STATEMENT OF ADDITIONAL INFORMATION
Filed pursuant to Rule 497(e)
Registration Nos.: 333-65579
811-9051
[Logo]
La Crosse Funds, Inc.
La Crosse Large Cap Stock Fund
P.O. Box 717
Milwaukee, Wisconsin 53201-0717
Telephone: 1-888-661-7600
This Statement of Additional Information ("SAI")
is not a prospectus and should be read together with
the Prospectus of the La Crosse Large Cap Stock Fund
(the "Fund"), dated January 28, 2000. The Fund's
prospectus may be obtained by calling the telephone
number indicated above. The Fund is a series of
La Crosse Funds, Inc. (the "Corporation"). The Fund's
audited financial statements for the period ended
October 31, 1999 are incorporated herein by reference
to its 1999 Annual Report.
This Statement of Additional Information is dated May 23, 2000.
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TABLE OF CONTENTS
FUND ORGANIZATION 1
FUND POLICIES: FUNDAMENTAL AND NON-FUNDAMENTAL 1
IMPLEMENTATION OF INVESTMENT OBJECTIVE 3
Temporary Strategies 3
Convertible Securities 4
Illiquid Securities 4
Reverse Repurchase Agreements 5
Derivative Instruments 5
Depositary Receipts and Foreign Securities 13
Warrants 14
Short Sales Against the Box 15
Borrowing 15
Lending Portfolio Securities 15
Concentration 15
DIRECTORS AND OFFICERS 15
PRINCIPAL SHAREHOLDERS 17
INVESTMENT ADVISER 17
FUND TRANSACTIONS AND BROKERAGE 18
CUSTODIAN 19
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT 19
ADMINISTRATOR AND FUND ACCOUNTANT 19
DISTRIBUTOR 20
FINANCIAL INTERMEDIARIES 20
PURCHASE AND PRICING OF SHARES 20
TAXATION OF THE FUND 21
PERFORMANCE INFORMATION 21
Total Return 21
Comparisons 22
INDEPENDENT ACCOUNTANTS 22
FINANCIAL STATEMENTS 22
No person has been authorized to give any
information or to make any representations other than
those contained in this SAI and related Prospectus, and
if given or made, such information or representations
may not be relied upon as having been authorized by the
Fund. This SAI does not constitute an offer to sell
securities in any state or jurisdiction in which such
offering may not lawfully be made.
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FUND ORGANIZATION
The Corporation is a diversified, open-end
management investment company, commonly referred to as
a mutual fund. The Corporation is organized as a
Wisconsin company and was incorporated on September 4,
1998.
The Corporation is authorized to issue shares of
common stock in series and classes. The Corporation
currently offers one series of shares: the La Crosse
Large Cap Stock Fund (the "Fund"). La Crosse Advisers,
L.L.C. (the "Adviser") is the investment adviser to the
Fund. Each share of common stock of the Fund is
entitled to one vote, and each share is entitled to
participate equally in dividends and capital gains
distributions and in the residual assets of the Fund in
the event of liquidation.
No certificates will be issued for shares held in
your account. You will, however, have full shareholder
rights.
Generally, the Fund will not hold annual
shareholders' meetings unless required by the
Investment Company Act of 1940, as amended (the "1940
Act"), or Wisconsin law.
FUND POLICIES: FUNDAMENTAL AND NON-FUNDAMENTAL
The following are the Fund's fundamental
investment policies which cannot be changed without the
approval of a majority of the Fund's outstanding voting
securities. As used herein, a "majority of the Fund's
outstanding voting securities" means the lesser of (i)
67% of the shares of common stock of the Fund
represented at a meeting at which more than 50% of the
outstanding shares are present, or (ii) more than 50%
of the outstanding shares of common stock of the Fund.
The Fund:
1. May not, with respect to 75% of its total
assets, purchase the securities of any issuer
(except securities issued or guaranteed by
the U.S. government or its agencies or
instrumentalities) if, as a result, (i) more
than 5% of the Fund's total assets would be
invested in the securities of that issuer or
(ii) the Fund would hold more than 10% of the
outstanding voting securities of that issuer.
2. May not issue senior securities, except as
permitted under the 1940 Act.
3. May (i) borrow money from banks for temporary
or emergency purposes (but not for leveraging
or the purchase of investments), and (ii)
make other investments or engage in other
transactions permissible under the 1940 Act
which may involve a borrowing, including
borrowing through reverse repurchase
agreements, provided that the combination of
(i) and (ii) shall not exceed 33 1/3% of the
value of the Fund's assets (including the
amount borrowed), less the Fund's liabilities
(other than borrowings). If the amount
borrowed at any time exceeds 33 1/3% of the
Fund's total assets, the Fund will, within
three days thereafter (not including Sundays,
holidays and any longer permissible period),
reduce the amount of the borrowings such that
the borrowings do not exceed 33 1/3% of the
Fund's total assets. The Fund may also
borrow money from other persons to the extent
permitted by applicable law.
4. May not act as an underwriter of another
issuer's securities, 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 connection with the
purchase and sale of portfolio securities.
5. May not purchase the securities of any issuer
if, as a result, more than 25% of the Fund's
total assets would be invested in the
securities of issuers, the principal business
activities of which are in the same industry.
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6. May not purchase or sell real estate unless
acquired as a result of ownership of
securities or other instruments (but this
shall not prohibit the Fund from purchasing
or selling securities or other instruments
backed by real estate or of issuers engaged
in real estate activities).
7. May not make loans if, as a result, more than
33 1/3% of the Fund's total assets would be
lent to other persons, except through (i)
purchases of debt securities or other debt
instruments, or (ii) engaging in repurchase
agreements.
8. May not purchase or sell physical commodities
unless acquired as a result of ownership of
securities or other instruments (but this
shall not prevent the Fund from purchasing or
selling options, futures contracts, or other
derivative instruments, or from investing in
securities or other instruments backed by
physical commodities).
9. Notwithstanding any other fundamental
investment policy or restriction, may invest
all of its assets in the securities of a
single open-end management investment company
with substantially the same fundamental
investment objective, policies, and
restrictions as the Fund.
The Fund's investment objective, which is to seek
capital appreciation and income, is also a fundamental
investment policy which cannot be changed without the
approval of a majority of the Fund's outstanding voting
securities.
The following are the Fund's non-fundamental
investment policies which may be changed by the Board
of Directors of the Corporation without shareholder
approval.
The Fund may not:
1. Sell securities short, unless the Fund owns
or has the right to obtain securities
equivalent in kind and amount to the
securities sold short, or unless it covers
such short sale as required by the current
rules and positions of the Securities and
Exchange Commission (the "SEC") or its staff,
and provided that transactions in options,
futures contracts, options on futures
contracts, or other derivative instruments
are not deemed to constitute selling
securities short.
2. Purchase securities on margin, except that
the Fund may obtain such short-term credits
as are necessary for the clearance of
transactions; and provided that margin
deposits in connection with futures
contracts, options on futures contracts, or
other derivative instruments shall not
constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result
of such investment, more than 15% of its net
assets would be invested in illiquid
securities.
4. Purchase securities of other investment
companies except in compliance with the 1940
Act and applicable state law.
5. Engage in futures or options on futures
transactions which are impermissible pursuant
to Rule 4.5 under the Commodity Exchange Act
(the "CEA") and, in accordance with Rule 4.5,
will use futures or options on futures
transactions solely for bona fide hedging
transactions (within the meaning of the CEA);
provided, however, that the Fund may, in
addition to bona fide hedging transactions,
use futures and options on futures
transactions if the aggregate initial margin
and premiums required to establish such
positions, less the amount by which any such
options positions are in the money (within
the meaning of the CEA), do not exceed 5% of
the Fund's net assets.
6. Make any loans, except through (i) purchases
of debt securities or other debt instruments,
or (ii) engaging in repurchase agreements.
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7. Borrow money except from banks or through
reverse repurchase agreements, and will not
purchase securities when bank borrowings
exceed 5% of its total assets.
8. Under normal circumstances, invest less than
70% of the value of its total assets in the
stock of companies with market
capitalizations of at least $5 billion.
Except for the fundamental investment limitations
listed above and the Fund's investment objective, the
other investment policies described in the Prospectus
and this SAI are not fundamental and may be changed
with approval of the Corporation's Board of Directors.
Unless noted otherwise, if a percentage restriction is
adhered to at the time of investment, a later increase
or decrease in percentage resulting from a change in
the Fund's assets (i.e., due to cash inflows or
redemptions) or in the market value of the investment
or the Fund's assets will not constitute a violation of
that restriction.
IMPLEMENTATION OF INVESTMENT OBJECTIVE
The following information supplements the
discussion of the Fund's investment objective and
strategy described in the Prospectus under the headings
"Investment Objective" and "How the Fund Invests and
Related Risks." The following represent strategies
that are not principal strategies of the Fund, but may
be used from time to time.
Temporary Strategies
As described in the Prospectus under the heading
"How the Fund Invests and Related Risks," prior to
investing proceeds from sales of Fund shares, to meet
ordinary daily cash needs, and to retain the
flexibility to respond promptly to changes in market
and economic conditions, the Fund may hold cash and/or
invest all or a portion of its assets in money market
instruments which are "investment grade" as determined
by Standard & Poor's Corporation ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), a comparable
rating agency or the Adviser. The investment grade
money market instruments which the Fund may purchase
may include:
U.S. Government Securities. Obligations issued or
guaranteed as to principal and interest by the United
States or its agencies (such as the Export-Import Bank
of the United States, Federal Housing Administration
and Government National Mortgage Association) or its
instrumentalities (such as the Federal Home Loan Bank),
including Treasury bills, notes, and bonds;
Bank Obligations. Obligations (including
certificates of deposit, bankers' acceptances,
commercial paper (see below) and other debt
obligations) of banks subject to regulation by the U.S.
Government and instruments secured by such obligations,
not including obligations of foreign branches of
domestic banks;
Obligations of Savings Institutions. Certificates
of deposit of savings banks and savings and loan
associations;
Fully Insured Certificates of Deposit.
Certificates of deposit of banks and savings
institutions, if the principal amount of the obligation
is insured by the Bank Insurance Fund or the Savings
Association Insurance Fund (each of which is
administered by the Federal Deposit Insurance
Corporation), limited to $100,000 principal amount per
certificate and to 15% or less of the Fund's total
assets in all such obligations and in all illiquid
assets, in the aggregate;
Commercial Paper. Commercial paper rated within
the two highest grades by Moody's, S&P or, if not
rated, issued by a company having an outstanding debt
issue rated at least Aaa by Moody's or AAA by S&P; and
Money Market Funds. Securities issued by
registered investment companies holding themselves out
as money market funds ("Money Market Funds") which
attempt to maintain a stable net asset value of $1.00
per share. The Fund shall not purchase securities
issued by a Money Market Fund if, after such purchase,
the Fund would own
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(i) more than 3% of the outstanding
voting stock of the Money Market Fund, (ii) securities
of the Money Market Funds having an aggregate value in
excess of 5% of the total value of the Fund, or (iii)
securities issued by the Money Market Fund and all
other investment companies having an aggregate value in
excess of 10% of the value of the total assets of the
Fund.
Convertible Securities
The Fund may invest in convertible securities,
which are bonds, debentures, notes, preferred stocks,
or other securities that may be converted into or
exchanged for a specified amount of common stock or
warrants of the same or a different company within a
particular period of time at a specified price or
formula. A convertible security entitles the holder to
receive interest normally paid or accrued on debt or
the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted,
or exchanged. Convertible securities have unique
investment characteristics in that they generally (i)
have higher yields than common stocks, but lower yields
than comparable non-convertible securities, (ii) are
less subject to fluctuation in value than the
underlying stock (or warrant) since they have fixed
income characteristics, and (iii) provide the potential
for capital appreciation if the market price of the
underlying common stock (or warrant) increases. A
convertible security may be subject to redemption at
the option of the issuer at a price established in the
convertible security's governing instrument. If a
convertible security held by the Fund is called for
redemption, the Fund will be required to permit the
issuer to redeem the security, convert it into the
underlying common stock (or warrant), or sell it to a
third party.
Illiquid Securities
The Fund may invest up to 15% of its net assets in
illiquid securities (i.e., securities that are not
readily marketable). For purposes of this restriction,
illiquid securities include, but are not limited to,
restricted securities (securities the disposition of
which is restricted under the federal securities laws),
repurchase agreements with maturities in excess of
seven days, and other securities that are not readily
marketable. The Board of Directors of the Corporation,
or its delegate, has the ultimate authority to
determine, to the extent permissible under the federal
securities laws, which securities are liquid or
illiquid for purposes of this 15% limitation. Certain
securities exempt from registration or issued in
transactions exempt from registration under the
Securities Act, such as securities that may be resold
to institutional investors under Rule 144A under the
Securities Act, may be considered liquid under
guidelines adopted by the Board of Directors. However,
investing in securities which may be resold pursuant to
Rule 144A under the Securities Act could have the
effect of increasing the level of the Fund's
illiquidity to the extent that institutional investors
become, for a time, uninterested in purchasing such
securities.
The Board of Directors has delegated to the
Adviser the day-to-day determination of the liquidity
of any security, although it has retained oversight and
ultimate responsibility for such determinations.
Although no definitive liquidity criteria are used, the
Board of Directors has directed the Adviser to look to
such factors as (i) the nature of the market for a
security (including the institutional private resale
market), (ii) the terms of certain 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 (e.g., for securities
quoted in the PORTAL system), and (iv) other
permissible relevant factors.
Restricted securities may be sold only in
privately negotiated transactions or in a public
offering with respect to which a registration statement
is in effect under the Securities Act. Where
registration is required, the Fund may be obligated to
pay all or part of the registration expenses and a
considerable period may elapse between the time of the
decision to sell and the time the Fund may be permitted
to sell a security under an effective registration
statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a
less favorable price than that which prevailed when it
decided to sell. Restricted securities will be priced
at fair value as determined in good faith by the Board
of Directors. If, through the appreciation of
restricted securities or the depreciation of
unrestricted securities, the Fund should be in a
position where more than 15% of the value of its net
assets are invested in illiquid securities, including
restricted securities which are not readily marketable
(except for Rule 144A securities deemed to be liquid by
the Adviser), the affected Fund will take such steps as
is deemed advisable, if any, to protect liquidity.
<PAGE>
Reverse Repurchase Agreements
The Fund may, with respect to up to 5% of its net
assets, engage in reverse repurchase agreements. In a
reverse repurchase agreement, the Fund would sell a
security and enter into an agreement to repurchase the
security at a specified future date and price. The
Fund generally retains the right to interest and
principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase
agreement, it may be considered a borrowing. When
required by guidelines of the SEC, the Fund will set
aside permissible liquid assets in a segregated account
to secure its obligations to repurchase the security.
Derivative Instruments
In General. Although it does not currently intend
to engage in derivative transactions, the Fund may
invest up to 5% of its respective net assets in
derivative instruments. Derivative instruments may be
used for any lawful purpose consistent with the Fund's
investment objective such as hedging or managing risk,
but not for speculation. Derivative instruments are
commonly defined to include securities or contracts
whose value depend on (or "derive" from) the value of
one or more other assets, such as securities,
currencies, or commodities. These "other assets" are
commonly referred to as "underlying assets."
A derivative instrument generally consists of, is
based upon, or exhibits characteristics similar to
options or forward contracts. Options and forward
contracts are considered to be the basic "building
blocks" of derivatives. For example, forward-based
derivatives include forward contracts, swap contracts,
as well as exchange-traded futures. Option-based
derivatives include privately negotiated, over-the-
counter (OTC) options (including caps, floors, collars,
and options on forward and swap contracts) and exchange-
traded options on futures. Diverse types of
derivatives may be created by combining options or
forward contracts in different ways, and by applying
these structures to a wide range of underlying assets.
An option is a contract in which the "holder" (the
buyer) pays a certain amount (the "premium") to the
"writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or
sell to the writer (in a "put") a specific asset at an
agreed upon price at or before a certain time. The
holder pays the premium at inception and has no further
financial obligation. The holder of an option-based
derivative generally will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to
losses due to changes in the value of the underlying
asset.
A forward contract is a sales contract between a
buyer (holding the "long" position) and a seller
(holding the "short" position) for an asset with
delivery deferred until a future date. The buyer
agrees to pay a fixed price at the agreed future date
and the seller agrees to deliver the asset. The seller
hopes that the market price on the delivery date is
less than the agreed upon price, while the buyer hopes
for the contrary. The change in value of a forward-
based derivative generally is roughly proportional to
the change in value of the underlying asset.
Hedging. The Fund may use derivative instruments
to protect against possible adverse changes in the
market value of securities held in, or are anticipated
to be held in, the Fund's portfolio. Derivatives may
also be used by the Fund to "lock-in" gains in the
value of its portfolio securities. Hedging strategies,
if successful, can reduce the risk of loss by wholly or
partially offsetting the negative effect of unfavorable
price movements in the investments being hedged.
However, hedging strategies can also reduce the
opportunity for gain by offsetting the positive effect
of favorable price movements in the hedged investments.
Managing Risk. The Fund may also use derivative
instruments to manage the risks of the Fund's
portfolio. Risk management strategies include, but are
not limited to, facilitating the sale of portfolio
securities, managing the effective maturity or duration
of debt obligations in the Fund's portfolio,
establishing a position in the derivatives markets as a
substitute for buying or selling certain securities, or
creating or altering exposure to certain asset classes,
such as equity, debt, and foreign securities. The use
of derivative instruments may provide a less expensive,
more expedient or more specifically focused way for the
Fund to invest than "traditional" securities (i.e.,
stocks or bonds) would.
<PAGE>
Exchange or OTC Derivatives. Derivative
instruments may be exchange-traded or traded in OTC
transactions between private parties. Exchange-traded
derivatives are standardized options and futures
contracts traded in an auction on the floor of a
regulated exchange. Exchange contracts are generally
liquid. The exchange clearinghouse is the counterparty
of every contract. Thus, each holder of an exchange
contract bears the credit risk of the clearinghouse
(and has the benefit of its financial strength) rather
than that of a particular counterparty. OTC
transactions are subject to additional risks, such as
the credit risk of the counterparty to the instrument,
and are less liquid than exchange-traded derivatives
since they often can only be closed out with the other
party to the transaction.
Risks and Special Considerations. The use of
derivative instruments involves risks and special
considerations as described below. Risks pertaining to
particular derivative instruments are described in the
sections that follow.
(1) Market Risk. The primary risk of derivatives
is the same as the risk of the underlying assets;
namely, that the value of the underlying asset may go
up or down. Adverse movements in the value of an
underlying asset can expose the Fund to losses.
Derivative instruments may include elements of leverage
and, accordingly, the fluctuation of the value of the
derivative instrument in relation to the underlying
asset may be magnified. The successful use of
derivative instruments depends upon a variety of
factors, particularly the Adviser's ability to predict
movements of the securities, currencies, and
commodities markets, which requires different skills
than predicting changes in the prices of individual
securities. There can be no assurance that any
particular strategy adopted will succeed. A decision
to engage in a derivative transaction will reflect the
Adviser's judgment that the derivative transaction will
provide value to the Fund and its shareholders and is
consistent with the Fund's objectives, investment
limitations, and operating policies. In making such a
judgment, the Adviser will analyze the benefits and
risks of the derivative transaction and weigh them in
the context of the Fund's entire portfolio and
investment objective.
(2) Credit Risk. The Fund will be subject to the
risk that a loss may be sustained by the Fund as a
result of the failure of a counterparty to comply with
the terms of a derivative instrument. The counterparty
risk for exchange-traded derivative instruments is
generally less than for privately-negotiated or OTC
derivative instruments, since generally a clearing
agency, which is the issuer or counterparty to each
exchange-traded instrument, provides a guarantee of
performance. For privately-negotiated instruments,
there is no similar clearing agency guarantee. In all
transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a
loss of the expected benefit of the derivative
transaction and possibly other losses to the Fund. The
Fund will enter into transactions in derivative
instruments only with counterparties that the Adviser
reasonably believes are capable of performing under the
contract.
(3) Correlation Risk. When a derivative
transaction is used to completely hedge another
position, changes in the market value of the combined
position (the derivative instrument plus the position
being hedged) result from an imperfect correlation
between the price movements of the two instruments.
With a perfect hedge, the value of the combined
position remains unchanged for any change in the price
of the underlying asset. With an imperfect hedge, the
value of the derivative instrument and its hedge are
not perfectly correlated. Correlation risk is the risk
that there might be imperfect correlation, or even no
correlation, between price movements of an instrument
and price movements of investments being hedged. For
example, if the value of a derivative instrument used
in a short hedge (such as writing a call option, buying
a put option, or selling a futures contract) increased
by less than the decline in value of the hedged
investments, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due
to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on
the markets in which these instruments are traded. The
effectiveness of hedges using instruments on indices
will depend, in part, on the degree of correlation
between price movements in the index and price
movements in the investments being hedged.
(4) Liquidity Risk. Derivatives are also subject
to liquidity risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out, or
replaced quickly at or very close to its fundamental
value. Generally, exchange contracts are very liquid
because the exchange clearinghouse is the counterparty
of every contract. OTC transactions are less liquid
than exchange-traded derivatives since they often can
only be closed out with the other party to the
transaction. The Fund might be required by applicable
regulatory requirement to maintain assets as "cover,"
maintain segregated accounts, and/or make margin
payments when it takes positions in derivative
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instruments involving obligations to third parties
(i.e., instruments other than purchased options). If
the Fund is unable to close out its positions in such
instruments, it might be required to continue to
maintain such assets or accounts or make such payments
until the position expired, matured, or is closed out.
The requirements might impair the Fund's ability to
sell a portfolio security or make an investment at a
time when it would otherwise be favorable to do so, or
require that the Fund sell a portfolio security at a
disadvantageous time. The Fund's ability to sell or
close out a position in an instrument prior to
expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a
market, the ability and willingness of the counterparty
to enter into a transaction closing out the position.
Therefore, there is no assurance that any derivatives
position can be sold or closed out at a time and price
that is favorable to the Fund.
(5) Legal Risk. Legal risk is the risk of loss
caused by the legal unenforceability of a party's
obligations under the derivative. While a party
seeking price certainty agrees to surrender the
potential upside in exchange for downside protection,
the party taking the risk is looking for a positive
payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting
various legal uncertainties about certain derivative
products.
(6) Systemic or "Interconnection" Risk.
Interconnection risk is the risk that a disruption in
the financial markets will cause difficulties for all
market participants. In other words, a disruption in
one market will spill over into other markets, perhaps
creating a chain reaction. Much of the OTC derivatives
market takes place among the OTC dealers themselves,
thus creating a large interconnected web of financial
obligations. This interconnectedness raises the
possibility that a default by one large dealer could
create losses for other dealers and destabilize the
entire market for OTC derivative instruments.
General Limitations. The use of derivative
instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon
which they may be traded, and the Commodity Futures
Trading Commission ("CFTC").
The Corporation has filed a notice of eligibility
for exclusion from the definition of the term
"commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in
the futures markets. In accordance with Rule 4.5 of
the regulations under the CEA, the notice of
eligibility for the Fund includes representations that
the Fund will use futures contracts and related options
solely for bona fide hedging purposes within the
meaning of CFTC regulations, provided that the Fund may
hold other positions in futures contracts and related
options that do not qualify as a bona fide hedging
position if the aggregate initial margin deposits and
premiums required to establish these positions, less
the amount by which any such futures contracts and
related options positions are "in the money," do not
exceed 5% of the Fund's net assets. To the extent the
Fund were to engage in derivative transactions, it will
limit such transactions to no more than 5% of its net
assets.
The SEC has identified certain trading practices
involving derivative instruments that involve the
potential for leveraging the Fund's assets in a manner
that raises issues under the 1940 Act. In order to
limit the potential for the leveraging of the Fund's
assets, as defined under the 1940 Act, the SEC has
stated that the Fund may use coverage or the
segregation of the Fund's assets. The Fund will also
set aside permissible liquid assets in a segregated
custodial account if required to do so by SEC and CFTC
regulations. Assets used as cover or held in a
segregated account cannot be sold while the derivative
position is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion
of the Fund's assets to segregated accounts could
impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
In some cases the Fund may be required to maintain
or limit exposure to a specified percentage of its
assets to a particular asset class. In such cases,
when the Fund uses a derivative instrument to increase
or decrease exposure to an asset class and is required
by applicable SEC guidelines to set aside liquid assets
in a segregated account to secure its obligations under
the derivative instruments, the Adviser may, where
reasonable in light of the circumstances, measure
compliance with the applicable percentage by reference
to the nature of the economic exposure created through
the use of the derivative instrument and not by
reference to the nature of the exposure arising from
the assets set aside in the segregated account (unless
another interpretation is specified by applicable
regulatory requirements).
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Options. The Fund may use options for any lawful
purpose consistent with the Fund's investment objective
such as hedging or managing risk but not for
speculation. An option is a contract in which the
"holder" (the buyer) pays a certain amount (the
"premium") to the "writer" (the seller) to obtain the
right, but not the obligation, to buy from the writer
(in a "call") or sell to the writer (in a "put") a
specific asset at an agreed upon price (the "strike
price" or "exercise price") at or before a certain time
(the "expiration date"). The holder pays the premium
at inception and has no further financial obligation.
The holder of an option will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option will receive fees or premiums but
is exposed to losses due to changes in the value of the
underlying asset. The Fund may purchase (buy) or write
(sell) put and call options on assets, such as
securities, currencies, commodities, and indices of
debt and equity securities ("underlying assets") and
enter into closing transactions with respect to such
options to terminate an existing position. Options
used by the Fund may include European, American, and
Bermuda style options. If an option is exercisable
only at maturity, it is a "European" option; if it is
also exercisable prior to maturity, it is an "American"
option. If it is exercisable only at certain times, it
is a "Bermuda" option.
The Fund may purchase (buy) and write (sell) put
and call options and enter into closing transactions
with respect to such options to terminate an existing
position. The purchase of call options serves as a
long hedge, and the purchase of put options serves as a
short hedge. Writing put or call options can enable
the Fund to enhance income by reason of the premiums
paid by the purchaser of such options. Writing call
options serves as a limited short hedge because
declines in the value of the hedged investment would be
offset to the extent of the premium received for
writing the option. However, if the security
appreciates to a price higher than the exercise price
of the call option, it can be expected that the option
will be exercised and the Fund will be obligated to
sell the security at less than its market value or will
be obligated to purchase the security at a price
greater than that at which the security must be sold
under the option. All or a portion of any assets used
as cover for OTC options written by the Fund would be
considered illiquid to the extent described under
"Implementation of Investment Objective Illiquid
Securities." Writing put options serves as a limited
long hedge because increases in the value of the hedged
investment would be offset to the extent of the premium
received for writing the option. However, if the
security depreciates to a price lower than the exercise
price of the put option, it can be expected that the
put option will be exercised and the Fund will be
obligated to purchase the security at more than its
market value.
The value of an option position will reflect,
among other things, the historical price volatility of
the underlying investment, the current market value of
the underlying investment, the time remaining until
expiration, the relationship of the exercise price to
the market price of the underlying investment, and
general market conditions.
The Fund may effectively terminate its right or
obligation under an option by entering into a closing
transaction. For example, the Fund may terminate its
obligation under a call or put option that it had
written by purchasing an identical call or put option;
this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put
or call option it had purchased by writing an identical
put or call option; this is known as a closing sale
transaction. Closing transactions permit the Fund to
realize the profit or limit the loss on an option
position prior to its exercise or expiration.
The Fund may purchase or write both exchange-
traded and OTC options. Exchange-traded options are
issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect,
guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts
between the Fund and the other party to the transaction
("counterparty") (usually a securities dealer or a
bank) with no clearing organization guarantee. Thus,
when the Fund purchases or writes an OTC option, it
relies on the counterparty to make or take delivery of
the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in
the loss of any premium paid by the Fund as well as the
loss of any expected benefit of the transaction.
The Fund's ability to establish and close out
positions in exchange-listed options depends on the
existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options
for which there appears to be a liquid secondary
market. However, there can be no assurance that such a
market will exist at any particular time. Closing
transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market
exists. Although the Fund will enter into OTC options
only
<PAGE>
with counterparties that are expected to be
capable of entering into closing transactions with the
Fund, there is no assurance that the Fund will in fact
be able to close out an OTC option at a favorable price
prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an
OTC option position at any time prior to its
expiration. If the Fund were unable to effect a
closing transaction for an option it had purchased, it
would have to exercise the option to realize any
profit.
The Fund may engage in options transactions on
indices in much the same manner as the options on
securities discussed above, except the index options
may serve as a hedge against overall fluctuations in
the securities market in general.
The writing and purchasing of options is a highly
specialized activity that involves investment
techniques and risks different from those associated
with ordinary portfolio securities transactions.
Imperfect correlation between the options and
securities markets may detract from the effectiveness
of attempted hedging.
Spread Transactions. The Fund may use spread
transactions for any lawful purpose consistent with the
Fund's investment objective such as hedging or managing
risk, but not for speculation. The Fund may purchase
covered spread options from securities dealers. Such
covered spread options are not presently exchange-
listed or exchange-traded. The purchase of a spread
option gives the Fund the right to put, or sell, a
security that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that
the Fund does not own, but which is used as a
benchmark. The risk to the Fund in purchasing covered
spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition,
there is no assurance that closing transactions will be
available. The purchase of spread options will be used
to protect the Fund against adverse changes in
prevailing credit quality spreads, i.e., the yield
spread between high quality and lower quality
securities. Such protection is only provided during
the life of the spread option.
Futures Contracts. The Fund may use futures
contracts for any lawful purpose consistent with the
Fund's investment objective such as hedging and
managing risk but not for speculation. The Fund may
enter into futures contracts, including interest rate,
index, and currency futures. The Fund may also
purchase put and call options, and write covered put
and call options, on futures in which it is allowed to
invest. The purchase of futures or call options
thereon can serve as a long hedge, and the sale of
futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options
on futures contracts can serve as a limited short
hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a
strategy similar to that used for writing covered
options in securities. The Fund's hedging may include
purchases of futures as an offset against the effect of
expected increases in currency exchange rates and
securities prices and sales of futures as an offset
against the effect of expected declines in currency
exchange rates and securities prices.
To the extent required by regulatory authorities,
the Fund may enter into futures contracts that are
traded on national futures exchanges and are
standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading
are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures
contracts could be used to reduce the Fund's exposure
to market, currency, or interest rate fluctuations, the
Fund may be able to hedge its exposure more effectively
and perhaps at a lower cost through using futures
contracts.
An interest rate futures contract provides for the
future sale by one party and purchase by another party
of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a
specified price at a designated date, time, and place.
An index futures contract is an agreement pursuant to
which the parties agree to take or make delivery of an
amount of cash equal to the difference between the
value of the index at the close of the last trading day
of the contract and the price at which the index
futures contract was originally written. Transaction
costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as
the case may be, of the instrument or the currency or
by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out
prior to delivery by entering into an offsetting
transaction in a matching futures contract. Although
the value of an index might be a function of the value
of certain specified securities, no physical delivery
of those securities is made. If the offsetting
purchase price is less than the original sale price,
the Fund realizes a gain; if it is more, the Fund
realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, the
Fund realizes a
<PAGE>
gain; if it is less, the Fund realizes
a loss. The transaction costs must also be included in
these calculations. There can be no assurance,
however, that the Fund will be able to enter into an
offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is
not able to enter into an offsetting transaction, the
Fund will continue to be required to maintain the
margin deposits on the futures contract.
No price is paid by the Fund upon entering into a
futures contract. Instead, at the inception of a
futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of
the futures broker through whom the transaction was
effected, "initial margin," consisting of cash, U.S.
government securities or other liquid, high-grade debt
obligations, in an amount generally equal to 10% or
less of the contract value. Margin must also be
deposited when writing a call or put option on a
futures contract, in accordance with applicable
exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does
not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is
returned to the Fund at the termination of the
transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as
periods of high volatility, the Fund may be required by
an exchange to increase the level of its initial margin
payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to
and from the futures broker daily as the value of the
futures position varies, a process known as "marking to
market." Variation margin does not involve borrowing,
but rather represents a daily settlement of the Fund's
obligations to or from a futures broker. When the Fund
purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast,
when the Fund purchases or sells a futures contract or
writes a call or put option thereon, it is subject to
daily variation margin calls that could be substantial
in the event of adverse price movements. If the Fund
has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a
time when such sales are disadvantageous. Purchasers
and sellers of futures positions and options on futures
can enter into offsetting closing transactions by
selling or purchasing, respectively, an instrument
identical to the instrument held or written. Positions
in futures and options on futures may be closed only on
an exchange or board of trade that provides a secondary
market. The Fund intends to enter into futures
transactions only on exchanges or boards of trade where
there appears to be a liquid secondary market.
However, there can be no assurance that such a market
will exist for a particular contract at a particular
time.
Under certain circumstances, futures exchanges may
establish daily limits on the amount that the price of
a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price
beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily
limit for several consecutive days with little or no
trading, thereby preventing liquidation of unfavorable
positions.
If the Fund were unable to liquidate a futures or
option on a futures contract position due to the
absence of a liquid secondary market or the imposition
of price limits, it could incur substantial losses.
The Fund would continue to be subject to market risk
with respect to the position. In addition, except in
the case of purchased options, the Fund would continue
to be required to make daily variation margin payments
and might be required to maintain the position being
hedged by the future or option or to maintain certain
liquid securities in a segregated account.
Certain characteristics of the futures market
might increase the risk that movements in the prices of
futures contracts or options on futures contracts might
not correlate perfectly with movements in the prices of
the investments being hedged. For example, all
participants in the futures and options on futures
contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or
options on futures contracts positions whose prices are
moving unfavorably to avoid being subject to further
calls. These liquidations could increase the price
volatility of the instruments and distort the normal
price relationship between the futures or options and
the investments being hedged. Also, because initial
margin deposit requirements in the futures markets are
less onerous than margin requirements in the securities
markets, there might be increased participation by
speculators in the future markets. This participation
also might cause temporary price distortions. In
addition, activities of large traders in both the
futures and securities markets involving arbitrage,
"program trading," and other investment strategies
might result in temporary price distortions.
<PAGE>
Foreign Currencies. The Fund may purchase and
sell foreign currency on a spot basis, and may use
currency-related derivatives instruments such as
options on foreign currencies, futures on foreign
currencies, options on futures on foreign currencies
and forward currency contracts (i.e., an obligation to
purchase or sell a specific currency at a specified
future date, which may be any fixed number of days from
the contract date agreed upon by the parties, at a
price set at the time the contract is entered into).
The Fund may use these instruments for hedging or any
other lawful purpose consistent with its investment
objective, including transaction hedging, anticipatory
hedging, cross hedging, proxy hedging, and position
hedging. The Fund's use of currency-related derivative
instruments will be directly related to the Fund's
current or anticipated portfolio securities, and the
Fund may engage in transactions in currency-related
derivative instruments as a means to protect against
some or all of the effects of adverse changes in
foreign currency exchange rates on its portfolio
investments. In general, if the currency in which a
portfolio investment is denominated appreciates against
the U.S. dollar, the dollar value of the security will
increase. Conversely, a decline in the exchange rate
of the currency would adversely effect the value of the
portfolio investment expressed in U.S. dollars.
For example, the Fund might use currency-related
derivative instruments to "lock in" a U.S. dollar price
for a portfolio investment, thereby enabling the Fund
to protect itself against a possible loss resulting
from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or
sold and the date on which payment is made or received.
The Fund also might use currency-related derivative
instruments when the Adviser believes that one currency
may experience a substantial movement against another
currency, including the U.S. dollar, and it may use
currency-related derivative instruments to sell or buy
the amount of the former foreign currency,
approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign
currency. Alternatively, where appropriate, the Fund
may use currency-related derivative instruments to
hedge all or part of its foreign currency exposure
through the use of a basket of currencies or a proxy
currency where such currency or currencies act as an
effective proxy for other currencies. The use of this
basket hedging technique may be more efficient and
economical than using separate currency-related
derivative instruments for each currency exposure held
by the Fund. Furthermore, currency-related derivative
instruments may be used for short hedges - for example,
the Fund may sell a forward currency contract to lock
in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign
currency.
In addition, the Fund may use a currency-related
derivative instrument to shift exposure to foreign
currency fluctuations from one foreign country to
another foreign country where the Adviser believes that
the foreign currency exposure purchased will appreciate
relative to the U.S. dollar and thus better protect the
Fund against the expected decline in the foreign
currency exposure sold. For example, if the Fund owns
securities denominated in a foreign currency and the
Adviser believes that currency will decline, it might
enter into a forward contract to sell an appropriate
amount of the first foreign currency, with payment to
be made in a second foreign currency that the Adviser
believes would better protect the Fund against the
decline in the first security than would a U.S. dollar
exposure. Hedging transactions that use two foreign
currencies are sometimes referred to as "cross hedges."
The effective use of currency-related derivative
instruments by the Fund in a cross hedge is dependent
upon a correlation between price movements of the two
currency instruments and the underlying security
involved, and the use of two currencies magnifies the
risk that movements in the price of one instrument may
not correlate or may correlate unfavorably with the
foreign currency being hedged. Such a lack of
correlation might occur due to factors unrelated to the
value of the currency instruments used or investments
being hedged, such as speculative or other pressures on
the markets in which these instruments are traded.
The Fund also might seek to hedge against changes
in the value of a particular currency when no hedging
instruments on that currency are available or such
hedging instruments are more expensive than certain
other hedging instruments. In such cases, the Fund may
hedge against price movements in that currency by
entering into transactions using currency-related
derivative instruments on another foreign currency or a
basket of currencies, the values of which the Adviser
believes will have a high degree of positive
correlation to the value of the currency being hedged.
The risk that movements in the price of the hedging
instrument will not correlate perfectly with movements
in the price of the currency being hedged is magnified
when this strategy is used.
The use of currency-related derivative instruments
by the Fund involves a number of risks. The value of
currency-related derivative instruments depends on the
value of the underlying currency relative to the U.S.
dollar.
<PAGE>
Because foreign currency transactions
occurring in the interbank market might involve
substantially larger amounts than those involved in the
use of such derivative instruments, the Fund could be
disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1
million) for the underlying foreign currencies at
prices that are less favorable than for round lots
(generally consisting of transactions of greater than
$1 million).
There is no systematic reporting of last sale
information for currencies or any regulatory
requirement that quotations available through dealers
or other market sources be firm or revised on a timely
basis. Quotation information generally is
representative of very large transactions in the
interbank market and thus might not reflect odd-lot
transactions where rates might be less favorable. The
interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options
or futures markets are closed while the markets for the
underlying currencies remain open, significant price
and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the
derivative instruments until they re-open.
Settlement of transactions in currency-related
derivative instruments might be required to take place
within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make
delivery of the underlying foreign currency in
accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking
arrangements by U.S. residents and might be required to
pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
When the Fund engages in a transaction in a
currency-related derivative instrument, it relies on
the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or
otherwise complete the contract. In other words, the
Fund will be subject to the risk that it may sustain a
loss as a result of the failure of the counterparty to
comply with the terms of the transaction. The
counterparty risk for exchange-traded instruments is
generally less than for privately-negotiated or OTC
currency instruments, since generally a clearing
agency, which is the issuer or counterparty to each
instrument, provides a guarantee of performance. For
privately-negotiated instruments, there is no similar
clearing agency guarantee. In all transactions, the
Fund will bear the risk that the counterparty will
default, and this could result in a loss of the
expected benefit of the transaction and possibly other
losses to the Fund. The Fund will enter into
transactions in currency-related derivative instruments
only with counterparties that the Adviser reasonably
believes are capable of performing under the contract.
Purchasers and sellers of currency-related
derivative instruments may enter into offsetting
closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument
purchased or sold. Secondary markets generally do not
exist for forward currency contracts, with the result
that closing transactions generally can be made for
forward currency contracts only by negotiating directly
with the counterparty. Thus, there can be no assurance
that the Fund will, in fact, be able to close out a
forward currency contract (or any other currency-
related derivative instrument) at a time and price
favorable to the Fund. In addition, in the event of
insolvency of the counterparty, the Fund might be
unable to close out a forward currency contract at any
time prior to maturity. In the case of an exchange-
traded instrument, the Fund will be able to close the
position out only on an exchange which provides a
market for the instruments. The ability to establish
and close out positions on an exchange is subject to
the maintenance of a liquid market, and there can be no
assurance that a liquid market will exist for any
instrument at any specific time. In the case of a
privately-negotiated instrument, the Fund will be able
to realize the value of the instrument only by entering
into a closing transaction with the issuer or finding a
third party buyer for the instrument. While the Fund
will enter into privately-negotiated transactions only
with entities who are expected to be capable of
entering into a closing transaction, there can be no
assurance that the Fund will, in fact, be able to enter
into such closing transactions.
The precise matching of currency-related
derivative instrument amounts and the value of the
portfolio securities involved generally will not be
possible because the value of such securities, measured
in the foreign currency, will change after the currency-
related derivative instrument position has been
established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market. The
projection of short-term currency market movements is
extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain.
Permissible foreign currency options will include
options traded primarily in the OTC market. Although
options on foreign currencies are traded primarily in
the OTC market, the Fund will normally purchase or sell
OTC
<PAGE>
options on foreign currency only when the Adviser
reasonably believes a liquid secondary market will
exist for a particular option at any specific time.
There will be a cost to the Fund of engaging in
transactions in currency-related derivative instruments
that will vary with factors such as the contract or
currency involved, the length of the contract period
and the market conditions then prevailing. In using
these instruments, the Fund may have to pay a fee or
commission or, in cases where the instruments are
entered into on a principal basis, foreign exchange
dealers or other counterparties will realize a profit
based on the difference ("spread") between the prices
at which they are buying and selling various
currencies. Thus, for example, a dealer may offer to
sell a foreign currency to the Fund at one rate, while
offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
When required by the SEC guidelines, the Fund will
set aside permissible liquid assets in segregated
accounts or otherwise cover its potential obligations
under currency-related derivatives instruments. To the
extent the Fund's assets are so set aside, they cannot
be sold while the corresponding currency position is
open, unless they are replaced with similar assets. As
a result, if a large portion of the Fund's assets are
so set aside, this could impede portfolio management or
the Fund's ability to meet redemption requests or other
current obligations.
The Adviser's decision to engage in a transaction
in a particular currency-related derivative instrument
will reflect the Adviser's judgment that the
transaction will provide value to the Fund and its
shareholders and is consistent with the Fund's
objectives and policies. In making such a judgment,
the Adviser will analyze the benefits and risks of the
transaction and weigh them in the context of the Fund's
entire portfolio and objectives. The effectiveness of
any transaction in a currency-related derivative
instrument is dependent on a variety of factors,
including the Adviser's skill in analyzing and
predicting currency values and upon a correlation
between price movements of the currency instrument and
the underlying security. There might be imperfect
correlation, or even no correlation, between price
movements of an instrument and price movements of
investments being hedged. Such a lack of correlation
might occur due to factors unrelated to the value of
the investments being hedged, such as speculative or
other pressures on the markets in which these
instruments are traded. In addition, the Fund's use of
currency-related derivative instruments is always
subject to the risk that the currency in question could
be devalued by the foreign government. In such a case,
any long currency positions would decline in value and
could adversely affect any hedging position maintained
by the Fund.
The Fund's dealing in currency-related derivative
instruments will generally be limited to the
transactions described above. However, the Fund
reserves the right to use currency-related derivatives
instruments for different purposes and under different
circumstances. Of course, the Fund is not required to
use currency-related derivatives instruments and will
not do so unless deemed appropriate by the Adviser. It
should also be realized that use of these instruments
does not eliminate, or protect against, price movements
in the Fund's securities that are attributable to other
(i.e., non-currency related) causes. Moreover, while
the use of currency-related derivatives instruments may
reduce the risk of loss due to a decline in the value
of a hedged currency, at the same time the use of these
instruments tends to limit any potential gain which may
result from an increase in the value of that currency.
Additional Derivative Instruments and Strategies.
In addition to the derivative instruments and
strategies described above, the Adviser expects to
discover additional derivative instruments and other
hedging or risk management techniques. The Adviser may
utilize these new derivative instruments and techniques
to the extent that they are consistent with the Fund's
investment objective and permitted by the Fund's
investment limitations, operating policies, and
applicable regulatory authorities.
Depositary Receipts and Foreign Securities
The Fund may invest up to 20% of its net assets in
foreign securities directly or by purchasing depositary
receipts, including American Depositary Receipts
("ADRs") and European Depositary Receipts ("EDRs") or
other securities convertible into securities or issuers
based in foreign countries. These securities may not
necessarily be denominated in the same currency as the
securities into which they may be converted.
Generally, ADRs, in registered form, are denominated in
U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs, in bearer form, may be
denominated in other currencies and are designed for
use in European securities markets. ADRs are receipts
typically issued by a U.S. bank or trust company
evidencing ownership of the
<PAGE>
underlying securities.
EDRs are European receipts evidencing a similar
arrangement. For purposes of the Fund's investment
objectives, ADRs and EDRs are deemed to have the same
classification as the underlying securities they
represent. Thus, an ADR or EDR representing ownership
of common stock will be treated as common stock.
ADR facilities may be established as either
"unsponsored" or "sponsored." While ADRs issued under
these two types of facilities are in some respects
similar, there are distinctions between them relating
to the rights and obligations of ADR holders and the
practices of market participants. For example, a non-
sponsored depositary may not provide the same
shareholder information that a sponsored depositary is
required to provide under its contractual arrangements
with the issuer, including reliable financial
statements. Under the terms of most sponsored
arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to
provide shareholder communications and other
information to the ADR holders at the request of the
issuer of the deposited securities.
Investments in securities of foreign issuers
involve risks which are in addition to the usual risks
inherent in domestic investments. In many countries
there is less publicly available information about
issuers than is available in the reports and ratings
published about companies in the United States.
Additionally, foreign countries are not subject to
uniform accounting, auditing and financial reporting
standards. Other risks inherent in foreign investments
include expropriation; confiscatory taxation;
withholding taxes on dividends or interest; less
extensive regulation of foreign brokers, securities
markets, and issuers; costs incurred in conversions
between currencies; possible delays in settlement in
foreign securities markets; limitations on the use or
transfer of assets (including suspension of the ability
to transfer currency from a given country); the
difficulty of enforcing obligations in other countries;
diplomatic developments; and political or social
instability. Foreign economies may differ favorably or
unfavorably from the U.S. economy in various respects
and many foreign securities are less liquid and their
prices are more volatile than comparable U.S.
securities. From time to time foreign securities may
be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs,
may be higher than those attributable to domestic
investment. The value of the Fund's assets denominated
in foreign currencies will increase or decrease in
response to fluctuations in the value of those foreign
currencies relative to the U.S. dollar. Currency
exchange rates can be volatile at times in response to
supply and demand in the currency exchange markets,
international balances of payments, governmental
intervention, speculation and other political and
economic conditions. In addition, a number of European
countries have entered into the European Monetary Union
("EMU"), an economic and monetary union which resulted
in a single currency and a single monetary policy for
all EMU countries beginning January 1, 1999. The EMU
may have adverse effects on foreign securities if it is
not implemented as planned or if one or more countries
withdraws from the EMU. The EMU may also have adverse
effects on foreign securities if portfolio management
software used by the Adviser or the accounting and
trading systems used by the Fund do not recognize the
Euro, the new currency adopted by the EMU. In the
Euro's infancy, investment advisers, like the Adviser,
will be unfamiliar with new indices and benchmarks for
EMU countries and companies.
Warrants
The Fund may invest in warrants, valued at the
lower of cost or market value, if, after giving effect
thereto, not more than 5% of its net assets will be
invested in warrants other than warrants acquired in
units or attached to other securities. Warrants are
options to purchase equity securities at a specific
price for a specific period of time. They do not
represent ownership of the securities but only the
right to buy them. Investing in warrants is purely
speculative in that they have no voting rights, pay no
dividends and have no rights with respect to the assets
of the corporation issuing them. In addition, the
value of a warrant does not necessarily change with the
value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to
its expiration date.
Short Sales Against the Box
The Fund may sell securities short against the box
to hedge unrealized gains on portfolio securities.
Selling securities short against the box involves
selling a security that the Fund owns or has the right
to acquire, for delivery at a specified date in the
future. If the Fund sells securities short against the
box, it may protect unrealized gains, but will lose the
opportunity to profit on such securities if the price
rises.
<PAGE>
Borrowing
The Fund is authorized to borrow money from banks
and make other investments or engage in other
transactions permissible under the 1940 Act which may
be considered a borrowing (such as reverse repurchase
agreements), provided that the amount borrowed may not
exceed 33 1/3% of the value of the Fund's net assets.
The Fund's borrowings create an opportunity for greater
return to the Fund and, ultimately, the Fund's
shareholders, but at the same time increase exposure to
losses. In addition, interest payments and fees paid
by the Fund on any borrowings may offset or exceed the
return earned on borrowed funds. The Fund currently
intends to borrow money only for temporary,
extraordinary or emergency purposes.
Lending Portfolio Securities
The Fund may lend portfolio securities with a
value not exceeding 33 1/3% of the Fund's total assets
to brokers or dealers, banks or other institutional
borrowers of securities as a means of earning income.
In return, the Fund will receive collateral in cash or
money market instruments. Such collateral will be
maintained at all times in an amount equal to at least
100% of the current market value of the loaned
securities. The purpose of such securities lending is
to permit the borrower to use such securities for
delivery to purchasers when such borrower has sold
short. The Fund will continue to receive the
equivalent of the interest or dividends paid by the
issuer of the securities lent, and the Fund may also
receive interest on the investment of collateral, or a
fee from the borrower as compensation for the loan.
The Fund may pay reasonable custodial and
administrative fees in connection with the loan. The
Fund will retain the right to call, upon notice, lent
securities. While there may be delays in recovery or
even a loss of right in collateral should the borrower
fail financially, the Fund's investment adviser will
review the creditworthiness of the entities to which
such loans are made to evaluate those risks. Although
the Fund is authorized to lend securities, the Fund
does not presently intend to engage in lending.
Concentration
The Fund has adopted a fundamental investment
policy which prohibits the Fund from investing more
than 25% of its assets in the securities of companies
in any one industry. An industry is defined as a
business-line subsector of a stock-market sector.
While the Fund may be heavily invested in a single
market sector like technology or health care, for
example, it will not invest more than 25% of its assets
in securities of companies in any one industry or
subsector. Technology industries or subsectors include
networking, telecommunications, software,
semiconductors, and voice-processing business lines.
Health care industries or subsectors include medical
devices and information systems business lines.
DIRECTORS AND OFFICERS
Under the laws of the State of Wisconsin, the
Board of Directors of the Fund is responsible for
managing the Fund's business and affairs.
The directors and officers of the Fund, together
with information as to their principal business
occupations during the last five years, and other
information, are shown below. Each director and
officer who is deemed an "interested person" of the
Fund, as defined in the 1940 Act, is indicated by an
asterisk.
*Darwin F. Isaacson, age 44. Mr. Isaacson is the
Treasurer and a Director of the Fund. Since 1991, Mr.
Isaacson has been employed by North Central Trust
Company ("North Central") and currently serves as a
Vice President in the estate and financial planning
area.
*Steven J. Hulme, age 40. Mr. Hulme is the
President, Secretary, portfolio manager and a Director
of the Fund. From 1993 to January 1999, Mr. Hulme
served as Vice President and head of North Central's
investment division, during which time he managed the
collective investment fund and the common trust fund
for which North Central served as trustee. He is also
the President, a Director and a Class B Member of La
Crosse Advisers, L.L.C.
<PAGE>
Mr. Hulme received his undergraduate degree from the
University of Nebraska and his MBA from the University
of Chicago. Mr. Hulme is a Chartered Financial Analyst.
Ralph A. La Point, age 60. Mr. La Point is a
Director of the Fund. Since 1994, Mr. La Point has
served as the Chief Executive Officer of the Gillette
Group. Mr. La Point has served as a Director of Wis-
Pak, Inc. since 1990, and was appointed its Chairman in
March 1998.
Joseph T. Kastantin, age 52. Mr. Kastantin is a
Director of the Fund. Since 1984, Mr. Kastantin has
served as an Assistant Professor at the University of
Wisconsin - La Crosse. From February 1997 until August
1998, he was employed by KPMG Peat Marwick as a
training manager. Mr. Kastantin served as a Director
of North Central from 1991 to 1994.
Lois Z. Grubb, age 53. Ms. Grubb is a Director of
the Fund. From 1998 to 2000, Ms. Grubb was the Vice
President of Gundersen Lutheran Hospital. From 1996 to
1998, Ms. Grubb was the Vice President of CNA Insurance
Co. From 1985 to 1996, Ms. Grubb served as the
Executive Director, Human Resources at G.D. Searle.
The address of each director and officer is 311
Main Street, La Crosse, Wisconsin 54602.
The Fund and the Adviser have adopted a code of
ethics under Rule 17j-1 of the 1940 Act which permits
personnel subject to the code of ethics to invest in
securities, including securities which may be purchased
or held by the Fund, subject to certain limitations.
Sunstone Distribution Services, LLC has adopted a code
of ethics which permits personnel subject to the code
of ethics to invest in securities, including securities
which may be purchased or held by the Fund, subject to
certain limitations.
As of January 18, 2000, officers and directors of
the Fund beneficially owned less than 1% of the shares
of the Fund's then outstanding shares.
Directors and officers of the Fund who are also
officers, directors, or employees of the Adviser do not
receive any remuneration from the Fund for serving as
directors or officers. Accordingly, neither Mr. Hulme
nor Mr. Isaacson receive any remuneration from the Fund
for their services as directors and/or officers. The
following table provides information relating to
compensation paid to directors of the Corporation for
their services as such for the period from the close of
business on December 31, 1998 (commencement of
operations) to October 31, 1999.
Cash Other
Name Compensation(1) Compensation Total
Ralph A. La Point $1,500 0 $1,500
Joseph T. Kastantin $1,500 0 $1,500
Lois Z. Grubb(2) $ 0 0 $ 0
__________
(1) Each director who is not deemed an "interested
person" of the Fund, as defined in the 1940 Act,
receives $500 for each Board of Directors meeting
attended by such person and reimbursement of
reasonable expenses incurred in connection
therewith. The Board held three meetings during
fiscal 1999.
(2) Ms. Grubb was appointed to the Board on March 28, 2000.
PRINCIPAL SHAREHOLDERS
As of January 18, 2000, the following persons
owned of record or are known by the Fund to own
beneficially 5% or more of the outstanding shares of
the Fund:
<PAGE>
Name and Address Number of Shares Percentage
North Central Trust Company 689,418.311 18.8%
311 Main Street
La Crosse, WI 54601
Reinhart Companies 187,992.480 5.1%
Profit Sharing Plan
201 Main Street, Suite 800
La Crosse, WI 54602
Based on the foregoing, as of January 18, 2000, no
person owned a controlling interest in the Fund.
Shareholders with a controlling interest could effect
the outcome of proxy voting or the direction of
management of the Fund. The amount of fund shares
owned by Fund directors and officers as a group is less
than 1% of the outstanding shares of the Fund.
INVESTMENT ADVISER
La Crosse Advisers, L.L.C. (the "Adviser") is the
investment adviser to the Fund. The Adviser is a
subsidiary of North Central, a state-chartered trust
company bank.
The investment advisory agreement between the Fund
and the Adviser dated as of December 22, 1998 (the
"Advisory Agreement") is required to be approved
annually by the Board of Directors of the Fund or by
vote of a majority of the Fund's outstanding voting
securities. Each annual renewal must also be approved
by the vote of a majority of the directors who are not
parties to the Advisory Agreement or interested persons
of any such party ("disinterested directors"), cast
in person at a meeting called for the purpose of voting
on such approval. The Advisory Agreement was approved
on December 21, 1999 by the full Board of Directors and
a majority of the disinterested directors. The Advisory
Agreement is terminable without penalty on 60 days'
written notice by the Board of Directors, by vote of a
majority of the Fund's outstanding voting securities,
or by the Adviser, and will terminate automatically in
the event of its assignment.
Under the terms of the Advisory Agreement, the
Adviser manages the Fund's investments and business
affairs, subject to the supervision of the Board of
Directors. At its expense, the Adviser provides office
space and all necessary office facilities, equipment,
and personnel for managing the investments of the Fund.
As compensation for its services, the Corporation pays
the Adviser an annual management fee of 0.75% of the
Fund's average daily net assets. The advisory fee is
accrued daily and paid monthly.
For the fiscal year ended October 31, 1999, the
Adviser waived a portion of its management fee and
reimbursed a portion of the Fund's other expenses so
that the Fund's total operating expenses (on an annual
basis) did not exceed 1.00% of its average daily net
assets. The Adviser has agreed for the period ending
March 31, 2001 to waive its management fees and/or
reimburse the Fund's operating expenses to the extent
necessary to ensure that the total annual operating
expenses for the Fund will not exceed 1.00% of average
daily net assets. After such date, the Adviser may
from time to time voluntarily waive all or a portion of
its fee and/or absorb expenses for the Fund. Any
waiver of fees or reimbursement of expenses will be
made on a monthly basis and, with respect to the
latter, will be paid to the Fund by reduction of the
Adviser's fee. Any such waiver and/or reimbursement is
subject to later adjustment during the term of the
Advisory Agreement to allow the Adviser to recoup
amounts waived and/or reimbursed to the extent actual
fees and expenses are less than the expense limitation
caps, provided, however, that the Adviser shall only be
entitled to recoup such amounts for a maximum period of
three years from the date such amount was waived or
reimbursed. For the period from the close of business
on December 31, 1998 (commencement of operations) to
October 31, 1999, the Fund paid the Adviser $648,795
under the Advisory Agreement and the Adviser waived
$101,464 of its management fee.
<PAGE>
FUND TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, the Adviser is
responsible for decisions to buy and sell securities
for the Fund and for the placement of the Fund's
securities business, the negotiation of the commissions
to be paid on such transactions, and the allocation of
portfolio brokerage and principal business. Purchases
may be made from brokers, dealers and, on occasion,
issuers. The purchase price of securities purchased
from a broker or dealer may include commissions and
dealer spreads. The Fund may also pay mark-ups on
principal transactions.
In executing transactions on behalf of the Fund,
the Adviser has no obligation to deal with any
particular broker or dealer. Rather, the Adviser seeks
to obtain the best execution at the best security price
available with respect to each transaction. The best
price means the best net price without regard to the
mix between purchase or sale price and commission, if
any. While the Adviser seeks reasonably competitive
commission rates, the Fund does not necessarily pay the
lowest available commission. Brokerage may be
allocated based on the sale of the Fund's shares where
best execution and price may be obtained from more than
one broker or dealer.
Section 28(e) of the Securities Exchange Act of
1934, as amended ("Section 28(e)"), permits an
investment adviser, under certain circumstances, to
cause an account to pay a broker or dealer who supplies
brokerage and research services a commission for
effecting a transaction in excess of the amount of
commission another broker or dealer would have charged
for effecting the transaction. Brokerage and research
services include (i) furnishing advice as to the value
of securities, the advisability of investing,
purchasing, or selling securities, and the availability
of securities or purchasers or sellers of securities;
(ii) furnishing analyses and reports concerning
issuers, industries, sectors, securities, economic
factors and trends, portfolio strategy, and the
performance of accounts; and (iii) effecting securities
transactions and performing functions incidental
thereto (such as clearance, settlement, and custody).
In selecting brokers or dealers, the Adviser
considers investment and market information and other
research, such as economic, securities, and performance
measurement research provided by such brokers or
dealers and the quality and reliability of brokerage
services, including execution capability, performance,
and financial responsibility. Accordingly, the
commissions charged by any such broker or dealer may be
greater than the amount another firm might charge if
the Adviser determines in good faith that the amount of
such commissions is reasonable in relation to the value
of the research information and brokerage services
provided by such broker or dealer to the Fund. The
Adviser believes that the research information received
in this manner provides the Fund with benefits by
supplementing the research otherwise available to the
Fund. Such higher commissions will not, however, be
paid by the Fund unless (i) the Adviser determines in
good faith that the amount is reasonable in relation to
the services in terms of the particular transaction or
in terms of the Adviser's overall responsibilities with
respect to the accounts, including the Fund, as to
which it exercises investment discretion; (ii) such
payment is made in compliance with the provisions of
Section 28(e) and other applicable state and federal
laws; and (iii) in the opinion of the Adviser, the
total commissions paid by the Fund will be reasonable
in relation to the benefits to the Fund over the long
term.
The aggregate amount of brokerage commissions paid
by the Fund for the period from the close of business
on December 31, 1998 (commencement of operations) to
October 31, 1999 was $165,253, all of which amount was
paid with respect to transactions for which research
services were provided. During the period from the
close of business on December 31, 1998 (commencement of
operations) to October 31, 1999, the Fund acquired
stock ofan affiliate of one of its regular brokers or
dealers, Morgan Stanley & Co., Inc., which had a value
of $2,647,500.00 as of October 31, 1999.
The Adviser may place portfolio transactions for
other advisory accounts in addition to the Fund.
Research services furnished by firms through which the
Fund effects its securities transactions may be used by
the Adviser in servicing all of its accounts; that is,
not all of such services may be used by the Adviser in
connection with the Fund. The Adviser believes it is
not possible to measure separately the benefits from
research services received by each of the accounts
(including the Fund) managed by it. Because the volume
and nature of the trading activities of the accounts
are not uniform, the amount of commissions in excess of
those charged by another broker or dealer paid by each
account for brokerage and research services will vary.
However, the Adviser believes that such costs to the
Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis. The
Adviser seeks to
<PAGE>
allocate portfolio transactions
equitably whenever concurrent decisions are made to
purchase or sell securities by the Fund and another
advisory account. In some cases, this procedure could
have an adverse effect on the price or the amount of
securities available to the Fund. There can be no
assurance that a particular purchase or sale
opportunity will be allocated to the Fund. In making
such allocations between the Fund and other advisory
accounts, certain factors considered by the Adviser are
the respective investment objectives, the relative size
of portfolio holdings of the same or comparable
securities, the availability of cash for investment,
and the size of investment commitments generally held.
CUSTODIAN
As custodian of the Fund's assets, North Central,
311 Main Street, La Crosse, Wisconsin 54602, the
parent company of the Adviser, has custody of all
securities and cash of the Fund, delivers and receives
payment for portfolio securities sold, receives and
pays for portfolio securities purchased, collects
income from investments, if any, and performs other
duties, all as directed by the officers of the
Corporation. For the foregoing services, North Central
receives from the Fund a fee, computed and payable
monthly based on the average net asset value of the
Fund at the annual rate of 0.01%, plus out-of-pocket
expenses.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Sunstone Financial Group, Inc. ("Sunstone"), 207
East Buffalo Street, Suite 315, Milwaukee, Wisconsin
53202-5712, serves as the transfer agent and dividend-
disbursing agent for the Fund.
From time to time, the Corporation, on behalf of
the Fund, directly or indirectly through arrangements
with the Adviser, the Distributor (as defined below) or
Sunstone, may pay amounts to third parties that provide
transfer agent type services and other administrative
services relating to the Fund to persons who
beneficially have interests in the Fund, such as
participants in 401(k) plans. These services may
include, among other things, sub-accounting services,
transfer agent type activities, answering inquiries
relating to the Fund, transmitting proxy statements,
annual reports, updated prospectuses, other
communications regarding the Fund and related services
as the Fund or beneficial owners may reasonably
request. In such cases, the Fund will not pay fees
based on the number of beneficial owners at a rate that
is greater than the rate the Fund is currently paying
Sunstone for providing these services to the Fund's
shareholders.
ADMINISTRATOR AND FUND ACCOUNTANT
Sunstone also provides administrative and fund
accounting services to the Fund pursuant to an
administration and fund accounting agreement dated as
of December 22, 1998 (the "Administrative Agreement").
Under the Administrative Agreement, Sunstone Financial
calculates the daily net asset value of the shares;
prepares and files all federal and state tax returns;
oversees the Fund's insurance relationships;
participates in the preparation of registration
statements, proxy statements and reports; prepares
filings relating to the qualification of the Fund's
shares pursuant to state securities laws; compiles data
for and prepares notices to the SEC; prepares financial
statements for annual and semi-annual reports; monitors
the Fund's expense accruals and performs securities
valuations; monitors compliance with the Fund's
investment policies; and generally assists in the
Fund's administrative operations. For the foregoing
services, Sunstone receives from the Fund a fee,
computed daily and payable monthly based on the average
net asset value of the Fund, at the annual rate of
0.28% which decreases as the assets of the Fund reach
certain levels, subject to an annual minimum of
$115,000, plus out-of-pocket expenses. For the period
from the close of business on December 31, 1998
(commencement of operations) to October 31, 1999, the
Fund paid Sunstone $221,727 pursuant to the
Administrative Agreement. Sunstone is under common
ownership with Sunstone Distribution Services, LLC, the
Fund's principal distributor.
<PAGE>
DISTRIBUTOR
Under a distribution agreement dated as of
December 22, 1998 (the "Distribution Agreement"),
Sunstone Distribution Services, LLC (the "Distributor")
acts as principal distributor of the Fund's shares.
Under the Distribution Agreement, the Distributor shall
offer shares of the Fund on a continuous basis and may
engage in advertising and solicitation activities in
connection therewith. The Distributor is not obligated
to sell any certain number of shares of the Fund. The
Distributor's principal business address is 207 East
Buffalo Street, Suite 315, Milwaukee, Wisconsin 53202.
FINANCIAL INTERMEDIARIES
If you purchase or redeem shares of the Fund
through a financial intermediary (such as a broker-
dealer), certain features of the Fund relating to such
transactions may not be available or may be modified.
In addition, certain operational policies of the Fund,
including those related to settlement and dividend
accrual, may vary from those applicable to direct
shareholders of the Fund and may vary among
intermediaries. You should consult your financial
intermediary for more information regarding these
matters. Refer to "Transfer Agent and Dividend-
Disbursing Agent" for information regarding certain
fees paid by the Corporation to financial
intermediaries. Certain financial intermediaries may
charge you an advisory, transaction or other fee for
their services. You will not be charged for such fees
if you purchase or redeem your Fund shares directly
from the Fund without the intervention of a financial
intermediary.
PURCHASE AND PRICING OF SHARES
Shares of the Fund are offered to the public at
the net asset value per share next computed after the
time a properly completed purchase application and
funds are received by Sunstone.
The net asset value per share is determined as of
the close of regular trading (generally 4:00 p.m.,
Eastern Time) on each day the New York Stock Exchange
("NYSE") is open for business. Purchase orders and
redemption requests received on a day the NYSE is open
for trading, prior to the close of trading on that day,
will be valued as of the close of trading on that day.
Applications for the purchase of shares and requests
for the redemption of shares received after the close
of trading on the NYSE will be valued as of the close
of trading on the next day the NYSE is open. The Fund
is not required to calculate its net asset value on
days during which the Fund receives no orders to
purchase or redeem shares. Net asset value per share
is calculated by taking the fair value of the total
assets of the Fund, including interest or dividends
accrued, but not yet collected, less all liabilities,
and dividing by the total number of shares outstanding
of the Fund. The result, rounded to the nearest cent,
is the net asset value per share.
In determining net asset value, expenses are
accrued and applied daily and securities and other
assets for which market quotations are available are
valued at fair value. Common stocks and other equity-
type securities are valued at the last sales price on
the national securities exchange or NASDAQ on which
such securities are primarily traded, however,
securities traded on a national securities exchange or
NASDAQ for which there were no transactions on a given
day, and securities not listed on a national securities
exchange or NASDAQ, are valued at the average of the
most recent bid and asked prices. Any securities or
other assets for which market quotations are not
readily available are valued at fair value as
determined in good faith by the Board of Directors of
the Fund or its delegate. The Board of Directors may
approve the use of pricing services to assist the Fund
in the determination of net asset value. All money
market instruments held by the Fund will be valued on
an amortized cost basis.
<PAGE>
TAXATION OF THE FUND
The Fund intends to qualify annually for treatment
as a "regulated investment company" under Subchapter M
of the Internal Revenue Code of 1986, as amended, and,
if so qualified, will not be liable for federal income
taxes to the extent earnings are distributed to
shareholders on a timely basis. In the event the Fund
fails to qualify as a "regulated investment company,"
it will be treated as a regular corporation for federal
income tax purposes. Accordingly, the Fund would be
subject to federal income taxes and any distributions
that it makes would be taxable and non-deductible by
the Fund. What this means for shareholders of the Fund
is that the cost of investing in the Fund would
increase. Under these circumstances, it would be more
economical for shareholders to invest directly in
securities held by the Fund, rather than invest
indirectly in such securities through the Fund.
PERFORMANCE INFORMATION
The Fund's historical performance or return may be
shown in the form of various performance figures,
including average annual total return, total return,
and cumulative total return. The Fund's performance
figures are based upon historical results and are not
necessarily representative of future performance.
Factors affecting the Fund's performance include
general market conditions, operating expenses,
investment management, and the imposition of sales
charges. Any additional fees charged by a dealer or
other financial services firm would reduce the returns
described in this section.
Total Return
Average annual total return and total return
figures measure both the net investment income
generated by, and the effect of any realized and
unrealized appreciation or depreciation of, the
underlying investments of the Fund over a specified
period of time, assuming the reinvestment of all
dividends and distributions. Average annual total
return figures are annualized and therefore represent
the average annual percentage change over the specified
period. Total return figures are not annualized and
therefore represent the aggregate percentage or dollar
value change over the period.
The average annual total return of the Fund is
computed by finding the average annual compounded rates
of return over the periods that would equate the
initial amount invested to the ending redeemable value,
according to 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.
Performance for a specific period is calculated by
first taking an investment (assumed to be $1,000) (the
"initial investment") in the shares on the first day of
the period and computing the "ending value" of that
investment at the end of the period. The total return
percentage is then determined by subtracting the
initial investment from the ending value and dividing
the remainder by the initial investment and expressing
the result as a percentage. The calculation assumes
that all income and capital gains dividends paid by the
Fund have been reinvested at the net asset value of the
shares on the reinvestment dates during the period.
The calculation also assumes that all recurring fees
have been charged to all shareholder accounts. Total
return may also be shown as the increased dollar value
of the hypothetical investment over the period.
Cumulative total return represents the simple
change in the value of an investment over a stated
period and may be quoted as a percentage or as a dollar
amount. Total returns may be broken down into their
<PAGE>
components of income and capital (including capital
gains and changes in share price) in order to
illustrate the relationship between these factors and
their contributions to total return.
Comparisons
From time to time, in marketing and other Fund
literature, the performance of shares of the Fund may
be compared to the performance of other mutual funds in
general or to the performance of particular types of
mutual funds with similar investment goals, as tracked
by independent organizations. Among these
organizations, Lipper Analytical Services, Inc.
("Lipper"), a widely used independent research firm
which ranks mutual funds by overall performance,
investment objectives, and assets, may be cited.
Lipper performance figures are based on changes in net
asset value, with all income and capital gains
dividends reinvested. Shares of the Fund will be
compared to Lipper's appropriate fund category; that
is, by fund objective and portfolio holdings.
The performance of the Fund may be compared in
publications to averages, performance rankings, or
other information prepared by recognized mutual fund
statistical services. The Fund's performance may also
be compared to the performance of other mutual funds by
Morningstar, Inc. ("Morningstar"), which ranks funds on
the basis of historical risk and total return.
Morningstar's rankings range from five stars (highest)
to one star (lowest) and represent Morningstar's
assessment of the historical risk level and total
return of a fund as a weighted average for 3, 5, and 10
year periods. Rankings are not absolute or necessarily
predictive of future performance.
Evaluations of the Fund's performance made by
independent sources may also be used in advertisements
concerning the Fund, including reprints of or
selections from editorials or articles about the Fund.
Sources for Fund performance and articles about the
Fund may include publications such as Money, Forbes,
Kiplinger's, Financial World, Business Week, U.S. News
and World Report, The Wall Street Journal, Barron's,
and a variety of investment newsletters.
The Fund may compare the performance of the shares
of the Fund to a wide variety of indices and measures
of inflation, including the Lipper Growth & Income
Index. There are differences and similarities between
the investments that the Fund may purchase and the
investments measured by these indices. The performance
of the Fund may be compared in publications to the
performance of various indices and investments for
which reliable performance data is available. The
Fund's performance may also be discussed during
television interviews of the Adviser personnel
conducted by news organizations to be broadcast in the
United States and elsewhere.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, 100 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202, has been selected as the
independent accountant for the Fund.
FINANCIAL STATEMENTS
The following audited financial statements of the
Fund are incorporated herein by reference to the Fund's
Annual Report for the period from the close of business
on December 31, 1998 (commencement of operations) to
October 31, 1999, as filed with the Securities and
Exchange Commission on December 27, 1999:
(a) Report of Independent Accountants.
(b) Portfolio of Investments as of October 31, 1999.
(c) Statement of Assets and Liabilities as of October 31, 1999.
(d) Statement of Operations for the period ended
October 31, 1999.
<PAGE>
(e) Statement of Changes in Net Assets for the period
ended October 31, 1999.
(f) Financial Highlights for the period ended October
31, 1999.
(g) Notes to Financial Statements.
<PAGE>
APPENDIX
SHORT-TERM RATINGS
Standard & Poor's Short-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
Short-term ratings are generally assigned to those
obligations considered short-term in the relevant
market. In the U.S., for example, that means
obligations with an original maturity of no more than
365 days-including commercial paper. Short-term
ratings are also used to indicate the creditworthiness
of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the
short-term rating addresses the put feature, in
addition to the usual long-term rating.
Ratings are graded into several categories,
ranging from `A-1' for the highest quality obligations
to `D' for the lowest. These categories are as
follows:
A-1 A short-term obligation rated `A-1' is rated
in the highest category by Standard & Poor's.
The obligor's capacity to meet its financial
commitment on the obligation is strong.
Within this category, certain obligations are
designated with a plus sign (+). This
indicates that the obligor's capacity to meet
its financial commitment on these obligations
is extremely strong.
A-2 A short-term obligation rated `A-2' is
somewhat more susceptible to the adverse
effects of changes in circumstances and
economic conditions than obligations in
higher rating categories. However, the
obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
A-3 A short-term obligation rated `A-3' exhibits
adequate protection parameters. However,
adverse economic conditions or changing
circumstances are more likely to lead to a
weakened capacity of the obligor to meet its
financial commitment on the obligation.
B A short-term obligation rated `B' is regarded
as having significant speculative
characteristics. The obligor currently has
the capacity to meet its financial commitment
on the obligation; however, it faces major
ongoing uncertainties which could lead to the
obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated `C' is
currently vulnerable to nonpayment and is
dependent upon favorable business, financial
and economic conditions for the obligor to
meet its financial commitment on the
obligation.
D A short-term obligation rated `D' is in
payment default. The `D' rating category is
used when payments on an obligation 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 grace period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
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Moody's Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of
the ability of issuers to repay punctually senior debt
obligations. These obligations have an original
maturity not exceeding one year, unless explicitly
noted. Moody's ratings are opinions, not
recommendations to buy or sell, and their accuracy is
not guaranteed.
Moody's employs the following three designations,
all judged to be investment grade, to indicate the
relative repayment ability of rated issuers:
PRIME-1 Issuers rated `Prime-1' (or supporting
institutions) have a superior ability for
repayment of senior short-term debt
obligations. Prime-1 repaying ability will
often be evidenced by many of the following
characteristics:
* Leading market positions in well-established
industries.
* High rates of return on funds employed.
* Conservative capitalization structure with
moderate reliance on debt and ample asset protection.
* Broad margins in earnings coverage of fixed
financial charges and high internal cash generation.
* Well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2 Issuers rated `Prime-2' (or supporting
institutions) have a strong ability for
repayment of senior short-term debt
obligations. This will normally be evidenced
by many of the characteristics cited above,
but to a lesser degree. Earnings trends and
coverage ratios, while sound, may be more
subject to variation. Capitalization
characteristics, while still appropriate, may
be more affected by external conditions.
Ample alternate liquidity is maintained.
PRIME-3 Issuers rated `Prime-3' (or supporting
institutions) have an acceptable ability for
repayment of senior short-term obligations.
The effect of industry characteristics and
market compositions may be more pronounced.
Variability in earnings and profitability may
result in changes in the level of debt
protection measurements and may require
relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME Issuers rated `Not Prime' do not fall within
any of the Prime rating categories.
Fitch IBCA International Short-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these short-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
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A short-term rating has a time horizon of less
than 12 months for most obligations, or up to three
years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to
meet financial commitments in a timely manner.
F-1 Highest credit quality. Indicates the
strongest capacity for timely payment of
financial commitments; may have an added "+"
to denote any exceptionally strong credit
feature.
F-2 Good credit quality. A satisfactory capacity
for timely payment of financial commitments,
but the margin of safety is not as great as
in the case of the higher ratings.
F-3 Fair credit quality. The capacity for timely
payment of financial commitments is adequate;
however, near term adverse changes could
result in a reduction to non-investment
grade.
B Speculative. Minimal capacity for timely
payment of financial commitments, plus
vulnerability to near term adverse changes in
financial and economic conditions.
C High default risk. Default is a real
possibility. Capacity for meeting financial
commitments is solely reliant upon a
sustained, favorable business and economic
environment.
D Default. Denotes actual or imminent payment
default.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps Credit Ratings' short-term debt
ratings are consistent with the rating criteria used by
money market participants. The ratings apply to all
obligations with maturities of under one year,
including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of
credit and current maturities of long-term debt. Asset-
backed commercial paper is also rated according to this
scale.
Emphasis is placed on liquidity which is defined
as not only cash from operations, but also access to
alternative sources of funds including trade credit,
bank lines and the capital markets. An important
consideration is the level of an obligor's reliance on
short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps Credit
Ratings' short-term debt ratings is the refinement of
the traditional `1' category. The majority of short-
term debt issuers carry the highest rating, yet quality
differences exist within that tier. As a consequence,
Duff & Phelps Credit Rating has incorporated gradations
of `1+' (one plus) and `1-` (one minus) to assist
investors in recognizing those differences.
These ratings are recognized by the SEC for broker-
dealer requirements, specifically capital computation
guidelines. These ratings meet Department of Labor
ERISA guidelines governing pension and profit sharing
investments. State regulators also recognize the
ratings of Duff & Phelps Credit Rating for insurance
company investment portfolios.
Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely payment.
Short-term liquidity, including internal
operating factors and/or access to
alternative sources of funds, is outstanding,
and safety is just below risk-free U.S.
Treasury short-term obligations.
D-1 Very high certainty of timely payment.
Liquidity factors are excellent and supported
by good fundamental protection factors. Risk
factors are minor.
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D-1- High certainty of timely payment.
Liquidity factors are strong and supported by
good fundamental protection factors. Risk
factors are very small.
Good Grade
D-2 Good certainty of timely payment.
Liquidity factors and company fundamentals
are sound. Although ongoing funding needs may
enlarge total financing requirements, access
to capital markets is good. Risk factors are
small.
Satisfactory Grade
D-3 Satisfactory liquidity and other
protection factors qualify issue as to
investment grade. Risk factors are larger
and subject to more variation. Nevertheless,
timely payment is expected.
Non-investment Grade
D-4 Speculative investment characteristics.
Liquidity is not sufficient to insure against
disruption in debt service. Operating
factors and market access may be subject to a
high degree of variation.
Default
D-5 Issuer failed to meet scheduled
principal and/or interest payments.
