of the Fund is determined as of the close of
regular trading (4:00 P.M. Eastern Time) on each day the New York Stock Exchange
is open for trading. The New York Stock Exchange is open for trading Monday
through Friday except New Year's Day, Dr. Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when any such holiday falls on a Sunday, the
New York Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period. The New York Stock Exchange also may be closed on
national days of mourning.
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 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 the 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 the Nasdaq Stock Market but
which are not traded on the valuation date are valued at the current bid prices.
Unlisted equity securities for which market quotations are readily available and
options are valued at the current bid prices. Debt securities which mature in
more than 60 days are valued at the latest bid prices furnished by an
independent pricing service. Short-term instruments (those with remaining
maturities of 60 days or less) are valued at amortized cost, which approximates
market value. Other assets and securities for which there are no readily
available market quotations 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
17
<PAGE>
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 $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:
P(1 + T)n = 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
The Fund's average annual total returns for the one-year period ended
June 30, 2000 and for the period from the Fund's commencement of operations
(August 8, 1997) through June 30, 2000 were 55.61% and 47.52%, respectively.
Any reported performance results will be 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 Morningstar, Inc., Lipper Analytical
Services, Inc., Money, Forbes, Business Week and Barron's magazines and The Wall
Street Journal. (Morningstar, Inc. and Lipper Analytical Services, Inc. are
independent services that each rank over 1,000 mutual funds based upon total
return
18
<PAGE>
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 and the Consumer Price
Index. Such comparisons may be made in advertisements, shareholder reports or
other communications to shareholders.
DISTRIBUTION OF SHARES
Service and Distribution Plan
Prior to July 1, 2000 the Fund had in effect a Service and
Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
authorized 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 were only be used to pay distribution expenses in the year
incurred. Amounts paid under the Plan by the Fund could be spent by the Fund on
any activities or expenses primarily intended to result in the sale of shares of
the Fund as determined by the Board of Directors, including but not limited to,
advertising, compensation for sales and sales marketing activities of financial
institutions and others, such as dealers or other distributors, shareholder
account servicing, production and dissemination of prospectuses and sales and
marketing materials, and capital or other expenses of associated equipment,
rent, salaries, bonuses, interest and other overhead. To the extent any activity
was one which the Fund was permitted to finance without a Plan, the Fund could
also make payments to finance such activity outside of the Plan and not subject
to its limitations.
During the fiscal year ended June 30, 2000, the Fund incurred
distribution fees of $19,671 pursuant to the Plan of which all were used to pay
for printing of sales literature.
Automatic Investment Plan
The Fund offers an Automatic Investment Plan whereby a shareholder may
automatically make purchases of Fund shares on a regular, convenient basis ($100
minimum per transaction). Under the Automatic Investment Plan, a shareholder's
designated bank or other financial institution debits a pre-authorized amount on
the shareholder's account on any date specified by the shareholder each month or
calendar quarter and applies the amount to the purchase of Fund shares. If such
date is a weekend or holiday, such purchase shall be made on the next business
day. The Automatic Investment Plan must be implemented with a financial
institution that is a member of the Automatic Clearing House ("ACH"). The Fund
currently does not charge a fee for participating in the Automatic Investment
Plan. the transfer agent, MSS, will impose a $20 fee if sufficient funds are not
available in the shareholder's account at the time of the automatic transaction.
An application to establish the Automatic Investment Plan is included as part of
the account application. Shareholders may change the date or amount of
investments at any time by writing to or calling MSS at 1-888-848-7569. In the
event an investor discontinues participation in the Automatic Investment Plan,
the Fund reserves the right to redeem the investor's account involuntarily, upon
60 days notice, if the account value is $500 or less.
19
<PAGE>
Retirement Plans
The Fund offers the following retirement plans that may be funded with
purchases of Fund shares and may allow investors to defer some of their income
from taxes. A description of applicable service fees and certain limitations on
contributions and withdrawals, as well as applications forms, are available from
the Fund upon request. The IRA documents contain a disclosure statement that the
Internal Revenue Service requires to be furnished to individuals who are
considering adopting an IRA. Because a retirement program involves commitments
covering future years, it is important that the investment objective of the Fund
be consistent with the participant's retirement objectives. Premature
withdrawals from a retirement plan will result in adverse tax consequences. The
Fund recommends that investors consult with a competent financial and tax
adviser before investing in the Fund through the retirement plans.
Individual shareholders may establish their own tax-sheltered
Individual Retirement Accounts ("IRA"). The Fund currently offers a prototype
Traditional IRA plan, a prototype Roth IRA plan and a prototype Education IRA.
There is currently no charge for establishing an IRA account although there is
an annual maintenance fee. (See the applicable IRA Custodian Agreement and
Disclosure Statement for a discussion of the annual maintenance fee, other fees
associated with the account, eligibility requirements and related tax
consequences.)
The Fund also offers a prototype simplified employee pension ("SEP")
plan for employers, including self-employed individuals, who wish to purchase
shares of the Fund with tax-deductible contributions not exceeding annually for
any one participant the lesser of $30,000 or 15% of earned income. Under the SEP
plan, employer contributions are made directly to the IRA accounts of eligible
participants.
REDEMPTION OF SHARES
A shareholder's right to redeem shares of the Fund will be suspended
and the right to payment postponed for more than seven days 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)
such 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.
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
20
<PAGE>
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 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 year ended June 30, 2000, the Fund paid brokerage
commissions of $100,896 on transactions having a total market value of
$133,299,383. During such year the Fund paid commissions of $42,805 on
transactions having a total market value of $79,350,427 to brokers who provided
research services to the Adviser. During the fiscal year ended June 30, 1999,
the Fund paid brokerage commissions of $56,194 on transactions having a total
market value of $13,647,430. During the fiscal period ended June 30, 1998, the
Fund paid brokerage commissions of $9,978 on transactions having a total market
value of $2,515,844. Brokerage commissions were higher during the fiscal years
ended June 30, 2000 and 1999 than the prior period because of the Fund's
increased portfolio turnover rate and the increase in the Fund's average net
assets.
21
<PAGE>
TAXES
The Fund intends 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"). 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
accumulated earnings and profits of the Fund.
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 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.
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 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
22
<PAGE>
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
shareholders 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 shareholder's holding period
for the shares. Such dividends and distributions are taxable to shareholders
whether received in cash or in additional shares. The 70% dividends-received
deduction for corporations will apply to dividends from the Fund's net
investment income, subject to proportionate reductions if the aggregate
dividends received by the Fund from domestic corporations in any year are less
than 100% of the net investment company 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
shareholder, the dividend or distribution will be taxable to the shareholder
even though it results in a return of capital to the shareholder.
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 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 Fund, 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.
23
<PAGE>
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 designate or redesignate any unissued shares with respect to such
series. Currently the shares of the Fund are the only series of shares being
offered by the Corporation. Shareholders are entitled: (i)
24
<PAGE>
to 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.
DESCRIPTION OF SECURITIES RATINGS
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"). The Fund also 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 determined 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
issuers 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.
25
<PAGE>
"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.
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,
26
<PAGE>
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.
27
<PAGE>
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.
28
<PAGE>
INDEPENDENT ACCOUNTANTS
Baird, Kurtz & Dobson, 120 West 12th Street, Kansas City,
Missouri 64105-1936 serves as the independent accountants for the Fund. As such
Baird, Kurtz & Dobson performs an audit of the Fund's financial statement and
considers the Fund's internal control structure.
29
<PAGE>
PART C
OTHER INFORMATION
Item 24. Exhibits
--------
(a) Registrant's Articles of Incorporation. (1)
(b) Registrant's By-Laws, as amended. (1)
(c) None
(d) Investment Advisory Agreement with Thurlow Capital
Management, Inc. relating to The Thurlow Growth Fund
(e) None
(f) None
(g) Custody Agreement with The Fifth Third Bank (2)
(h)(i) Accounting Services Agreement with Mutual Shareholder
Services, Inc. (2)
(h)(ii) Transfer Agent Agreement with Mutual Shareholder Services,
Inc. (2)
(i) Opinion of Foley & Lardner, counsel for Registrant.
(j) Consent of Baird, Kurtz & Dobson
(k) None
(l) Subscription Agreement. (1)
(m) None
(n) None
(p) Code of Ethics of The Thurlow Funds, Inc. and Thurlow
Capital Management, Inc.
-----------------------
(1) Previously filed as an exhibit to the Registration Statement and
incorporated by reference thereto. The Registration Statement was filed on
May 21, 1997 and its accession number is 0000897069-97-000251.
(2) Previously filed as an exhibit to Post-Effective Amendment No. 3 to the
Registration Statement and incorporated by reference thereto.
Post-Effective Amendment No. 3 was filed on September 1, 1999 and its
accession number is 0000897069-99-000452.
S-1
<PAGE>
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Registrant is not controlled by any person, nor does Registrant
control any person.
Item 26. Indemnification
---------------
Pursuant to the authority of the Maryland General Corporation Law,
particularly Section 2-418 thereof, Registrant's Board of Directors has adopted
the following bylaw which is in full force and effect and has not been modified
or cancelled:
Article VII
GENERAL PROVISIONS
Section 7. Indemnification.
--------- ---------------
1. The Corporation shall indemnify all of its corporate
representatives against expenses, including attorneys fees,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by them in connection with the defense
of any action, suit or proceeding, or threat or claim of
such action, suit or proceeding, whether civil, criminal,
administrative, or legislative, no matter by whom brought,
or in any appeal in which they or any of them are made
parties or a party by reason of being or having been a
corporate representative, if the corporate representative
acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interests of the
corporation and with respect to any criminal proceeding, if
he had no reasonable cause to believe his conduct was
unlawful provided that the corporation shall not indemnify
corporate representatives in relation to matters as to which
any such corporate representative shall be adjudged in such
action, suit or proceeding to be liable for gross
negligence, willful misfeasance, bad faith, reckless
disregard of the duties and obligations involved in the
conduct of his office, or when indemnification is otherwise
not permitted by the Maryland General Corporation Law.
2. In the absence of an adjudication which expressly absolves
the corporate representative, or in the event of a
settlement, each corporate representative shall be
indemnified hereunder only if there has been a reasonable
determination based on a review of the facts that
indemnification of the corporate representative is proper
because he has met the applicable standard of conduct set
forth in paragraph A. Such determination shall be made: (i)
by the board of directors, by a majority vote of a quorum
which consists of directors who were not parties to the
action, suit or proceeding, or if such a quorum cannot be
obtained, then by a majority vote of a committee of the
board consisting solely of two
S-2
<PAGE>
or more directors, not, at the time, parties to the action,
suit or proceeding and who were duly designated to act in
the matter by the full board in which the designated
directors who are parties to the action, suit or proceeding
may participate; or (ii) by special legal counsel selected
by the board of directors or a committee of the board by
vote as set forth in (i) of this paragraph, or, if the
requisite quorum of the full board cannot be obtained
therefor and the committee cannot be established, by a
majority vote of the full board in which directors who are
parties to the action, suit or proceeding may participate.
3. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall create a rebuttable
presumption that the person was guilty of willful
misfeasance, bad faith, gross negligence or reckless
disregard to the duties and obligations involved in the
conduct of his or her office, and, with respect to any
criminal action or proceeding, had reasonable cause to
believe that his or her conduct was unlawful.
4. Expenses, including attorneys' fees, incurred in the
preparation of and/or presentation of the defense of a civil
or criminal action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such
action, suit or proceeding as authorized in the manner
provided in Section 2-418(F) of the Maryland General
Corporation Law upon receipt of: (i) an undertaking by or on
behalf of the corporate representative to repay such amount
unless it shall ultimately be determined that he or she is
entitled to be indemnified by the corporation as authorized
in this bylaw; and (ii) a written affirmation by the
corporate representative of the corporate representative's
good faith belief that the standard of conduct necessary for
indemnification by the corporation has been met.
5. The indemnification provided by this bylaw shall not be
deemed exclusive of any other rights to which those
indemnified may be entitled under these bylaws, any
agreement, vote of shareholders or disinterested directors
or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and
administrators of such a person subject to the limitations
imposed from time to time by the Investment Company Act of
1940, as amended.
6. This corporation shall have power to purchase and maintain
insurance on behalf of any corporate representative against
any liability asserted against him or her and incurred by
him or her in such capacity or arising out of his or her
status as such, whether or not the corporation would have
the power to indemnify him or her against such liability
under this
S-3
<PAGE>
bylaw provided that no insurance may be purchased or
maintained to protect any corporate representative against
liability for gross negligence, willful misfeasance, bad
faith or reckless disregard of the duties and obligations
involved in the conduct of his or her office.
7. "Corporate Representative" means an individual who is or was
a director, officer, agent or employee of the corporation or
who serves or served another corporation, partnership, joint
venture, trust or other enterprise in one of these
capacities at the request of the corporation and who, by
reason of his or her position, is, was, or is threatened to
be made, a party to a proceeding described herein.
Insofar as indemnification for and with respect to liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of Registrant pursuant to the foregoing provisions or
otherwise, Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or controlling person or
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 27. Business and Other Connections of Investment Adviser
----------------------------------------------------
Incorporated by reference to pages 10 through 12 of the Statement of
Additional Information pursuant to Rule 411 under the Securities Act of 1933.
Item 28. Principal Underwriters
----------------------
Not Applicable.
Item 29. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the physical possession of Registrant's
Treasurer, Thomas F. Thurlow, at Registrant's corporate offices, 3212 Jefferson
Street, #416, Napa, California 94558.
Item 30. Management Services
-------------------
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
S-4
<PAGE>
Item 31. Undertakings
------------
Registrant undertakes to provide its Annual Report to Shareholders
upon request without charge to each person to whom a prospectus is delivered.
S-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amended Registration Statement under
Rule 485(b) under the Securities Act of 1933 and has duly caused this amended
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Napa and State of California on the 15th day of
September, 2000.
THE THURLOW FUNDS, INC.
(Registrant)
By: /s/ Thomas F. Thurlow
------------------------------------
Thomas F. Thurlow, President
Pursuant to the requirements of the Securities Act of 1933, this
amended Registration Statement has been signed below by the following persons in
the capacities and on the date(s) indicated.
Name Title Date
---- ----- ----
/s/ Thomas F. Thurlow President(Principal Executive, September 15, 2000
-----------------------------Financial and Accounting
Thomas F. Thurlow Officer) and a Director
/s/ Martina Hearn Director September 15, 2000
-----------------------------
Martina Hearn
/s/ Tamara Thurlow Field Director September 15, 2000
-----------------------------
Tamara Thurlow Field
/s/ Christine Owens Director September 15, 2000
-----------------------------
Christine Owens
Director September __, 2000
-----------------------------
Clint McRee
September __, 2000
-----------------------------
Natasha L. McRee Director
/s/ Stephanie E. Rosendahl September 15, 2000
-----------------------------
Stephanie E. Rosendahl Director
S-6
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Exhibit Page No.
----------- ------- --------
(a) Registrant's Articles of Incorporation*
(b) Registrant's Bylaws*
(c) None
(d) Investment Advisory Agreement with Thurlow Capital
Management, Inc. relating to The Thurlow Growth Fund
(e) None
(f) None
(g) Custody Agreement with The Fifth Third Bank*
(h)(i) Accounting Services Agreement with Mutual Shareholder
Services, Inc.*
(h)(ii) Transfer Agent Agreement with Mutual Shareholder Services,
Inc.*
(i) Opinion of Foley & Lardner, counsel for Registrant
(j) Consent of Baird, Kurtz & Dobson
(k) None
(l) Subscription Agreement*
(m) None
(n) None
(p) Code of Ethics of The Thurlow Funds, Inc. and Thurlow
Capital Management, Inc.
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* Incorporated by reference.
