STATEMENT OF ADDITIONAL INFORMATION January 31, 2000
FIDUCIARY CAPITAL GROWTH FUND, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the prospectus of Fiduciary Capital Growth
Fund, Inc. dated January 31, 2000. Requests for copies of the prospectus should
be made by writing to Fiduciary Capital Growth Fund, Inc., 225 East Mason
Street, Milwaukee, Wisconsin 53202, Attention:
Corporate Secretary or by calling (414) 226-4555.
The following financial statements are incorporated by reference
to the Annual Report, dated September 30, 1999, of Fiduciary Capital Growth
Fund, Inc. (File No. 811-03235) as filed with the Securities and Exchange
Commission on November 8, 1999:
Report of Independent Accountants
Statement of Net Assets
Statement of Operations
Statements of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
Shareholders may obtain a copy of the Annual Report, without charge, by calling
1-800-811-5311.
<PAGE>
FIDUCIARY CAPITAL GROWTH FUND, INC.
Table of Contents
Page No.
FUND HISTORY AND CLASSIFICATION ...........................................1
INVESTMENT RESTRICTIONS ...................................................1
INVESTMENT CONSIDERATIONS .................................................2
DIRECTORS AND OFFICERS OF THE FUND ........................................5
PRINCIPAL SHAREHOLDERS ....................................................7
INVESTMENT ADVISER AND ADMINISTRATOR ......................................8
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE .........................10
DISTRIBUTION OF SHARES ...................................................12
RETIREMENT PLANS .........................................................13
AUTOMATIC INVESTMENT PLAN ................................................16
REDEMPTION OF SHARES .....................................................16
SYSTEMATIC WITHDRAWAL PLAN ...............................................16
ALLOCATION OF PORTFOLIO BROKERAGE ........................................17
CUSTODIAN ................................................................18
TAXES ....................................................................18
SHAREHOLDER MEETINGS .....................................................19
CAPITAL STRUCTURE ........................................................20
INDEPENDENT ACCOUNTANTS ..................................................21
DESCRIPTION OF SECURITIES RATINGS ........................................21
No person has been authorized to give any information or to make
any representations other than those contained in this Statement of Additional
Information and the Prospectus dated January 31, 2000 and, if given or made,
such information or representations may not be relied upon as having been
authorized by Fiduciary Capital Growth Fund, Inc.
This Statement of Additional Information does not constitute an
offer to sell securities.
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FUND HISTORY AND CLASSIFICATION
Fiduciary Capital Growth Fund, Inc. (the "Fund"), a Wisconsin
corporation incorporated on July 29, 1981, is a diversified, open-end management
investment company registered under the Investment Company Act of 1940 (the
"Act").
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions which
are matters of fundamental policy and cannot be changed without approval of the
holders of the lesser of: (i) 67% of the Fund's shares present or represented at
a shareholders meeting at which the holders of more than 50% of such shares are
present or represented; or (ii) more than 50% of the outstanding shares of the
Fund.
1. The Fund will not purchase securities on margin, participate in a
joint-trading account, sell securities short, or write or invest in put or call
options. The Fund's investments in warrants, valued at the lower of cost or
market, will not exceed 5% of the value of the Fund's net assets. Included
within such amount, but not to exceed 2% of the value of the Fund's net assets,
may be warrants which are not listed on the New York or American Stock Exchange.
2. The Fund will not borrow money or issue senior securities, except
for temporary bank borrowings (not in excess of 5% of the value of its assets)
for emergency or extraordinary purposes, and will not pledge any of its assets
except to secure borrowings and only to an extent not greater than 10% of the
value of the Fund's net assets.
3. The Fund will not lend money (except by purchasing publicly
distributed debt securities or entering into repurchase agreements provided that
repurchase agreements maturing in more than seven days plus all other illiquid
or not readily marketable securities will not exceed 10% of the Fund's total
assets) and will not lend its portfolio securities.
4. The Fund will not purchase securities of other investment companies
except (a) as part of a plan of merger, consolidation or reorganization approved
by the shareholders of the Fund or (b) securities of registered closed-end
investment companies on the open market where no commission or profit results,
other than the usual and customary broker's commission and where as a result of
such purchase the Fund would hold less than 3% of any class of securities,
including voting securities, of any registered closed-end investment company and
less than 5% of the Fund's assets, taken at current value, would be invested in
securities of registered closed-end investment companies.
5. The Fund will not make investments for the purpose of exercising
control or management of any company.
6. The Fund will not purchase securities of any issuer (other than the
United States or an instrumentality of the United States) if, as a result of
such purchase, the Fund would hold more than 10% of any class of securities,
including voting securities, of such issuer or more
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than 5% of the Fund's total assets, taken at current value, would be invested in
securities of such issuer, except that up to 25% of the Fund's total assets may
be invested without regard to these limitations.
7. The Fund will not concentrate 25% or more of the value of its
assets, determined at the time an investment is made, exclusive of government
securities, in securities issued by companies primarily engaged in the same
industry.
8. The Fund will not acquire or retain any security issued by a
company, an officer or director of which is an officer or director of the Fund
or an officer, director or other affiliated person of its investment adviser.
9. The Fund will not acquire or retain any security issued by a company
if any of the directors or officers of the Fund, or directors, officers or other
affiliated persons of its investment adviser beneficially own more than 1/2% of
such company's securities and all of the above persons owning more than 1/2% own
together more than 5% of its securities.
10. The Fund will not act as an underwriter or distributor of
securities other than shares of the Fund and will not purchase any securities
which are restricted from sale to the public without registration under the
Securities Act of 1933, as amended.
11. The Fund will not purchase any interest in any oil, gas or other
mineral leases or any interest in any oil, gas or any other mineral exploration
or development program.
12. The Fund will not purchase or sell real estate or real estate
mortgage loans or real estate limited partnerships.
13, The Fund will not purchase or sell commodities or commodities
contracts or engage in arbitrage transactions.
The aforementioned percentage restrictions on investment or
utilization of assets refer to the percentage at the time an investment is made.
If these restrictions are adhered to at the time an investment is made, and such
percentage subsequently changes as a result of changing market values or some
similar event, no violation of the Fund's fundamental restrictions will be
deemed to have occurred.
INVESTMENT CONSIDERATIONS
The Fund invests mainly in common stocks of U.S. companies.
However when the Fund's investment adviser, Fiduciary Management, Inc. (the
"Adviser") believes that securities other than common stocks offer opportunity
for long-term capital appreciation, the Fund may invest in publicly distributed
debt securities, preferred stocks, particularly those which are convertible into
or carry rights to acquire common stocks, and warrants. Investments in publicly
distributed debt securities and nonconvertible preferred stocks offer an
opportunity for growth of capital during periods of declining interest rates,
when the market value of such securities in general increases. The Fund will
limit its investments in publicly distributed debt securities to those which
have been assigned one of the three highest ratings of
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either Standard & Poor's Corporation (AAA, AA and A) or Moody's Investors
Service, Inc. (Aaa, Aa and A). A description of the foregoing ratings is set
forth in "Description of Securities Ratings."
The principal risks associated with investments in debt
securities are interest rate risk and credit risk. Interest rate risk reflects
the principle that, in general, the value of debt securities rises when interest
rates fall and falls when interest rates rise. Longer term obligations are
usually more sensitive to interest rate changes than shorter term obligations.
Credit risk is the risk that the issuers of debt securities held by the Fund may
not be able to make interest or principal payments. Even if these issuers are
able to make interest or principal payments, they may suffer adverse changes in
financial condition that would lower the credit quality of the security leading
to greater volatility in the price of the security.
Preferred stocks have a preference over common stocks in
liquidation (and generally dividends as well) but are subordinated to the
liabilities of the issuer in all respects. As a general rule, the market value
of preferred stock with a fixed dividend rate and no conversion element varies
inversely with interest rates and perceived credit risks while the market price
of convertible preferred stock generally also reflects some element of
conversion value. Because preferred stock is junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similarly stated yield characteristics. Unlike
interest payments on debt securities, preferred stock dividends are payable only
if declared by the issuer's board of directors. Preferred stock also may be
subject to optional or mandatory redemption provisions.
Warrants are pure speculation in that they have no voting rights,
pay no dividends and have no rights with respect to the assets of the
corporation issuing them. Warrants are options to purchase equity securities at
a specific price valid for a specific period of time. They do not represent
ownership of the securities, but only the right to buy them. Warrants involve
the risk that the Fund could lose the purchase value of the warrant if the
warrant is not exercised prior to its expiration. They also involve the risk
that the effective price paid for the warrant added to the subscription price of
the related security may be greater than the value of the subscribed security's
market price.
The Fund may invest in securities of foreign issuers or in
American Depository Receipts of such issuers, but will limit its investments in
such securities to 10% of its net assets. Such investments may involve risks
which are in addition to the usual risks inherent in domestic investments. The
value of the Fund's foreign investments may be significantly affected by changes
in currency exchange rates and the Fund may incur costs in converting securities
denominated in foreign currencies to U.S. dollars. In many countries, there is
less publicly available information about issuers than is available in the
reports and ratings published about companies in the United States.
Additionally, foreign companies are not subject to uniform accounting, auditing
and financial reporting standards. Dividends and interest on foreign securities
may be subject to foreign withholding taxes, which would reduce the Fund's
income without providing a tax credit for the Fund's shareholders. Although the
Fund intends to invest in securities of foreign issuers domiciled in nations
which the Fund's
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investment adviser considers as having stable and friendly governments, there is
the possibility of expropriation, confiscatory taxation, currency blockage or
political or social instability which would affect investments in those nations.
The money market instruments in which the Fund invests include
conservative fixed-income securities, such as United States Treasury Bills,
certificates of deposit of U.S. banks (provided that the bank has capital,
surplus and undivided profits, as of the date of its most recently published
annual financial statements, with a value in excess of $100,000,000 at the date
of investment), commercial paper rated A-1 by Standard & Poor's Corporation,
commercial paper master notes and repurchase agreements. These money market
instruments are the types of investments the Fund may make while assuming a
temporary defensive position. Commercial paper master notes are unsecured
promissory notes issued by corporations to finance short-term credit needs. They
permit a series of short-term borrowings under a single note. Borrowings under
commercial paper master notes are payable in whole or in part at any time upon
demand, may be prepaid in whole or in part at any time, and bear interest at
rates which are fixed to known lending rates and automatically adjusted when
such known lending rates change. There is no secondary market for commercial
paper master notes. The Adviser will monitor the creditworthiness of the issuer
of the commercial paper master notes while any borrowings are outstanding. The
principal investment risk associated with the Fund's investments in commercial
paper and commercial paper master notes is credit risk.
Repurchase agreements are agreements under which the seller of a
security agrees at the time of sale to repurchase the security at an agreed time
and price. The Fund will not enter into repurchase agreements with entities
other than banks or invest over 5% of its net assets in repurchase agreements
with maturities of more than seven days. If a seller of a repurchase agreement
defaults and does not repurchase the security subject to the agreement, the Fund
will look to the collateral security underlying the seller's repurchase
agreement, including the securities subject to the repurchase agreement, for
satisfaction of the seller's obligation to the Fund. In such event, the Fund
might incur disposition costs in liquidating the collateral and might suffer a
loss if the value of the collateral declines. In addition, if bankruptcy
proceedings are instituted against a seller of a repurchase agreement,
realization upon the collateral may be delayed or limited. The principal
investment risk associated with the Fund's investments in repurchase agreements
is credit risk. There is also the risk of lost opportunity if the market price
of the repurchased security exceeds the repurchase price.
The percentage limitations set forth in this section are not
fundamental policies and may be changed without shareholder approval.
The Fund does not trade actively for short-term profits. However,
if the objectives of the Fund would be better served, short-term profits or
losses may be realized from time to time. The annual portfolio turnover rate
indicates changes in the Fund's portfolio and is calculated by dividing the
lesser of purchases or sales of portfolio securities (excluding securities
having maturities at acquisition of one year or less) for the fiscal year by the
monthly average of the value of the portfolio securities (excluding securities
having maturities at acquisition of one year or less) owned by the Fund during
the fiscal year. The annual
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<PAGE>
portfolio turnover rate may vary widely from year to year depending upon market
conditions and prospects. Increased portfolio turnover necessarily results in
correspondingly heavier transaction costs (such as brokerage commissions or
mark-ups or mark-downs) which the Fund must pay and increased realized gains (or
losses) to investors. Distributions to shareholders of realized gains, to the
extent that they consist of net short-term capital gains, will be considered
ordinary income for federal income tax purposes.
DIRECTORS AND OFFICERS OF THE FUND
As a Wisconsin corporation, the business and affairs of the Fund
are managed by its officers under the direction of its Board of Directors. The
name, age, address, principal occupations during the past five years and other
information with respect to each of the directors and officers of the Fund are
as follows:
Principal Occupation(s)
Name, Address and Age Position(s) Held with Fund During Past 5 Years
BARRY K. ALLEN, 51 DIRECTOR Mr. Allen is President of
Ameritech, Chicago, Illinois
30 South Wacker Drive and has been an officer of
Suite 3800 Ameritech since August,
Chicago, Illinois 60606 1995. From September, 1993
until August, 1995, Mr.
Allen was President and
Chief Operating Officer of
Marquette Medical Systems,
Inc., a manufacturer of
medical electronic equipment
and systems, Milwaukee,
Wisconsin. Mr. Allen is a
director of Harley-Davidson,
Inc. and First Business Bank
- Milwaukee. Mr. Allen is
also a director of FMI
Funds, Inc., an investment
company for which the
Adviser serves as an
investment adviser.
GEORGE D. DALTON, 71 DIRECTOR Mr. Dalton is Chairman of
the Board and a director of
255 Fiserv Drive Fiserv, Inc., a provider of
Brookfield, WI 53045 financial data processing
services to financial
institutions, and has served
in that capacity since 1984.
Mr. Dalton is also a member
of the Board of Directors of
ARI, Inc., a provider of
standard-based
Internet-enabled electronic
commerce services, APAC
TeleServices, Inc., a
provider of out-sourced
telephone-based marketing,
sales and customer
management solutions,
Clark/Bardes Inc., a
distributor of life
insurance/compensation
programs, and Wisconsin
Wireless, Inc. Mr. Dalton is
also a director of FMI
Funds, Inc.
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<PAGE>
PATRICK J. ENGLISH*, 39 VICE PRESIDENT Mr. English is Senior Vice
AND DIRECTOR President of Fiduciary
225 East Mason Street Management, Inc. and has
Milwaukee, Wisconsin been employed by such firm
in various capacities since
December, 1986. Mr. English
is also Vice President and a
director of FMI Funds, Inc.
TED D. KELLNER*, 53 PRESIDENT, TREASURER Mr. Kellner is Chairman of
AND DIRECTOR the Board and Chief
225 East Mason Street Executive Officer of
Milwaukee, Wisconsin Fiduciary Management, Inc.
which he co-founded with Mr.
Donald S. Wilson in 1980.
Mr. Kellner is also a
director of FMI Funds, Inc.
THOMAS W. MOUNT, 68 DIRECTOR Mr. Mount is retired
Chairman of Stokely USA,
401 Pine Terrace Inc., a canned and frozen
Oconomowoc, Wisconsin food processor, and was
employed by such firm in
various capacities from 1957
to 1993. Mr. Mount is also a
director of FMI Funds, Inc.
DONALD S. WILSON*, 56 VICE PRESIDENT, SECRETARY Mr. Wilson is President and
AND DIRECTOR Treasurer of Fiduciary
225 East Mason Street Management, Inc. Mr. Wilson
Milwaukee, Wisconsin is also a director of FMI
Funds, Inc.
GARY G. WAGNER, 56 VICE PRESIDENT AND Mr. Wagner is Executive Vice
ASSISTANT SECRETARY President of Fiduciary
225 East Mason Street Management, Inc.
Milwaukee, Wisconsin
CAMILLE F. WILDES, 47 VICE PRESIDENT AND Ms. Wildes is a Vice
ASSISTANT TREASURER President of Fiduciary
225 East Mason Street Management, Inc.
Milwaukee, Wisconsin
During the fiscal year ended September 30, 1999 the Fund paid
$1,800 in director's fees. For the fiscal year ending September 30, 2000 the
Fund's standard method of compensating directors is to pay each director who is
not an officer of the Fund a fee of $400 for each meeting of the Board of
Directors attended.
- --------
* Messrs. English, Kellner and Wilson are directors who are "interested persons"
of the Fund as that term is defined in the Investment Company Act of 1940.
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<TABLE>
COMPENSATION TABLE
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Benefits Annual from Fund and
Aggregate Accrued as Benefits Fund Complex
Compensation Part of Upon Paid to
Name of Person from Fund Fund Expenses Retirement Director(1)
-------------- --------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Barry K. Allen $600 $0 $0 $750
George D. Dalton 600 0 0 750
Patrick J. English 0 0 0 0
Ted D. Kellner 0 0 0 0
Thomas W. Mount 600 0 0 750
Donald S. Wilson 0 0 0 0
- ---------------
(1) FMI Funds, Inc. and the Fund are the only investment companies in the
Fund Complex.
</TABLE>
The Fund and the Adviser have adopted separate codes of ethics
pursuant to Rule 17j-1 under the Act. Each code of ethics permits personnel
subject thereto to invest in securities, including securities that may be
purchased or held by the Fund. Each code of ethics prohibits, among other
things, persons subject thereto from purchasing or selling securities if they
know at the time of such purchase or sale that the security is being considered
for purchase or sale by the Fund or is being purchased or sold by the Fund.
PRINCIPAL SHAREHOLDERS
Set forth below are the names and addresses of all holder's of
the Fund's Common Stock who as of October 31, 1999 beneficially owned more than
5% of the then outstanding shares of the Fund's Common Stock as well as the
number of shares of the Fund's Common Stock beneficially owned by Ted D.
Kellner, Donald S. Wilson and all officers and directors of the Fund as a group,
indicating in each case whether the person has sole or shared power to vote or
dispose of such shares.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address Beneficial Ownership Percent
of Beneficial Owner Sole Power Shared Power Aggregate of Class
<S> <C> <C> <C> <C>
Ted D. Kellner 102,123(1) 586,653(2)(3)(4) 688,766 28.02%
225 E. Mason Street
Milwaukee, WI 53202
Donald S. Wilson 1006 541,296(3)(4) 542,302 22.06%
225 E. Mason Street
Milwaukee, WI 53202
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<PAGE>
<CAPTION>
Amount and Nature of
Name and Address Beneficial Ownership Percent
of Beneficial Owner Sole Power Shared Power Aggregate of Class
<S> <C> <C> <C> <C>
Clark & Co. -0- 127,446 127,446 5.19%
FAO Western Industries, Inc.
P.O. Box 39
Westerville, OH 43086
Officers & Directors 713,436(1)(2) 29.03%
as a group (8 persons) (3)(4)
- ----------------------
(1) Includes 16,626 shares held under several custodial accounts for Mr.
Kellner's children and 13,552 shares held by an investment partnership
over which Mr. Kellner has voting and investment authority.
(2) Includes 42,542 shares held in a trust for which Mr. Kellner is a
co-trustee and co-beneficiary and 2,815 shares held in a partnership of
which Mr. Kellner is a partner.
(3) Includes 541,296 shares owned by the Adviser, retirement plans of the
Adviser and clients of the Adviser for whom the Adviser exercises
investment discretion.
(4) Messrs. Kellner and Wilson share the power to vote and dispose of the
same 541,296 shares.
</TABLE>
Mr. Ted D. Kellner is deemed to "control," as that term is
defined in the Act, the Fund. Mr. Kellner and shareholders owning 21.99% of the
outstanding shares of the Fund have the ability to elect the entire Board of
Directors. The Fund does not control any person.
INVESTMENT ADVISER AND ADMINISTRATOR
The investment adviser and administrator to the Fund is Fiduciary
Management, Inc. (the "Adviser"). The Adviser is controlled by Ted D. Kellner
and Donald S. Wilson. The Adviser's executive officers include Messrs. Kellner,
Wilson, Wagner, English, Ms. Maria Blanco, Senior Vice President and Secretary,
Mr. John Brandser, Vice President-Fixed Income, Ms. Camille Wildes, Vice
President, Ms. Jody Reckard, Vice President and Richard E. Lane, Vice President.
The directors of the Adviser are Messrs. Kellner and Wilson.
Pursuant to an investment advisory agreement between the Fund and
the Adviser (the "Advisory Agreement") the Adviser furnishes continuous
investment advisory services to the Fund. The Adviser supervises and manages the
investment portfolio of the Fund and subject to such policies as the Board of
Directors may determine, directs the purchase or sale of investment securities
in the day-to-day management of the Fund's investment portfolio. Under the
Advisory Agreement, the Adviser, at its own expense and
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<PAGE>
without reimbursement from the Fund, furnishes office space, and all necessary
office facilities, equipment and executive personnel for managing the Fund's
investments, and bears all sales and promotional expenses of the Fund, other
than expenses incurred in complying with laws regulating the issue or role of
securities. For the foregoing, the Adviser receives an annual fee of 1% on the
first $30,000,000 of the average daily net assets of the Fund and an annual fee
of .75% on the average daily net assets of the Fund in excess of $30,000,000.
During the fiscal years ended September 30, 1999, 1998 and 1997, respectively,
the Fund paid the Adviser fees of $384,046, $447,738 and $416,417.
The Fund pays all of its expenses not assumed by the Adviser
pursuant to the Advisory Agreement or the Administration Agreement described
below including, but not limited to, the professional costs of preparing and the
costs of printing its registration statements required under the Securities Act
of 1933 and the Act and any amendments thereto, the expense of registering its
shares with the Securities and Exchange Commission and in the various states,
the printing and distribution cost of prospectuses mailed to existing
shareholders, the cost of stock certificates, director and officer liability
insurance, reports to shareholders, reports to government authorities and proxy
statements, interest charges, and brokerage commissions and expenses in
connection with portfolio transactions. The Fund also pays the fees of directors
who are not interested persons of the Adviser or officers or employees of the
Fund, salaries of administrative and clerical personnel, association membership
dues, auditing and accounting services, fees and expenses of any custodian or
trustees having custody of Fund assets, expenses of repurchasing and redeeming
shares, printing and mailing expenses, charges and expenses of dividend
disbursing agents, registrars and stock transfer agents, including the cost of
keeping all necessary shareholder records and accounts and handling any problems
related thereto.
The Adviser has undertaken to reimburse the Fund to the extent
that the aggregate annual operating expenses, including the investment advisory
fee and the administration fee but excluding interest, taxes, brokerage
commissions and extraordinary items, exceed that percentage of the daily net
assets of the Fund for such year, as determined by valuations made as of the
close of each business day of the year, which is the most restrictive percentage
provided by the state laws of the various states in which its shares are
qualified for sale or, if the states in which its shares are qualified for sale
impose no such restrictions, 2%. As of the date of this Statement of Additional
Information, no such state law provision was applicable to the Fund. The Fund
monitors its expense ratio on a monthly basis. If the accrued amount of the
expenses of the Fund exceeds the expense limitation, the Fund creates an account
receivable from the Adviser for the amount of such excess. In such a situation
the monthly payment of the Adviser's fee will be reduced by the amount of such
excess, subject to adjustment month by month during the balance of the Fund's
fiscal year if accrued expenses thereafter fall below this limit. No expense
reimbursement was required during the fiscal years ended September 30, 1999,
1998 and 1997.
The Adviser is also the administrator to the Fund. Pursuant to an
administration agreement (the "Administration Agreement") between the Fund and
the Adviser, the Adviser supervises all aspects of the Fund's operations except
those performed by it as investment adviser. In connection with such supervision
the Adviser prepares and
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<PAGE>
maintains the books, accounts and other documents required by the Act,
calculates the Fund's net asset value, responds to shareholder inquiries,
prepares the Fund's financial statements, prepares reports and filings with the
Securities and Exchange Commission and with state Blue Sky authorities,
furnishes statistical and research data, clerical, accounting and bookkeeping
services and stationery and office supplies, keeps and maintains the Fund's
financial accounts and records and generally assists in all aspects of the
Fund's operations. For the foregoing, the Adviser receives an annual fee of 0.1%
on the first $30,000,000 of the average daily net assets of the Fund and an
annual fee of 0.05% on the average daily net assets of the Fund in excess of
$30,000,000. During the fiscal years ended September 30, 1999, 1998 and 1997 the
Fund paid the Adviser fees of $35,603, $39,849 and $42,531, respectively,
pursuant to the Administration Agreement.
The Advisory Agreement and the Administration Agreement will
remain in effect as long as their continuance is specifically approved at least
annually, by (i) the Board of Directors of the Fund, or by the vote of a
majority (as defined in the Act) of the outstanding shares of the Fund, and (ii)
by the vote of a majority of the directors of the Fund who are not parties to
the Advisory Agreement or the Administration Agreement or interested persons of
the Adviser, cast in person at a meeting called for the purpose of voting on
such approval. Both the Advisory Agreement and the Administration Agreement
provide that they may be terminated at any time without the payment of any
penalty, by the Board of Directors of the Fund or by vote of a majority of the
Fund's shareholders, on sixty days' written notice to the Adviser, and by the
Adviser on the same notice to the Fund and that they shall be automatically
terminated if they are assigned.
The Advisory Agreement and the Administration Agreement provide
that the Adviser shall not be liable to the Fund or its shareholders for
anything other than willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations or duties. The Advisory Agreement and the
Administration Agreement also provide that the Adviser and its officers,
directors and employees may engage in other businesses, devote time and
attention to any other business whether of a similar or dissimilar nature, and
render services to others.
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE
The net asset value of the Fund will be determined as of the
close of regular trading (4:00 P.M. Eastern Time) on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is open for trading
Monday through Friday except New Year's Day, Dr. Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when any such holiday falls on a Sunday, the
New York Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period. The staff of the Securities and Exchange Commission
considers the New York Stock Exchange to be closed on any day when it is not
open for trading the entire day. On those days the Fund may, but is not
obligated to, determine its net asset value.
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<PAGE>
The Fund's net asset value per share is determined by dividing
the total value of its investments and other assets, less any liabilities, by
the number of its outstanding shares. Securities traded on any national stock
exchange or the Nasdaq Stock Market are valued on the basis of the last sale
price on the date of valuation or, in the absence of any sales on that date, the
most recent bid price. Other equity securities are valued at the most recent bid
price, if market quotations are readily available. Debt securities are valued at
the latest bid prices furnished by an independent pricing service. Any
securities for which there are no readily available market quotations and other
assets are valued at their fair value as determined by the Adviser in accordance
with procedures approved by the Board of Directors.
The Fund may provide from time to time in advertisements, reports
to shareholders and other communications with shareholders its average annual
total return. An average annual total return refers to the rate of return which,
if applied to an initial investment in the Fund at the beginning of a stated
period and compounded over the period, would result in the redeemable value of
the investment in the Fund at the end of the stated period assuming reinvestment
of all dividends and distributions and reflecting the effect of all recurring
fees. The Fund may also provide "aggregate" total return information for various
periods, representing the cumulative change in value of an investment in the
Fund for a specific period (again reflecting changes in share price and assuming
reinvestment of dividends and distributions).
Any total rate of return quotation for the Fund will be for a
period of three or more months and will assume the reinvestment of all dividends
and capital gains distributions which were made by the Fund during that period.
Any period total rate of return quotation of the Fund will be calculated by
dividing the net change in value of a hypothetical shareholder account
established by an initial payment of $1,000 at the beginning of the period by
1,000. The net change in the value of a shareholder account is determined by
subtracting $1,000 from the product obtained by multiplying the net asset value
per share at the end of the period by the sum obtained by adding (A) the number
of shares purchased at the beginning of the period plus (B) the number of shares
purchased during the period with reinvested dividends and distributions. Any
average annual compounded total rate of return quotation of the Fund will be
calculated by dividing the redeemable value at the end of the period (i.e., the
product referred to in the preceding sentence) by $1,000. A root equal to the
period, measured in years, in question is then determined and 1 is subtracted
from such root to determine the average annual compounded total rate of return.
The foregoing computation may also be expressed by the following
formula:
n
P(1+T) = ERV
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
11
<PAGE>
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the stated periods at the end of the
stated periods.
The Fund's average annual compounded returns for the one-year,
five-year and ten-year periods ended September 30, 1999 and for the period from
the Fund's commencement of operations (December 18, 1981) through September 30,
1999 were 16.38%, 12.91%, 10.52%, and 12.85%, respectively.
The results below show the value of an assumed initial investment
of $10,000 made on December 18, 1981 through December 31, 1999, assuming
reinvestment of all dividends and distributions.
<TABLE>
<CAPTION>
Value of
Value of $10,000 Cumulative $10,000 Cumulative
December 31 Investment % Change December 31 Investment % Change
----------- ---------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1981 $10,010 +.1% 1991 $35,831 +258.3%
1982 14,532 +45.3 1992 41,008 +310.1
1983 18,731 +87.3 1993 47,032 +370.3
1984 17,942 +79.4 1994 47,213 +372.1
1985 23,312 +133.1 1995 59,726 +497.3
1986 23,325 +133.3 1996 69,948 +599.5
1987 21,261 +112.6 1997 90,377 +803.8
1988 25,254 +152.5 1998 85,824 +758.2
1989 29,777 +197.8 1999 91,402 +814.0
1990 26,297 +163.0
</TABLE>
The foregoing performance results are based on historical
earnings and should not be considered as representative of the performance of
the Fund in the future. An investment in the Fund will fluctuate in value and at
redemption its value may be more or less than the initial investment. The Fund
also may compare its performance to other mutual funds with similar investment
objectives and to the industry as a whole, as reported by Lipper Analytical
Services, Inc., Money, Forbes, Business Week and Barron's magazines and The Wall
Street Journal. (Lipper Analytical Services, Inc. is an independent service that
ranks over 1,000 mutual funds based upon total return performance.) The Fund may
also compare its performance to the Dow Jones Industrial Average, Nasdaq
Composite Index, Nasdaq Industrials Index, Value Line Composite Index, the
Standard & Poor's 500 Stock Index, Russell 2000 Index and the Consumer Price
Index. Such comparisons may be made in advertisements, shareholder reports or
other communications to shareholders.
DISTRIBUTION OF SHARES
The Fund is a no load fund and as such offers its shares directly
to the public. Additionally the Fund may enter into agreements with
broker-dealers, financial institutions or other service providers that may
include the Fund as an investment alternative in the programs they offer or
administer.
12
<PAGE>
RETIREMENT PLANS
The Fund offers the following retirement plans that may be funded
with purchases of shares of the Fund and may allow investors to reduce their
income taxes:
Individual Retirement Accounts
Individual shareholders may establish their own Individual
Retirement Account ("IRA"). The Fund currently offers a Traditional IRA, a Roth
IRA and an Education IRA, that can be adopted by executing the appropriate
Internal Revenue Service ("IRS") Form.
Traditional IRA. In a Traditional IRA, amounts contributed to the
IRA may be tax deductible at the time of contribution depending on whether the
shareholder is an "active participant" in an employer-sponsored retirement plan
and the shareholder's income. Distributions from a Traditional IRA will be taxed
at distribution except to the extent that the distribution represents a return
of the shareholder's own contributions for which the shareholder did not claim
(or was not eligible to claim) a deduction. Distributions prior to age 59-1/2
may be subject to an additional 10% tax applicable to certain premature
distributions. Distributions must commence by April 1 following the calendar
year in which the shareholder attains age 70-l/2. Failure to begin distributions
by this date (or distributions that do not equal certain minimum thresholds) may
result in adverse tax consequences.
Roth IRA. In a Roth IRA, amounts contributed to the IRA are taxed
at the time of contribution, but distributions from the IRA are not subject to
tax if the shareholder has held the IRA for certain minimum periods of time
(generally, until age 59-1/2). Shareholders whose incomes exceed certain limits
are ineligible to contribute to a Roth IRA. Distributions that do not satisfy
the requirements for tax-free withdrawal are subject to income taxes (and
possibly penalty taxes) to the extent that the distribution exceeds the
shareholder's contributions to the IRA. The minimum distribution rules
applicable to Traditional IRAs do not apply during the lifetime of the
shareholder. Following the death of the shareholder, certain minimum
distribution rules apply.
For Traditional and Roth IRAs, the maximum annual contribution
generally is equal to the lesser of $2,000 or 100% of the shareholder's
compensation (earned income). An individual may also contribute to a Traditional
IRA or Roth IRA on behalf of his or her spouse provided that the individual has
sufficient compensation (earned income). Contributions to a Traditional IRA
reduce the allowable contribution under a Roth IRA, and contributions to a Roth
IRA reduce the allowable contribution to a Traditional IRA.
Education IRA. In an Education IRA, contributions are made to an
IRA maintained on behalf of a beneficiary under age 18. The maximum annual
contribution is $500 per beneficiary. The contributions are not tax deductible
when made. However, if amounts are used for certain educational purposes,
neither the contributor nor the beneficiary of the IRA are taxed upon
distribution. The beneficiary is subject to income (and possibly penalty taxes)
on amounts withdrawn from an Education IRA that are not used for qualified
13
<PAGE>
educational purposes. Shareholders whose income exceeds certain limits are
ineligible to contribute to an Education IRA.
Under current IRS regulations, an IRA applicant must be furnished
a disclosure statement containing information specified by the IRS. The
applicant generally has the right to revoke his account within seven days after
receiving the disclosure statement and obtain a full refund of his
contributions. The custodian may, in its discretion, hold the initial
contribution uninvested until the expiration of the seven-day revocation period.
The custodian does not anticipate that it will exercise its discretion but
reserves the right to do so.
Simplified Employee Pension Plan
A Traditional IRA may also be used in conjunction with a
Simplified Employee Pension Plan ("SEP-IRA"). A SEP-IRA is established through
execution of Form 5305-SEP together with a Traditional IRA established for each
eligible employee. Generally, a SEP-IRA allows an employer (including a
self-employed individual) to purchase shares with tax deductible contributions,
not exceeding annually for any one participant, 15% of compensation
(disregarding for this purpose compensation in excess of $170,000 per year). The
$170,000 compensation limit applies for 2000 and is adjusted periodically for
cost of living increases. A number of special rules apply to SEP Plans,
including a requirement that contributions generally be made on behalf of all
employees of the employer (including for this purpose a sole proprietorship or
partnership) who satisfy certain minimum participation requirements.
SIMPLE IRA
An IRA may also be used in connection with a SIMPLE Plan
established by the shareholder's employer (or by a self-employed individual).
When this is done, the IRA is known as a SIMPLE IRA, although it is similar to a
Traditional IRA with the exceptions described below. Under a SIMPLE Plan, the
shareholder may elect to have his or her employer make salary reduction
contributions of up to $6,000 per year to the SIMPLE IRA. The $6,000 limit
applies for 2000 and is adjusted periodically for cost of living increases. In
addition, the employer will contribute certain amounts to the shareholder's
SIMPLE IRA, either as a matching contribution to those participants who make
salary reduction contributions or as a non-elective contribution to all eligible
participants whether or not making salary reduction contributions. A number of
special rules apply to SIMPLE Plans, including (1) a SIMPLE Plan generally is
available only to employers with fewer than 100 employees; (2) contributions
must be made on behalf of all employees of the employer (other than bargaining
unit employees) who satisfy certain minimum participation requirements; (3)
contributions are made to a special SIMPLE IRA that is separate and apart from
the other IRAs of employees; (4) the distribution excise tax (if otherwise
applicable) is increased to 25% on withdrawals during the first two years of
participation in a SIMPLE IRA; and (5) amounts withdrawn during the first two
years of participation may be rolled over tax-free only into another SIMPLE IRA
(and not to a Traditional IRA or to a Roth IRA). A SIMPLE IRA is established by
executing Form 5304-SIMPLE together with an IRA established for each eligible
employee.
14
<PAGE>
403(b)(7) Custodial Account
A 403(b)(7) Custodial Account is available for use in conjunction
with the 403(b)(7) program established by certain educational organizations and
other organizations that are exempt from tax under 501(c)(3) of the Internal
Revenue Code, as amended (the "Code"). Amounts contributed to the custodial
account in accordance with the employer's 403(b)(7) program will be invested on
a tax-deductible basis in shares of the Fund. Various contribution limits apply
with respect to 403(b)(7) arrangements.
Defined Contribution Retirement Plan (401(k))
A prototype defined contribution plan is available for employers
who wish to purchase shares of any Fund with tax deductible contributions. The
plan consists of both profit sharing and money purchase pension components. The
profit sharing component includes a Section 401(k) cash or deferred arrangement
for employers who wish to allow eligible employees to elect to reduce their
compensation and have such amounts contributed to the plan. The limit on
employee salary reduction contributions is $10,500 annually (as adjusted for
cost-of-living increases) although lower limits may apply as a result of
non-discrimination requirements incorporated into the plan. The Fund has
received an opinion letter from the IRS holding that the form of the prototype
defined contribution retirement plan is acceptable under Section 401 of the
Code. The maximum annual contribution that may be allocated to the account of
any participant is generally the lesser of $30,000 or 25% of compensation
(earned income). Compensation in excess of $170,000 (as periodically indexed for
cost-of-living increases) is disregarded for this purpose. The maximum amount
that is deductible by the employer depends upon whether the employer adopts both
the profit sharing and money purchase components of the plan, or only one
component.
Retirement Plan Fees
Firstar Bank Milwaukee, N.A., Milwaukee, Wisconsin, serves as
trustee or custodian of the retirement plans. Firstar Bank Milwaukee, N.A.
invests all cash contributions, dividends and capital gains distributions in
shares of the Fund. For such services, the following fees are charged against
the accounts of participants; $12.50 annual maintenance fee per participant
account; $15 for transferring to a successor trustee or custodian; $15 for
distribution(s) to a participant; and $15 for refunding any contribution in
excess of the deductible limit. The fee schedule of Firstar Bank Milwaukee, N.A.
may be changed upon written notice.
Requests for information and forms concerning the retirement
plans should be directed to the Fund. Because a retirement program may involve
commitments covering future years, it is important that the investment objective
of the Fund be consistent with the participant's retirement objectives.
Premature withdrawal from a retirement plan will result in adverse tax
consequences. Consultation with a competent financial and tax adviser regarding
the retirement plans is recommended.
15
<PAGE>
AUTOMATIC INVESTMENT PLAN
Shareholders wishing to invest fixed dollar amounts in the Fund
monthly or quarterly can make automatic purchases in amounts of $50 or more on
any day they choose by using the Fund's Automatic Investment Plan. If such day
is a weekend or holiday, such purchase shall be made on the next business day.
There is no service fee for participating in this Plan. To use this service, the
shareholder must authorize the transfer of funds from their checking account or
savings account by completing the Automatic Investment Plan application included
as part of the share purchase application. Additional application forms may be
obtained by calling the Fund's office at (414) 226-4555. The Automatic
Investment Plan must be implemented with a financial institution that is a
member of the Automated Clearing House. The Fund reserves the right to suspend,
modify or terminate the Automatic Investment Plan without notice.
The Automatic Investment Plan is designed to be a method to
implement dollar cost averaging. Dollar cost averaging is an investment approach
providing for the investment of a specific dollar amount on a regular basis
thereby precluding emotions dictating investment decisions. Dollar cost
averaging does not insure a profit nor protect against a loss.
REDEMPTION OF SHARES
The right to redeem shares of the Fund will be suspended for any
period during which the New York Stock Exchange is closed because of financial
conditions or any other extraordinary reason and may be suspended for any period
during which (a) trading on the New York Stock Exchange is restricted pursuant
to rules and regulations of the Securities and Exchange Commission, (b) the
Securities and Exchange Commission has by order permitted such suspension, or
(c) an emergency, as defined by rules and regulations of the Securities and
Exchange Commission, exists as a result of which it is not reasonably
practicable for the Fund to dispose of its securities or fairly to determine the
value of its net assets.
SYSTEMATIC WITHDRAWAL PLAN
The Fund has available to shareholders a Systematic Withdrawal
Plan, pursuant to which a shareholder who owns shares of the Fund worth at least
$10,000 at current net asset value may provide that a fixed sum will be
distributed to him or her at regular intervals. To participate in the Systematic
Withdrawal Plan, a shareholder deposits his or her Fund shares with the Fund and
appoints it as his agent to effect redemptions of shares held in his or her
account for the purpose of making monthly or quarterly withdrawal payments of a
fixed amount to him or her out of the account. To utilize the Systematic
Withdrawal Plan, the shares cannot be held in certificate form. The Systematic
Withdrawal Plan does not apply to shares of the Fund held in Individual
Retirement Accounts or retirement plans. An application for participation in the
Systematic Withdrawal Plan is included as part of the share purchase
application. Additional application forms may be obtained by calling the Fund at
(414) 226-4555.
16
<PAGE>
The minimum amount of a withdrawal payment is $100. These
payments will be made from the proceeds of periodic redemption of Fund shares in
the account at net asset value. Redemptions will be made on such day (no more
than monthly) as a shareholder chooses or, if that day is a weekend or holiday,
on the next business day. Participation in the Systematic Withdrawal Plan
constitutes an election by the shareholder to reinvest in additional Fund
shares, at net asset value, all income dividends and capital gains distributions
payable by the Fund on shares held in such account, and shares so acquired will
be added to such account. The shareholder may deposit additional shares in his
or her account at any time.
Withdrawal payments cannot be considered as yield or income on
the shareholder's investment, since portions of each payment will normally
consist of a return of capital. Depending on the size or the frequency of the
disbursements requested, and the fluctuation in the value of the Fund's
portfolio, redemptions for the purpose of making such disbursements may reduce
or even exhaust the shareholder's account.
The shareholder may vary the amount or frequency of withdrawal
payments, temporarily discontinue them, or change the designated payee or
payee's address, by notifying Firstar Mutual Fund Services, LLC, the Funds'
transfer agent.
ALLOCATION OF PORTFOLIO BROKERAGE
Decisions to buy and sell securities for the Fund are made by the
Adviser subject to review by the Fund's Board of Directors. In placing purchase
and sale orders for portfolio securities for the Fund, it is the policy of the
Adviser to seek the best execution of orders at the most favorable price in
light of the overall quality of brokerage and research services provided, as
described in this and the following paragraph. In selecting brokers to effect
portfolio transactions, the determination of what is expected to result in best
execution at the most favorable price involves a number of largely judgmental
considerations. Among these are the Adviser's evaluation of the broker's
efficiency in executing and clearing transactions, block trading capability
(including the broker's willingness to position securities) and the broker's
financial strength and stability. The most favorable price to the Fund means the
best net price without regard to the mix between purchase or sale price and
commission, if any. Over-the-counter securities are generally purchased and sold
directly with principal market makers who retain the difference in their cost in
the security and its selling price (i.e., "markups" when the market maker sells
a security and "markdowns" when the market maker purchases a security). In some
instances, the Adviser feels that better prices are available from non-principal
market makers who are paid commissions directly. Although the Fund does not
intend to market its shares through intermediary broker-dealers, the Fund may
place portfolio orders with broker-dealers who recommend the purchase of Fund
shares to clients if the Adviser believes the commissions and transaction
quality are comparable to that available from other brokers and may allocate
portfolio brokerage on that basis.
In allocating brokerage business for the Fund, the Adviser also
takes into consideration the research, analytical, statistical and other
information and services provided by the broker, such as general economic
reports and information, reports or analyses of particular companies or industry
groups, market timing and technical information, and the
17
<PAGE>
availability of the brokerage firm's analysts for consultation. While the
Adviser believes these services have substantial value, they are considered
supplemental to the Adviser's own efforts in the performance of its duties under
the Advisory Agreement. Other clients of the Adviser may indirectly benefit from
the availability of these services to the Adviser, and the Fund may indirectly
benefit from services available to the Adviser as a result of transactions for
other clients. The Advisory Agreement provides that the Adviser may cause the
Fund to pay a broker which provides brokerage and research services to the
Adviser a commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting the transaction, if the
Adviser determines in good faith that such amount of commission is reasonable in
relation to the value of brokerage and research services provided by the
executing broker viewed in terms of either the particular transaction or the
Adviser's overall responsibilities with respect to the Fund and the other
accounts as to which it exercises investment discretion. Brokerage commissions
paid by the Fund during the fiscal years ended September 30, 1999, 1998 and 1997
totaled $126,622 on total transactions of $47,172,157, $86,020 on total
transactions of $37,386,002, and $87,353 on total transactions of $38,072,430,
respectively. All of the brokers to whom commissions were paid provided research
services to the Adviser.
CUSTODIAN
Firstar Bank, N.A., 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as custodian for the Fund. As such, Firstar Bank, N.A.
holds all securities and cash of the Fund, delivers and receives payment for
securities sold, receives and pays for securities purchased, collects income
from investments and performs other duties, all as directed by officers of the
Fund. Firstar Bank, N.A. does not exercise any supervisory function over the
management of the Fund, the purchase and sale of securities or the payment of
distributions to shareholders. Firstar Mutual Fund Services, LLC, an affiliate
of Firstar Bank, N.A. acts as the Fund's transfer agent and dividend disbursing
agent. Its address is 615 East Michigan Street, Milwaukee, Wisconsin 53202.
TAXES
The Fund intends to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Code. The
Fund has so qualified in each of its fiscal years. If the Fund fails to qualify
as a regulated investment company under Subchapter M in any fiscal year, it will
be treated as a corporation for federal income tax purposes. As such the Fund
would be required to pay income taxes on its net investment income and net
realized capital gains, if any, at the rates generally applicable to
corporations. Shareholders of the Fund would not be liable for income tax on the
Fund's net investment income or net realized capital gains in their individual
capacities. Distributions to shareholders, whether from the Fund's net
investment income or net realized capital gains, would be treated as taxable
dividends to the extent of current or accumulated earnings and profits of the
Fund.
The Fund intends to distribute substantially all of its net
investment income and net capital gain each fiscal year. Dividends from net
investment income, including short-term
18
<PAGE>
capital gains, are taxable to investors as ordinary income, while distributions
of net long-term capital gains are taxable as long-term capital gain regardless
of the shareholder's holding period for the shares. Distributions from the Fund
are taxable to investors, whether received in cash or in additional shares of
the Fund. A portion of the Fund's income distributions may be eligible for the
70% dividends-received deduction for domestic corporate shareholders.
Any dividend or capital gain distribution paid shortly after a
purchase of shares of the Fund, will have the effect of reducing the per share
net asset value of such shares by the amount of the dividend or distribution.
Furthermore, if the net asset value of the shares of the Fund immediately after
a dividend or distribution is less than the cost of such shares to the
shareholder, the dividend or distribution will be taxable to the shareholder
even though it results in a return of capital to him.
The redemption of shares will generally result in a capital gain
or loss for income tax purposes. Such capital gain or loss will be long-term or
short-term, depending on the holding period. However, if a loss is realized on
shares held for six months or less, and the investor received a capital gain
distribution during that period, then such loss is treated as a long-term
capital loss to the extent of the capital gain distribution received.
The Fund may be required to withhold Federal income tax at a rate
of 31% ("backup withholding") from dividend payments and redemption proceeds if
a shareholder fails to furnish the Fund with his social security or other tax
identification number and certify under penalty of perjury that such number is
correct and that he is not subject to backup withholding due to the under
reporting of income. The certification form is included as part of the share
purchase application and should be completed when the account is opened.
This section is not intended to be a complete discussion of
present or proposed federal income tax laws and the effects of such laws on an
investor. Investors are urged to consult their own tax advisers for a complete
review of the tax ramifications of an investment in the Fund.
SHAREHOLDER MEETINGS
The Wisconsin Business Corporation Law permits registered
investment companies, such as the Fund, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not required
by the Act. The Fund has adopted the appropriate provisions in its bylaws and
may, at its discretion, not hold an annual meeting in any year in which none of
the following matters is required to be acted upon by the shareholders under the
Act: (i) election of directors; (ii) approval of an investment advisory
agreement; (iii) ratification of the selection of auditors; and (iv) approval of
a distribution agreement.
The Fund's bylaws also contain procedures for the removal of
directors by its shareholders. At any meeting of shareholders, duly called and
at which a quorum is present, the shareholders may, by the affirmative vote of
the holders of a majority of the votes entitled
19
<PAGE>
to be cast thereon, remove any director or directors from office and may elect a
successor or successors to fill any resulting vacancies for the unexpired terms
of removed directors.
Upon the written request of the holders of shares entitled to not
less than ten percent (10%) of all the votes entitled to be cast at such
meeting, the Secretary of the Fund shall promptly call a special meeting of
shareholders for the purpose of voting upon the question of removal of any
director. Whenever ten or more shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
one percent (1%) of the total outstanding shares, whichever is less, shall apply
to the Fund's Secretary in writing, stating that they wish to communicate with
other shareholders with a view to obtaining signatures to a request for a
meeting as described above and accompanied by a form of communication and
request which they wish to transmit, the Secretary shall within five business
days after such application either: (1) afford to such applicants access to a
list of the names and addresses of all shareholders as recorded on the books of
the Fund; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course specified in clause
(2) of the last sentence of the preceding paragraph, the Secretary, upon the
written request of such applicants, accompanied by a tender of the material to
be mailed and of the reasonable expenses of mailing, shall, with reasonable
promptness, mail such material to all shareholders of record at their addresses
as recorded on the books unless within five business days after such tender the
Secretary shall mail to such applicants and file with the Securities and
Exchange Commission, together with a copy of the material to be mailed, a
written statement signed by at least a majority of the Board of Directors to the
effect that in their opinion either such material contains untrue statements of
fact or omits to state facts necessary to make the statements contained therein
not misleading, or would be in violation of applicable law, and specifying the
basis of such opinion.
After opportunity for hearing upon the objections specified in
the written statement so filed, the Securities and Exchange Commission may, and
if demanded by the Board of Directors or by such applicants shall, enter an
order either sustaining one or more of such objections or refusing to sustain
any of them. If the Securities and Exchange Commission shall enter an order
refusing to sustain any of such objections, or if, after the entry of an order
sustaining one or more of such objections, the Securities and Exchange
Commission shall find, after notice and opportunity for hearing, that all
objections so sustained have been met, and shall enter an order so declaring,
the Secretary shall mail copies of such material to all shareholders with
reasonable promptness after the entry of such order and the renewal of such
tender.
CAPITAL STRUCTURE
The Fund's authorized capital consists of 10,000,000 shares of
Common Stock. Shareholders are entitled: (i) to one vote per full share of
Common Stock; (ii) to such distributions as may be declared by the Fund's Board
of Directors out of funds legally
20
<PAGE>
available; and (iii) upon liquidation, to participate ratably in the assets
available for distribution. There are no conversion or sinking fund provisions
applicable to the shares, and the holders have no preemptive rights and may not
cumulate their votes in the election of directors. Consequently the holders of
more than 50% of the shares of Common Stock voting for the election of directors
can elect the entire Board of Directors and in such event the holders of the
remaining shares voting for the election of directors will not be able to elect
any person or persons to the Board of Directors.
The shares are redeemable and are transferable. All shares issued
and sold by the Fund will be fully paid and nonassessable except as provided in
Section 180.0622(2)(b) of the Wisconsin Business Corporation Law. Fractional
shares of Common Stock entitle the holder to the same rights as whole shares of
Common Stock.
The Fund will not issue certificates evidencing shares of Common
Stock purchased unless so requested in writing. Where certificates are not
issued, the shareholder's account will be credited with the number of shares
purchased, relieving shareholders of responsibility for safekeeping of
certificates and the need to deliver them upon redemption. Written confirmations
are issued for all purchases of Common Stock. Any shareholder may deliver
certificates to Firstar Mutual Fund Services, LLC and direct that his account be
credited with the shares. A shareholder may direct Firstar Mutual Fund Services,
LLC at any time to issue a certificate for his shares of Common Stock without
charge.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite
1500, Milwaukee, Wisconsin 53202 currently serves as the independent accountants
for the Fund and has so served since the fiscal year ended September 30, 1989.
As such PricewaterhouseCoopers LLP performs an audit of the Fund's financial
statements and considers the Fund's internal controls.
DESCRIPTION OF SECURITIES RATINGS
The Fund may invest in publicly distributed debt securities
assigned one of the three highest ratings of either Standard & Poor's
Corporation ("Standard & Poor's") or Moody's Investors Service, Inc.
("Moody's"). A brief description of the ratings symbols and their meanings
follows.
Standard & Poor's Debt Ratings. A Standard & Poor's corporate
debt rating is a current assessment of the creditworthiness of an obligor with
respect to a specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not
21
<PAGE>
perform any audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights;
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 the higher rated
categories.
Moody's Bond Ratings.
Aaa - Bonds which are rated Aaa are judged to be 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 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 risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
22
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Moody's applies numerical modifiers 1, 2 and 3 in each of the
foregoing generic rating classifications. 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.
