As filed with the Securities and Exchange Commission on March 8, 2000
1933 Act Registration No. 333-64917
1940 Act Registration No. 811-9023
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 2 [X]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2
Integrity Small-Cap Fund of Funds, Inc.
(Exact Name of Registrant as Specified in Charter)
1 North Main, Minot, North Dakota 58703
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (701) 852-5292
with a copy to:
Robert E. Walstad Mark J. Kneedy
President Chapman and Cutler
Integrity Small-Cap Fund of Funds, Inc. 111 West Monroe Street
1 North Main Chicago, Illinois 60603
Minot, ND 58703
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Registrant hereby amends this Registration Statement under the Securities
Act of 1933 on such date or dates as may be necessary, to delay its effective
date until the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to Section 8(a), may determine.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and contents:
The Facing Sheet
Part A-Prospectus
Part B-Statement of Additional Information
Part C-Other Information
Signatures
___________, 2000
INTEGRITY
MUTUAL FUNDS
INTEGRITY SMALL-CAP FUND OF FUNDS, INC.
PROSPECTUS
This prospectus is intended to provide important information to help you
evaluate whether the Integrity Small-Cap Fund of Funds, Inc. may be right
for you. Please read it carefully before investing and keep it for future
reference. To learn more about how the Integrity Mutual Funds can help you
achieve your financial goals, call us at (800) 276-1262.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
The Fund.................................................................1
Integrity Small-Cap Fund of Funds, Inc. .................................1
Fund Summary..........................................................1
What are the Fund's Expenses? ........................................2
Fund Management..........................................................3
Principal Investment Strategies..........................................4
Non-Principal Investment Strategies......................................5
Other Fund Policies......................................................5
Portfolio Transactions...................................................6
Principal Risk Factors...................................................6
Other Risk Factors.......................................................7
The Shares we offer......................................................7
How To Buy Shares........................................................8
Systematic Investing-the Monthomatic Investment Plan.....................9
Special Services.........................................................9
How to Sell Shares......................................................10
Systematic Withdrawal...................................................11
Distributions and Taxes.................................................11
Distribution and Service Plan...........................................12
Net Asset Value.........................................................12
Fund Service Providers..................................................12
Shareholder Inquiries...................................................13
-i-
INTEGRITY SMALL-CAP FUND OF FUNDS, INC.
FUND SUMMARY
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation and growth of income. Current
income is a secondary objective of the Fund.
PRINCIPAL STRATEGIES: HOW THE FUND PURSUES ITS OBJECTIVE
The Fund invests primarily in a diversified group of other registered open-end
investment companies which, in turn, invest principally in equity securities.
We seek underlying funds we believe will advance the objective of the Fund.
In selecting underlying funds, we consider the underlying fund's objectives,
policies, performance and management as well as their overall operations
(such as size, fees and expenses, and services). We invest in approximately
15 to 50 underlying funds. We normally invest in underlying funds that are
classified as growth, aggressive growth or growth-income funds. The Fund
generally focuses on underlying funds which primarily invest in companies
with market capitalization of less than $2 billion. The Fund generally
invests in seasoned underlying funds that have had favorable performance
returns compared to other similar funds and market indexes.
The Fund may also invest in stock index futures and options on stock index
futures for hedging purposes.
PRINCIPAL RISKS: WHAT ARE THE RISKS OF INVESTING IN THE FUND?
The assets of the Fund are invested in other investment companies, so the
Fund's investment performance and risk of the Fund is directly related to
the investment performance and risks of the underlying funds held. The
risks of the underlying funds include market risk, interest rate risk,
income risk and credit risk. In addition, the underlying funds generally
will invest in small capitalization companies which are more vulnerable to
adverse market changes, may be less liquid, and have greater market volatility.
The ability of the Fund to meet its investment objective is directly related
to the ability of the underlying funds held to meet their objectives as well
as the allocation among those underlying funds. There can be no assurance
that the investment objective of the Fund or any underlying fund will be
achieved. Further, the Fund has been organized recently and has no history
of operations.
The Fund and the underlying funds have transactional and operating expenses.
An investor in the Fund will therefore bear not only his or her proportionate
share of the Fund's expenses, but also the similar expenses of the funds in
which the Fund invests.
The value of the underlying funds' investments, and thus the net asset value
("NAV") of both the underlying funds' and the Fund's shares, will fluctuate
in response to changes in market and economic conditions, as well as the
financial condition and prospects of issuers in which the underlying funds
invest.
Because the Fund uses hedging strategies, the Fund also bears the risk that
the price movements of the futures and options will not correlate with the
price movements of the portfolio securities being hedged.
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. You should be aware that loss of money is a risk of
investing.
IS THIS FUND RIGHT FOR YOU?
The Fund may be a suitable investment for you if you are seeking:
* Long-term growth potential and income growth;
* The convenience of a diversified portfolio of mutual funds in a
single investment;
You should not invest in this Fund if you are:
* Unwilling to accept share price fluctuation;
* Investing to meet short-term financial goals.
-2-
INTEGRITY SMALL-CAP FUND OF FUNDS, INC.
WHAT ARE THE FUND'S EXPENSES?
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES1, 2 (fees paid directly from your investment)
<S> <C>
Maximum Sales Charge (Load) Imposed
on Purchases.........................................................NONE
Maximum Deferred Sales Charge (Load)
(as a percentage of lesser of purchase
price or redemption proceeds) .......................................1.50%3
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends..............................................NONE
Redemption Fees........................................................NONE
Exchange Fee...........................................................NONE
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from fund assets)4
Management Fees........................................................0.90%
Distribution and Service (12b-1) Fees5.................................0.75%
Other Expenses6........................................................0.45%
Total Annual Fund Operating Expenses3, 7...............................2.10%
</TABLE>
[FN]
1 Authorized brokers and other firms may charge additional fees to effect
shareholder transactions. Please see their materials for details.
2 An investor will not only bear the cost of any deferred sales charge (load)
but also his or her proportionate share of sales charge (loads) of the
funds in which the Fund invests.
3 Shares redeemed within five years of purchase are subject to a contingent
deferred sales charge ("CDSC") of 1.5%. Purchases of $1 million or more
are subject to a reduced CDSC if redeemed within 1 year of purchase. See
"The Shares We Offer."
4 An investor will bear not only his or her proportionate share of the
Fund's transactional and operating expenses but also similar expenses of
the funds in which the Fund invests. Generally, the operating expenses of
the underlying funds are expected to range from 0.50 % to 1.50% of average
net assets.
5 Because the fund pays 12b-1 fees, long-term shareholders may pay more in
distribution expenses than the economic equivalent of the maximum front-end
sales charges permitted by the NASD.
6 The percentage shown for "Other Expenses" is based on estimated amounts for
the current fiscal year.
7 The investment adviser has voluntarily agreed to waive fees through April
30, 2001 in order to prevent Total Annual Fund Operating Expenses (excluding
extraordinary expenses) from exceeding 1.60% of the average daily net asset
value of Fund shares.
</FN>
EXAMPLE:
This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
This example assumes that you invest $10,000 in the Fund for the time periods
indicated and then either redeem or do not redeem all of your shares at the
end of those periods. The example also assumes that your investment has a 5%
return each year and that the Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 year 3 years
$363 $808
You would pay the following expenses if you did not redeem your shares:
1 year 3 years
$213 $658
FUND MANAGEMENT
The overall management of the business and affairs of the Fund is the
responsibility of the Fund's Board of Directors. ND Money Management, Inc.
("ND Management"), 1 North Main, Minot, North Dakota 58703, is the investment
adviser to the Fund. ND Management has been advising mutual funds since 1989
and is currently investment adviser to four funds with assets under management
of approximately $168 million. ND Management was also the investment adviser
to the ND Insured Income Fund, Inc. from 1991 to 1998. ND Management is
responsible for the selection and ongoing monitoring of the securities in the
Fund's portfolio, and, at its own expense, provides all necessary a
dministrative services, office space, equipment and clerical services for
managing the Fund's investments. ND Management also pays the salaries and
fees of all officers and directors of the Fund who are affiliated persons of
ND Management.
Harvey Merson, portfolio manager, is primarily responsible for the day-to-day
management of the Fund's portfolio, under the supervision and direction of
Robert E. Walstad, President of the Fund. Mr. Walstad started in the
securities business with PaineWebber as a retail broker in 1972. In 1977, he
became branch manager with Dean Witter Reynolds and spent ten years in that
capacity. In 1987, Mr. Walstad founded ND Holdings, Inc. ("ND Holdings"),
which wholly-owns the Fund's investment adviser and underwriter. ND Holdings
is the sponsor of Integrity Mutual Funds, which currently offers five open-end
funds, including the Fund. Mr. Walstad is the President of these funds, as
well as the Fund's adviser and underwriter. Mr. Walstad has supervised and
directed the management of the portfolios of the Integrity Mutual Funds since
they commenced operations with the first fund being offered in 1989. In
addition, since January 5, 1996, Mr. Walstad has been President of Ranson
Managed Portfolios, which currently offers four series, and has supervised
the management of these series.
-2-
Since April 1997, Mr. Merson has been a registered investment adviser with the
State of New Jersey assisting clients with the purchasing, monitoring, and
sale of mutual funds. He has also been the President of MH Investment
Management Inc. and MH Elite Portfolios of Funds since October 1997.
MH Investment Management Inc. provides portfolio management to the MH Elite
Portfolio of Funds, a fund of funds that invests in small and micro cap mutual
funds. Mr. Merson is also the Portfolio Manager for MH Elite Portfolio of
Funds.
For providing management services, ND Management is paid an annual fund
management fee by the Fund of .90% of the Fund's average daily net assets,
payable monthly.
The Fund pays for its own operating expenses such as custodial, transfer agent,
accounting and legal fees; brokerage fees and commissions, if any; distribution
and service fees; insurance premiums; interest; organizational expenses;
taxes; securities registration fees; and extraordinary expenses. See the
Statement of Additional Information for an additional discussion of Fund
expenses.
You should note that because the Fund invests in other funds, you pay not only
the transactional expenses (such as a deferred sales charge) and a pro rata
share of the operating expenses of the Fund, you will also pay a portion of
similar expenses of the underlying funds. An investor in the Fund therefore
will indirectly pay higher expenses than if the underlying fund shares were
owned directly. You may also receive taxable capital gains distributions to
a greater extent than if the underlying funds were owned directly.
PRINCIPAL INVESTMENT STRATEGIES
SECURITIES THE FUND INVESTS IN
The Fund's investment objective may not be changed without shareholder
approval. The Fund's investment policies, unless otherwise noted, may be
changed by the Fund's Board of Directors without shareholder approval. The
Fund, however, has adopted certain investment limitations that cannot be
changed without shareholder approval. For a detailed discussion of the Fund's
fundamental investment policies, see the Statement of Additional Information.
INVESTMENT COMPANIES
Under normal circumstances, the Fund invests at least 65% of its assets in
shares of registered (diversified or non-diversified) open-end investment
companies which invest primarily in companies with market capitalizations of
less than $2 billion. The Fund will normally invest in approximately fifteen
to fifty underlying funds and may invest up to 25% of its total assets in any
one underlying fund. The Fund will generally invest in underlying funds that
invest primarily in common stock and which seek long-term capital appreciation
and growth of income with current income of secondary importance. The Fund
normally invests in underlying funds that are classified as growth, aggressive
growth, or growth-income funds.
Although the Fund generally focuses in underlying funds which primarily invest
in the equity securities of companies with a market capitalization of less than
$2 billion, the underlying funds may also have a portion of their assets
invested in fixed-income securities. These underlying funds typically invest
primarily in investment grade quality securities with respect to their assets
allocated to fixed-income securities.
The Fund generally invests in seasoned underlying funds. Accordingly, the
Fund normally invests in underlying funds with at least a 5 year operating
history and at least $300 million assets under management. The above policies
may be changed without shareholder approval.
The Fund will not purchase shares of closed-end investment companies or in
investment companies which are not registered with the Securities and Exchange
Commission. The Fund intends to invest only in underlying funds which qualify
for treatment as a regulated investment company ("RIC") under the Internal
Revenue Code. If an underlying fund fails to qualify as a RIC, it may be
subject to federal income tax. Although there is no assurance an underlying
fund will qualify as a RIC, the Fund will promptly dispose of any shares in
its portfolio which have been issued by a fund which has failed to qualify as
a RIC.
-3-
HOW WE SELECT INVESTMENTS
ND Management selects underlying funds based primarily upon its assessment of
the underlying fund's potential to advance the Fund's objective. ND
Management evaluates underlying funds based on their investment objectives,
policies and techniques, past performance, and management. ND Management
will also consider the fund's operations including: the fund's size,
reputation, management style, fees and expenses, portfolio composition and
liquidity, and shareholder services provided. In selecting funds, ND
Management looks for funds that have had favorable performance returns
compared to similar funds or market indexes. ND Management will compare the
underlying fund's performance record over the past 3, 5, or 10 years (if
available), against that of other funds and market measurements.
RISK MANAGEMENT
HEDGING STRATEGIES
The Fund may also engage in various investment strategies designed to hedge
against changes in market conditions using stock index futures contracts and
options on stock index futures contracts. The Fund may enter into futures
contracts for the purchase or sale of stock indexes or purchase and sell
options on these futures contracts. The Fund uses these investment strategies
to hedge against changes in the values of securities the Fund owns or expects
to purchase and not for speculation. The Fund will not enter into such
transactions if the sum of the initial margin deposits and premiums paid for
unexpired options exceed 5% of the Fund's total assets. The ability of the
Fund to benefit from options and futures is largely dependent on ND
Management's ability to use these strategies successfully. If ND Management's
judgment about the general direction of markets is wrong, the overall
performance of the Fund will be poorer than if no such futures and options
had been used. In addition, the Fund's ability effectively to hedge all or
a portion of its portfolio through transactions in futures and options
depends on the degree to which price movements in the futures and options
correlate with the price movements in the Fund's portfolio. Consequently,
if the price of the futures and options moves more or less than the price of
the security that is subject to the hedge, the Fund will experience a gain or
loss that will not be completely offset by movements in the price of the
security. The Fund could lose money on futures transactions or an option
can expire worthless. Losses (or gains) involving futures can sometimes be
substantial-in part because a relatively small price movement in a futures
contract may result in an immediate and substantial loss (or gain) for a
fund. Use of options may also (i) result in losses to the Fund, (ii) force
the purchase or sale of portfolio securities at inopportune times or for
prices higher than or lower than current market values, (iii) limit the amount
of appreciation the Fund can realize on its investments, (iv) increase the
cost of holding a security and reduce the returns on securities or (v) cause
the Fund to hold a security it might otherwise sell.
TEMPORARY INVESTMENT STRATEGIES
The Fund may, from time to time, take temporary defensive positions that are
inconsistent with the Fund's principal investment strategies in attempting to
respond to adverse market, economic, political or other conditions.
The Fund may therefore invest up to 100% of its assets in money market mutual
funds and short-term obligations including U.S. government securities
(including U.S. Treasury bills), commercial paper, certificates of deposit and
bankers' acceptances as a temporary defensive measure. During these periods,
the Fund may not be able to achieve its investment objective. For more
detailed information on eligible short-term investments, see the Statement
of Additional Information.
NON-PRINCIPAL INVESTMENT STRATEGIES
As a non-principal investment strategy, the Fund may also invest in underlying
funds which invest primarily in long or short-term fixed-income securities
that are investment grade quality. We will invest in bond funds if we believe
they offer a potential for capital appreciation.
-4-
OTHER FUND POLICIES
Although the Fund invests primarily in shares of underlying funds, the Fund
may hold cash or may invest in money market mutual funds and in short-term
obligations including U.S. government securities (including U.S. Treasury
bills), commercial paper, certificates of deposit and bankers' acceptances
to accumulate cash for investment and redemptions. Cash held for investments
or redemptions may not exceed 35% of the Fund's total assets.
The Fund and its affiliated persons will not purchase more than 3% of the
total outstanding shares of another fund in accordance with federal securities
laws. Because of this restriction, the Fund may have to forego certain
investment opportunities. In addition, the Fund may not invest more than
15% of its net assets in illiquid securities.
The Fund may acquire shares of underlying funds that impose sales loads or
12b-1 distribution or service fees. The underlying funds, however, may
offer shareholder programs which reduce the sales loads such as quantity
discounts, rights of accumulation or letters of intent. To the extent
available, the Fund will use these arrangements to reduce any sales load the
Fund pays. Because of these available discounts, the Fund in most cases
will not pay a sales charge of more than 1% of the public offering price
(1.01% of the net amount invested).
PORTFOLIO TRANSACTIONS
The Investment Adviser may consider a number of factors in determining which
brokers to use for the Fund's portfolio transactions. These factors include
research services, reasonableness of commissions, quality of services and
execution and sale of Fund shares. When the Fund purchases the shares of
underlying funds subject to a front-end sales load, the Investment Adviser
anticipates that the Fund's Underwriter, ND Capital, Inc. ("ND Capital")
will execute a substantial portion of these portfolio transactions. When ND
Capital acts as the dealer on these purchases, it may receive a dealer
reallowance, up to a maximum 1% of the public offering price. ND Capital
will not be designated as dealer if the dealer reallowance exceeds 1% of the
public offering price. ND Capital may also receive 12b-1 fees from underlying
funds when assisting the Fund in purchasing shares of the underlying funds.
In addition, ND Capital may receive brokerage commissions on portfolio
transactions of underlying funds held in the Fund's portfolio.
PRINCIPAL RISK FACTORS
Risk is inherent in all investing. Investing in the Fund involves risk,
including the risk that you may receive little or no return on your investment
or that you may even lose part or all of your investment. Before you invest,
you should consider the following risks:
MARKET RISK: the risk that a particular stock, an industry, or stocks in
general may fall in value.
FUND RISK: the Fund's investment performance and risk is directly related to
the investment performance and risks of the underlying funds. The ability of
the Fund to achieve its investment objective is therefore dependent on a
number of factors, including the skills of the adviser of the underlying funds
to invest to meet the objectives of the underlying fund, to effectively
respond to changes in market conditions and to maintain sufficient liquidity
to meet redemptions. The Fund is independent from any of the underlying funds
and has little voice in the management and investment practices of the
underlying funds.
SMALL-CAP COMPANY RISK: to the extent the Fund invests in underlying funds
that invest in small capitalization companies, the Fund is subject to small-
cap company risk. Such companies may be more vulnerable to adverse general
market or economic developments, may be less liquid and may experience
greater price volatility than larger capitalization companies. Accordingly,
such companies are generally subject to greater market risk than larger
capitalization companies.
INTEREST RATE RISK: to the extent the Fund invests in underlying funds that
invest in debt securities, the Fund is subject to interest rate risk.
Interest rate risk is the risk that the value of the Fund's portfolio will
decline because of rising market interest rates (bond prices move in the
opposite direction of interest rates). The longer the average maturity
(duration) of an underlying bond fund's portfolio, the greater its interest
rate risk.
INCOME RISK: to the extent the Fund invests in underlying funds that invest
in debt securities, the Fund is subject to income risk. Income risk is the
risk that the income from the Fund's portfolio will decline because of
falling market interest rates. This can result when the underlying bond fund
invests the proceeds from the new share sales, or from matured or called bonds,
at market interest rates that are below the portfolio's current earnings rate.
CREDIT RISK: to the extent the Fund invests in underlying funds that invest
in debt securities, the Fund is subject to credit risk. Credit risk is the
risk that an issuer of a bond is unable to meet its obligation to make interest
and principal payments due to changing market conditions. Generally, lower
rated bonds provide higher current income but are considered to carry greater
credit risk than higher rated bonds. Underlying funds may invest in
investment grade and non-investment grade bonds (i.e., junk bonds).
-5-
LIQUIDITY: under federal securities laws, an underlying fund is not obligated
to redeem any securities in an amount exceeding 1% of its total outstanding
securities during any period of less than 30 days. The Fund therefore may
not be able to liquidate more than 1% of an underlying fund's securities
when desired.
INFLATION RISK: the risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As
inflation increases, the value of the Fund's assets can decline as can the
value of the Fund's distributions.
OTHER CONSIDERATIONS: the underlying funds have their own investment
objectives, policies, practices and techniques, any one or all of which may
subject their assets to varying degrees of risk. Principal and certain non-
principal risks have been discussed in this prospectus. Additional non-
principal risks of certain of the practices of the underlying funds are
described further in the Statement of Additional Information. The Fund is
independent from any of the underlying funds and has little influence in the
investment practices of the underlying funds. If the Fund disagrees with
these practices, the Fund may have to liquidate its shares in the underlying
fund, which can entail further losses. In addition, the investment advisers
of the underlying funds may also simultaneously pursue inconsistent investment
strategies. For example, one underlying fund may be purchasing shares of the
same issuer that another underlying fund is selling. Under these
circumstances, the Fund's indirect expenses would increase without any
corresponding investment benefit.
YEAR 2000 DISCLOSURE
ND Management and the Fund's service providers each rely on computer systems
to manage the Fund's investments, process transactions and provide account
maintenance. Because of the way computers historically have stored dates, some
of these systems currently may not be able to correctly process activity
occurring in the year 2000. This is commonly known as the "Year 2000
Problem." The Fund and their service providers have not been and do not expect
to be adversely affected by computer problems related to the transition to the
year 2000. However, these problems could arise or be discovered in the
future. The Fund will continue to monitor for any computer problems that may
arise. Year 2000 related problems also may negatively affect issuers whose
securities the Fund purchases, which could have an impact on the value of your
investment.
OTHER RISK FACTORS
FOREIGN INVESTMENT RISK: to the extent the Fund invests in underlying funds
that invest in foreign securities, the Fund is subject to foreign investment
risk. Securities issued by foreign companies or governments present risks
beyond those of securities of U.S. issuers. Such risks include political or
economic instability, changes in foreign currency exchange rates, and less
publicly available information. Prices of foreign securities also may be
more volatile and they may be less liquid than U.S. stocks.
THE SHARES WE OFFER
You can buy shares at the net asset value per share without any up-front
sales charge so that the full amount of your purchase is invested in the
Fund. The Fund has adopted a distribution and service plan under Rule 12b-1
under the Investment Company Act of 1940 (the "12b-1 Plan") that allows the
Fund to pay distribution and service fees for the sale of its shares and for
services provided to shareholders. Under the 12b-1 Plan, you will pay an
annual distribution and service fee of 0.75% of average daily net assets of
the Fund. The annual 12b-1 fee compensates ND Capital, the Fund's
underwriter, for paying dealers an up-front sales commission of 4% on
amounts invested (1% on sales of $1 million or more), excluding sales to
investors exempt from the contingent deferred sales charge ("CDSC"). ND
Capital may use a portion of this fee to pay an annual service fee of up to
0.25% of average daily net assets to dealers for providing ongoing service to
you. Because these fees are paid out of the Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
-6-
If you sell your shares within five years of purchase, you will have to pay a
CDSC of 1.5% based on either your purchase price or what you sell your shares
for, whichever amount is lower. You do not pay a CDSC on any shares you
purchase by reinvesting dividends and capital gains. When you redeem shares
subject to a CDSC, the Fund will first redeem any shares that are not subject
to a CDSC or that represent an increase in the value of your Fund account due
to capital appreciation, and then redeem the shares you have owned in the
order purchased. When you redeem shares subject to a CDSC, the CDSC is
deducted from your redemption proceeds and paid to ND Capital. Purchases of
$1 million or more are subject to a reduced CDSC of 1% if shares are redeemed
within 12 months of purchase.
Fund shares are also available for individual retirement accounts (IRAs),
401(k) Plans, and other retirement plans. See the Statement of Additional
Information or call (800) 276-1262 for additional information.
CDSC WAIVERS
The Funds may sell shares without a CDSC to:
* directors, officers, employees (including retirees) of the Fund,
ND Holdings, ND Management and ND Capital for themselves or certain members
of their families;
* trusts, pension, profit-sharing or other plans for the benefit of
directors, officers, employees (including retirees) of the Fund, ND Holdings,
ND Management and ND Capital and certain members of their families;
* authorized broker-dealers and financial institutions and certain
employees (including their spouses and children) of such dealers and
institutions; and
* any broker-dealer, financial institution or other qualified firm
which does not receive commissions for selling shares to its clients.
Please refer to the Statement of Additional Information for detailed
eligibility requirements. Additional information is available by calling
(800) 276-1262.
HOW TO BUY SHARES
Fund shares may be purchased on any business day, which is any day the New
York Stock Exchange is open for business and normally ends at 3 p.m., Minot,
North Dakota time. Generally, the Exchange is closed on weekends, national
holidays and Good Friday.
You may buy shares through investment dealers who have sales agreements with
ND Capital, the Fund's distributor or directly from ND Capital. If you do not
have a dealer, call (800) 276-1262 and ND Capital can refer you to one.
-7-
Purchase requests should be addressed to the authorized dealer or agent from
which you received this Prospectus. Such dealers or agents may place a
telephone order with ND Capital for the purchase of shares. It is the
broker's or dealer's responsibility to promptly forward payment and the
purchase application to the transfer agent for the investor to receive the
next determined net asset value. Payment for shares purchased by telephone
should be received within three business days. Checks should be made payable
to Integrity Small-Cap Fund of Funds, Inc.
MINIMUM INVESTMENTS AND SHARE PRICE
You may open an account with $1,000 ($100 for the Monthomatic Investment Plan
and $250 for an Individual Retirement Account) and make additional investments
at any time with as little as $50. The Fund may change these minimum initial
investments at any time.
The price you pay for shares will depend on how and when the Fund receives
your order. You will receive the share price next determined after the Fund
has received your order. If you place your order by contacting the Fund
directly, your order must be received by the Fund prior to close of trading of
the New York Stock Exchange (normally 3:00 p.m. Minot, North Dakota time) for
you to receive that day's price. However, if you place your order through a
dealer prior to the close of trading of the New York Stock Exchange and the
Fund receives such order prior to the close of business of the Fund (normally
5:00 p.m. Minot, North Dakota time), you will receive that day's price.
Dealers are obligated to transmit orders promptly. See "Net Asset Value" for
a discussion of how shares are priced.
SYSTEMATIC INVESTING-THE MONTHOMATIC INVESTMENT PLAN
Once you have established a Fund account, systematic investing allows you to
make regular investments through automatic deductions from your bank account
(simply complete the appropriate section of the account application form) or
call ND Resources, Inc. ("ND Resources") at (800) 601-5593 for appropriate
forms.
With the Monthomatic Investment Plan, you can make regular investments of $50
or more per month by authorizing us to draw either checks or debits on your
bank account. Such account must have check or draft writing privileges. You
can stop the withdrawals at any time by sending a written notice to ND
Resources, the Fund's transfer agent, at P.O. Box 759, Minot, ND 58702.
The termination will become effective within 7 days after the transfer agent
has received the request. The Fund may terminate or modify this privilege at
any time and may immediately terminate a shareholder's monthomatic plan if
any item is unpaid by the shareholder's financial institution. There is no
charge for this plan.
SPECIAL SERVICES
To help make your investing with us easy and efficient, we offer you the
following services at no extra cost.
EXCHANGING SHARES
You may exchange Fund shares into an identically registered account at any
time for shares of any mutual fund advised or underwritten by ND Capital
or ND Management at net asset value. If you exchange your Fund shares into
shares of the Montana Tax-Free Fund, Inc., ND Tax-Free Fund, Inc., or South
Dakota Tax-Free Fund, Inc., funds advised by ND Management, you will exchange
into Class B Shares of such funds. In addition, the CDSC and the holding
period of your original investment will be carried forward into the fund in
which you are exchanging and applied in the event you redeem any or all
of your shares in this fund, subject to the following provision. If the
amount of the CDSC applicable to the fund shares being acquired is higher
than the charge applicable to the shares of the Fund, such higher charge
shall be applied upon redemption of these acquired shares.
-8-
Similarly, shareholders in funds advised or underwritten by ND Capital, Ranson
Capital Corporation or ND Management exercising the applicable exchange
privilege of these funds, may purchase shares of the Fund at net asset value.
If these shareholders paid an up-front sales load on the shares being
exchanged, you will not pay a CDSC upon redemption of any or all of your
shares. If the shares of the original fund being exchanged are subject to a
CDSC, the CDSC and holding period of the original investment will be carried
forward into the Fund and applied upon redemption.
Your exchange must meet the minimum purchase requirements of the fund into
which you are exchanging and be available in your state. Because an exchange
is treated for tax purposes as a concurrent sale and purchase, and any gain
may be subject to tax, you should consult your tax adviser about the tax
consequences of any contemplated exchange. A shareholder considering an
exchange should obtain and read the prospectus of the fund and consider the
differences between it and the fund whose shares he or she owns before making
an exchange.
The exchange privilege is not intended to allow you to use a Fund for short-
term trading. Because excessive exchanges may interfere with portfolio
management, raise Fund operating expenses or otherwise have an adverse
effect on other shareholders, the Fund reserves the right to revise or suspend
the exchange privilege on 60 days written notice, limit the amount or number
of exchanges, or reject any exchange. For additional information on how to
exercise the exchange privilege, call ND Resources at (800) 601-5593.
REINSTATEMENT PRIVILEGE
If you redeem Fund shares, you may reinstate all or part of your redemption
proceeds without incurring any additional charges. If you paid a CDSC, we
will refund your CDSC as additional shares in proportion to the reinstatement
amount of your redemption proceeds and your holding period will also be
reinstated. An investor exercising this privilege a year or more after
redemption must complete a new account application and provide proof that the
investor was a shareholder of the Fund. If you redeemed shares in a retirement
account, please review the plan document you received when you opened your
account for rules and limitations if you are repurchasing shares in the same
retirement account. The Funds may modify or terminate this privilege at any
time.
HOW TO SELL SHARES
You may sell (redeem) your shares on any day the New York Stock Exchange is
open. You will receive the share price next determined after the Fund has
received your properly completed redemption request as described below.
Your redemption request must be received before the close of trading for you
to receive that day's price. While the Fund does not charge a redemption
fee, you may be assessed a CDSC, if applicable.
You can sell your shares at any time by sending a written request to the
Fund, c/o ND Resources, P.O. Box 759, Minot, ND 58702 or by placing an order
to sell through your financial adviser. Such dealers or agents may place a
fax or mail in the order to ND Capital for the sale of shares. It is the
broker's or dealer's responsibility to promptly forward the redemption
requests to the transfer agent for shares being redeemed to receive the
next determined net asset value.
To properly complete your redemption request, your request must include the
following information:
* The Fund's name;
* Your name and account number;
* The dollar or share amount you wish to redeem;
* The signature of each owner exactly as it appears on the account;
* The name of the person to whom you want your redemption proceeds
paid (if other than to the shareholder of record);
* The address where you want your redemption proceeds sent (if other
than the address of record);
* Any certificates you have for the shares (signed certificate or a
duly endorsed stock power); and
* Any required signature guarantees.
-9-
We will normally mail your check the next business day, but in no event more
than seven days after we receive your request. If you purchased your shares
by check, your redemption proceeds will not be mailed until your check has
cleared which may take up to 15 days from the date of purchase. Guaranteed
signatures are required if you are redeeming more than $50,000, you want the
check payable to someone other than the shareholder of record or you want the
check sent to another address. Signature guarantees are also required and
additional documentation may be requested from corporations, custodians,
executors, administrators, trustees or guardians. Signature guarantees
must be obtained from a commercial bank, trust company, savings and loan
association, or brokerage firm. A notary public cannot provide a signature
guarantee.
You should note that the Fund reserves the right to liquidate your account
other than an IRA) upon 60 days' written notice if the value of your account
falls below $1,000 for any reason other than a fluctuation in the market
value of the Fund shares. The Fund also reserves the right to redeem in-kind
(that is to pay redemption requests in cash and portfolio securities or wholly
in portfolio securities). Because you would receive portfolio securities in an
in-kind redemption, you would still be subject to market risk and may incur
transaction costs in selling the securities.
The Fund may also suspend the right of redemption under the following unusual
circumstances:
* when the New York Stock Exchange is closed (other than weekends
and holidays) or trading is restricted as determined by the SEC;
* when an emergency exists, making disposal of portfolio securities
or the valuation of net assets not reasonably practicable as determined by
the SEC; or
* during any period when the SEC has by order permitted a suspension
of redemption for the protection of shareholders.
SYSTEMATIC WITHDRAWAL
If the value of your Fund account is at least $5,000, you may request to have
$50 or more withdrawn automatically from your account, subject to any
applicable CDSC. You may elect to receive payments monthly, quarterly, semi-
annually or annually. If payments exceed reinvested dividends and
distributions, an investor's shares will be reduced and eventually depleted.
You must complete the appropriate section of the account application to
participate in the Fund's systematic withdrawal plan. A shareholder who
participates in the Monthomatic Investment Plan is ineligible to participate
in the Plan. You may terminate participation in the program at any time by
written notice. The Fund may also terminate or modify this program at any
time.
DISTRIBUTIONS AND TAXES
The Fund pays dividends and any capital gains at least once a year. The Fund
will automatically reinvest your dividends in additional Fund shares at net
asset value unless you request your dividends to be paid to you in cash.
You may change your selected method of distribution, provided such change
will be effective only for distributions paid three days after the transfer
agent receives the written request. The Fund will send a check to investors
electing to receive dividends in cash. You may have your distribution check
paid to a third party or sent to an address other than your address of record
(although a signature guarantee will be required). If checks are to be sent
to an investor's bank, a voided check should be attached. For further
information, contact ND Resources at (800) 601-5593.
-10-
TAXES AND TAX REPORTING
The Fund intends to make distributions that may be taxed as ordinary income or
capital gains (which may be taxable at different rates depending on the length
of time the Fund holds its assets). Distributions of net long-term capital
gain distributions received by the Fund from underlying funds as well as net
long-term capital gains realized by the Fund are generally taxable as long-
term capital gains. Dividends from income (including dividends and net short-
term capital gains received from the underlying funds) as well as short-term
capital gains realized by the Fund are generally taxable as ordinary income.
The tax you pay on a given capital gains distribution depends generally on how
long the Fund has held the portfolio securities it sold. It does not depend
on how long you have owned your Fund shares. Because the Fund is actively
managed and can realize taxable net short-term capital gains by selling shares
of an underlying fund with unrealized portfolio appreciation, investing in the
Fund rather than directly in the underlying funds may result in increased tax
liability to the shareholder because the Fund must distribute its gain in
accordance with tax law.
Early in each year, you will receive a statement detailing the amount and
nature of all dividends and capital gains that you were paid during the prior
year. The tax status of your dividends is not affected by whether you reinvest
your dividends or receive them in cash. The sale of shares in your account may
produce a gain or loss and is a taxable event.
Tax laws are subject to change, so we urge you to consult your tax adviser
about your particular tax situation and how it might be affected by current tax
law.
Please note that if you do not furnish us with your correct Social Security
number or employer identification number, federal law requires us to withhold
federal income tax from your distributions and redemption proceeds at a rate
of 31%.
BUYING OR SELLING SHARES CLOSE TO A RECORD DATE
Buying Fund shares shortly before the record date for a taxable dividend is
commonly known as "buying the dividend." The entire dividend may be taxable
to you even though a portion of the dividend effectively represents a return
of your purchase price.
DISTRIBUTION AND SERVICE PLAN
ND Capital serves as the distributor of the Fund's shares. In this capacity,
ND Capital manages the offering of the Fund's shares and is responsible for
all sales and promotional activities. In order to reimburse ND Capital for
its costs in connection with these activities, including compensation paid to
authorized dealers, the Fund has adopted a 12b-1 Plan. See "The Shares We
Offer" for a description of the distribution and service fees paid under this
plan.
ND Capital receives the 12b-1 fee primarily for providing compensation to
authorized dealers including ND Capital in connection with the distribution
of shares and related financing costs. These fees also compensate ND Capital
for other expenses, including printing and distributing prospectuses to
persons other than shareholders; preparing, printing, and distributing
advertising and sales literature, and reports to shareholders used in
connection with the sale of shares, and other overhead expenses (such as
rent and salaries).
ND Capital may also use a portion of this fee to pay an annual service fee to
authorized dealers, including ND Capital, for providing account services to
shareholders. These services may include answering shareholder inquiries,
assisting in redeeming shares, interpreting confirmations, statements and
other documents, and providing other personal services to shareholders.
-11-
NET ASSET VALUE
The price you pay for your shares is based on the Fund's net asset value
per share which is determined as of the close of trading (normally 3:00 p.m.
Minot, North Dakota time) on each day the New York Stock Exchange is open for
business. Net asset value is calculated by calculating the total value of the
Fund's assets, including interest or dividends accrued but not yet collected,
less all liabilities, and dividing by the total number of shares outstanding.
The result, rounded to the nearest cent, is the net asset value per share.
All valuations are subject to review by the Fund's Board of Directors or its
delegate.
The Fund's assets consist primarily of shares of the underlying funds which
are valued at their respective net asset values. The underlying funds value
securities in their portfolios for which market quotations are readily
available at their current market value (generally the last reported
sale price) and all other securities and assets at fair value pursuant to
methods established in good faith by their boards of directors. Money market
funds with portfolio securities that mature in one year or less may use the
amortized cost or penny-rounding methods to value their securities.
Securities having 60 days or less remaining to maturity generally are valued
at their amortized cost, which approximates market value. Other assets of the
Fund are valued at their current market value if market quotations are readily
available and, if not available, at fair value pursuant to methods established
in good faith by the Board of Directors.
FUND SERVICE PROVIDERS
The custodian of the assets of the Fund is First Western Bank & Trust, 900
South Broadway, Minot, North Dakota 58701. ND Resources, a wholly-owned
subsidiary of ND Holdings, is the Fund's transfer agent. As transfer agent,
ND Resources performs bookkeeping, data processing, accounting and other
administrative services for the operation of the Fund and the maintenance of
shareholder accounts.
SHAREHOLDER INQUIRIES
All inquiries regarding the Fund should be directed to ND Capital at 1 North
Main, Minot, ND 58703 or call (800) 276-1262.
All inquiries regarding account information should be directed to ND
Resources at P.O. Box 759, Minot, ND 58702 or call (800) 601-5593.
-12-
INTEGRITY SMALL-CAP FUND OF FUNDS, INC.
1 NORTH MAIN * MINOT, NORTH DAKOTA 58703 * (701) 852-5292
P.O. BOX 759 * MINOT, NORTH DAKOTA 58702
(800) 276-1262 * MARKETING * FAX (701) 838-4902
(800) 601-5593 * TRANSFER AGENT * FAX (701) 852-2548
INVESTMENT ADVISER
ND MONEY MANAGEMENT, INC.
1 NORTH MAIN
MINOT, ND 58703
PRINCIPAL UNDERWRITER
ND CAPITAL, INC.
1 NORTH MAIN
MINOT, ND 58703
CUSTODIAN
FIRST WESTERN BANK & TRUST
900 SOUTH BROADWAY
MINOT, ND 58701
TRANSFER AGENT
ND RESOURCES, INC.
1 NORTH MAIN, MINOT, ND 58703
P.O. BOX 759, MINOT, ND 58702
INDEPENDENT ACCOUNTANT
BRADY, MARTZ & ASSOCIATES, P.C.
24 WEST CENTRAL AVENUE
MINOT, ND 58701
LEGAL COUNSEL
CHAPMAN AND CUTLER
111 WEST MONROE STREET
CHICAGO, IL 60603
INTEGRITY MUTUAL FUNDS
Integrity Small-Cap Fund of Funds, Inc.
Several additional sources of information are available to you.
The Statement of Additional Information (SAI), incorporated by reference
into this prospectus, contains detailed information on the Fund's policies
and operation. Call ND Capital at (800) 276-1262 to request a free copy of
these materials or for other Fund information.
Information about the Fund (including the SAI) can be reviewed and copied at
the Commission's Public Reference Room in Washington D.C. Information on the
operation of the Public Reference Room may be obtained by calling the
Commission at 202-942-8090. Reports and other information about the Fund are
also available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov. Copies of this information may be obtained, after
paying a duplicating fee by electronic request at the following E-mail
address: [email protected], or by writing the Commission's Public Reference
Section, Washington D.C. 20549-0102.
Integrity Mutual Funds
1 North Main
Minot, North Dakota 58703
(800) 276-1262
File No. 811-9023
PART B
STATEMENT OF ADDITIONAL INFORMATION
_ ___________, 2000
Integrity Small-Cap Fund of Funds, Inc.
1 NORTH MAIN
MINOT, NORTH DAKOTA 58703
(701) 852-5292
(800) 601-5593 / TRANSFER AGENT
(800) 276-1262 / MARKETING
This Statement of Additional Information is not a prospectus.
It should be read in conjunction with the Prospectus of the Integrity Small-
Cap Fund of Funds, Inc. (the "Fund"), dated ___________, 2000. The Prospectus
may be obtained without charge from the Fund by writing to the above address or
calling (800) 276-1262.
TABLE OF CONTENTS
SECTION HEADING PAGE
Investments.............................................................1
Stock Index Futures Contracts and Options on Stock Index Futures
Contracts............................................................2
Temporary Investments...................................................3
Investment Policies and Practices of Underlying Funds...................4
Investment Restrictions of the Fund....................................11
Management of the Fund.................................................13
Control Persons and Principal Holders of Securities....................13
Investment Advisory and Other Services.................................13
Distribution and Service Plan..........................................15
Expenses...............................................................16
Portfolio Transactions.................................................18
Purchase and Redemption of Shares......................................19
Retirement Plans.......................................................21
Individual Retirement accounts (IRAs) .................................22
Defined Contribution Plan..............................................22
Other Deferral Plans...................................................23
Monthomatic Investment Plan............................................23
Exchange Privilege.....................................................23
Minimum Investment.....................................................23
Redemptions............................................................24
Contingent Deferred Sales Charges......................................24
Systematic Withdrawal Plan.............................................25
Underwriter............................................................26
Dividends and Taxes....................................................27
Calculation of Performance Data........................................30
Organization and Share Attributes......................................31
Shareholder Meetings...................................................32
Financial Statements...................................................33
-ii-
INVESTMENTS
INVESTMENT COMPANIES
The Fund seeks to achieve its objective by investing primarily in a
diversified group of other open-end investment companies ("underlying funds")
which, in turn, invest principally in equity securities. The Fund seeks to
invest, under normal circumstances, in approximately fifteen to fifty
underlying funds which invest primarily in common stock and which seek long-
term capital appreciation and growth of income, with current income of
secondary importance. The underlying funds may also invest in securities
convertible into or exchangeable for common stock (such as convertible
preferred stock, convertible debentures or warrants). For temporary defensive
purposes, the underlying funds may also invest in (or enter into repurchase
agreements with banks and broker-dealers with respect to) corporate bonds,
U.S. Government securities, commercial paper, certificates of deposit or
other money market instruments.
The Fund may also invest in underlying funds which invest primarily in
long- or short-term bonds and other fixed income securities (such as
securities issued, guaranteed or insured by the U.S. Government, its agencies
and instrumentalities, commercial paper, preferred stock, convertible preferred
stock or convertible debentures) whenever ND Money Management, Inc. (the
"Investment Adviser" or "ND Management"), thinks that such funds offer a
potential for capital appreciation. The underlying fund may invest in both
investment-grade and non-investment grade bonds.
The Investment Adviser exercises broad discretion in choosing which
underlying funds to include in the Fund's portfolio. The Fund, however,
will not purchase shares of closed-end investment companies or of investment
companies which are not registered with the Securities and Exchange
Commission. In addition, the Fund intends to invest only in underlying
funds which qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended. If a fund fails to
qualify as a RIC, it may be subject to federal income tax. No assurance
can be given that an underlying fund will qualify as a RIC. However, the
Fund will promptly dispose of any shares in its portfolio which have been
issued by a fund which failed to qualify as a RIC. Under normal
circumstances, the Fund will invest in approximately fifteen to fifty
underlying funds. The Fund may invest up to 25% of its total assets in any
one underlying fund.
The Fund may acquire shares of underlying funds irrespective of whether
such funds impose sales loads of various kinds or have 12b-1 or other
distribution plans or expenses. However, whenever possible, the Fund will
purchase shares pursuant to arrangements which provide for (1) quantity
discounts under which lower front-end loads are available for substantial
minimum purchases; (2) letters of intent, permitting reduced front-end loads
by aggregating intended purchases over time; (3) rights of accumulation,
permitting reduced front-end loads for purchases of additional shares of
the underlying fund; and (4) rights to obtain reduced front-end sales loads
by aggregating purchases of several funds within a family of funds.
Rules adopted by the Securities and Exchange Commission allow funds to
elect to make redemptions either in part or wholly in securities from their
portfolios ("in kind" redemptions) instead of in cash under certain
circumstances. If the Fund acquires in kind securities from an underlying
fund which has exercised such an election, the Fund may hold the securities
until the Investment Adviser decides to sell them. The Fund will likely
incur additional expenses in connection with the sale of any securities
acquired as a result of an in kind redemption.
In addition to the foregoing, the Investment Company Act of 1940 (the "1940
Act") imposes certain conditions on funds which invest in other funds. For
example, a fund and its affiliated persons may not purchase or otherwise
acquire more than 3% of the total outstanding shares of another fund.
Consequently, the Fund may have to forego what the Investment Adviser deems
to be an advantageous purchase because of this restriction. The 1940 Act
also provides that an underlying fund is not obligated to redeem any
securities in an amount exceeding 1% of its total outstanding securities
during any period of less than 30 days. As a result of this provision, the
Investment Adviser may be unable to liquidate more than 1% of an underlying
fund's securities should market or other considerations indicate the
advisability of doing so. Finally, the 1940 Act requires that the Fund either
seek instructions from its shareholders regarding the voting of proxies with
respect to securities of underlying funds it holds and vote the proxies in
accordance with such instructions or vote such shares in the same proportion
as the vote of all other holders of such securities. The Fund will vote the
shares in the same proportion as the vote of all other shareholders.
STOCK INDEX FUTURES CONTRACTS AND
OPTIONS ON STOCK INDEX FUTURES CONTRACTS
The Fund may purchase and sell stock index futures contracts and options
on such futures in accordance with its investment objective and policies for
hedging purposes and not for speculation. For a description of these
securities and the risks associated with them, see Investment Policies and
Practices of the Underlying Funds-Futures Contracts, Options on Futures
Contracts, Option Activities, and Hedging.
To the extent required to comply with Securities and Exchange Commission
Release No. 10666, when purchasing a futures contract, writing a put option,
or entering into a delayed delivery purchase, the Fund will maintain in a
segregated account with its custodian, cash or liquid high-grade debt
securities equal to the value of such contracts. The amount held by the
custodian is less than the amount held by any futures commission agent as
initial margin and will be marked to market daily.
To the extent required to comply with Commodity Futures Trading Commission
("CFTC") Regulation 4.5 to avoid "commodity pool operator" status, the Fund
will use futures and options positions only (a) for "bona fide hedging
purposes" (as defined in CFTC regulations) or (b) for other purposes so long
as aggregate initial margins and premiums required in connection with non-
hedging positions do not exceed 5% of the liquidation value of the investment
company's portfolio. The Fund will not engage in transactions in financial
futures contracts or options thereon for speculation, but only to attempt to
hedge against changes in market conditions affecting the values of securities
which the Fund holds or intends to purchase.
-2-
TEMPORARY INVESTMENTS
Although the Fund invests primarily in shares of underlying funds, for
temporary defensive purposes or to accumulate cash for investments or
redemptions, the Fund may hold cash or invest in money market mutual funds or
in a variety of short-term debt securities, including U.S. Treasury Bills and
other U.S. Government securities, commercial paper, certificates of deposit and
bankers' acceptances. When the Fund invests for temporary defensive purposes,
it may do so without any percentage limitations. The following information
supplements that in the Prospectus under "Risk Management - Temporary
Investment Strategies" and "Other Fund Policies."
U.S. GOVERNMENT SECURITIES
The Fund may invest in obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities which have remaining maturities not
exceeding one year. Agencies and instrumentalities which issue or guarantee
debt securities and which have been established or sponsored by the U.S.
Government include the Bank for Cooperatives, the Export-Import Bank, the
Federal Farm Credit System, the Federal Home Loan Banks, the Federal Home Loan
Mortgage Corporation, the Federal Intermediate Credit Banks, the Federal Land
Banks, the Federal National Mortgage Association and the Student Loan Marketing
Association.
BANK OBLIGATIONS
The Fund may invest in obligations of U.S. banks (including certificates of
deposit and bankers' acceptances) having total assets at the time of purchase
in excess of $100 million. Such banks must be members of the Federal Deposit
Insurance Corporation.
A certificate of deposit is an interest-bearing negotiable certificate
issued by a bank against funds deposited in the bank. A bankers' acceptance
is a short-term draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction. Although the
borrower is liable for payment of the draft, the bank unconditionally
guarantees to pay the draft at its face value on the maturity date.
COMMERCIAL PAPER
Commercial paper represents short-term unsecured promissory notes
issued in bearer form by bank holding companies, corporations and finance
companies. The commercial paper purchased by the Fund consists of direct
obligations of domestic issuers which, at the time of investment, are (i)
rated "P-1" by Moody's Investors Service, Inc. ("Moody's"), or "A-1" or
better by Standard & Poor's Corporation ("Standard & Poor's"), (ii) issued
or guaranteed as to principal and interest by issuers or guarantors having
an existing debt security rating of "Aa" or better by Moody's or "AA" or
better by Standard & Poor's, or (iii) securities which, if not rated, are,
in the opinion of the Fund's Investment Adviser, of an investment quality
comparable to rated commercial paper in which the Fund may invest.
The rating "P-1" is the highest commercial paper rating assigned by
Moody's, and the ratings "A-1" and "A-1+" are the highest commercial paper
ratings assigned by Standard & Poor's. Debt rated "Aa" or better by Moody's
or "AA" or better by Standard & Poor's is generally regarded as high-grade,
and such ratings indicate that the ability to pay principal and interest is
very strong.
-3-
INVESTMENT POLICIES AND PRACTICES OF UNDERLYING FUNDS
The underlying funds have their own investment objectives, policies,
practices and techniques, any one or all of which may subject their assets to
varying degrees of risk. For example, the underlying funds in which the fund
invests may be authorized to invest up to 100% of their assets in securities
of foreign issuers and engage in foreign currency transactions with respect to
these investments; invest up to 15% of their assets in illiquid securities;
invest in warrants; lend their portfolio securities; sell securities short;
borrow money in amounts up to 33-1/3% of their assets for leverage purposes;
write or purchase call or put options on securities or financial indexes;
invest up to 100% of their assets in master demand notes; enter into futures
contracts and options on futures contracts; trade their portfolio
aggressively, which results in higher brokerage commissions and increased
realization of capital gains; invest in start-up and unproven companies;
invest in junk bonds; and engage in any number of other investment practices
and techniques that involve greater risks. The risks involved in certain of
these practices and techniques are described below.
CONVERTIBLE SECURITIES
Certain preferred stocks and debt securities that may be held by an
underlying fund have conversion features allowing the holder to convert
securities into another specified security (usually common stock) of the
same issuer at a specified conversion ratio (e.g., two shares of preferred
for one share of common stock) at some specified future date or period. The
market value of convertible securities generally includes a premium that
reflects the conversion right. That premium may be negligible or substantial.
To the extent that any preferred stock or debt security remains unconverted
after the expiration of the conversion period, the market value will fall to
the extent represented by that premium.
FOREIGN INVESTMENTS
The Fund may invest in certain underlying funds which invest all or a
portion of their assets in foreign securities. Investing in securities of
non-U.S. companies, which are generally denominated in foreign currencies,
and utilization of forward foreign currency exchange contracts and other
currency hedging techniques involve certain considerations comprising both
opportunity and risk not typically associated with investing in U.S. dollar-
denominated securities. Risks unique to international investing include:
(1) restrictions on foreign investment and on repatriation of capital; (2)
fluctuations in currency exchange rates; (3) costs of converting foreign
currency into U.S. dollars; (4) price volatility and less liquidity; (5)
settlement practices, including delays, which may differ from those customary
in U.S. markets; (6) exposure to political and economic risks, including the
risk of nationalization, expropriation of assets and war; (7) possible
imposition of foreign taxes and exchange control and currency restrictions;
(8) lack of uniform accounting, auditing, and financial reporting standards;
(9) less governmental supervision of securities markets, brokers and issuers
of securities; (10) less financial information available to investors; (11)
difficulty in enforcing legal rights outside the U.S.; and (12) higher costs,
including custodial fees. These risks are often heightened for investments
in emerging or developing countries.
-4-
FOREIGN CURRENCY TRANSACTIONS
Foreign securities in which the underlying funds invest are subject to
currency risk, i.e., the risk that the U.S. dollar value of these securities
may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations. To manage this risk and
facilitate the purchase and sale of foreign securities, these underlying funds
may engage in foreign currency transactions involving the purchase and sale of
forward foreign currency exchange contracts. Although foreign currency
transactions will be used primarily to protect the underlying funds from
adverse currency movements, they also involve the risk that anticipated
currency movements will not be accurately predicted and the underlying funds'
total return could be adversely affected.
FUTURES CONTRACTS
An underlying fund may enter into futures contracts for the purchase or sale
of debt securities and financial indexes. A futures contract is an agreement
between two parties to buy and sell a security or an index for a set price
on a future date. Futures contracts are traded on designated "contract
markets" which, through their clearing corporations, guarantee performance of
the contracts.
Generally, if market interest rates increase, the value of outstanding
debt securities declines (and vice versa). Entering into a futures contract
for the sale of securities has an effect similar to the actual sale of
securities, although sale of the futures contract might be accomplished more
easily and quickly. For example, if a fund holds long-term U.S. Government
securities and it anticipates a rise in long-term interest rates, it could,
in lieu of disposing of its portfolio securities, enter into futures contracts
for the sale of similar long-term securities. If rates increased and the
value of the fund's portfolio securities declined, the value of the fund's
futures contracts would increase, thereby protecting the fund by preventing
the net asset value from declining as much as it otherwise would have.
Similarly, entering into futures contracts for the purchase of securities
has an effect similar to the actual purchase of the underlying securities
but permits the continued holding of securities other than the underlying
securities. For example, if the fund expects long-term interest rates to
decline, it might enter into futures contracts for the purchase of long-term
securities so that it could gain rapid market exposure that may offset
anticipated increases in the cost of securities it intends to purchase while
continuing to hold higher-yield short-term securities or waiting for the long-
term market to stabilize.
A financial index futures contract may be used to hedge an underlying
fund's portfolio with regard to market risk as distinguished from risk
relating to a specific security. A financial index futures contract does not
require the physical delivery of securities but merely provides for profits
and losses resulting from changes in the market value of the contract to be
credited or debited at the close of each trading day to the respective
accounts of the parties to the contract. On the contract's expiration date,
a final cash settlement occurs. Changes in the market value of a particular
financial index futures contract reflect changes in the specified index of
securities on which the futures contract is based.
-5-
There are several risks in connection with the use of futures contracts.
In the event of an imperfect correlation between the futures contract and the
portfolio position which is intended to be protected, the desired protection
may not be obtained, and the fund may be exposed to risk of loss. Further,
unanticipated changes in interest rates or stock price movements may result
in a poorer overall performance for the fund than if it had not entered into
the futures contracts.
In addition, the market prices of futures contracts may be affected by
certain factors. First, all participants in the futures market are subject
to margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between
the securities and futures markets. Second, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions.
Finally, positions in futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market for such futures.
There is no assurance that a liquid secondary market on an exchange or board
of trade will exist for any particular contract or at any particular time.
OPTIONS ON FUTURES CONTRACTS
A fund also may purchase and sell listed put and call options on futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is
a put) at a specified exercise price at any time during the option period.
When an option on a futures contract is exercised, delivery of the futures
position is accompanied by cash representing the difference between the
current market price of the futures contract and the exercise price of the
option. The fund may purchase put options on futures contracts in lieu of,
and for the same purpose as, a sale of a futures contract. It also may
purchase such put options in order to hedge a long position in the underlying
futures contract in the same manner as it purchases "protective puts" on
securities.
As with options on securities, the holder of an option may terminate a
position by selling an option of the same series. There is no guarantee
that such closing transactions can be effected. The fund is required to
deposit initial margin and maintenance margin with respect to put and call
options on futures contracts written by it pursuant to brokers' requirements
similar to those applicable to futures contracts described above, and, in
addition, net option premiums received will be included as initial margin
deposits.
-6-
In addition to the risks which apply to all options transactions
(discussed below under "OPTIONS ACTIVITIES"), there are several special risks
relating to options on futures contracts. The ability to establish and
close out positions on such options will be subject to the development and
maintenance of a liquid secondary market. It is not certain that this
market will develop. Compared to the use of futures contracts, the purchase
of options on futures contracts involves less potential risk to the fund,
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the use of an
option on a futures contract would result in a loss to the fund when the use
of a futures contract would not, such as when there is no movement in the
prices of the underlying securities. Writing an option on a futures contract
involves risks similar to those arising in the sale of futures contracts as
described above.
OPTIONS ACTIVITIES
An underlying fund may write (i.e., sell) and purchase put and call
options on securities and securities indexes.
A put option on a security gives the purchaser of the option the right
(but not the obligation) to sell, and the writer of the option the obligation
to buy, the underlying security at a stated price (the "exercise price")
at any time before the option expires. A call option on a security gives
the purchaser the right (but not the obligation) to buy, and the writer
the obligation to sell, the underlying security at the exercise price at
any time before the option expires. The purchase price for a put or call
option is the "premium" paid by the purchaser for the right to sell or buy.
Options on indexes are similar to options on securities except that,
rather than the right to take or make delivery of a specific security at a
stated price, an option on an index gives the holder the right to receive,
upon exercise of the option, a defined amount of cash if the closing value of
the index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the option.
Writing Options. The principal reason for writing call or put options is to
obtain, through the receipt of premiums, a greater current return than would
be realized on the underlying securities alone. By writing a call option, a
fund becomes obligated during the term of the option to deliver the securities
underlying the option upon payment of the exercise price if the option is
exercised. By writing a put option, a fund becomes obligated during the term
of the option to purchase the securities underlying the option at the exercise
price if the option is exercised. Options on securities indexes are settled
in cash based on the values of the securities in the underlying index rather
than by delivery of the underlying securities.
Underlying funds receive premiums from writing call or put options, which
they retain whether or not the options are exercised. If a call option
written by a fund is exercised, the fund will forgo any gain from an
increase in the market price of the underlying security over the exercise
price. If a put option written by a fund is exercised, the fund will be
obligated to purchase the underlying security for more than its current market
price.
-7-
Purchasing Options. Underlying funds generally will purchase put options
in order to protect portfolio holdings against a substantial decline in the
market value of such holdings. Such protection is provided during the life
of a put because a fund may sell the underlying security at the put exercise
price, regardless of a decline in the underlying security's market price.
Underlying funds generally will purchase call options for the purpose of
hedging against an increase in prices of securities that the funds ultimately
want to buy. Such protection is provided during the life of the call option
because the fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. An
underlying fund's loss exposure in purchasing an option is limited to the
sum of the premium paid and the commission or other transaction expenses
associated with acquiring the option.
A fund's option positions may be closed out only on an exchange
which provides a secondary market for options of the same series, but
there can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options
on certain securities (such as U.S. Government securities) is relatively
new so that it is impossible to predict to what extent liquid markets will
develop or continue.
HEDGING
An underlying fund may employ many of the investment techniques described
herein not only for investment purposes, but also for hedging purposes.
For example, an underlying fund may purchase or sell put and call options
on common stocks to hedge against movements in individual common stock prices
or purchase and sell stock index futures and related options to hedge against
marketwide movements in common stock prices. Although such hedging techniques
generally tend to minimize the risk of loss that is hedged against, they also
may limit commensurately the potential gain that might have resulted had the
hedging transaction not occurred. Also, the desired protection generally
resulting from hedging transactions may not always be achieved.
JUNK BONDS
Bonds which are rated BB and below by Standard and Poor's and Ba and below
by Moody's (See APPENDIX-DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS for a
more detailed explanation of bond ratings) are commonly known as "junk bonds."
Investing in junk bonds involves special risks in addition to the risks
associated with investments in higher rated debt securities. Junk bonds
may be regarded as predominately speculative with respect to the issuer's
continuing ability to meet principal and interest payments.
Junk bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade securities. The prices
of junk bonds have been found to be less sensitive to interest rate changes
than more highly rated investments but more sensitive to adverse economic
downturns or individual corporate developments. A projection of an economic
downturn or of a period of rising interest rates, for example, could cause a
decline in junk bond prices, because the advent of a recession could lessen
the ability of a highly leveraged company to make principal and interest
payments on its debt securities. If the issuer of junk bonds defaults, a fund
may incur additional expenses to seek recovery. In the case of junk bonds
structured as zero coupon or payment-in-kind securities, the market prices of
such securities are affected to a greater extent by interest rate changes and,
therefore, tend to be more volatile than securities which pay interest
periodically and in cash.
-8-
The secondary markets on which junk bonds are traded may be less liquid
than the market for higher grade securities. Less liquidity in the secondary
trading markets could adversely affect and cause large fluctuations in the
daily net asset value of a fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of junk bonds, especially in a thinly traded market.
There may be special tax considerations associated with investing in junk
bonds structured as zero coupon or payment-in-kind securities. A fund
records the interest on these securities as income even though it receives no
cash interest until the security's maturity or payment date. A fund will be
required to distribute all or substantially all such amounts annually and may
have to obtain the cash to do so by selling securities which otherwise would
continue to be held. Shareholders will be taxed on these distributions.
The use of credit ratings as the sole method of evaluating junk bonds can
involve certain risks. For example, credit ratings evaluate the safety of p
rincipal and interest payments, not the market value risk of junk bonds.
Also, credit rating agencies may fail to change credit ratings in a timely
fashion to reflect events since the security was last rated.
ILLIQUID SECURITIES
An underlying fund may invest up to 15% of its net assets in securities
for which there is no readily available market ("illiquid securities")
including repurchase agreements having more than seven days to maturity. A
considerable period of time may elapse between an underlying fund's decision
to dispose of such securities and the time when the fund is able to dispose
of them, during which time the value of the securities (and therefore the
value of the underlying fund's shares held by the Fund) could decline.
INDUSTRY CONCENTRATION
An underlying fund may concentrate its investments within one industry.
Accordingly, such fund bears the investment risk from economic, political
or regulatory changes that could adversely affect issuers in that industry
and therefore the value of such underlying fund's investment portfolio.
LEVERAGE THROUGH BORROWING
An underlying fund may borrow up to 33-1/3% of the value of its total
assets on an unsecured basis from banks to increase its holdings of portfolio
securities. Under the 1940 Act, a fund is required to maintain continuous
asset coverage of 300% with respect to such borrowings and to sell (within
three days) sufficient portfolio holdings to restore such coverage if it
should decline to less than 300% due to market fluctuations or otherwise, even
if disadvantageous from an investment standpoint. Leveraging will exaggerate
the effect of any increase or decrease in the value of portfolio securities on
a fund's net asset value, and money borrowed will be subject to interest costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances) which may or may not exceed the interest or dividends
received from, or appreciation of, the securities purchased with borrowed
funds.
-9-
LOANS OF PORTFOLIO SECURITIES
An underlying fund may lend its portfolio securities provided that: (1) the
loan is secured continuously by collateral maintained on a daily mark-to-
market basis in an amount at least equal to the current market value of the
securities loaned; (2) the fund may at any time call the loan and obtain the
return of the securities loaned; (3) the fund will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value
of securities loaned will not at any time exceed one-third of the total assets
of the fund. Loans of securities involve a risk that the borrower may fail to
return the securities or may fail to provide additional collateral.
MASTER DEMAND NOTES
Although the Fund itself will not do so, underlying funds (particularly
money market mutual funds) may invest up to 100% of their assets in master
demand notes. Master demand notes are unsecured obligations of U.S.
corporations redeemable upon notice that permit investment by a fund of
fluctuating amounts at varying rates of interest pursuant to direct
arrangements between the fund and the issuing corporation. Because they are
direct arrangements between the fund and the issuing corporation, there is no
secondary market for the notes. However, they are redeemable at face value
plus accrued interest at any time.
REPURCHASE AGREEMENTS
Underlying funds, particularly money market funds, may enter into
repurchase agreements with banks and broker-dealers under which they acquire
securities subject to an agreement with the seller to repurchase the
securities at an agreed upon time and price. These agreements are considered
under the 1940 Act to be loans by the purchaser collateralized by the
underlying securities. If the seller should default on its obligation to
repurchase the securities, the underlying fund may experience delay or
difficulties in exercising its rights to realize upon the securities held as
collateral and might incur a loss if the value of the securities should decline.
SHORT SALES
An underlying fund may sell securities short. In a short sale, a fund
sells stock which it does not own, making delivery with securities "borrowed"
from a broker. The fund is then obligated to replace the security borrowed
by purchasing it at the market price at the time of replacement. This price
may or may not be less than the price at which the security was sold by the
fund. Until the security is replaced, the fund is required to pay to the
lender any dividends or interest which accrue during the period of the loan.
In order to borrow the security, the fund may also have to pay a premium which
would increase the cost of the security sold. The proceeds of the short sale
will be retained by the broker to the extent necessary to meet margin
requirements until the short position is closed out.
-10-
The fund also must deposit in a segregated account an amount of cash or
liquid securities equal to the difference between (a) the market value of the
securities sold short at the time they were sold short and (b) the value of
the collateral deposited with the broker in connection with the short sale
(not including the proceeds from the short sale). While the short position
is open, the fund must maintain daily the segregated account at such a level
that (1) the amount deposited in it plus the amount deposited with the broker
as collateral equals the current market value of the securities sold short and
(2) the amount deposited in it plus the amount deposited with the broker as
collateral is not less than the market value of the securities at the time
they were sold short. Depending upon market conditions, up to 80% of the
value of a fund's net assets may be deposited as collateral for the obligation
to replace securities borrowed to effect short sales and allocated to a
segregated account in connection with short sales.
The fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on
which the fund replaces the borrowed security. The fund will realize a gain
if the security declines in price between those dates. The amount of any gain
will be decreased and the amount of any loss increased by the amount of any
premium, dividends, or interest the fund may be required to pay in connection
with a short sale.
A short sale is "against the box" if at all times when the short position
is open the fund owns an equal amount of the securities or securities
convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short. Such a transaction
serves to defer a gain or loss for federal income tax purposes.
WARRANTS
An underlying fund may invest in warrants, which are options to purchase
equity securities at specific prices valid for a specific period of time.
The prices do not necessarily move parallel to the prices of the underlying
securities. Warrants have no voting rights, receive no dividends, and have
no rights with respect to the assets of the issuer. If a warrant is not
exercised within the specified time period, it will become worthless and the
fund will lose the purchase price and the right to purchase the underlying
security.
INVESTMENT RESTRICTIONS OF THE FUND
The Fund has adopted certain fundamental investment restrictions which,
together with the Fund's investment objective, cannot be changed without
approval by holders of a majority of its outstanding voting shares. As
defined in the 1940 Act, this means the lesser of the vote of (a) 67% or
more of the outstanding shares of the Fund present at a meeting where more
than 50% of the outstanding shares are present in person or by proxy; or (b)
more than 50% of the outstanding shares of the Fund. The Fund may not:
-11-
(1) Purchase securities of any one issuer if as a result more than 5%
of the Fund's total assets would be invested in such issuer or the Fund would
own or hold more than 10% of the outstanding voting securities of that issuer;
provided, however, that up to 25% of the Fund's total assets may be invested
without regard to this limitation and provided further that this limitation
does not apply to securities issued by the U.S. Government, its agencies or
instrumentalities, nor to securities issued by other open-end investment
companies.
(2) Make loans, except in accordance with its investment objective
and policies.
(3) Purchase or sell commodities or commodity contracts, except that
the Fund may purchase and sell stock index futures contracts and options
thereon for hedging purposes.
(4) Underwrite securities issued by others, except to the extent that
the Fund may be deemed to be an underwriter under the federal securities laws
in connection with the purchase and disposition of portfolio securities.
(5) Issue senior securities as defined in the 1940 Act, except as
appropriate to evidence indebtedness which the Fund is permitted to incur,
provided that the Fund's use of stock index futures contracts and options
thereon will not be deemed to constitute senior securities for this purpose.
(6) Borrow money except from a bank and then only for temporary or
emergency purposes and in amounts not exceeding the lesser of 10% of its total
assets valued at cost or 5% of its total assets valued at market, and, in any
event, only if immediately thereafter there is an asset coverage of at least
300%. The Fund will not purchase portfolio securities when outstanding
borrowings exceed 5% of the total assets. The Fund may mortgage, pledge, or
hypothecate its assets in an amount not exceeding 10% of its total assets to
secure temporary or emergency borrowing.
(7) Invest in real estate or real estate mortgage loans, although it
may invest in securities which are secured by real estate and securities of
issuers which invest or deal in real estate.
In addition to the foregoing, under its fundamental investment policies,
the Fund will invest at least 25% of its total assets in shares of underlying
funds. The Fund may not invest more than 25% of its total assets in the
securities of companies in the same industry or in securities of underlying
funds which concentrate (i.e., invest 25% or more of total assets) in any one
industry. Nevertheless, through its investment in underlying funds, the Fund
may invest more than 25% of its assets in one industry.
-12-
The following investment restrictions are nonfundamental and may be changed
by the vote of the Fund's Board of Directors without shareholder approval.
The Fund may not:
(1) Purchase or retain the securities of any issuer if any of its
officers or directors or if the Investment Adviser owns beneficially more
than 1/2 of 1% of the securities of such issuer and together own more than
5% of the securities of such issuer.
(2) Invest more than 15% of its net assets in illiquid securities,
including securities which at the time of such investment are not readily
marketable and securities restricted as to disposition under the federal
securities laws.
(3) Invest for the purpose of exercising control or management of
another issuer.
(4) Make short sales of securities.
(5) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in securities of issuers which
invest in or sponsor such programs.
With the exception of the Fund's policy with respect to borrowing, any
policy or restriction which involves a maximum percentage of securities or
assets will not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition of
securities or assets of, or borrowing by, the Fund. Changes due to market
action will not cause a violation of a policy or restriction.
MANAGEMENT OF THE FUND
The management of the Fund, including general supervision of the duties
performed for the Fund under the Investment Advisory Agreement, is the
responsibility of the Board of Directors. The number of directors of the
Fund is five, two of whom are "interested persons" (as the term "interested
persons" is defined in the Investment Company Act of 1940) and three of whom
are "disinterested persons." The names and business addresses of the directors
and officers of the Fund and their principal occupations and other
affiliations during the past five years are set forth below, with the
directors who are "interested persons" of the Fund indicated by an asterisk.
-13-
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION(S) HELD WITH EACH FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS1
<S> <C> <C> <C>
Lynn W. Aas2 78 Director Retired; Attorney; Director, Integrity
904 NW 27th Fund of Funds, Inc., ND Tax-Free
Minot, North Dakota 58701 Fund, Inc., Montana Tax-Free Fund, Inc.,
South Dakota Tax-Free Fund, Inc., and ND
Insured Income Fund, Inc. (December 1994
to August 1999); Trustee, Ranson Managed
Portfolios; Director, First Western Bank &
Trust
Orlin W. Backes3 64 Director Attorney, McGee, Hankla, Backes & Wheeler,
15 2nd Ave. SW, Suite 305 P.C.; Director, ND Insured Income
Minot, North Dakota 58701 Fund, Inc. (March 1995 to August 1999), ND
Tax-Free Fund, Inc., Montana Tax-Free
Fund, Inc., South Dakota Tax-Free Fund,
Inc. and Integrity Fund of Funds, Inc.;
Trustee, Ranson Managed Portfolios;
Director, First Western Bank & Trust
R. James Maxson4 52 Director Attorney, McGee, Hankla, Backes & Wheeler,
15 2nd Ave. SW, Suite 305 P.C. (since April 2000)Attorney, Farhart,
Minot, North Dakota 58701 Lian and Maxson,P.C.( through March
2000); Director, ND Tax-Free Fund,Inc.,
Montana Tax-Free Fund, Inc., South
Dakota Tax-Free Fund, Inc. and Integrity
Fund of Funds, Inc.; Trustee, Ranson
Managed Portfolios
*Peter A. Quist5 66 Director Attorney; Director and Vice President,
1 North Main Vice-President ND Holdings, Inc.; Director, Vice
Minot, North Dakota 58703 Secretary President, and Secretary, ND Money
Management, Inc., ND Capital, Inc., ND
Resources, Inc., ND Insured Income Fund,
Inc. (November 1990 to August 1999),
Integrity Fund of Funds, Inc., ND Tax-Free
Fund, Inc., Montana Tax-Free Fund, Inc.,
South Dakota Tax-Free Fund, Inc., The
Ranson Company , Inc. (January 1996 to
February 1997) and Ranson Capital
Corporation; Vice President and Secretary,
Ranson Managed Portfolios
*Robert E. Walstad6 55 Director Director and President, ND Holdings,
1 North Main President Inc.; Director, President, and Treasurer,
Minot, North Dakota 58703 Treasurer ND Money Management, Inc., ND Capital,
Inc., ND Resources, Inc., ND Insured
Income Fund, Inc. (November 1990 to August
1999), Integrity Fund of Funds, Inc., ND
Tax-Free Fund, Inc., Montana Tax-Free
Fund, Inc., and South Dakota Tax-Free
Fund, Inc.; Trustee, Chairman, President,
and Treasurer, Ranson Managed Portfolios;
Director, President, CEO, and Treasurer,
The Ranson Company, Inc. (January 1996 to
February 1997) and Ranson Capital
Corporation
</TABLE>
[FN]
1 Except as otherwise indicated, each individual has held the office(s)
shown for the past five years. Messrs. Aas, Backes and Walstad were elected
to the Board of Trustees of Ranson Managed Portfolios at a joint special
meeting of the shareholders of The Kansas Municipal Fund Series, The Kansas
Insured Municipal Fund - Limited Maturity (subsequently renamed "The Kansas
Insured Intermediate Fund") Series and The Nebraska Municipal Fund Series of
Ranson Managed Portfolios held on December 11, 1995, but did not assume office
until January 5, 1996.
2 Mr. Aas has served on the Board of Directors of the Fund since its
inception.
3 Mr. Backes was elected to the Board of Directors of ND Tax-Free Fund, Inc.,
Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc. and Integrity
Fund of Funds, Inc. in April 1995. He has served on the Board of Directors of
the Fund since its inception.
4 Mr. R. James Maxson was elected to the board of directors of ND Tax-Free
Fund, Inc., Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc.,
Integrity Fund of Funds, Inc., and the Fund and the Board of Trustees for the
five series of Ranson Managed Portfolios on December 4, 1998, effective
January 1, 1999.
5 Mr. Quist has served on the Board of Directors of the Fund and as an
officer of the Fund since its inception. He was elected to the board of South
Dakota Tax-Free Fund, Inc. on April 7, 1995, and has served as the Vice
President and Secretary of such fund since its inception. Mr. Quist has served
as Director of the Ranson Capital Corporation and held the offices listed in
the chart above for Ranson Capital Corporation and for the Ranson Managed
Portfolios since January 5, 1996.
6 Mr. Walstad has served on the Board of Directors of the Fund and as the
president and treasurer of the Fund since its inception. Mr. Walstad has been
a Director of the Ranson Capital Corporation and a Trustee of Ranson Managed
Portfolios and has held the offices listed in the chart above with Ranson
Capital Corporation and Ranson Managed Portfolios since January 5, 1996.
</FN>
-14-
Directors who are not an "interested person" as that term is defined in the
1940 Act of the Fund are paid an annual fee of $10,000 for serving as director
or trustee, as the case may be, on the boards of the funds in the complex.
In addition to the Fund, the directors are also directors or trustees of eight
open-end investment companies advised by ND Money Management, Inc., or Ranson
Capital Corporation, an affiliate of the Adviser. The annual fee paid to the
directors is allocated among the funds in the complex (including the Fund) as
follows: Each fund (which includes the four series of Ranson Managed
Portfolios), pays a minimum of $500, and the remainder of the fee is allocated
among the funds on the basis of their relative net asset values. Messrs.
Quist and Walstad, who are the only "interested persons" of such funds,
receive no compensation from the funds.
The following table sets forth compensation estimated to be paid by the
Fund to each of the directors of the Fund during the Fund's current fiscal
year ending December 31, 2000 and the total compensation paid to each director
by the fund complex for the one year period ended December 31, 1999.
The Fund has no retirement or pension plans.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------
ESTIMATED*
AGGREGATE TOTAL**
COMPENSATION COMPENSATION FROM THE FUND AND
NAME OF PERSON, POSITION(S) FROM THE FUND FUND COMPLEX PAID TO DIRECTORS
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
Lynn W. Aas
Director $530.00 $10,000.00
Orlin W. Backes
Director $530.00 $10,000.00
R. James Maxson
Director $530.00 $10,000.00
Peter A. Quist
Director,
Vice President and
Secretary -0- -0-
Robert E. Walstad
Director, President
and Treasurer -0- -0-
-------------- -----------
TOTALS $1,590.00 $30,000.00
</TABLE>
[FN]
* Based on estimated compensation to be paid to the directors for the
one-year period ending December 31, 2000 for services to the Fund.
** Based on the compensation paid to the directors for the one-year period
ended December 31, 1999 for services to the eight open-end funds advised by ND
Money Management, Inc. or Ranson Capital Corporation.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of _____________, all of the outstanding shares of the Fund are owned by
ND Capital, Inc. ("ND Capital" or the "Underwriter"), the Fund's principal
underwriter. The Underwriter will be able to control the Fund until others
purchase a number of shares sufficient to constitute a majority of the Fund's
outstanding shares. It is expected that as a result of the public offering,
the percentage of the Fund's shares owned by the Underwriter will decrease to
less than 5%.
-15-
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER
ND Management has been retained by the Fund under an Investment Advisory
Agreement to act as the Fund's investment adviser, subject to the authority
of the Board of Directors. The Investment Adviser is a wholly-owned
subsidiary of ND Holdings, Inc. ("ND Holdings"), a venture capital corporation
organized under the laws of the State of North Dakota on September 22, 1987.
The Investment Adviser was incorporated under North Dakota law on August 19,
1988, and also serves as investment adviser for ND Tax-Free Fund, Inc.,
Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund, Inc. and Integrity
Fund of Funds, Inc. The address of the Investment Adviser is 1 North Main,
Minot, North Dakota 58703.
The Investment Adviser furnishes the Fund with investment advice and, in
general, supervises the management and investment program of the Fund. The
Investment Adviser furnishes, at its own expenses, all necessary
administrative services, office space, equipment, and clerical personnel for
servicing the investments of the Fund and investment advisory facilities and
executive and supervisory personnel for managing the investments and effecting
the portfolio transactions of the Fund. In addition, the Investment Adviser
pays the salaries and fees of all officers and directors of the Fund who are
affiliated persons of the Investment Adviser. All other charges and expenses,
as more fully described under "Expenses," are paid by the Fund.
For the management services and facilities furnished by ND Management, the
Fund has agreed to pay the Investment Adviser an annual management fee,
payable monthly, of 0.90% of the Fund's average daily net assets. In addition,
the Investment Adviser voluntarily agreed to waive all or a portion of its
management fee or reimburse certain expenses of the Fund for the year ended
April 30, 2001 in order to prevent total operating expenses, excluding
extraordinary expenses, from exceeding 1.60% of the average daily net asset
value of the shares of the Fund.
The Investment Advisory Agreement with the Fund provides that the Investment
Adviser will not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the matters to which the
Investment Advisory Agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Investment
Adviser in the performance of its duties or by reason of reckless disregard
of its obligations and duties under the Investment Advisory Agreement.
The Investment Advisory Agreement continues in effect until September 15,
2000 and from year to year thereafter as long as its continuation is approved
at least annually by a majority of the directors who are not parties to the
Investment Advisory Agreement or interested persons of any such party except
in their capacity as directors of the Fund and by the shareholders or the
Board of Directors. The Investment Advisory Agreement may be terminated at
any time upon 60 days' written notice by the Fund or by a majority vote of
the outstanding shares or 90 days' written notice by the Investment Adviser
and will terminate automatically upon assignment.
-16-
Robert E. Walstad and Peter A. Quist, directors and officers of the Fund,
are also directors and officers of the Investment Adviser as indicated under
"Management of the Funds."
The Investment Adviser and the Fund's Underwriter are subsidiaries of
ND Holdings. Robert E. Walstad and Peter A. Quist, directors and president
and vice president, respectively, of Holdings, are also directors and
officers of the Fund, the Investment Adviser and the Underwriter. See
"Management of the Funds." Messrs. Walstad and Quist are also
shareholders of Holdings.
CODE OF ETHICS
You should also note that the Investment Adviser, the Fund's Underwriter,
and the Fund have adopted a code of ethics under Rule 17j-1 of the 1940 Act.
Such code of ethics permit personnel subject to the code to invest in
securities.
CUSTODIAN AND TRANSFER AGENT
First Western Bank & Trust, 900 South Broadway, Minot, North Dakota 58701,
serves as custodian for the Fund's portfolio securities and cash. Similar to
the Fund's Investment Adviser and Underwriter, ND Resources, Inc. ("ND
Resources" or "Transfer Agent") is a wholly-owned subsidiary of ND Holdings
located at 1 North Main, Minot, North Dakota 58703 and is the Fund's Transfer
Agent. As Transfer Agent, ND Resources performs many of the Fund's clerical
and administrative functions, including providing dividend and distribution
functions, administrative agent functions in connection with the issuance,
transfer, redemption or repurchase of shares, certain shareholder services,
and recordkeeping functions. For its services, the Fund pays ND Resources a
monthly fee ranging from .16 of 1% of the net asset value of all the Fund's
outstanding shares up to $10 million down to .09 of 1% for net assets in
excess of $50 million. ND Resources also provides internal accounting and
related services for the Fund, for which it is paid a monthly fee of $2,000
plus 0.05% of the Fund's average daily net assets on an annual basis for the
first $50 million down to 0.01% for the net assets in excess of $500 million.
ACCOUNTANTS AND REPORTS TO SHAREHOLDERS
The Fund's independent public accountant, Brady, Martz & Associates, P.C.,
24 West Central Avenue, Minot, North Dakota 58701, audits and reports on the
Fund's annual financial statements, reviews certain regulatory reports and the
Fund's federal income tax return, and performs other professional accounting,
auditing, tax, and advisory services when engaged to do so by the Fund.
Shareholders will receive annual audited financial statements and semiannual
unaudited financial statements.
-17-
DISTRIBUTION AND SERVICE PLAN
The Fund has adopted a distribution and service plan (the "Plan") pursuant
to Rule 12b-1 under the Investment Company Act of 1940, which provides that
Fund shares will be subject to an annual distribution and service fee. Rule
12b-1 provides that any payments made by the Fund in connection with the
distribution of its shares may be made only pursuant to a written plan
describing all material aspects of the proposed financing of the distribution
and also requires that all agreements with any person relating to the
implementation of a plan must be in writing. The Fund has also entered into
a related Distribution Agreement with ND Capital, Inc.
The 12b-1 fee under the Fund's Plan will be payable to compensate ND
Capital for services performed and expenses incurred in connection with the
distribution of the Fund's shares. These services and expenses include, but
are not limited to the following: sales commissions and other fees paid,
together with related financing costs, to dealers including ND Capital,
who sell Fund shares; making payments to, and the expenses of, persons who
provide support services in connection with the distribution of the Fund's
shares, including, but not limited to, office space and equipment, telephone
facilities, answering routine inquiries regarding the Fund, processing
shareholder transactions, maintaining account records for shareholders who
beneficially own shares, assisting in interpreting confirmations, statements
and other documents, communicating with the Fund's transfer agent and
custodian, assisting in redeeming shares and providing any other shareholder
services not otherwise provided by the Fund's transfer agent and for which
"service fees" lawfully may be paid; costs relating to the formulation and
implementation of marketing and promotional activities including, but not
limited to, direct mail promotions and television, radio, newspaper, magazine
and other mass media advertising; expenses of printing and distributing
prospectuses, statements of additional information and reports of the Fund
to persons other than shareholders of the Fund; expenses of preparing printing
and distributing advertising and sales literature; costs involved in obtaining
whatever information, analyses and reports with respect to marketing and
promotional activities that the Fund may from time to time deem advisable;
and providing training, marketing and support to dealers. The Plan does not
require the Underwriter to perform any specific type or level of distribution
activities or to incur any specific kind of expenses for activities primarily
intended to result in the sale of Fund shares.
The Fund may spend up to .75 of 1% per year of the average daily net assets
of the Fund as a distribution and service fee. The Underwriter may, but is not
obligated to, use a portion of this fee to pay an annual service fee of up to
.25 of 1% per year of the average daily net assets of the Fund to dealers for
providing personal services and/or maintenance of shareholder accounts, as
described above.
The Fund's Plan continues in effect from year to year, provided that each
such continuance is approved at least annually by a vote of the Board of
Directors, including a majority of the directors who are not "interested
persons" of such Fund and have no direct or indirect financial interest in the
operation of the Plan or in any agreements related to the Plan (the "Qualified
Directors"), cast in person at a meeting called for the purpose of voting on
such continuance. The Fund's Plan may be terminated at any time by vote of
majority of the Qualified Directors of the Fund or by vote of a majority of the
outstanding voting securities of the Fund. Any amendment to a Plan to increase
materially the amount the Fund is authorized to pay thereunder would require
approval by a majority of the outstanding voting shares of the Fund. Other
material amendments to the Fund's Plan would be required to be approved by
vote of the Board of Directors, including a majority of the Qualified
Directors, cast in person at a meeting called for that purpose. The Fund's
Plan further provides that as long as the Fund's Plan remains in effect, the
selection and nomination of the Fund's Directors who are not interested
persons of the Fund will be committed to the discretion of the disinterested
Directors then in office. It is expected that payments made under the Plan
will serve to encourage the Underwriter and investment dealers to sell Fund
shares and to provide ongoing services to Fund shareholders.
-18-
The Investment Adviser and the Underwriter are subsidiaries of ND Holdings.
Robert E. Walstad and Peter A. Quist, directors and president and vice
president, respectively, of ND Holdings, are also directors and officers of
the Fund, the Investment Adviser, and the Underwriter. See "Management of
the Fund." Mssrs. Walstad and Quist are also shareholders of ND Holdings and,
accordingly, may indirectly benefit from the payment of 12b-1 fees by the
Fund to the Underwriter.
EXPENSES
The expenses of the Fund are deducted from its respective total income before
dividends are paid. These expenses include, but are not limited to,
organizational expenses; taxes; interest; brokerage fees and commissions, if
any; fees and expenses of directors and officers of the Fund who are not
officers or directors of the Investment Adviser; Securities and Exchange
Commission fees and state securities laws fees; charges of custodians,
transfer and dividend disbursing agents and accounting services agents;
insurance premiums; outside auditing and legal expenses; costs of maintenance
of the Fund's existence; costs attributable to investor services, including,
without limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders; costs of shareholders'
reports and meetings of the shareholders of the Fund and of the officers and
Board of Directors of the Fund; and any extraordinary expenses. In addition,
under a Rule 12b-1 distribution and service plan, the Fund pays an annual
distribution and service fee of 0.75% of the Fund's average daily net assets.
PORTFOLIO TRANSACTIONS
In effecting purchases and sales of the Fund's portfolio securities, the
Investment Adviser and Fund may place orders with and pay brokerage
commissions, if any, to brokers, including brokers affiliated with the
Fund or the Investment Adviser.
Subject to policies established by the Fund's Board of Directors, the
Investment Adviser, is responsible for the execution of the Fund's portfolio
transactions. In executing portfolio transactions and selecting brokers or
dealers, the Investment Adviser will use its best efforts to obtain the best
overall terms available for the Fund. A primary consideration is prompt and
efficient execution of orders in an effective manner at the most favorable
price. With respect to purchases of shares of underlying funds subject to
a front-end sales load at the time of purchase ("load fund shares"), the
Investment Adviser anticipates directing, to the extent possible,
substantially all of the Fund's orders to ND Capital, the Fund's Underwriter.
Where the Underwriter acts as the dealer with respect to purchases of load
fund shares, it retains dealer reallowances on those purchases up to a maximum
of 1% of the public offering price of the shares. The Underwriter is not
designated as the dealer on any sales where such reallowance exceeds 1% of the
public offering price. In the event the Underwriter is unable to execute a
particular transaction, the Investment Adviser will direct such order to
another broker-dealer.
-19-
Where underlying fund shares are purchased through the Underwriter, the
Underwriter may also receive Rule 12b-1 fees (in an amount not to exceed
0.25% of net assets) or service fees from the underlying funds or their
underwriters or sponsors in accordance with the normal arrangements of those
funds. Rule 12b-1 fees and dealer reallowances as described in the preceding
paragraph will be aggregated for determining compliance with Section 17(e)(2)
of the 1940 Act. Any non-Rule 12b-1 service fees the Underwriter receives
from the underlying fund with respect to purchases by the Fund shall not be
retained by the Underwriter but will be paid to the Fund.
The Underwriter may retain brokerage commissions on portfolio transactions
of underlying funds held in the Fund's portfolio, including funds which have
a policy of considering sales of their shares in selecting broker-dealers for
the execution of their portfolio transactions. The payment of brokerage
commissions and Rule 12b-1 fees to the Underwriter on such transactions is
not a factor considered by the Investment Adviser in selecting or retaining
an underlying fund for investment.
Under the 1940 Act, a mutual fund must sell its shares at the price
(including sales load, if any) described in its prospectus, and current
rules under the 1940 Act do not permit negotiations of sales loads. The
Investment Adviser takes into account the amount of the applicable sales
load, if any, when it is considering whether or not to purchase shares of an
underlying fund. The Investment Adviser anticipates investing most of the
assets of the Fund in funds that impose no front-end sales load or impose a
front-end sales load on the Fund of no more than 1% of the public offering
price. The Investment Adviser, to the extent possible, seeks to reduce the
sales load imposed by purchasing shares pursuant to (i) letters of intent,
permitting purchases over time; (ii) rights of accumulation, permitting it
to obtain reduced sales charges as it purchases additional shares of an
underlying fund; and (iii) rights to obtain reduced sales charges by
aggregating its purchases of several funds within a "family" of mutual funds.
The Investment Adviser also takes advantage of exchange or conversion
privileges offered by any "family" of mutual funds.
A factor in the selection of brokers is the receipt of research, analysis,
advice, and similar services. Information thus received will enable the
Investment Adviser to supplement its own research and analysis with the views
and information of other securities firms and may be used for the benefit of
clients of the Investment Adviser other than the Fund. Research services may
include advice as to the value of securities; the advisability of investing
in, purchasing, or selling securities; the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports
concerning issues, industries, securities, economic factors and trends,
portfolio strategy, and performance of accounts; and effecting securities
transactions and performing functions incidental thereto (such as clearance
and settlement). The extent to which commissions reflect an element of
value for research services cannot be presently determined. To the extent
that research services of value are provided by broker-dealers with or
through whom the Investment Adviser places the Fund's portfolio transactions,
the Investment Adviser may be relieved of expenses that it might otherwise
bear. Any research and other services provided by brokers to the Investment
Adviser or the Fund are considered to be in addition to, and not in lieu of,
services required to be performed by the Investment Adviser under the
Investment Advisory Agreement.
-20-
Another important factor in the selection of brokers is the sale of Fund
shares. Where all major factors are equal, the fact that a broker has sold
Fund shares may be considered in placing portfolio transactions.
The Fund expects that purchases and sales of money market instruments will
usually be principal transactions and purchases and sales of other debt
securities may be principal transactions. Thus, the Fund will normally not
pay brokerage commissions in connection with those transactions. The Fund
may pay mark-ups on principal transactions. Money market instruments are
generally purchased directly from the issuer or from an underwriter or market
maker for the securities, and other debt securities may be purchased in a
similar manner. Purchases from underwriters include an underwriting
commission or concession, and purchases from dealers serving as market makers
include the spread between the bid and asked price. Where transactions are
made in the over-the-counter market, the Fund will deal with the primary
market makers unless more favorable prices are obtainable elsewhere.
Commissions will be paid on the Fund's futures and options transactions,
if any.
Because of the possibility of further regulatory developments affecting
the securities exchanges and brokerage practices generally, the foregoing
practices may be modified.
Although there are no restrictions on portfolio turnover, the portfolio
turnover rate of the Fund is not expected to exceed 100% annually. A 100%
annual turnover rate would occur, for example, if all the investments in the
Fund's portfolio (exclusive of securities with less than one year to maturity)
were replaced once in a period of one year. To the extent that the Fund
purchases shares of load funds, a higher turnover rate would result in
correspondingly higher sales loads paid by the Fund. Trading also may result
in the realization of net short-term capital gains which would not otherwise
by realized, and shareholders are taxed on such gains when distributed by the
Fund at ordinary income tax rates. See Dividends and Taxes in the Prospectus.
There may be no limit on the portfolio turnover rates of the underlying funds
in which the Fund may invest.
PURCHASE AND REDEMPTION OF SHARES
Fund shares may be purchased from investment dealers who have sales
agreements with the Fund's Underwriter or from the Underwriter. Fund
shares are sold at their public offering price, which is the net asset
value next determined after an order and payment are received in proper
form. See "Net Asset Value" in the Fund's prospectus for a discussion of
the valuation procedures used by the Fund in determining net asset value.
-21-
No sales charge is imposed when shares are purchased. However, a
contingent deferred sales charge is imposed if certain shares are redeemed
within five years after their purchase. See "The Shares We Offer" in the
Fund's Prospectus and "Contingent Deferred Sales Charges" below. The
Underwriter will pay a sales commission to investment dealers and to its
salesmen who sell Fund shares. The Underwriter may also provide additional
promotional incentives to dealers who sell Fund shares. In some instances,
these incentives may be offered only to certain dealers who have sold or may
sell significant amounts of shares.
The Fund reserves the right to withdraw all or any part of the offering
of its shares and to reject purchase orders. Also, from time to time, the
Fund may temporarily suspend the offering of its shares to new investors.
During the period of such suspension, persons who are already shareholders
of the Fund normally will be permitted to continue to purchase additional
shares and to have dividends reinvested.
In order to facilitate redemptions and to eliminate the need for
safekeeping, the Fund's transfer agent, ND Resources, will not issue
certificates for shares of the Fund unless requested to do so. A
shareholder or broker may obtain a certificate by writing to the
Transfer Agent at P.O. Box 759, Minot, North Dakota 58702.
RETIREMENT PLANS
The Fund offers shares in connection with tax-deferred retirement plans.
Application forms and additional information about these plans, including
applicable fees, are available from the Fund or the Fund's custodian, First
Western Bank & Trust (the "Custodian"), upon request. The federal income
tax treatment of contributions to retirement plans has been substantially
affected by recently enacted federal tax legislation. Before investing in
the Fund through such a plan, an investor should consult a tax adviser.
INDIVIDUAL RETIREMENT ACCOUNTS ("IRAS")Error! Bookmark not defined.
Fund shares may be used as a funding medium for an IRA. An Internal
Revenue Service-approved IRA plan is available from the Custodian. The
minimum initial investment for an IRA is $250; the minimum subsequent
investment is $50. IRAs are available to individuals who receive compensation
or earned income and their spouses whether or not they are active participants
in a tax-qualified or government-approved retirement plan. An IRA
contribution by an individual or spouse who participates in a tax-qualified or
government-approved retirement plan may not be deductible depending upon the
individual's income. Individuals also may establish an IRA to receive a
rollover contribution of distributions from another IRA or a qualified plan.
Tax advice should be obtained before planning a rollover.
-22-
DEFINED CONTRIBUTION PLAN
Investors who are self-employed may purchase Fund shares for retirement
plans for self-employed persons which are known as Defined Contribution Plans
(formerly Keogh or H.R. 10 Plans). The Custodian offers a prototype Defined
Contribution Plan for Money Purchase or Profit Sharing Plans.
OTHER DEFERRAL PLANS
The Fund may be used as a vehicle for a cash or deferred arrangement
designed to qualify under Section 401(k) of the Code, under Section 403(B)
of the Code (plan for charitable and education entities), and under Section
457 of the Code (plan for governmental entities).
MONTHOMATIC INVESTMENT PLAN
A shareholder may purchase additional Fund shares through an automatic
investment program (minimum initial investment is $100). With the
Monthomatic Investment Plan (the "Monthomatic"), monthly investments
(minimum $50) are made automatically from the shareholder's account at a
bank, savings and loan association, or credit union into the shareholder's
Fund account. By enrolling in Monthomatic, the shareholder authorizes the
Fund and its agents to either draw checks or initiate Automated Clearing
House debits against the designated account at a bank or other financial
institution. Such account must have check or draft writing privileges. A
shareholder may terminate the Monthomatic by sending written notice to the
Transfer Agent. See "Systematic-Investing - the Monthomatic Plan" in the
Fund's Prospectus for additional information.
EXCHANGE PRIVILEGE
As described in the Fund's Prospectus under "Exchanging Shares," the Fund
offers an exchange privilege pursuant to which a shareholder in the Fund may
exchange some or all of his shares for shares in any of the funds advised or
underwritten by the Underwriter or ND Management at net asset value, subject
to certain terms and conditions described in the Prospectus. The exchange
privilege may be changed or discontinued upon 60 days' written notice to
shareholders and is available only to shareholders where such exchanges may be
legally made. Each exchange involves the redemption of Fund shares to be
exchanged and the purchase of the fund shares being acquired. As a result,
any gain or loss on the redemption of fund shares exchanged is reportable on
the shareholder's federal income tax return. A shareholder considering an
exchange should obtain and read the prospectus of the fund to be acquired and
consider the differences between it and the fund whose shares he owns before
making an exchange. For further information on how to exercise the exchange
privilege, contact the Transfer Agent.
-23-
MINIMUM INVESTMENT
The minimum initial investment for each Fund is $1,000 ($100 for the
Monthomatic Investment Plan and $250 for an Individual Retirement Account),
and the minimum subsequent investment is $50, but such minimum amounts may
be changed at any time.
REDEMPTIONS
Any Fund shareholder may require the Fund to redeem shares. All
registered owners must sign a letter of instruction which needs to be
signature guaranteed if the request is over $50,000 and sent to the Transfer
Agent at P.O. Box 759, Minot, North Dakota 58702. When certificates for
shares have been issued, they must be mailed to or deposited with the
Transfer Agent, along with a signed certificate or duly endorsed stock
power with signatures guaranteed over $50,000 and accompanied by a written
request for redemption. Signatures must be guaranteed by a commercial bank,
trust company, savings and loan association, or member firm of a national
securities exchange. A notary public may not provide a signature guarantee.
The redemption request and signed certificate or stock power must be signed
exactly as the account is registered including any special capacity of the
registered owner. The redemption price will be the net asset value next
determined following receipt of a properly executed request with any
required documents, less any applicable contingent deferred sales charge, as
described below. Payment for shares redeemed will be made in cash as
promptly as practicable but in no event later than seven days after receipt
of a properly executed letter of instruction accompanied by any outstanding
share certificates in proper form for transfer. When the Fund is requested
to redeem shares for which it may not yet have received good payment (e.g.,
cash or certified check on a United States bank), it may delay the mailing of
a redemption check until such time as it has assured itself that good payment
has been collected for the purchase of such shares (which will generally be
within 15 calendar days of the purchase date).
CONTINGENT DEFERRED SALES CHARGES
Except as otherwise provided below, a contingent deferred sales charge
("charge") equal to 1.5% of the redemption proceeds is imposed if a
shareholder redeems shares purchased within the preceding five years.
Shares acquired by reinvestment of dividends may be redeemed without charge
even though acquired within five years. In addition, a number of shares
having a value equal to any net increase in the value of all shares purchased
by the shareholder during the preceding five years will be redeemed without a
contingent deferred sales charge. In determining whether a charge is payable
on any redemption, the Fund will first redeem shares not subject to a charge.
-24-
If the initial amount of purchase is $1 million or more, the charge is
reduced to 1% and only applies during the first year of purchase.
All purchases are considered made on trade date. Upon receipt of a request
for redemption, shares will be redeemed by a Fund at the net asset value next
determined following receipt of a properly executed request with any required
documents, less any applicable contingent deferred sales charge.
The Fund may sell shares without a contingent deferred sales charge to
directors, officers, and employees (including retirees) of the Fund, of ND
Holdings, of ND Management, and of ND Capital, for themselves or their spouses,
children, or parents and parents of spouses, or to any trust, pension, or
profit-sharing, or other benefit plan for only such persons at net asset
value and in any amount. The Fund may also sell shares without a contingent
deferred sales charge to broker-dealers having sales agreements with ND
Capital, and registered representatives and other employees of such broker-
dealers, including their spouses and children; to financial institutions having
sales agreements with ND Capital, and employees of such financial
institutions, including their spouses and children; and to any broker-dealer,
financial institution, or other qualified firm which receives no commissions
for selling shares to its clients. The elimination of the contingent deferred
sales charge for redemptions by certain classes of persons is provided because
of anticipated economies of scale and sales related efforts. The Underwriter
receives the entire amount of any contingent deferred sales charges assessed.
The Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the New York Stock Exchange is closed
for trading (other than customary weekend and holiday closings), (b) when
trading in the markets the Fund normally utilizes is restricted or an
emergency exists as determined by the Securities and Exchange Commission so
that disposal of the Fund's investments or determination of its net asset
value is not reasonably practicable, or (c) for such other periods as the
Securities and Exchange Commission by order may permit for protection of the
Fund's shareholders. The New York Stock Exchange is currently closed on the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, the Fourth of July, Labor Day, Thanksgiving, and
Christmas. The amount received by a shareholder upon redemption may be more
or less than the amount paid for such shares depending on the market value of
the Fund's portfolio securities at the time.
The Fund reserves the right to redeem Fund accounts (other than an IRA)
that are reduced to a value of less than $1,000 (for any reason other than
fluctuation in the market value of the Fund's portfolio securities). Should
the Fund elect to exercise this right, the investor will be notified before
such redemption is processed that the value of the investor's account is
less than $1,000 and that the investor will have sixty days to increase the
account to at least the $1,000 minimum amount before the account is redeemed.
The Fund receives the entire public offering price of all of its shares sold.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder who owns shares with an aggregate value of $5,000 or more
may establish a Systematic Withdrawal Plan (the "Withdrawal Plan"). Under
the Withdrawal Plan, a shareholder may redeem at net asset value, subject to
any applicable contingent deferred sales charge (see Contingent Deferred Sales
Charge above), the number of full and fractional shares that will produce
whatever monthly, quarterly, semi-annual, or annual payments (minimum $50 per
payment) are selected. No additional charge is made for this service.
-25-
A shareholder who participates in the Monthomatic Investment Plan is
ineligible to participate in the Withdrawal Plan. The Withdrawal Plan may be
terminated at any time by a shareholder or the Fund by written notice.
UNDERWRITER
ND Capital, a wholly-owned subsidiary of ND Holdings, is the principal
underwriter of the Fund's shares in a continuous public offering. ND Capital
is organized as a North Dakota organization and is located at 1 North Main,
Minot, North Dakota 58703. Robert E. Walstad and Peter A. Quist, who are
directors and the president and treasurer and vice president and secretary,
respectively, of the Fund, are also the only two directors and officers of
the Underwriter. The Underwriter sells shares to or through brokers,
dealers, or other qualified financial intermediaries (collectively referred
to as "Dealers"), or others, in a manner consistent with the then effective
registration statement of the Fund. ND Capital may act as such a Dealer.
Under the terms of the Distribution Agreement between the Fund and the
Underwriter, the Underwriter has agreed to use its best efforts to solicit
orders for the sale of the Fund's shares and to undertake such advertising
and promotion as it believes is reasonable in connection with such
solicitation. In consideration for these services, the Fund has agreed to
pay the Underwriter the proceeds from any contingent deferred sales charge
imposed on the redemption of shares. In addition, the Fund has adopted a
distribution and service plan under Rule 12b-1 under the Investment Company
Act of 1940 (the "12b-1 Plan") that allows the Fund to pay an annual
distribution and service fee to the Underwriter of 0.75% of average daily
net assets of the Fund. The Underwriter pays a sales commission currently
equal to 4% (1% on sales of $1 million or more) of the amount invested to
dealers who sell shares (excluding sales to investors exempt from the
contingent deferred sales charge). In addition, in recognition of services
provided to shareholders, the Underwriter may also use a portion of the
12b-1 fee it receives from the Fund to pay service fees to dealers at the
annual rate of up to 0.25% of the average net assets which are attributable
to shareholders of the Fund for whom such dealers are designated as the
dealers of record.
Because shares of the Fund are sold without any front-end sales loads,
the Underwriter does not receive underwriting commissions. In consideration
for these services, the Underwriter receives any contingent deferred sales
charges imposed on redemptions of shares.
The Underwriter also may receive dealer reallowances (up to a maximum
of 1% of the public offering price) and/or 12b-1 distribution and service
fees on purchases by the Fund of shares of underlying funds sold with a sales
load and/or which have a Rule 12b-1 distribution and/or service plan. Any
non-Rule 12b-1 service fees the Underwriter receives from underlying funds
with respect to purchases by the Fund will be rebated to the Fund.
-26-
The Distribution Agreement will continue until September 15, 2000 and year
to year thereafter must be approved at least annually by the respective Fund's
Board of Directors and a vote of a majority of such Fund's directors who are
not "interested persons" (as defined in the 1940 Act) of the Fund and who
have no direct or indirect financial interest in the Distribution Agreement
(the "Qualified Directors"), by vote cast in person at a meeting called for
the purpose of voting on such approval. The Fund's Distribution Agreement
will terminate automatically in the event of its assignment and is
terminable with respect to the Fund without penalty on 60 days' written
notice by vote of a majority of the Qualified Directors or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act)
of such Fund or on 90 days' written notice by the Underwriter.
DIVIDENDS AND TAXES
The Fund distributes any net investment income and net realized capital
gains at least annually.
Income and capital gains dividends, if any, of the Fund will be credited
to shareholders' accounts in full and fractional Fund shares at net asset
value on the reinvestment date unless shareholders indicate in writing to
the Transfer Agent that they wish to receive them in cash.
Share certificates are issued for full and fractional shares and only
upon a request by the shareholder or broker to the Transfer Agent.
A check will be generated on the date on which distributions are payable
for dividends to be received in cash. A shareholder can expect to receive
this check within seven days. If the U.S. Postal Service cannot deliver the
check or if the check remains uncashed for six months, a letter will be sent
to the shareholder. If the shareholder has not cashed the check or called
within a month and if the shareholder has shares in his or her account, the
check will be reinvested in the shareholder's account at the then-current
net asset value. If the shareholder has a zero balance, we will contact the
shareholder by phone or contact his or her broker. If the shareholder has
misplaced or lost the check, we will then issue a new check.
Distribution checks may be sent to parties other than the investor. The
Transfer Agent of the Fund will accept a letter from the shareholder. Please
attach a voided check if payable to your bank account (signature guarantee
is not required). If payable to a person or address other than the person
or address under which the shares are registered, a signature guarantee is
required.
TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
In any year in which the Fund qualifies as a regulated investment company
and distributes substantially all of its investment company taxable income
-27-
(which includes, among other items, the excess of net short-term capital
gains over net long-term capital losses) and its net capital gains (the
excess of net long-term capital gains over net short-term capital losses),
the Fund will not be subject to federal income tax to the extent it
distributes to shareholders such income and capital gains in the manner
required under the Code. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, the
Fund must distribute for each calendar year an amount equal to the sum of (1)
at least 98% of its net ordinary income (excluding any capital gains or
losses) for the calendar year, (2) at least 98% of the excess of its capital
gains over capital losses (adjusted for certain ordinary losses) realized
during the one-year period ending October 31 of such year, and (3) all
ordinary income and capital gains for previous years that were not distributed
during such years. A distribution will be treated as paid on December 31 of
the calendar year if it is declared by the Fund in October, November, or
December of that year with a record date in such a month and paid by the
Fund during January of the following calendar year. Such distributions will
be taxable to shareholders in the calendar year in which the distributions
are declared, rather than the calendar year in which the distributions are
received. The Fund intends to distribute its income in accordance with this
requirement to prevent application of the excise tax.
Income received by the Fund from an underlying fund (including dividends
and distributions of short-term capital gains), as well as interest received
on money market instruments and net short-term capital gains received by the
Fund on the sale of underlying funds' shares, will be distributed by the Fund
(after deductions for expenses) and will be taxable to shareholders as
ordinary income. Because the Fund is actively managed and can realize taxable
net short-term capital gains by selling shares of an underlying fund with
unrealized portfolio appreciation, investing in the Fund rather than directly
in the underlying funds may result in increased tax liability to the
shareholder, because the Fund must distribute its gain in accordance with the
rules in the Code.
Distributions of net capital gains distributions received by the Fund from
underlying funds, as well as net long-term capital gains realized by the Fund
from the purchase and sale (or redemption) of underlying funds' shares or other
securities held (generally) by the Fund for more than one year, will be
distributed by the Fund and will be taxable to shareholders generally as long-
term capital gain, (regardless of the period for which the shareholder has held
shares of the Fund).
For purposes of determining the character of income received by the Fund
when an underlying fund distributes net capital gains to the Fund, the Fund
will treat the distribution as a long-term capital gain, even if it has held
shares of the underlying fund for less than one year. However, any loss
incurred by the Fund on the sale of that underlying fund's shares held for
six months or less will be treated as a long-term capital loss to the
extent of the gain distribution.
The tax treatment of distributions from the Fund is the same whether the
distributions are received in additional shares or in cash. Shareholders
receiving distributions in the form of additional shares will have a cost
basis for federal income tax purposes in each share received equal to the net
asset value of a share of the Fund on the reinvestment date.
-28-
Redemption of shares of a Fund will be a taxable transaction for federal
income tax purposes. Gain or loss realized on the sale or exchange of shares
in the Fund will be treated as capital gain or loss, provided that (as is
usually the case) the shares represented a capital asset in the hands of the
shareholder. In such case, the shareholder will recognize capital gain or
loss in an amount equal to the difference between the basis of the shares
and the amount received. Such gain or loss will be long-term gain or loss
if the shares were held more than one year. The loss on shares held six
months or less will be a long-term capital loss to the extent any long-
term capital gain distribution is made with respect to such shares during
the period the investor owns the shares.
A Fund's options and futures transactions are subject to special tax
provisions that may accelerate or defer recognition of certain gains or
losses, change the character of certain gains or losses, or alter the
holding periods of certain of the Fund's securities.
The Fund may invest in underlying funds with capital loss carry-
forwards. If such an underlying fund realizes capital gains, it will be
able to offset the gains to the extent of its loss carry-forwards in
determining the amount of capital gains which must be distributed to its
shareholders. To the extent that gains are offset in this manner,
distributions to the Fund (and its shareholders) will not be characterized
as capital gain dividends but may be ordinary income.
Depending on the residence of the shareholder for tax purposes,
distributions also may be subject to state and local taxes, including
withholding taxes. Shareholders should consult their own tax advisers as
to the tax consequences of ownership of shares of the Fund in their
particular circumstances.
If in any year a Fund should fail to qualify under Subchapter M for
tax treatment as a regulated investment company, the Fund would incur a
regular corporate federal income tax upon its income for that year, and
distribution to its shareholders would be taxable to shareholders as
ordinary dividend income for federal income tax purposes to the extent
of the Fund's available earnings and profits.
The Fund generally will be required to withhold federal income tax at
a rate of 31% ("backup withholding") from dividends paid to certain
shareholders if (a) the payee fails to furnish the Fund with and to certify
the payee's correct taxpayer identification number or Social Security number,
(b) the Internal Revenue Service (the "IRS") notifies the Fund that the payee
has failed to report properly certain interest and dividend income to the
IRS and to respond to notices to that effect or (c) the payee fails to
certify that he is not subject to backup withholding.
After each transaction, shareholders will receive a confirmation
statement giving complete details of the transaction. In addition, the
statement will show the details of prior transactions in the account during
the calendar year. Information for federal income tax purposes will be
provided after the end of the calendar year.
CALCULATION OF PERFORMANCE DATA
The Fund may publish certain performance figures in advertisements from
time to time. These performance figures may include yield and total return
figures.
-29-
Yields are calculated according to accounting methods that are standardized
by the SEC for all stock and bond funds. Because yield calculation methods
differ from the methods used for other accounting purposes, the Fund's yield
may not equal its distribution rate, the income paid to an investor's account,
or the income reported in the Fund's financial statements. The Fund may also
include in advertisements performance rankings compiled by independent
organizations such as Lipper Analytical Services and publications which
monitor the performance of mutual funds. Performance information may be
quoted numerically or may be represented in a table, graph, or other
illustration.
All performance figures are based on historical results and are not
intended to indicate future performance.
YIELD
Yield reflects the income per share deemed earned by the Fund's portfolio
investments. Yield is determined by dividing the net investment income per
share deemed earned during the preceding 30-day period by the maximum
offering price per share on the last day of the period and annualizing
the result according to the following formula:
YIELD = 2[( a-b + 1)6 - 1]
[( cd)]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
TOTAL RETURN
Total return is the percentage change in the value of a hypothetical
investment that has occurred in the indicated time period, taking into account
the imposition of various fees, including the contingent deferred sales charge,
and assuming the reinvestment of all dividends and distributions. Cumulative
total return reflects the Fund's performance over a stated period of time and
is computed as follows:
-30-
ERV - P = Total Return
P
Where:
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the base period, assuming reinvestment of all dividends and
distributions
P = a hypothetical initial payment of $1,000
In calculating cumulative and average annual total return, the maximum
contingent deferred sales charge is deducted from the hypothetical investment.
However, such total return quotations may also be accompanied by quotations
which do not reflect the contingent deferred sales charges, and which
therefore will be higher.
Average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if the Fund's
performance had been constant over the entire period and is computed according
to the following formula:
P(1 + T)n = ERV
Where:
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 base period, assuming reinvestment of all dividends and
distributions
All performance figures are based on historical results and are not intended
to indicate future performance.
ORGANIZATION AND SHARE ATTRIBUTES
The Fund is an open-end, diversified, management investment company.
The Fund is organized as a corporation under the laws of the State of North
Dakota on September 10, 1998 and is authorized to issue a total of one billion
shares, all of one class and one series, with a par value of $.0001 per
share. Shares are fully paid and nonassessable when issued, are redeemable
and freely transferable, and have equal rights and preferences in all matters,
including voting, redemption, dividends and liquidation.
Cumulative voting, a form of proportional representation, is permitted in
the election of directors. Under cumulative voting, a shareholder may
cumulate votes either by casting for one candidate a number of votes equal to
the number of directors to be elected multiplied by the number of votes
represented by the shares entitled to vote or by distributing all of those
votes on the same principle among any number of candidates. There are no
subscription, preemptive, or conversion rights.
-31-
SHAREHOLDER MEETINGS
Regular meetings of shareholders will not be held unless required under
the North Dakota Business Corporation Act or the 1940 Act. It is probable
that the Fund will not hold regular meetings of shareholders. The Fund's
Bylaws provide the regular meetings of shareholders may be held on an annual
or other less frequent basis but need not be held unless required by law.
Under the North Dakota Business Corporation Act, if a regular meeting of
shareholders has not been held during the earlier of six months after the
fiscal year end of the corporation or fifteen months after its last meeting,
a shareholder or shareholders holding 5% or more of the voting power of all
shares entitled to vote may demand a regular meeting by written notice of
demand given to the president or secretary of the Fund. Within thirty days
after receipt of the demand by one of these officers, the Board of Directors
must cause a regular meeting of shareholders to be called and held at the
expense of the Fund on notice no later than 90 days after receipt of the
demand, or if the Board fails to do so, the shareholder or shareholders
making the demand may call the meeting by giving notice as prescribed by
law. All necessary expenses of the notice and the meeting must be paid
by the Fund.
In addition to regular meetings, special meetings of shareholders may be
called for any purpose at any time in the manner prescribed under the North
Dakota Business Corporation Act. Meetings of shareholders will also be held
whenever required in order to comply with the 1940 Act; however, the Fund does
not intend to hold annual shareholder meetings. Shareholders have the right to
remove directors.
Pursuant to the 1940 Act, if an underlying fund submits a matter to its
shareholders for a vote, the Fund will vote the shares of the underlying fund
which it owns in the same proportion as the vote of all other holders of such
shares.
FINANCIAL STATEMENTS
to be Filed by Pre-effective Amendment
APPENDIX-DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
Description of Moody's Investors Service, Inc. ("Moody's"), Short-Term
Debt Ratings
Prime-1. Issuers (or supporting institutions) rated Prime-1 ("P-1") have a
superior ability for repayment of senior short-term debt obligations. P-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries;
high rates of return on funds employed; conservative capitalization
structure with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; well-established access to a range of financial markets and assured
sources of alternate liquidity.
-32-
Prime-2. Issuers (or supporting institutions) rated Prime-2 ("P-2") 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.
DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP ("STANDARD & POOR'S"),
COMMERCIAL PAPER RATINGS
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2, and 3 to indicate the relative degree of safety. A-1. This
designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation. A-2.
Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high for issues designated
A-1.
DESCRIPTION OF MOODY'S LONG-TERM DEBT RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues;
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds, because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than
the Aaa securities; A. Bonds which are rated A possess many favorable
investment attributes and are considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment some
time in the future; Baa. Bonds which are rated Baa are considered as medium-
grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well; Ba. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class; B. Bonds
which are rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small; Caa. Bonds which
are rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest; Ca.
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings; C. Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
-33-
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
DESCRIPTION OF STANDARD & POOR'S CORPORATE DEBT RATINGS
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong; AA. Debt
Rated AA has a very strong capacity to pay interest and repay principal and
differs from the higher rated issues only in small degree; A. Debt rated A
has a strong capacity to pay interest and repay principal although it is
somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories; BBB. Debt
rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories; BB, B, CCC, CC, C. Debt Rated BB,
B, CCC, CC, and C is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates the lowest degree of speculation
and C the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are out-weighed by large
uncertainties or major risk exposures to adverse conditions; BB. Debt rated
BB has less near-term vulnerability to default than other speculative issues.
However, it faces major ongoing uncertainties or exposure of adverse business,
financial, or economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating category is also
used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating; B. Debt rated B has a greater vulnerability to default
but currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating; CCC. Debt rated CCC has a
currently identifiable vulnerability to default and is dependent upon
favorable business, financial, and economic conditions to meet timely payment
of interest and repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have the capacity to
pay interest and repay principal. The CCC rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied B or
B- rating; CC. The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC rating; C. The rating
C is typically applied to debt subordinated to senior debt which is assigned
an actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued; CI. The rating CI is reserved for income bonds on which no
interest is being paid; D. Debt rated D is in payment default. The D rating
category is used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
-35-
INTEGRITY SMALL-CAP FUND OF FUNDS, INC.
PART C
OTHER INFORMATION
ITEM 23. Exhibits
(a) Articles of Incorporation1
(b) Bylaws1
(c) Specimen Copy of Share Certificate1
(d) Form of Investment Advisory Agreement1
(e)(1) Form of Distribution Agreement2
(e)(2) Form of Dealer Sales Agreement2
(f) Not Applicable
(g) Form of Custodian Agreement2
(h)(1) Form of Transfer Agency Agreement1
(h)(2) Form of Accounting Services Agreement1
(i) Opinion of Chapman and Cutler2
(j) Consent of Independent Accountant2
(k) Not Applicable
(l) Form of Purchase Agreement1
(m) Form of Distribution and Service Plan2
(n) Not Applicable
(o) Not Applicable
(p) Code of Ethics2
[FN]
1 Previously filed as an exhibit to Registrant's Registration Statement on
Form N-1A filed with the Securities and Exchange Commission on September 30,
1998, and incorporated by reference herein.
2 To be filed by Pre-Effective Amendment.
</FN>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
Section 4 of the Distribution Agreement [Exhibit (e)(1)] provides for the
indemnification of ND Capital, Inc., Registrant's principal underwriter,
against certain losses. Section 12 of the Transfer Agency Agreement [Exhibit
(h)(1)] provides for the indemnification of ND Resources, Inc., Registrant's
transfer agent, against certain losses.
Indemnification of directors, officers, employees, and agents of Registrant
is required under Section 10-19.1-91 of the North Dakota Century Code. In
addition, Registrant has obtained an insurance policy on behalf of directors
and officers against any liability asserted against and incurred by the person
in or arising from that person's official capacity to the extent permitted by
law.
In no event will Registrant indemnify its directors, officers, employees,
or agents against any liability to which such person would otherwise be
subject by reason of his willful misfeasance, bad faith, gross negligence in
the performance of his duties, or by reason of his reckless disregard of the
duties involved in the conduct of his office arising under his agreement with
Registrant.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a director, officer, or controlling person of Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Anything in the North Dakota Business Corporation Act (Chapters 10-19.1
through 10-23 of the North Dakota Century Code), the Fund's Articles of
Incorporation or Bylaws, or the Investment Advisory, Distribution, or Transfer
Agency Agreements to the contrary notwithstanding, Registrant will comply in
all respects with the provisions of Investment Company Act Release No. 11330
(September 4, 1980) concerning indemnification.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
ND Money Management, Inc. (the "Investment Adviser"), is a wholly-owned
subsidiary of ND Holdings, Inc. ("Holdings"), Registrant's promoter. The
Investment Adviser was organized under the laws of the State of North Dakota
on August 19, 1988, and also serves as investment adviser for ND Tax-Free
Fund, Inc. ("NDTFF"), Montana Tax-Free Fund, Inc. ("MTFF"), South Dakota Tax-
Free Fund, Inc. ("SDTFF"), and Integrity Fund of Funds, Inc. ("IFF").
The officers and directors of the Investment Adviser are Robert E. Walstad
and Peter A. Quist. Mssrs. Walstad and Quist are also officers and directors
of Holdings, ND Capital, Inc. ("Capital"), Registrant's principal underwriter
and initial shareholder, ND Resources, Inc. ("Resources"), Registrant's
transfer agent and accounting services agent, NDTFF, MTFF, SDTFF, IFF, Ranson
Capital Corporation ("RCC") and Registrant. Mr. Walstad is also an officer
and a trustee of Ranson Managed Portfolios ("RMP"), and Mr. Quist is an
officer of RMP.
The Investment Adviser, Holdings, Capital, Resources, NDTFF, MTFF, SDTFF,
IFF, RCC, RMP and Registrant have their principal address at 1 North Main,
Minot, North Dakota 58703.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Other investment companies for which Registrant's principal
underwriter also acts as principal underwriter, depositor, or investment
adviser: ND Tax-Free Fund, Inc., Montana Tax-Free Fund, Inc., South Dakota
Tax-Free Fund, Inc., and Integrity Fund of Funds, Inc.
(b) Information concerning each director, officer, or partner of the
principal underwriter:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
<S> <C> <C>
Robert E. Walstad President, Treasurer, President, Treasurer,
1 North Main and Director and Director
Minot, ND 58703
Peter A. Quist Vice President, Secretary, Vice President, Secretary,
1 North Main and Director and Director
Minot, ND 58703
</TABLE>
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
First Western Bank & Trust, 900 South Broadway, Minot, North Dakota, 58701,
serves as custodian of Registrant and maintains all records related to that
function. ND Resources, Inc. ("Resources"), serves as transfer agent,
dividend disbursing, administrative, and accounting services agent of
Registrant and maintains all records related to those functions. ND Capital,
Inc. ("Capital"), serves as the principal underwriter of Registrant and
maintains all records related to that function. ND Money Management, Inc.
("Money Management"), serves as Registrant's investment adviser and maintains
all records related to that function. Registrant maintains all of its
corporate records. The address of Resources, Capital, Money Management, and
Registrant is 1 North Main, Minot, North Dakota 58703.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant has duly caused this Pre-effective
Amendment No. 2 to Registrant's Registration Statement, to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Minot,
State of North Dakota on the 3rd day of March, 2000.
INTEGRITY SMALL-CAP FUND OF FUNDS, INC.
By/s/Robert E. Walstad
-----------------------------
Robert E. Walstad
President
The undersigned each hereby constitutes and appoints Robert E. Walstad his
attorney-in-fact and agent, for him and in his name, place, and stead, in any
and all amendments (including post-effective amendments) to the Registration
Statement for Integrity Small-Cap Fund of Funds, Inc., a North Dakota
corporation, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this Pre-effective Amendment No. 2 to
Registrant's Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
/s/ Lynn W. Aas March 3, 2000
- ----------------------------
Lynn W. Aas
Director
/s/ Orlin W. Backes March 3, 2000
- ----------------------------
Orlin W. Backes
Director
/s/James R. Maxson March 3, 2000
- ----------------------------
R. James Maxson
Director
/s/Peter A. Quist March 3, 2000
- ----------------------------
Peter A. Quist
Director, Vice President, and Secretary
/s/Robert E. Walstd March 3, 2000
- ----------------------------
Robert E. Walstad
Director, President, and Treasurer
