STATEMENT OF ADDITIONAL INFORMATION December 30, 1997
EASTCLIFF FUNDS, INC.
900 Second Avenue South
300 International Centre
Minneapolis, Minnesota 55402
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the prospectus of Eastcliff Funds, Inc.
dated December 30, 1997. Requests for copies of the prospectus should be
made in writing to Eastcliff Funds, Inc., 900 Second Avenue South, 300
International Centre, Minneapolis, Minnesota 55402, Attention: Corporate
Secretary, or by calling (612) 336-1444.
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EASTCLIFF FUNDS, INC.
Table of Contents
Page No.
General Information and History . . . . . . . . . . . . . . . . . . . . 1
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 1
Investment Considerations . . . . . . . . . . . . . . . . . . . . . . . 3
Directors and Officers of the Corporation . . . . . . . . . . . . . . . 13
Ownership of Management and Principal Shareholders . . . . . . . . . . 16
Investment Adviser, Portfolio Managers and Administrator . . . . . . . 17
Determination of Net Asset Value and Performance . . . . . . . . . . . 22
Distribution of Shares . . . . . . . . . . . . . . . . . . . . . . . . 24
Allocation of Portfolio Brokerage . . . . . . . . . . . . . . . . . . . 25
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Shareholder Meetings . . . . . . . . . . . . . . . . . . . . . . . . . 28
Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . 29
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 29
Description of Securities Ratings . . . . . . . . . . . . . . . . . . . 30
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 December 30, 1997 and, if
given or made, such information or representations may not be relied upon
as having been authorized by Eastcliff Funds, Inc.
The Statement of Additional Information does not constitute an
offer to sell securities.
GENERAL INFORMATION AND HISTORY
Eastcliff Funds, Inc., a Wisconsin corporation organized on May
23, 1986 (the "Corporation"), is an open-end, diversified management
investment company consisting of four portfolios, Eastcliff Growth Fund
(the "Growth Fund"), Eastcliff Total Return Fund (the "Total Return
Fund"), Eastcliff Regional Small Capitalization Value Fund (the "Regional
Small Cap Fund") and Eastcliff Contrarian Value Fund (the "Contrarian
Value Fund") (collectively, the "Eastcliff Funds" or the "Funds"). The
Corporation was called "Fiduciary Total Return Fund, Inc." prior to
December 23, 1994.
INVESTMENT RESTRICTIONS
As set forth in the prospectus dated December 30, 1997 of the
Corporation under the caption "Investment Objectives and Policies", the
investment objective of the Growth Fund is to produce long-term growth of
capital. The investment objective of the Total Return Fund is to realize
a combination of capital appreciation and income which will result in the
highest total return, while assuming reasonable risks. The term
"reasonable risks" refers to the judgment of the Total Return Fund's
investment adviser or portfolio manager that investment in certain
securities would not present an excessive risk of loss in light of current
and anticipated future general market and economic conditions, trends in
yields and interest rates, and fiscal and monetary policies. The
investment objective of the Regional Small Cap Fund is to produce capital
appreciation. The investment objective of the Contrarian Value Fund is to
produce long-term capital appreciation. Consistent with these investment
objectives, each of the Funds has adopted the following investment
restrictions which are matters of fundamental policy. Each Fund's
fundamental investment policies cannot be changed without approval of the
holders of the lesser of: (i) 67% of that 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 that Fund.
1. None of the Funds will purchase securities on margin,
participate in a joint-trading account, sell securities short, or write or
invest in put or call options, except that (a) the Growth Fund may invest
for hedging purposes up to 5% of its net assets in put or call options and
options on futures contracts and up to 5% of its net assets in futures
contracts, and (b) each of the Regional Small Cap Fund and the Contrarian
Value Fund may write or invest in put and call options to the extent
permitted by the Investment Company Act of 1940. No Fund's investments in
warrants, valued at the lower of cost or market, will exceed 5% of the
value of such Fund's net assets.
2. None of the Funds will borrow money or issue senior
securities, except for temporary bank borrowings (not in excess of 5% of
the value of its net assets) or for emergency or extraordinary purposes,
and none of the Funds will pledge any of its assets, except to secure
borrowings and only to an extent not greater than 10% of the value of such
Fund's net assets.
3. None of the Funds will 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 securities will not exceed 10% of such Fund's
net assets) or will lend its portfolio securities. A repurchase agreement
involves a sale of securities to a Fund with the concurrent agreement of
the seller to repurchase the securities at the same price plus an amount
equal to an agreed upon interest rate, within a specified time. In the
event of a bankruptcy or other default of a seller of a repurchase
agreement, such Fund could experience both delays in liquidating the
underlying securities and losses, including: (a) possible decline in
value of the collateral during the period while such Fund seeks to enforce
its rights thereto; (b) possible decreased levels of income during this
period; and (c) expenses of enforcing its rights.
4. None of the Funds will make investments for the purpose of
exercising control or management of any company.
5. None of the Funds will purchase securities of any issuer
(other than the United States or an agency or instrumentality of the
United States) if, as a result of such purchase, such Fund would hold more
than 10% of any class of securities, including voting securities, of such
issuer or more than 5% of such Fund's assets, taken at current value,
would be invested in securities of such issuer, except that up to 25% of
the assets of each of the Regional Small Cap Fund and the Contrarian Value
Fund may be invested without regard to these limitations.
6. None of the Funds will concentrate more than 25% of the
value of its net assets, determined at the time an investment is made,
exclusive of government securities, in securities issued by companies
primarily engaged in the same industry.
7. None of the Funds will acquire or retain any security
issued by a company, an officer or director of which is an officer or
director of the Corporation or an officer, director or other affiliated
person of any Fund's investment adviser.
8. None of the Funds will acquire or retain any security
issued by a company if any of the directors or officers of the
Corporation, or directors, officers or other affiliated persons of any
Fund's 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.
9. None of the Funds will act as an underwriter or distributor
of securities other than shares of the Corporation and none of the Funds,
other than the Contrarian Value Fund, may purchase any securities which
are restricted from sale to the public without registration under the
Securities Act of 1933, as amended.
10. None of the Funds will purchase oil, gas or other mineral
leases or any interest in any oil, gas or any other mineral exploration or
development program.
11. None of the Funds will purchase or sell real estate, real
estate mortgage loans or real estate limited partnerships.
12. None of the Funds will purchase or sell commodities or
commodities contracts, except that the Growth Fund may invest in futures
contracts and options on future contracts to the extent set forth in
Investment Restriction No. 1 above.
13. The Total Return Fund will not invest more than 5% of its
total assets, and each of the Growth Fund, the Regional Small Cap Fund and
the Contrarian Value Fund will not invest more than 10% of its total
assets, in securities of issuers which have a record of less than three
years of continuous operation, including the operation of any predecessor
business of a company which came into existence as a result of a merger,
consolidation, reorganization or purchase of substantially all of the
assets of such predecessor business.
The following investment limitation is not fundamental, and may
be changed without shareholder approval.
1. None of the Funds will purchase securities of other
investment companies except (a) as part of a plan of merger, consolidation
or reorganization approved by the shareholders of such Fund; (b)
securities of money market mutual funds; or (c) 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.
No purchases described in (b) and (c) will be made if as a result of such
purchase such Fund would hold more than 3% of any class of securities,
including voting securities, of any registered investment company or more
than 5% of such Fund's assets, taken at current value, would be invested
in the securities of any registered investment company or in securities of
registered closed-end investment companies.
INVESTMENT CONSIDERATIONS
Low-Rated Securities
As set forth in the Funds' prospectus dated December 30, 1997
under the caption "Investment Practices and Risks", each of the Funds will
limit its investments in convertible securities to those for which such
Fund's investment adviser believes (a) the underlying common stock is a
suitable investment for that Fund and (b) a greater potential for total
return exists by purchasing the convertible security because of its higher
yield. Moreover, none of the Funds will invest more than 5% of its net
assets at the time of investment in convertible securities rated less than
investment grade.
Corporate obligations rated less than investment grade
(hereinafter referred to as "low-rated securities") are commonly referred
to as "junk bonds", and while generally offering higher yields than
investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy. They are
regarded as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal. The special risk
considerations in connection with investments in low-rated securities are
discussed below.
Effect of Interest Rates and Economic Changes. Even though the exposure
of each of the Funds to the low-rated security market is limited to a
maximum of 5% of its net assets, the Funds are required to provide the
following discussion of such market.
The low-rated security market is relatively new and its growth
paralleled a long economic expansion. As a result, it is not clear how
this market may withstand a prolonged recession or economic downturn.
Such a prolonged economic downturn could severely disrupt the market for
and adversely affect the value of high-yield securities.
Interest-bearing securities typically experience appreciation
when interest rates decline and depreciation when interest rates rise.
The market values of low-rated securities tend to reflect individual
corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Low-rated securities also tend to be more sensitive to
economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising
interest rates, highly leveraged issuers of low-rated securities may
experience financial stress and may not have sufficient revenues to meet
their payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate
developments, or the issuer's inability to meet specific projected
business forecasts or the unavailability of additional financing. The
risk of loss due to default by an issuer of low-rated securities is
significantly greater than issuers of higher-rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a low-rated security defaulted, the
applicable Fund might incur additional expenses in seeking recovery.
Periods of economic uncertainty and changes would also generally result in
increased volatility in the market prices of low-rated securities and thus
in the applicable Fund's net asset value.
As previously stated, the value of a low-rated security
generally will decrease in a rising interest rate market, and accordingly,
so normally will the applicable Fund's net asset value. If such Fund
experiences unexpected net redemptions in such a market, it may be forced
to liquidate a portion of its portfolio securities without regard to their
investment merits. Due to the limited liquidity of low-rated securities
(discussed below), the Fund may be forced to liquidate these securities at
a substantial discount. Any such liquidation would reduce the Fund's
asset base over which expenses could be allocated and could result in a
reduced rate of return for the Fund.
Payment Expectations. Low-rated securities typically contain redemption,
call or prepayment provisions which permit the issuer of such securities
containing such provisions to, at their discretion, redeem the securities.
During periods of falling interest rates, issuers of low-rated securities
are likely to redeem or prepay the securities and refinance them with debt
securities with a lower interest rate. To the extent an issuer is able to
refinance the securities or otherwise redeem them, the applicable Fund may
have to replace the securities with a lower yielding security which would
result in lower returns for the Fund.
Credit Ratings. Credit ratings issued by credit rating agencies evaluate
the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of low-rated securities
and therefore may not fully reflect the true risks of an investment. In
addition, credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the condition of the issuer
that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Liquidity and Valuation. A Fund may have difficulty disposing of certain
low-rated securities because there may be a thin trading market for such
securities. Because not all dealers maintain markets in all low-rated
securities there is no established retail secondary market for many of
these securities. The Funds anticipate that such securities could be sold
only to a limited number of dealers or institutional investors. To the
extent a secondary trading market does exist, it is generally not as
liquid as the secondary market for higher rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of
the security, and accordingly, the net asset value of a particular Fund
and its ability to dispose of particular securities when necessary to meet
its liquidity needs, or in response to a specific economic event, or an
event such as a deterioration in the creditworthiness of the issuer. The
lack of a liquid secondary market for certain securities may also make it
more difficult for a Fund to obtain accurate market quotations for
purposes of valuing their respective portfolios. Market quotations are
generally available on many low-rated issues only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. During periods of thin trading, the spread
between bid and asked prices is likely to increase significantly. In
addition, adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of
high-yield securities, especially in a thinly-traded market.
Hedging Instruments
As set forth above under the caption "Investment Restrictions",
the Growth Fund may invest up to 5% of its net assets in put or call
options and options on futures contracts and up to 5% of its net assets in
futures contracts. Similarly, as set forth in the Prospectus under the
captions "Investment Objectives and Policies -- Eastcliff Regional Small
Capitalization Value Fund" and "Investment Objectives and Policies --
Eastcliff Contrarian Value Fund", each of the Regional Small Cap Fund and
Contrarian Value Fund may purchase put and call options on equity
securities and on stock indices and write covered call options on equity
securities owned by the Fund, provided not more than 5% of the Fund's net
assets will be invested in put and call options and the premiums received
by the Fund with respect to unexpired call options written by the Fund
will not exceed 5% of the Fund's net assets. The foregoing investments
will be effected during periods of anticipated market weakness and will
not result in leveraging of the applicable Fund's portfolio.
Futures Contracts. When the Growth Fund purchases a futures contract, it
agrees to purchase a specified underlying instrument at a specified future
date. When the Growth Fund sells a futures contract, it agrees to sell
the underlying instrument at a specified future date. The price at which
the purchase and sale will take place is fixed when the Growth Fund enters
into the contract. Futures can be held until their delivery dates, or can
be closed out before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease
in tandem with the value of its underlying instrument. Therefore,
purchasing futures contracts will tend to increase the Growth Fund's
exposure to positive and negative price fluctuations in the underlying
instrument, much as if the Growth Fund had purchased the underlying
instrument directly. When the Growth Fund sells a futures contract, by
contrast, the value of its future position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore,
will tend to offset both positive and negative market price changes, much
as if the underlying instrument had been sold.
Futures Margin Payments. The purchaser or seller of a futures contract is
not required to deliver or pay for the underlying instrument unless the
contract is held until the delivery date. However, both the purchaser and
seller are required to deposit "initial margin" with a futures broker,
known as a Futures Commission Merchant ("FCM"), when the contract is
entered into. Initial margin deposits are equal to a percentage of the
contract's value. If the value of either party's position declines, that
party will be required to make additional "variation margin" payments to
settle the change in value on a daily basis. The party that has a gain
may be entitled to receive all or a portion of this amount. Initial and
variation margin payments do not constitute purchasing securities on
margin for purposes of the Growth Fund's investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of the
Growth Fund, such Fund may be entitled to return of margin owed to it only
in proportion to the amount received by the FCM's other customers,
potentially resulting in losses to the Fund.
Purchasing Put and Call Options. By purchasing a put option, the Growth
Fund, the Regional Small Cap Fund or the Contrarian Value Fund, as the
case may be, obtains the right (but not the obligation) to sell the
option's underlying instrument at a fixed strike price. In return for
this right, the Fund pays the current market price for the option (known
as the option premium). The Growth Fund may purchase options on futures
contracts, as well as options on equity securities and stock indices. The
Regional Small Cap Fund and the Contrarian Value Fund may purchase options
on equity securities and on stock indices. The Growth Fund, the Regional
Small Cap Fund or the Contrarian Value Fund, as the case may be, may
terminate its position in a put option it has purchased by allowing it to
expire or by exercising the option. If the option is allowed to expire,
the Fund will lose the entire premium it paid. If a Fund exercises the
option, it completes the sale of the underlying instrument at the strike
price. Such Fund may also terminate a put option position by closing it
out in the secondary market at its current price, if a liquid secondary
market exists. The buyer of a put option can expect to realize a gain if
security prices fall substantially. However, if the underlying
instrument's price does not fall enough to offset the cost of purchasing
the option, a put buyer can expect to suffer a loss (limited to the amount
of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those
of put options, except that the purchaser of a call option obtains the
right to purchase, rather than sell, the underlying instrument at the
option's strike price. A call buyer attempts to participate in potential
price increases of the underlying instrument with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can
expect to suffer a loss if security prices do not rise sufficiently to
offset the cost of the option. Only exchange listed options will be
acquired.
Stock Index Options. Stock index options are put options and call options
on various stock indexes. In most respects, they are identical to listed
options on common stocks. The primary difference between stock options
and index options occurs when index options are exercised. In the case of
stock options, the underlying security, common stock, is delivered.
However, upon the exercise of an index option, settlement does not occur
by delivery of the securities comprising the index. The option holder who
exercises the index option receives an amount of cash if the closing level
of the stock 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. This amount of cash is equal to the difference between the
closing price of the stock index and the exercise price of the option
expressed in dollars times a specified multiple. A stock index fluctuates
with changes in the market value of the stocks included in the index. For
example, some stock index options are based on a broad market index, such
as the Standard & Poor's 500 or the Value Line Composite Index, or a
narrower market index, such as the Standard & Poor's 100. Indexes also
may be based on an industry or market segment, such as the AMEX Oil and
Gas Index or the Computer and Business Equipment Index. Options on stock
indexes are currently traded on the following exchanges: the Chicago
Board Options Exchange, the New York Stock Exchange, the American Stock
Exchange, the Pacific Stock Exchange, and the Philadelphia Stock Exchange.
Writing Call and Put Options. When the Growth Fund, the Regional Small
Cap Fund or the Contrarian Value Fund, as the case may be, writes a call
option, it receives a premium and agrees to sell the related investments
to a purchaser of the call during the call period (usually not more than
nine months) at a fixed exercise price (which may differ from the market
price of the related investments) regardless of market price changes
during the call period. If the call is exercised, the Fund forgoes any
gain from an increase in the market price over the exercise price. When
writing an option on a futures contract the Growth Fund will be required
to make margin payments to an FCM as described above for futures
contracts.
To terminate its obligations on a call which it has written,
the Growth Fund, the Regional Small Cap Fund or the Contrarian Value Fund,
as the case may be, may purchase a call in a "closing purchase
transaction." (As discussed above, such Funds may also purchase calls
other than as part of such closing transactions.) A profit or loss will
be realized depending on the amount of option transaction costs and
whether the premium previously received is more or less than the price of
the call purchased. A profit may also be realized if the call lapses
unexercised, because the Fund retains the premium received. Any such
profits are considered short-term gains for federal income tax purposes
and, when distributed, are taxable as ordinary income.
Writing calls generally is a profitable strategy if prices
remain the same or fall. Through receipt of the option premium, a call
writer mitigates the effects of a price decline. At the same time,
because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security
price increases.
When a Fund writes a put option, it takes the opposite side of
the transaction from the option's purchaser. In return for receipt of a
premium, the Fund assumes the obligation to pay the strike price for the
option's underlying instrument if the other party to the option chooses to
exercise it. The Growth Fund may only write covered puts and the Regional
Small Cap Fund and the Contrarian Value Fund currently will not write put
options. For a put to be covered, the Growth Fund must maintain in a
segregated account cash or high-quality, short-term readily marketable
obligations equal to the option price. A profit or loss will be realized
depending on the amount of option transaction costs and whether the
premium previously received is more or less than the put purchased in a
closing purchase transaction. A profit may also be realized if the put
lapses unexercised because the Fund retains the premium received. Any
such profits are considered short-term gains for federal income tax
purposes and, when distributed, are taxable as ordinary income.
Combined Option Positions. The Growth Fund, the Regional Small Cap Fund
or the Contrarian Value Fund may purchase and write options (subject to
the limitations discussed above) in combination with each other to adjust
the risk and return characteristics of the overall position. For example,
either Fund may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose
risk and return characteristics are similar to selling a futures contract.
Another possible combined position would involve writing a call option at
one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial
price increase. Because combined options involve multiple trades, they
result in higher transaction costs and may be more difficult to open and
close out.
Correlation of Price Changes. Because there are a limited number of types
of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the applicable Fund's
current or anticipated investments. The Growth Fund, the Regional Small
Cap Fund or the Contrarian Value Fund may invest in options and (with
respect to the Growth Fund only) futures contracts based on securities
which differ from the securities in which it typically invests. This
involves a risk that the options or futures position will not track the
performance of the Fund's investments.
Options and futures prices can also diverge from the prices of
their underlying instruments, even if the underlying instrument match the
applicable Fund's investments well. Options and future prices are
affected by such factors as current and anticipated short-term interest
rates, changes in volatility of the underlying instrument, and the time
remaining until expiration of the contract, which may not affect security
prices the same way. Imperfect correlation may also result from differing
levels of demand in the options and futures markets and the securities
markets, from structural differences in how options and futures and
securities are traded, or from imposition of daily price fluctuation
limits or trading halts. The Growth Fund, the Regional Small Cap Fund and
the Contrarian Value Fund may purchase or sell options and (with respect
to the Growth Fund only) futures contracts with a greater or less value
than the securities it wishes to hedge or intends to purchase in order to
attempt to compensate for differences in historical volatility between the
contract and the securities, although this may not be successful in all
cases. If price changes in the applicable Fund's options or futures
positions are poorly correlated with its other investments, the positions
may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments. Successful use of these techniques
requires skills different from those needed to select portfolio
securities.
Liquidity of Options and Futures Contracts. There is no assurance a
liquid secondary market will exist for any particular options or futures
contract at any particular time. Options may have relatively low trading
volume and liquidity if their strike prices are not close to the
underlying instruments' current price. In addition, exchanges may
establish daily price fluctuation limits for options and futures
contracts, and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days
when the price fluctuation limit is reached or a trading halt is imposed,
it may be impossible for the Growth Fund, the Regional Small Cap Fund or
the Contrarian Value Fund, as the case may be, to enter into new positions
or close out existing positions. If the secondary market for a contract
is not liquid because of price fluctuation limits or otherwise, it could
prevent prompt liquidation of unfavorable positions, and potentially could
require the applicable Fund to continue to hold a position until delivery
or expiration regardless of changes in its value. As a result, such
Fund's access to other assets held to cover its options or futures
positions could also be impaired.
Asset Coverage for Futures and Option Positions. The Growth Fund, the
Regional Small Cap Fund and the Contrarian Value Fund will comply with
guidelines established by the Securities and Exchange Commission with
respect to coverage of options and futures strategies by mutual funds, and
if the guidelines so require will set aside cash or liquid securities in a
segregated custodial account in the amount prescribed. Securities held in
a segregated account cannot be sold while the futures or option strategy
is outstanding, unless they are replaced with other suitable assets. As a
result, there is a possibility that segregation of a portion of the
applicable Fund's assets could impede portfolio management or such Fund's
ability to meet redemption requests or other current obligations.
Possible Tax Limitations on Portfolio and Hedging Strategies. The
Corporation intends that each of the Funds qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code for
each taxable year. In order to so qualify, each of such Funds must, among
other things, derive less than 30% of its gross income for the fiscal year
ending June 30, 1998, but not subsequent fiscal years, from the sale or
other disposition of stock or securities (or options thereon) held less
than three months. Due to this limitation, each of such Funds will limit
the extent to which it engages in the following activities, but will not
be precluded from them: (i) selling investments, including futures, held
for less than three months, whether or not they were purchased on the
exercise of a call; (ii) the writing of calls on investments held less
than three months; (iii) the writing or purchasing of calls or the
purchasing of puts which expire in less than three months; (iv) effecting
closing transactions with respect to calls written or purchased or puts
purchased less than three months previously; and (v) exercising certain
puts or calls held for less than three months.
Special Risks of Hedging and Income Enhancement Strategies. Participation
in the options or futures markets involves investment risks and
transactions costs to which the Growth Fund, the Regional Small Cap Fund
or the Contrarian Value Fund, as applicable, would not be subject absent
the use of these strategies. In particular, the loss from investing in
futures contracts is potentially unlimited. If the applicable Fund's
portfolio manager(s)' prediction of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse
consequences to such Fund may leave such Fund in a worse position than if
such strategies were not used. Risks inherent in the use of futures
contracts and options on futures contracts include: (1) dependence on the
portfolio manager(s)' ability to predict correctly movements in the
direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts
and options thereon and movements in the prices of the securities being
hedged; (3) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the
possible absence of a liquid secondary market for any particular
instrument at any time; and (5) the possible need to defer closing out
certain hedged positions to avoid adverse tax consequences.
Illiquid Securities. Each of the Funds may invest up to 10% of its net
assets in securities for which there is no readily available market
("illiquid securities"). The 10% limitation includes certain securities
whose disposition would be subject to legal restrictions ("restricted
securities") which may be purchased by the Contrarian Value Fund but not
the other Funds. However, certain restricted securities that may be
resold pursuant to Rule 144A under the Securities Act may be considered
liquid. The Board of Directors of the Corporation has delegated to
Resource Capital Advisers, Inc. (the "Adviser") the day-to-day
determination of the liquidity of a security although it has retained
oversight and ultimate responsibility for such determinations. Although
no definite quality criteria are used, the Board of Directors has directed
the Adviser to consider such factors as (i) the nature of the market for a
security (including the institutional private resale markets); (ii) the
terms of these securities or other instruments allowing for the
disposition to a third party or the issuer thereof (e.g. certain
repurchase obligations and demand instruments); (iii) and availability of
market quotations; and (iv) other permissible factors.
Restricted securities may be sold in private negotiated or
other exempt transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act. When
registration is required, the Contrarian Value Fund may be obligated to
pay all or part of the registration expenses and a considerable time may
elapse between the decision to sell and the sale date. If, during such
period, adverse market conditions were to develop, the Contrarian Value
Fund might obtain a less favorable price than the price which prevailed
when it decided to sell. Restricted securities will be priced at fair
value as determined in good faith by the Board of Directors.
DIRECTORS AND OFFICERS OF THE CORPORATION
The name, age, address, principal occupation(s) during the past
five years and other information with respect to each of the directors and
officers of the Corporation are as follows:
CONLEY BROOKS, JR.*
900 Second Avenue South
Suite 300
Minneapolis, Minnesota 55402
(PRESIDENT AND A DIRECTOR OF THE CORPORATION)
Mr. Brooks, age 52, has been President of Brooks Associates,
Inc., an asset and investment management firm, since 1982 and Chairman of
the Board of Resource Companies, Inc. since 1992. Resource Companies,
Inc. is a bank holding company which owns Resource Trust Company, the
corporate parent of Resource Capital Advisers, Inc. Mr. Brooks has been
President and a director of the Corporation since December, 1994.
JOHN J. FAUTH
3100 Metropolitan Centre
333 South Seventh Street
Minneapolis, Minnesota 55402
(A DIRECTOR OF THE CORPORATION)
Mr. Fauth, age 52, has been Chairman and Chief Executive
Officer of The Churchill Companies, a private investment company, since
April, 1982. Mr. Fauth has been a director of the Corporation since
December, 1994. He is also a director of Kinnard Investments, Inc.
A. SKIDMORE THORPE
4900 IDS Center
80 South Eighth Street
Minneapolis, Minnesota 55402
(A DIRECTOR OF THE CORPORATION)
Mr. Thorpe, age 68, is a private investor; he has been Chairman
of Andrus California Timberland Partnerships, a private investment firm,
since 1988. Mr. Thorpe has been a director of the Corporation since
December, 1994.
_______________
* Messrs. Brooks, Welch and Wilson are directors who are "interested
persons" of the Fund as that term is defined in the Investment Company Act
of 1940.
E. THOMAS WELCH*
900 Second Avenue South
Suite 300
Minneapolis, Minnesota 55402
(VICE PRESIDENT AND A DIRECTOR OF THE CORPORATION)
Mr. Welch, age 59, has been President and Managing Director of
Resource Trust Company since 1984, President of Resource Companies, Inc.
since January, 1990 and Chief Operating Officer of Resource Capital
Advisers, Inc. since February, 1992. He has served as Vice President and
a director of the Corporation since December, 1994. Mr. Welch is also a
director of Casino Magic.
JOHN A. CLYMER
900 Second Avenue South
Suite 300
Minneapolis, Minnesota 55402
(VICE PRESIDENT, SECRETARY AND TREASURER OF THE CORPORATION)
Mr. Clymer, age 49, has been a Managing Director of Resource
Trust Company and President of Resource Capital Advisers, Inc. since 1994.
Prior to joining the Resource companies, he was president of Minnesota
Mutual Life Insurance Company, and had held various positions within
Minnesota Mutual Life Insurance Company since 1972. Mr. Clymer has served
as a Vice President of the Corporation since June, 1996 and as Secretary
and Treasurer of the Corporation since June, 1997. Mr. Clymer is a
director of Hanover Capital Mortgage Holdings, Inc., a real estate
investment trust, and WTC Industries, Inc.
DONALD S. WILSON*
225 East Mason Street
Milwaukee, Wisconsin 53202
(A DIRECTOR OF THE CORPORATION)
Mr. Wilson, age 54, co-founded Fiduciary Management, Inc., a
Milwaukee, Wisconsin, investment advisory firm, in 1980 and has served as
a director and in various executive capacities since that time, including
as President and Treasurer since 1987. Mr. Wilson has served in various
capacities with the Corporation since its inception in 1986. He has been
a director of the Corporation since 1987. From 1986 through December,
1994, Mr. Wilson served as Vice President and Assistant Secretary of the
Corporation, and from December, 1994 through June, 1997, he served as
Secretary and Treasurer of the Corporation. Mr. Wilson also serves as a
director of Fiduciary Capital Growth Fund, Inc. and FMI Funds, Inc.
_______________
* Messrs. Brooks, Welch and Wilson are directors who are "interested
persons" of the Fund as that term is defined in the Investment Company Act
of 1940.
A. RODNEY BOREN
900 Second Avenue South
Suite 300
Minneapolis, Minnesota 55402
(VICE PRESIDENT OF THE CORPORATION)
Mr. Boren, age 51, has been a Managing Director of Resource
Trust Company since January, 1996. Prior to joining Resource Trust
Company, he was with Norwest Bank since 1974, most recently serving as
Executive Vice President, Norwest Institutional Trust Services, from 1990
to 1995. Mr. Boren served as an Investment Officer of the Corporation
from February, 1996 to June, 1997 and has served as Vice President of the
Corporation since June, 1997.
THOMAS M. KERESEY
249 Royal Palm Way
Suite 400
Palm Beach, Florida 33480
(VICE PRESIDENT OF THE CORPORATION)
Mr. Keresey, age 66, has been a Chairman and Chief Investment
Officer of Palm Beach Investment Advisers, Inc. ("PBIA") since February,
1990. Prior to founding PBIA, he was Chairman of Palm Beach Capital
Management, an independent counseling firm advising the ABT family of
mutual funds, as well as private and institutional accounts. Previously,
he served as Chairman and Director of the First National Bank in Palm
Beach for ten years, Executive Vice President and Director of Kidder
Peabody Company in New York, and Executive Vice President and Director of
Clark, Dodge and Company. Mr. Keresey served as an Investment Officer of
the Corporation from February, 1996 to June, 1997 and has served as a Vice
President of the Corporation since June, 1997.
SARAH A. HILLESHEIM
900 Second Avenue South
Suite 300
Minneapolis, Minnesota 55402
(VICE PRESIDENT AND ASSISTANT SECRETARY OF THE CORPORATION)
Ms. Hillesheim, age 36, has been employed at Resource Capital
Advisers, Inc. since 1994 and has served as a Compliance Specialist since
August, 1996. From November 1992 until June 1994, she was employed at the
Center for Diagnostic Imaging; prior to that time, she was employed at
Piper Jaffray Companies from 1985 to 1992. Ms. Hillesheim has been a Vice
President and Assistant Secretary of the Corporation since November, 1995.
The Corporation's standard method of compensating directors
is to pay each director who is not an officer of the Corporation a fee of
$500 for each meeting of the Board of Directors attended. During the
fiscal year ended June 30, 1997 the Corporation paid $1,050 in directors'
fees to the Corporation's directors who are not officers of the
Corporation. The table below sets forth the compensation paid by the
Corporation to each of the current directors of the Corporation during the
fiscal year ended June 30, 1997:
<TABLE>
COMPENSATION TABLE
<CAPTION>
Total
Pension or Retirement Estimated Annual Compensation
Name of Aggregate Compensation Benefits Accrued As Benefits Upon from Corporation
Person from Corporation Part of Fund Expenses Retirement Paid to Directors
<S> <C> <C> <C> <C>
Conley Brooks, Jr. $0 $0 $0 $0
John J. Fauth $450 $0 $0 $450
A. Skidmore Thorpe $600 $0 $0 $600
E. Thomas Welch $0 $0 $0 $0
Donald S. Wilson $0 $0 $0 $0
</TABLE>
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
As of September 30, 1997, the Contrarian Value Fund did not
have any outstanding voting securities. As of the same date, all officers
and directors of the Corporation as a group (9 persons) beneficially owned
16,712 shares of the Growth Fund (which constituted 0.51% of its then
outstanding shares), 10,364 shares of the Total Return Fund (which
constituted 0.79% of its then outstanding shares) and 16,039 shares of the
Regional Small Cap Fund (which constituted 0.40% of its then outstanding
shares). As of such date, the sole beneficial holders of more than 5% of
the Growth Fund's then outstanding shares were Resource Trust Company,
Suite 300, 900 Second Avenue South, Minneapolis, Minnesota 55402, which
owned 2,932,889 shares of such Fund (constituting 89.05% of its then
outstanding shares), and Hollybrook & Company, an affiliate of Conley
Brooks, Jr., which owned 189,835 shares of the Growth Fund (constituting
5.76% of its then outstanding shares). The Growth Fund shares held by
Hollybrook & Company are included in the 2,932,889 shares held by Resource
Trust Company. As of the same date, the sole beneficial holder of more
than 5% of the Total Return Fund's then outstanding shares was Resource
Trust Company, Suite 300, 900 Second Avenue South, Minneapolis, Minnesota
55402, which owned 1,242,863 shares, or 94.40% of the total shares of such
Fund then outstanding. As of the same date, the sole beneficial holders
of more than 5% of the Regional Small Cap Fund's then outstanding shares
were Resource Trust Company, Suite 300, 900 Second Avenue South,
Minneapolis, Minnesota 55402, which owned 1,383,550 shares of such Fund
(constituting 34.14% of its then outstanding shares), and First Trust
National Association, 180 E. 5 St., P.O. Box 64488, St. Paul,
Minnesota 55164-0488, which owned 1,317,957 shares of such Fund
(constituting 32.52% of its then outstanding shares). Resource Trust
Company, a Minnesota corporation, is the parent company of Resource
Capital Advisers, Inc., the investment adviser to each of the Funds.
The Growth Fund, the Total Return Fund, the Regional Small Cap
Fund and the Corporation are controlled by Resource Trust Company. The
Regional Small Cap Fund is also deemed to be controlled by First Trust
National Association. Resource Trust Company owns sufficient shares of
the Growth Fund, the Total Return Fund and, with First Trust National
Association, the Regional Small Cap Fund to approve or disapprove all
matters brought before shareholders of such Funds, including the election
of directors of the Corporation and the approval of auditors. The
Corporation does not control any person.
INVESTMENT ADVISER, PORTFOLIO MANAGERS AND ADMINISTRATOR
As set forth in the Prospectus under the caption "Management of
the Funds" the investment adviser to each of the Funds is Resource Capital
Advisers, Inc. (the "Adviser"), the portfolio manager to the Growth Fund
is Winslow Capital Management, Inc. ("WCM"), the portfolio manager to the
Total Return Fund is Palm Beach Investment Advisers, Inc. ("PBIA"), the
portfolio manager to the Regional Small Cap Fund is Woodland Partners LLC
("WP") and the portfolio manager to the Contrarian Value Fund is Sasco
Capital, Inc. ("Sasco"). The Adviser is a wholly-owned subsidiary of
Resource Trust Company, a Minnesota state bank. Resource Trust Company is
a wholly-owned subsidiary of Resource Companies, Inc., a Minnesota
corporation. The Adviser's executive officers include E. Thomas Welch,
Chief Operating Officer, John A. Clymer, President, Compliance Officer and
Chief Investment Officer, and Dan W. Melcher, Chief Financial Officer.
The directors of the Adviser are E. Thomas Welch, Conley Brooks, Jr. and
Lyman E. Wakefield, Jr. WCM is controlled by Clark J. Winslow, its
President, Chief Executive Officer, and principal shareholder. PBIA is
controlled by the Adviser. WP is owned in equal parts by Richard W.
Jensen, Elizabeth M. Lilly and Richard J. Rinkoff. Sasco is owned by Hoda
Bibi, Bruce Bottomley, Lee Garcia and Daniel Leary.
Prior to December 31, 1994, the Total Return Fund's investment
adviser was Fiduciary Management, Inc. (the "Administrator"). On such
date the investment advisory agreement with the Administrator was
terminated and the Total Return Fund entered into a substantially
identical investment advisory agreement with the Adviser. Effective July
1, 1995, this investment advisory agreement was terminated and replaced
with a new investment advisory agreement described below.
Pursuant to separate investment advisory agreements entered into
between the Funds and the Adviser effective July 1, 1995 with respect to
the Growth Fund and the Total Return Fund, September 16, 1996 with respect
to the Regional Small Cap Fund and December 30, 1997 with respect to the
Contrarian Value Fund (the "Management Agreements"), the Adviser provides
consulting, investment and administrative services to each of the Funds.
The specific investments for each Fund will be made by one or more
portfolio managers selected for such Fund by the Adviser. The Adviser has
overall responsibility for assets under management, provides overall
investment strategies and programs for the Funds, selects portfolio
managers, allocates assets among the portfolio managers and monitors and
evaluates the portfolio managers' performance. The Adviser and each of
the Funds enter into separate sub-advisory agreements with such Fund's
portfolio managers. The Adviser also provides each of the Funds with
office space, equipment and personnel necessary to operate and administer
such Fund's business and to supervise the provision of services by third
parties such as the transfer agent and the custodian. During the period
from October 1, 1994 to December 31, 1994 and the fiscal year ended
September 30, 1994, the Total Return Fund paid the Administrator advisory
fees of $5,379 and $26,332, respectively, pursuant to an investment
advisory agreement with compensation provisions identical to the
subsequent investment advisory agreements with the Adviser, including the
new Management Agreement described above. During the fiscal years ended
June 30, 1997 and 1996 and the period from January 1, 1995 through June
30, 1995, the Total Return Fund paid the Adviser advisory fees of
$191,191, $129,207 and $17,976, respectively, and the Adviser waived $0,
$38,729 and $33,908, respectively, in additional advisory fees. The
Growth Fund did not begin operations until June 30, 1995. During the
fiscal years ended June 30, 1997 and 1996, the Growth Fund paid the
Adviser advisory fees of $454,388 and $372,152, respectively, and the
Adviser waived $0 and $15,451 in additional advisory fees, respectively.
The Regional Small Cap Fund did not begin operations until September 16,
1996. During the period from September 16, 1996 through June 30, 1997,
the Regional Small Cap Fund paid the Adviser advisory fees of $144,375.
The Contrarian Value Fund did not begin operations until December 30, 1997
and, thus, such Fund had not paid the Adviser any fees as of that date.
The Adviser has undertaken to reimburse each Fund to the extent
that the aggregate annual operating expenses exceed that percentage of the
daily net assets of such 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 the shares of such Fund are qualified for sale or, if the states in
which the shares of such Fund are qualified for sale impose no such
restrictions, 2%. As of the date of this Statement of Additional
Information the shares of the Funds are not qualified for sale in any
state which imposes an expense limitation. Notwithstanding the most
restrictive applicable expense limitation of state securities commissions
set forth above or the terms of the Management Agreements, the Adviser has
voluntarily agreed to reimburse each of the Funds for expenses in excess
of 1.3% of such Fund's average daily net assets during the fiscal year
ending June 30, 1998, and did so for the fiscal years ended June 30, 1997
and 1996 for each of the Funds operating at such times. Each Fund
monitors its expense ratio on a monthly basis. If the accrued amount of
the expenses of a Fund exceeds the expense limitation, such 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 such Fund's fiscal year if accrued expenses thereafter fall
below this limit. During the period from October 1, 1994 to December 31,
1994 and the fiscal year ended September 30, 1994, the Administrator
reimbursed the Total Return Fund $6,505 and $19,352, respectively, for
excess expenses pursuant to an investment advisory agreement with an
expense limitation identical to that contained in the Management
Agreement. During the fiscal years ended June 30, 1997 and 1996 and the
period from January 1, 1995 to June 30, 1995, the Adviser reimbursed the
Total Return Fund $35,832, $9,060 and $17,811, respectively (in addition
to the waiver of advisory fees described above), for excess expenses
pursuant to an investment advisory agreement also containing an identical
expense limitation. The Growth Fund did not begin operations until June
30, 1995. During the fiscal years ended June 30, 1997 and 1996, the
Adviser reimbursed the Growth Fund $14,325 and $17,342, respectively, (in
addition to the waiver of advisory fees described above) for excess
expenses pursuant to its Management Agreement. The Regional Small Cap
Fund did not begin operations until September 16, 1996. During the period
from September 16, 1996 through September 30, 1997, the Advisor reimbursed
the Regional Small Cap Fund $45,235 for excess expenses pursuant to its
Management Agreement. The Contrarian Value Fund did not begin operations
until December 30, 1997 and, thus, no expense reimbursement was required
as of such date for such Fund.
As of the date hereof, WCM is the sole portfolio manager of the
Growth Fund, PBIA is the sole portfolio manager of the Total Return Fund,
WP is the sole portfolio manager of the Regional Small Cap Fund and Sasco
is the sole portfolio manager of the Contrarian Value Fund. Each of WCM,
PBIA, WP and Sasco has entered into a separate sub-advisory contract with
the applicable Fund and the Adviser (the Sub-Advisory Agreements").
Pursuant to their respective Sub-Advisory Agreements, WCM makes specific
portfolio investments for that segment of the assets of the Growth Fund
under its management in accordance with such Fund's investment objective
and WCM's investment approach and strategies, PBIA makes specific
portfolio investments for that segment of the assets of the Total Return
Fund under its management in accordance with such Fund's investment
objective and PBIA's investment approach and strategies, WP makes specific
portfolio investments for that segment of the assets of the Regional Small
Cap Fund under its management in accordance with such Fund's investment
objectives and WP's investment approach and strategies and Sasco makes
specific portfolio investments for that segment of the assets of the
Contrarian Value Fund under its management in accordance with such Fund's
investment objectives and Sasco's investment approach and strategies.
Portfolio managers of the Funds, including WCM, PBIA, WP, and
Sasco are employed and may be terminated by the Adviser subject to prior
approval by the Board of Directors of the Corporation. The employment of
a new portfolio manager currently requires the prior approval of the
shareholders of the applicable Fund. The Corporation, however, may
request an order of the Securities and Exchange Commission exempting the
Funds from the requirements under the Investment Company Act of 1940
relating to shareholder approval of new portfolio managers. There can be
no assurance that the Corporation will request such an order, or, if
requested, that such an order will be granted with respect to the Funds.
Selection and retention criteria for portfolio managers include: (i)
their historical performance records; (ii) consistent performance in the
context of the markets and preservation of capital in declining markets;
(iii) organizational stability and reputation; (iv) the quality and depth
of investment personnel; and (v) the ability of the portfolio manager to
apply its approach consistently. Each portfolio manager will not
necessarily exhibit all of the criteria to the same degree. Portfolio
managers are paid by the Adviser (not the Funds).
The portfolio managers' activities are subject to general
supervision by the Adviser and the Board of Directors of the Corporation.
Although the Adviser and the Board do not evaluate the investment merits
of the portfolio managers' specific securities selections, they do review
the performance of each portfolio manager relative to the selection
criteria.
As set forth in the Prospectus under the caption "Management of
the Funds" the Administrator is the administrator to each of the Funds.
The Administrator is controlled by Mr. Wilson and Ted D. Kellner.
Pursuant to separate administration agreements entered into between each
of the Funds and the Administrator (the "Administration Agreements"), the
Administrator supervises all aspects of the Funds' operations except those
performed by the Adviser or the portfolio managers. In connection with
such supervision the Administrator prepares and maintains the books,
accounts and other documents required by the Investment Company Act of
1940 (the "Act"), calculates the Fund's net asset value, responds to
shareholder inquiries, prepares the Fund's financial statements and excise
tax returns, 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. During the fiscal years ended June 30, 1997 and 1996, the
period from October 1, 1994 to June 30, 1995 and the fiscal year ended
September 30, 1994, the Total Return Fund paid the Administrator $38,238,
$33,575, $11,452, and $5,267, respectively, pursuant to such Fund's
Administration Agreement. The Growth Fund did not commence operations
until June 30, 1995. During the fiscal years ended June 30, 1997 and
1996, the Growth Fund paid the Administrator $75,438 and $68,201,
respectively, pursuant to such Fund's Administration Agreement. The
Regional Small Cap Fund did not commence operations until September 16,
1996. During the period from September 16, 1996 through June 30, 1997,
the Regional Small Cap Fund paid the Administrator $28,875 pursuant to
each Fund's Administration Agreement. The Contrarian Value Fund did not
commence operations until December 30, 1997 and, thus, such Fund had not
paid the Administrator any fees as of that date.
The respective Management Agreements and Sub-Advisory Agreements
of each of the Funds will remain in effect as long as its continuance is
specifically approved at least annually (i) by the Board of Directors of
the Corporation, or, in the case of the Management Agreements, by the vote
of a majority (as defined in the Act) of the outstanding shares of the
applicable Fund, and (ii) by the vote of a majority of the directors of
the Corporation who are not parties to the Management Agreement or Sub-
Advisory Agreement relating to the applicable Fund or interested persons
of the Adviser or applicable Portfolio Manager, cast in person at a
meeting called for the purpose of voting on such approval. The
Administration Agreements will remain in effect until terminated. Each of
the Management Agreements provides that it may be terminated at any time
without the payment of any penalty, by the Board of Directors of the
Corporation or by vote of a majority of the applicable Fund's
shareholders, on sixty days written notice to the Adviser and by the
Adviser on the same notice to the applicable Fund, and that it shall be
automatically terminated if it is assigned. Each of the Sub-Advisory
Agreements provides that it may be terminated by any party upon giving 30
days' written notice to the other parties and that it shall be
automatically terminated if it is assigned. Each of the Administration
Agreements provides that it may be terminated at any time without the
payment of any penalty by the Board of Directors of the Corporation on
ninety days' written notice to the Administrator and by the Administrator
on the same notice to the applicable Fund.
The Management Agreements, the Sub-Advisory Agreements and the
Administration Agreements provide that the Adviser, WCM, PBIA, WP, Sasco
and the Administrator, as the case may be, shall not be liable to either
of the Funds or their shareholders for anything other than willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties. The Management Agreements, the Sub-Advisory
Agreements and the Administration Agreements also provide that the
Adviser, WCM, PBIA, WP, Sasco and the Administrator, and their respective
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
As set forth in the Prospectus under the caption "Determination
of Net Asset Value", the net asset value of each Fund will be determined
as of the close of regular trading (currently 4:00 P.M. Eastern Time) on
each day the New York Stock Exchange is open for trading. The New York
Stock Exchange is open for trading Monday through Friday except New Year's
Day, Dr. Martin Luther King, Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day. Additionally, if any of the aforementioned holidays falls on a
Saturday, the New York Stock Exchange will not be open for trading on the
preceding Friday and when any such holiday falls on a Sunday, the New York
Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly
or the yearly accounting period. The New York Stock Exchange may also be
closed on national days of mourning.
Any total rate of return quotation for a particular 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 such Fund
during that period. Any period total rate of return quotation of a 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 a Fund will be
calculated by dividing the redeemable value at the end of the period
(i.e., the product referred to in the preceding sentence) by $1,000. A
root equal to the period, measured in years, in question is then
determined and 1 is subtracted from such root to determine the average
annual compounded total rate of return.
The foregoing computation may also be expressed by the following
formula:
P(1+T)n = ERV
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the stated periods at the end
of the stated periods.
Total return is the cumulative rate of investment growth which
assumes that income dividends and capital gains are reinvested. It is
determined by assuming a hypothetical investment at the net asset value at
the beginning of the period, adding in the reinvestment of all income
dividends and capital gains, calculating the ending value of the
investment at the net asset value as of the end of the specified time
period, subtracting the amount of the original investment, and dividing
this amount by the amount of the original investment. This calculated
amount is then expressed as a percentage by multiplying by 100.
The Growth Fund's average annual compounded return for the one-
year period ended June 30, 1997 was 10.83% and for the period from the
Growth Fund's commencement of operations (July 1, 1995) through June 30,
1997 was 18.01%. The Total Return Fund's average annual compounded
returns for the one-year, five-year and ten-year periods ended June 30,
1997 and for the period from the Fund's commencement of operations
(December 30, 1986) through June 30, 1997 were 28.10%, 15.64%, 12.28% and
14.09%, respectively. The Regional Small Cap Fund's return for the period
from the Regional Small Cap Fund's commencement of operations (September
16, 1996) through June 30, 1997 was 22.50%. The Contrarian Value Fund did
not commence operation until December 30, 1997.
The results below show the value of an assumed initial
investment in the Growth Fund of $10,000 made on June 30, 1995 through
June 30, 1997, assuming reinvestment of all dividends and distributions.
Value of $10,000 Cumulative % Change
Date Investment (i.e. total return)
December 31, 1995 $ 10,860 + 8.6%
December 31, 1996 12,690 +26.9%
June 30, 1997 13,920 +39.2%
The results below show the value of an assumed initial
investment in the Total Return Fund of $10,000 made on December 30, 1986
through June 30, 1997, assuming reinvestment of all dividends and
distributions.
Cumulative %
Value of $10,000 Change (i.e.
Date Investment total return)
December 31, 1986 $ 10,000 ---
December 31, 1987 11,225 +12.2%
December 31, 1988 13,554 +35.5
December 31, 1989 15,341 +53.4
December 31, 1990 14,663 +46.6
December 31, 1991 19,070 +90.7
December 31, 1992 21,052 +110.5
December 31, 1993 23,381 +133.8
December 31, 1994 22,909 +129.1
December 31, 1995 28,221 +182.2
December 31, 1996 34,000 +240.0
June 30, 1997 39,919 +299.2
The results below show the value of an assumed initial investment
in the Regional Small Cap Fund of $10,000 made on September 16, 1996
through June 30, 1997, assuming reinvestment of all dividends and
distributions.
Value of $10,000 Cumulative % Change
Date Investment (i.e. total return)
December 31, 1996 $ 10,908 9.1%
June 30, 1997 12,250 22.5
The foregoing performance results are based on historical earnings
and should not be considered as representative of the performance of the
Growth Fund, the Total Return Fund or the Regional Small Cap Fund in the
future. Such performance results also reflect reimbursements made by the
Adviser to keep total fund operating expenses at or below 1.3% of average
daily net assets. An investment in the Growth Fund, the Total Return Fund
or the Regional Small Cap Fund will fluctuate in value and at redemption
its value may be more or less than the initial investment.
DISTRIBUTION OF SHARES
Each of the Funds has adopted a Distribution Plan (the "Plan") in
anticipation that such Fund will benefit from the Plan through increased
sales of shares, thereby reducing such Fund's expense ratio and providing
an asset size that allows the Adviser greater flexibility in management.
However, each of the Funds presently intends not to utilize the Plan or
pay any 12b-1 fees during the fiscal year ending June 30, 1998. The Plan
may be terminated by any Fund at any time by a vote of the directors of
the Corporation who are not interested persons of the Corporation and who
have no direct or indirect financial interest in the Plan or any agreement
related thereto (the "Rule 12b-1 Directors") or by a vote of a majority of
the outstanding shares of such Fund. Messrs. Fauth and Thorpe are
currently the Rule 12b-1 Directors. Any change in the Plan that would
materially increase the distribution expenses of a particular Fund
provided for in the Plan requires approval of the shareholders of such
Fund and the Board of Directors, including the Rule 12b-1 Directors.
While the Plan is in effect, the selection and nomination of
directors who are not interested persons of the Corporation will be
committed to the discretion of the directors of the Corporation who are
not interested persons of the Corporation. The Board of Directors of the
Corporation must review the amount and purposes of expenditures pursuant
to the Plan quarterly as reported to it by a Distributor, if any, or
officers of the Corporation. The Plan will continue in effect for as long
as its continuance is specifically approved at least annually by the Board
of Directors, including the Rule 12b-1 Directors. The Growth Fund did not
begin operations until June 30, 1995, and such Fund has not incurred any
distribution costs to date. The Regional Small Cap Fund did not begin
operations until September 16, 1996 and such Fund has not incurred any
distribution costs to date. The Contrarian Value Fund did not begin
operations until December 30, 1997 and, thus, such Fund has not incurred
any distribution costs as of that date.
ALLOCATION OF PORTFOLIO BROKERAGE
Decisions to buy and sell securities for the Growth Fund are made
by the Adviser and WCM, for the Total Return Fund are made by the Adviser
and PBIA, for the Regional Small Cap Fund are made by the Adviser and WP
and for the Contrarian Value Fund are made by the Adviser and Sasco, in
each case subject to review by the Corporation's Board of Directors. In
placing purchase and sale orders for portfolio securities for the Funds,
it is the policy of the Adviser, WCM, PBIA, WP and Sasco 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 evaluation by the Adviser,
WCM, PBIA, WP and/or Sasco 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 a Fund means the best net
price without regard to the mix between purchase or sale price and
commission, if any. Over-the-counter securities are generally purchased
and sold directly with principal market makers who retain the difference
in their cost in the security and its selling price. In some instances,
the Adviser, WCM, PBIA, WP or Sasco may feel that better prices are
available from non-principal market makers who are paid commissions
directly. Although none of the Funds intends to market its shares through
intermediary broker-dealers, a Fund may place portfolio orders with
broker-dealers who recommend the purchase of such Fund's shares to clients
if the Adviser, WCM, PBIA, WP or Sasco, as the case may be, 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 Funds, the Adviser, WCM,
PBIA, WP and Sasco also take into consideration the research, analytical,
statistical and other information and services provided by the broker,
such as general economic reports and information, reports or analyses of
particular companies or industry groups, market timing and technical
information, and the availability of the brokerage firm's analysts for
consultation. While each of the Adviser, WCM, PBIA, WP and Sasco believes
these services have substantial value, they are considered supplemental to
the efforts of the Adviser, WCM, PBIA, WP or Sasco in the performance of
its duties under the applicable Management Agreement or Sub-Advisory
Agreement. Other clients of the Adviser, WCM, PBIA, WP or Sasco may
indirectly benefit from the availability of these services to the Adviser,
WCM, PBIA, WP or Sasco, and the Funds may indirectly benefit from services
available to the Adviser, WCM, PBIA, WP or Sasco as a result of
transactions for other clients. Each of the Management Agreements and
Sub-Advisory Agreements provides that the Adviser, WCM, PBIA, WP or Sasco,
as the case may be, may cause the applicable Fund to pay a broker which
provides brokerage and research services to the Adviser, WCM, PBIA, WP or
Sasco, a commission for effecting a securities transaction in excess of
the amount another broker would have charged for effecting the
transaction, if the Adviser, WCM, PBIA, WP or Sasco 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 overall
responsibilities of the Adviser, WCM, PBIA, WP or Sasco with respect to
the applicable Fund and the other accounts as to which it exercises
investment discretion. The Growth Fund did not begin operations until June
30, 1995. During the fiscal years ended June 30, 1996 and 1997, the
Growth Fund paid brokerage commissions of $70,820 on transactions having a
total market value of $67,831,156 and $43,545 on transactions having a
total market value of $25,936,201, respectively. Brokerage commissions
paid by the Total Return Fund totaled $1,814 on transactions having a
total market value of $911,515, $25,313 on transactions having a total
market value of $37,754,478, $28,705 on transactions having a total market
value of $32,270,945 and $19,854 on transactions having a total market
value of $15,590,327 during the fiscal year ended September 30, 1994, the
period from October 1, 1994 to June 30, 1995, and the fiscal years ended
June 30, 1996 and 1997, respectively. (The investment advisory agreement
between the Total Return Fund and the Administrator contained a provision
similar to that of the Total Return Fund's Management Agreement and Sub-
Advisory Agreement described above regarding allocation of portfolio
brokerage.) The Regional Small Cap Fund did not commence operations until
September 16, 1996. During the period from September 16, 1996 through
June 30, 1997, the Regional Small Cap Fund paid brokerage commissions of
$50,392 on transactions having a total market value of $15,758,909. All
of the brokers to whom commissions were paid by the Growth Fund, the Total
Return Fund and the Regional Small Cap Fund provided research services to
the Administrator and/or the Adviser. The Contrarian Value Fund did not
commence operations until December 30, 1997 and, thus, such Fund had not
paid any brokerage commissions as of that date.
CUSTODIAN
Firstar Trust Company, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as custodian for the Funds. As such, Firstar Trust
Company holds all securities and cash of the Funds, 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 Corporation. Firstar Trust Company does not
exercise any supervisory function over the management of the Funds, the
purchase and sale of securities or the payment of distributions to
shareholders. Firstar Trust Company also acts as the Funds' transfer
agent and dividend disbursing agent.
TAXES
As set forth in the Prospectus under the caption "Dividends,
Distributions and Taxes", each of the Funds will endeavor to qualify as a
regulated investment company under Subchapter M of the Internal Revenue
Code, as amended.
Dividends from each Fund's net investment income and distributions
from each Fund's net realized capital gains are taxable to shareholders,
whether received in cash or additional shares of such Fund. The 70%
dividends-received deduction for corporations will apply to dividends from
a Fund's net investment income, subject to proportionate reductions if the
aggregate dividends received by a Fund from domestic corporations in any
year are less than 100% of the net investment company income taxable
distributions made by the Fund.
Any dividend or capital gains distribution paid shortly after a
purchase of shares 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 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.
Each 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 such Fund with his social
security number 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.
SHAREHOLDER MEETINGS
The Wisconsin Business Corporation Law permits registered
investment companies, such as the Corporation, to operate without an
annual meeting of shareholders under specified circumstances if an annual
meeting is not required by the Act. The Corporation has adopted the
appropriate provisions in its bylaws and, at its discretion, may 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 Corporation's bylaws also contain procedures for the removal of
directors by its shareholders. At any meeting of shareholders, duly
called and at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be
cast thereon, remove any director or directors from office and may elect a
successor or successors to fill any resulting vacancies for the unexpired
terms of removed directors.
Upon the written request of the holders of shares entitled to not
less than ten percent (10%) of all the votes entitled to be cast at such
meeting, the Secretary of the Corporation shall promptly call a special
meeting of shareholders for the purpose of voting upon the question of
removal of any director. Whenever ten or more shareholders of record who
have been such for at least six months preceding the date of application,
and who hold in the aggregate either shares having a net asset value of at
least $25,000 or at least one percent (1%) of the total outstanding
shares, whichever is less, shall apply to the Corporation's Secretary in
writing, stating that they wish to communicate with other shareholders
with a view to obtaining signatures to a request for a meeting as
described above and accompanied by a form of communication and request
which they wish to transmit, the Secretary shall within five business days
after such application either: (1) afford to such applicants access to a
list of the names and addresses of all shareholders as recorded on the
books of the Corporation; or (2) inform such applicants as to the
approximate number of shareholders of record and the approximate cost of
mailing to them the proposed communication and form of request.
If the Secretary elects to follow the course specified in clause
(2) of the last sentence of the preceding paragraph, the Secretary, upon
the written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall,
with reasonable promptness, mail such material to all shareholders of
record at their addresses as recorded on the books unless within five
business days after such tender the Secretary shall mail to such
applicants and file with the Securities and Exchange Commission, together
with a copy of the material to be mailed, a written statement signed by at
least a majority of the Board of Directors to the effect that in their
opinion either such material contains untrue statements of fact or omits
to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the
basis of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the Securities and Exchange Commission may,
and if demanded by the Board of Directors or by such applicants shall,
enter an order either sustaining one or more of such objections or
refusing to sustain any of them. If the Securities and Exchange
Commission shall enter an order refusing to sustain any of such
objections, or if, after the entry of an order sustaining one or more of
such objections, the Securities and Exchange Commission shall find, after
notice and opportunity for hearing, that all objections so sustained have
been met, and shall enter an order so declaring, the Secretary shall mail
copies of such material to all shareholders with reasonable promptness
after the entry of such order and the renewal of such tender.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 3100 Multifoods Tower, 33 South 6th Street,
Minneapolis, Minnesota 55402, currently serves as the independent
accountants for the Corporation and has so served since the fiscal year
ended September 30, 1989. The Corporation changed its fiscal year end to
June 30 effective as of June 30, 1995.
FINANCIAL STATEMENTS
The following audited financial statements are incorporated by
reference to the Annual Report, dated June 30, 1997, of Eastcliff Funds,
Inc. (File No. 811-4722), as filed with the Securities and Exchange
Commission on August 6, 1997:
- Statements of Net Assets
- Statements of Operations
- Statements of Changes in Net Assets
- Financial Highlights
- Notes to the Financial Statements
- Report of Independent Accountants
DESCRIPTION OF SECURITIES RATINGS
As set forth in the Prospectus under the caption "Investment
Objectives and Policies", each of the Funds may invest in various
securities assigned ratings of either Standard & Poor's Corporation or
Moody's Investors Service, Inc. A brief description of the ratings
symbols and their meanings follows.
Standard & Poor's Corporation Bond 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 of lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform 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.
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 Bonds are regarded, on balance, as predominately
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 CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics,
they are outweighed by large uncertainties or major risk exposures to
adverse conditions.
Moody's Investors Service, Inc 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.
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.
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.
Standard & Poor's Commercial Paper Ratings. A Standard & Poor's
commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. The three highest
categories are as follows:
A-1. This highest category indicates that the degree of safety
regarding timely payment is strong. Those issuers 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 as
for issuers designated "A-1".
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying a higher
designation.
Standard & Poor's Preferred Stock Ratings. A Standard & Poor's
preferred stock rating is an assessment of the capacity and willingness of
an issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch
as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect
this difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
The preferred stock ratings are based on the following
considerations:
I. Likelihood of payment -- capacity and willingness of the issuer
to meet the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
"AAA" This is the highest rating that may be assigned by Standard
& Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
"AA" A preferred stock issue rated "AA" also qualifies as a high-
quality fixed income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues
rated "AAA."
"A" An issued rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions.
"BBB" An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to
make payments for a preferred stock in this category than for issues in
the "A" category.
"BB," "B," "CCC" Preferred stock rated "BB," "B," and "CCC" are
regarded, on balance, as predominately speculative with respect to the
issuer's capacity to pay preferred stock obligations. "BB" indicates the
lowest degree of speculation and "CCC" the highest degree of speculation.
While such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
