STATEMENT OF ADDITIONAL INFORMATION September 30, 1999
FOR THE EASTCLIFF FUNDS
Eastcliff Total Return Fund Eastcliff Regional Small Capitalization
Eastcliff Growth Fund Value Fund
Eastcliff Emerging Growth Fund Eastcliff Contrarian Value Fund
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the prospectus of Eastcliff Funds, Inc. dated
September 30, 1999. 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.
The following financial statements are incorporated by reference to
the Annual Report, dated June 30, 1999 of Eastcliff Funds, Inc. (File No.
811-4722) as filed with the Securities and Exchange Commission on August 23,
1999:
o Statements of Net Assets
o Statements of Operations
o Statements of Changes in Net Assets
o Financial Highlights
o Notes to the Financial Statements
o Report of Independent Accountants
EASTCLIFF FUNDS, INC.
900 Second Avenue South
300 International Centre
Minneapolis, Minnesota 55402
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EASTCLIFF FUNDS, INC.
Table of Contents
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GENERAL INFORMATION AND HISTORY..............................................1
INVESTMENT RESTRICTIONS......................................................1
INVESTMENT CONSIDERATIONS....................................................3
DIRECTORS AND OFFICERS OF THE CORPORATION...................................16
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS..........................20
INVESTMENT ADVISER, PORTFOLIO MANAGERS AND ADMINISTRATOR....................21
DETERMINATION OF NET ASSET VALUE AND PERFORMANCE............................25
DISTRIBUTION OF SHARES......................................................30
RETIREMENT PLANS............................................................30
AUTOMATIC INVESTMENT PLAN...................................................33
REDEMPTION OF SHARES........................................................34
SYSTEMATIC WITHDRAWAL PLAN..................................................34
ALLOCATION OF PORTFOLIO BROKERAGE...........................................35
CUSTODIAN...................................................................36
TAXES.......................................................................37
SHAREHOLDER MEETINGS........................................................38
CAPITAL STRUCTURE...........................................................39
INDEPENDENT ACCOUNTANTS.....................................................40
DESCRIPTION OF SECURITIES RATINGS...........................................40
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 September 30, 1999 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.
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GENERAL INFORMATION AND HISTORY
Eastcliff Funds, Inc., a Wisconsin corporation incorporated on May 23,
1986 (the "Corporation"), is an open-end management investment company
consisting of five diversified portfolios, Eastcliff Total Return Fund (the
"Total Return Fund"), Eastcliff Growth Fund (the "Growth Fund"), Eastcliff
Emerging Growth Fund (the "Emerging Growth Fund"), Eastcliff Regional Small
Capitalization Value Fund (the "Regional Small Capitalization Value Fund") and
Eastcliff Contrarian Value Fund (the "Contrarian Value Fund") (collectively, the
"Eastcliff Funds" or the "Funds"). The Corporation is registered under the
Investment Company Act of 1940 (the "Act"). The Corporation was called
"Fiduciary Total Return Fund, Inc." prior to December 23, 1994.
INVESTMENT RESTRICTIONS
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) each of the Growth Fund and the Emerging 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, (b) each of the Emerging Growth Fund, the Regional Small
Capitalization Value Fund and the Contrarian Value Fund may write or invest in
put and call options to the extent permitted by the Act; and (c) the Emerging
Growth Fund may sell securities short to the extent permitted by the Act. 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% (15% for the Emerging Growth Fund) 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.
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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 Emerging Growth Fund,
the Regional Small Capitalization Value 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 Emerging Growth Fund and 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 and the Emerging 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 Emerging Growth Fund, the Regional
Small Capitalization Value 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
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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
Money Market Instruments
Each of the Funds may invest in cash and money market securities. The
Funds may do so when taking a temporary defensive position or to have assets
available to pay expenses, satisfy redemption requests or take advantage of
investment opportunities. The money market securities in which they invest
include U.S. Treasury Bills, commercial paper, commercial paper master notes and
repurchase agreements.
The Funds may invest in commercial paper or commercial paper master
notes rated, at the time of purchase, within the highest rating category by a
nationally recognized statistical rating organization (NRSRO). Commercial paper
master notes are demand instruments without a fixed maturity bearing interest at
rates that are fixed to known lending rates and automatically adjusted when such
lending rates change.
The Funds may enter into repurchase agreements with banks that are
Federal Reserve Member banks and non-bank dealers of U.S. government securities
which, at the time of purchase, are on the Federal Reserve Bank of New York's
list of primary dealers with a capital base greater than $100 million. When
entering into repurchase agreements, a Fund will hold as collateral an amount of
cash or government securities at least equal to the market value of the
securities that are part of the repurchase agreement. A repurchase agreement
involves the risk that a seller may declare bankruptcy or default. In such event
a Fund may experience delays, increased costs and a possible loss.
Investment Grade Investments
Each of the Funds may invest in U.S. government securities and
publicly distributed corporate bonds and debentures to generate current income
(with respect to the
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Total Return Fund) and possible capital gains at those times when its portfolio
manager believes such securities offer opportunities for long-term growth of
capital, such as during periods of declining interest rates when the market
value of such securities generally rises. The Funds will limit their investments
in non-convertible bonds and debentures to those which have been assigned one of
the three highest ratings of either Standard & Poor's Corporation (AAA, AA and
A) or Moody's Investors Service, Inc. (Aaa, Aa and A). In the event a bond or
debenture is downgraded after investment, the Fund may retain such security
unless it is rated less than investment grade (i.e., less than BBB by Standard &
Poor's or Baa by Moody's). If a non-convertible bond or debenture is downgraded
below investment grade, a Fund will promptly dispose of such bond or debenture,
unless its portfolio manager believes it disadvantageous to the Fund to do so.
Convertible Low-Rated Securities
Each of the Funds may also invest in convertible securities (debt
securities or preferred stocks of corporations which are convertible into or
exchangeable for common stocks). A Fund's portfolio manager will select only
those convertible securities for which it believes (a) the underlying common
stock is a suitable investment for the Fund and (b) a greater potential for
total return exists by purchasing the convertible security because of its higher
yield and/or favorable market valuation. Each of the Funds may invest up to 5%
of its net assets in convertible debt securities rated less than investment
grade. Debt securities rated less than investment grade are commonly referred to
as "junk bonds."
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. 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 low-rated 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 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
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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
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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.
Government Obligations
Each of the Funds may invest in a variety of U.S. Treasury
obligations, including bills, notes and bonds. These obligations differ only in
terms of their interest rates, maturities and time of issuance. The Funds may
also invest in other securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities.
Obligations of certain agencies and instrumentalities, such as the
Government National Mortgage Association ("GNMA"), are supported by the full
faith and credit of the U.S. Treasury. Others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; and others, such as those of the Federal
National Mortgage Association ("FNMA"), are supported by the discretionary
authority of the U.S. government to purchase the agency's obligations; still
others, such as those of the Student Loan Marketing Association are supported
only by the credit of the agency or instrumentality that issues them. There is
no guarantee that the U.S. Government will provide financial support to its
agencies or instrumentalities, now or in the future, if it is not obligated to
do so by law.
Mortgage-Backed and Asset-Backed Securities
Each of the Funds may purchase residential and commercial
mortgage-backed as well as other asset-backed securities (collectively called
"asset-backed securities") that are secured or backed by automobile loans,
installment sale contracts, credit card receivables or other assets and are
issued by entities such as GNMA, FNMA, Federal Home Loan Mortgage Corporation
("FHLMC"), commercial banks, trusts, financial companies, finance subsidiaries
of industrial companies, savings and loan associations, mortgage banks and
investment banks. These securities represent interests in pools of assets in
which periodic payments of interest and/or principal on the securities are made,
thus, in effect passing through periodic payments made by the individual
borrowers on the assets that underlie the securities, net of any fees paid to
the issuer or guarantor of the securities. The average life of these securities
varies with the maturities and the prepayment experience of the underlying
instruments.
There are a number of important differences among the agencies and
instrumentalities of the U.S. government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as
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to the timely payment of principal and interest by GNMA and such guarantee is
backed by the full faith and credit of the United States. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA certificates also are supported by the authority of GNMA to
borrow funds from the U.S. Treasury to make payments under its guarantee.
Mortgage-backed securities issued by FNMA include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-backed securities issued
by the FHLMC include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress. Freddie Macs are not guaranteed
by the United States or by any Federal Home Loan Bank and do not constitute a
debt or obligation of the United States or of any Federal Home Loan Bank.
Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
Each of the Funds may also purchase mortgage-backed securities
structured as CMOs. CMOs are issued in multiple classes and their relative
payment rights may be structured in many ways. In many cases, however, payments
of principal are applied to the CMO classes in order of their respective
maturities, so that no principal payments will be made on a CMO class until all
other classes having an earlier maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which do not accrue
interest at a specified rate until other specified classes have been retired and
are converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PACs") which generally require, within certain
limits, that specified amounts of principal be applied to each payment date, and
generally exhibit less yield and market volatility than other classes. The
classes may include "IOs" which pay distributions consisting solely or primarily
for all or a portion of the interest in an underlying pool of mortgages or
mortgage-backed securities. "POs" which pay distributions consisting solely or
primarily of all or a portion of principal payments made from the underlying
pool of mortgages or mortgage-backed securities, and "inverse floaters" which
have a coupon rate that moves in the reverse direction to an applicable index.
Investments in CMO certificates can expose the Funds to greater
volatility and interest rate risk than other types of mortgage-backed
obligations. Among tranches of CMOs, inverse floaters are typically more
volatile than fixed or adjustable rate tranches of CMOs. Investments in inverse
floaters could protect a Fund against a reduction in income due to a decline in
interest rates. A Fund would be adversely affected by the purchase of an inverse
floater in the event of an increase in interest rates because the coupon rate
thereon will
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decrease as interest rates increase, and like other mortgage-backed securities,
the value of an inverse floater will decrease as interest rates increase. The
cash flows and yields on IO and PO classes are extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying pool of
mortgage loans or mortgage-backed securities. For example, a rapid or slow rate
of principal payments may have a material adverse effect on the yield to
maturity of IOs or POs, respectively. If the underlying assets experience
greater than anticipated prepayments of principal, the holder of an IO may incur
substantial losses irrespective of its rating. Conversely, if the underlying
assets experience slower than anticipated prepayments of principal, the yield
and market value for the holders of a PO will be affected more severely than
would be the case with a traditional mortgage-backed security. Prepayments on
mortgage-backed securities generally increase with falling interest rates and
decrease with rising interest rates. Prepayments are also influenced by a
variety of other economic and social factors.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity.
In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans. Like other fixed income
securities, when interest rates rise the value for an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed income securities.
Asset-backed securities may involve certain risks that are not
presented by mortgage-backed securities. These risks arise primarily from the
nature of the underlying assets (i.e., credit card and automobile loan
receivables as opposed to real estate mortgages). Non-mortgage asset-backed
securities do not have the benefit of the same security interest in the
collateral as mortgage-backed securities. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which have given debtors the right to
reduce the balance due on the credit cards. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is the risk that the purchaser would acquire an interest superior to that
of the holders of related automobile receivables. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
payments on the receivables together with recoveries on repossessed collateral
may not, in some cases, be able to support payments on these securities.
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Asset-backed securities may be subject to greater risk of default
during periods of economic downturn than other instruments. Also, while the
secondary market for asset-backed securities is ordinarily quite liquid, in
times of financial stress the secondary market may not be as liquid as the
market for other types of securities, which could cause a Fund to experience
difficulty in valuing or liquidating such securities.
When-Issued and Delayed-Delivery Transactions
Each of the Funds may purchase securities on a when-issued or
delayed-delivery basis. When such a transaction is negotiated, the purchase
price is fixed at the time the purchase commitment is made, but delivery of and
payment for the securities takes place at a later date. A Fund will not accrue
income with respect to securities purchased on a when-issued or delayed-delivery
basis prior to their stated delivery date. Pending delivery of the securities,
each Fund will maintain in a segregated account cash or liquid securities in an
amount sufficient to meet its purchase commitments. The purpose and effect of
such segregation is to prevent the Fund from gaining investment leverage from
such transactions. The purchase of securities on a when-issued or
delayed-delivery basis exposes a Fund to risk because the securities may
decrease in value prior to delivery. The Funds will engage in when-issued and
delayed-delivery transactions only for the purpose of acquiring portfolio
securities consistent with their investment objectives and not for the purpose
of investment leverage. A seller's failure to deliver securities to a Fund could
prevent the Fund from realizing a price or yield considered to be advantageous.
Preferred Stocks
Each of the Funds may invest in preferred stocks. 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 stocks 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 qualify 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.
Hedging Instruments
Each of the Growth Fund and the Emerging 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. Each of the Emerging Growth
Fund, the Regional Small Capitalization Value Fund and the 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
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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.
Generally the foregoing investments will be effected during periods of
anticipated market weakness and, in any event, will not result in leveraging of
the applicable Fund's portfolio.
Futures Contracts. When the Growth Fund or the Emerging Growth Fund
purchases a futures contract, it agrees to purchase a specified underlying
instrument at a specified future date. When the Growth Fund or the Emerging
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 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 a Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if the Fund
had purchased the underlying instrument directly. When a 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 investment limitations of the Growth
Fund or the Emerging Growth Fund. In the event of the bankruptcy of an FCM that
holds margin on behalf of a 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, a Fund
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 and the Emerging Growth Fund may purchase options on futures contracts, as
well as options on equity securities and stock indices. The Regional Small
Capitalization Value Fund and the Contrarian Value Fund may purchase options on
equity securities and on stock indices. A Fund 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
-10-
<PAGE>
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 a Fund 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 or the Emerging 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, a Fund
may purchase a call in a "closing purchase transaction." (As discussed above,
the Funds may also purchase
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<PAGE>
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 and the Emerging Growth Fund may only write covered puts and the Regional
Small Capitalization Value Fund and the Contrarian Value Fund currently will not
write put options. For a put to be covered, the Growth Fund or the Emerging
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 Emerging Growth Fund,
the Regional Small Capitalization Value Fund and 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, a 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 Emerging Growth Fund, the Regional
Small Capitalization Value Fund and the Contrarian Value Fund may invest in
options and (with respect to the Growth Fund and the Emerging Growth Fund only)
futures contracts based on securities which differ from the
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<PAGE>
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 Emerging Growth Fund,
the Regional Small Capitalization Value Fund and the Contrarian Value Fund may
purchase or sell options and (with respect to the Growth Fund and Emerging
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 option 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 a Fund 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 Funds 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.
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<PAGE>
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 Emerging Growth Fund, the
Regional Small Capitalization Value 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.
Foreign Securities
The Total Return Fund and the Emerging Growth Fund may invest up to
25% and the Growth Fund and the Contrarian Value Fund up to 20% of their
respective assets in foreign securities. Such investments may involve risks
which are in addition to the usual risks inherent in domestic investments. The
value of a Fund's foreign investments may be significantly affected by changes
in currency exchange rates, and a 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 may not be 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 a
Fund's income without providing a tax credit for a Fund's shareholders. Each
Fund will limit such investments to securities of foreign issuers domiciled in
Australia and the non-communist nations of Western Europe, North America and
Eastern Asia. There is the possibility of expropriation, confiscatory taxation,
currency blockage or political or social instability which could affect
investments in those nations. Foreign securities include sponsored and
unsponsored American Depository Receipts ("ADRs"). ADRs typically are issued by
a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation. Unsponsored ADRs differ from sponsored ADRs in
that the establishment of unsponsored ADRs are not approved by the issuer of the
underlying securities. As a result, available information concerning the issuer
may not be as current or reliable as the information for sponsored ADRs, and the
price of unsponsored ADRs may be more volatile.
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<PAGE>
Short Sales
The Emerging Growth Fund may seek to realize additional gains through
effecting short sales in securities. Short selling involves the sale of borrowed
securities. At the time a short sale is effected, the Emerging Growth Fund
incurs an obligation to replace the security borrowed at whatever its price may
be at the time it purchases it for delivery to the lender. The price at such
time may be more or less than the price at which the security was sold by the
Emerging Growth Fund. Until the security is replaced, the Emerging Growth Fund
is required to pay the lender amounts equal to any dividend or interest which
accrue during the period of the loan. To borrow the security, the Emerging
Growth Fund also may be required to pay a premium, which would increase the cost
of the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed. Until the Emerging Growth Fund closes its short position or
replaces the borrowed security, it will: (a) maintain a segregated account
containing cash or liquid securities at such a level that the amount deposited
in the account plus the amount deposited with the broker as collateral will
equal the current value of the security sold short; or (b) otherwise cover its
short position.
Warrants and Rights
Each Fund may invest up to 5% of its net assets in warrants or rights,
valued at the lower of cost or market, which entitle the holder to buy
securities during a specific period of time. A Fund will make such investments
only if the underlying securities are deemed appropriate by the Fund's portfolio
manager for inclusion in that Fund's portfolio. Additionally, the Total Return
Fund will purchase warrants or rights only if they are sold as a unit with
another equity or debt security. Included in the 5% amount, but not to exceed 2%
of net assets, are warrants and rights whose underlying securities are not
traded on principal domestic or foreign exchanges. Warrants and rights acquired
by a Fund in units or attached to securities are not subject to these
restrictions.
Illiquid Securities
Each of the Funds may invest up to 10% (15% for the Emerging Growth
Fund) of its net assets in securities for which there is no readily available
market ("illiquid securities"). This limitation includes certain securities
whose disposition would be subject to legal restrictions ("restricted
securities") which may be purchased by the Emerging Growth Fund and 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
-15-
<PAGE>
demand instruments); (iii) and availability of market quotations; and (iv) other
permissible factors.
Restricted securities may be sold in privately 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,
a Fund may be obligated to pay all or part of the registration expenses and a
considerable time may elapse between the decision to sell and the sale date. If,
during such period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than the price which prevailed when it decided to
sell. Restricted securities will be priced at fair value as determined in good
faith by the Board of Directors.
Portfolio Turnover
The Funds do not trade actively for short-term profits. However, if
the objectives of the Funds would be better served, short-term profits or losses
may be realized from time to time. The annual portfolio turnover rate indicates
changes in a 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 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 CORPORATION
As a Wisconsin corporation, the business and affairs of the
Corporation are managed by its officers under the direction of its Board of
Directors. 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:
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<PAGE>
CONLEY BROOKS, JR.*
- ------------------
900 Second Avenue South
Suite 300
Minneapolis, Minnesota 55402
(PRESIDENT AND A DIRECTOR OF THE CORPORATION)
Mr. Brooks, age 53, has been President of Brooks Associates, Inc., an
asset and investment management firm, since 1982. He has been Chairman of the
Board of Resource Companies, Inc. since 1992 and was elected CEO in 1998.
Resource Companies, Inc. is a bank holding company which owns Resource Trust
Company (where Mr. Brooks has also been CEO since 1998), the corporate parent of
Resource Capital Advisers, Inc. Mr. Brooks has been President and a director of
the Corporation since December, 1994.
ROLF ENGH
- ---------
1101 S. 3rd St.
Minneapolis, Minnesota 55415
(A DIRECTOR OF THE CORPORATION)
Mr. Engh, age 45, has been General Counsel, Vice
President-International Sales, General Manager Color Corp. and Corporate
Secretary of The Valspar Corporation, a paint manufacturing company, since 1993.
Mr. Engh has been a director of the Corporation since July, 1998.
JOHN J. FAUTH
- -------------
3100 Metropolitan Centre 333 South Seventh Street Minneapolis, Minnesota 55402
(A DIRECTOR OF THE CORPORATION)
Mr. Fauth, age 54, 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.
_______________
* 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.
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<PAGE>
A. SKIDMORE THORPE
- ------------------
4900 IDS Center
80 South Eighth Street
Minneapolis, Minnesota 55402
(A DIRECTOR OF THE CORPORATION)
Mr. Thorpe, age 70, 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.
E. THOMAS WELCH*
- ---------------
900 Second Avenue South
Suite 300
Minneapolis, Minnesota 55402
(VICE PRESIDENT AND A DIRECTOR OF THE CORPORATION)
Mr. Welch, age 61, 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.
DONALD S. WILSON*
- ----------------
225 East Mason Street
Milwaukee, Wisconsin 53202
(A DIRECTOR OF THE CORPORATION)
Mr. Wilson, age 56, 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.
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<PAGE>
JOHN A. CLYMER
- --------------
900 Second Avenue South
Suite 300
Minneapolis, Minnesota 55402
(VICE PRESIDENT, SECRETARY AND TREASURER OF THE CORPORATION)
Mr. Clymer, age 51, 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.
A. RODNEY BOREN
- ---------------
900 Second Avenue South
Suite 300
Minneapolis, Minnesota 55402
(VICE PRESIDENT OF THE CORPORATION)
Mr. Boren, age 53, 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.
SARAH A. HILLESHEIM
- -------------------
900 Second Avenue South
Suite 300
Minneapolis, Minnesota 55402
(VICE PRESIDENT AND ASSISTANT SECRETARY OF THE CORPORATION)
Ms. Hillesheim, age 38, has been employed at Resource Capital
Advisers, Inc. in various capacities since 1994. From November 1992 until June
1994, she was employed at the Center for Diagnostic Imaging. Ms. Hillesheim has
been a Vice President and Assistant Secretary of the Corporation since November,
1995.
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<PAGE>
PATRICE J. NEVERETT
- -------------------
249 Royal Palm Way
Suite 400
Palm Beach, Florida 33480
(VICE PRESIDENT OF THE CORPORATION)
Ms. Neverett, age 46, has been Executive Vice President and Senior
Portfolio Manager of Palm Beach Investment Advisers, LLC. since 1990. Ms.
Neverett is the Investment Manager of the Eastcliff Total Return Fund.
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. 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, 1999:
<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 $1,500 $0 $0 $1,500
A. Skidmore Thorpe $1,500 $0 $0 $1,500
E. Thomas Welch $0 $0 $0 $0
Donald S. Wilson $0 $0 $0 $0
Rolf Engh $1,000 $0 $0 $1,000
</TABLE>
OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
As of August 31, 1999, all officers and directors of the Corporation
as a group (10 persons) beneficially owned 14,789 shares of the Total Return
Fund (which constituted 1.28% of its then outstanding shares), 34,697 shares of
the Growth Fund (which constituted 2.55% of its then outstanding shares),
210,315 shares of the Regional Small Capitalization Value Fund (which
constituted 5.21% of its then outstanding shares) and 95,459 shares of the
Contrarian Value Fund (which constituted 7.23% of its then outstanding shares).
(The Emerging Growth Fund will commence operations on September 30, 1999.) As of
August 31, 1999, 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 967,243 shares, or
83.49% of the total shares of such Fund then outstanding. As of August 31, 1999,
the beneficial holders of more than 5% of the
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<PAGE>
Growth Fund's then outstanding shares were Resource Trust Company, Suite 300,
900 Second Avenue South, Minneapolis, Minnesota 55402, which owned 1,033,960
shares of such Fund (constituting 75.84% of its then outstanding shares) and
Winslow Capital Management, Inc., 400 Robert Street N., St. Paul, Minnesota
55101, which owned 104,703 shares of such Fund (constituting 7.68% of its then
outstanding shares). As of August 31, 1999, the beneficial holders of more than
5% of the Regional Small Capitalization Value Fund's then outstanding shares
were Resource Trust Company, Suite 300, 900 Second Avenue South, Minneapolis,
Minnesota 55402, which owned 1,519,087 shares of such Fund (constituting 37.66%
of its then outstanding shares), U.S. Bank, N.A., 180 E. 5th St., P.O. Box
64488, St. Paul, Minnesota 55164-0488, which owned 794,890 shares of such Fund
(constituting 19.70% of its then outstanding shares), and Norwest Bank MN, NA,
P. O. Box 1533, Minn, MN 55480, which owned 275,204 shares of such Fund
(constituting 6.82% of its then outstanding shares). As of August 31, 1999, the
beneficial holders of more than 5% of the Contrarian Value Fund's then
outstanding shares were Resource Trust Company, 900 Second Avenue South, Minn,
MN 55402, which owned 1,185,209 shares, (constituting 89.72% of its then
outstanding shares), and Hollybrook & Co. and Allbrook & Co., affiliates of
Conley Brooks, Jr., which owned 85,002 shares (constituting 6.43% 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 Total Return Fund, the Growth Fund, the Regional Small
Capitalization Value Fund, the Contrarian Value Fund and the Corporation are
controlled by Resource Trust Company. Resource Trust Company owns sufficient
shares of the Total Return Fund, the Growth Fund, the Contrarian Value Fund and,
with U.S. Bank, N.A., the Regional Small Capitalization Value 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
The investment adviser to each of the Funds is Resource Capital
Advisers, Inc. (the "Adviser"), the portfolio manager to the Total Return Fund
is Palm Beach Investment Advisers, LLC ("PBIA"), the portfolio manager to the
Growth Fund is Winslow Capital Management, Inc. ("WCM"), the portfolio manager
of the Emerging Growth Fund is KB Growth Advisors, LLC ("KB"), the portfolio
manager to the Regional Small Capitalization Value 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 and a one bank
holding company. Both Resource Trust Company and Resource Companies, Inc. have
been in business as such for more than five years. 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. PBIA is controlled by the
Adviser. WCM is controlled by Clark J. Winslow, its President, Chief
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<PAGE>
Executive Officer, and principal shareholder. KB is controlled by Gail
Knappenberger, its Chairman and principal owner. 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.
Pursuant to separate investment advisory agreements entered into
between the Funds and the Adviser (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 fiscal years ended June 30, 1999, 1998 and 1997 the Total Return Fund paid
the Adviser advisory fees of $251,628, $236,368 and $191,191, respectively.
During the fiscal years ended June 30, 1999, 1998 and 1997, the Growth Fund paid
the Adviser advisory fees of $417,074, $512,180 and $454,388, respectively. The
Regional Small Capitalization Value Fund did not begin operations until
September 16, 1996. During the fiscal years ended June 30, 1999 and 1998 and
during the period from September 16, 1996 through June 30, 1997, the Regional
Small Capitalization Value Fund paid the Adviser advisory fees of $499,521,
$544,391 and $144,375, respectively. The Contrarian Value Fund did not begin
operations until December 30, 1997. During the fiscal year ended June 30, 1999
and during the period from December 30, 1997 through June 30, 1998, the
Contrarian Value Fund paid the Adviser advisory fees of $158,237 and $90,399.
The Emerging Growth Fund will commence operations on September 30, 1999.
The Funds pay all of their own expenses not assumed by the Adviser or
their administrator including, without limitation, the cost of preparing and
printing their registration statements required under the Securities Act of 1933
and the Act and any amendments thereto, the expense of registering their shares
with the Securities and Exchange Commission and in the various states, the
printing and distribution costs of prospectuses mailed to existing investors,
reports to investors, reports to government authorities and proxy statements,
fees paid to directors who are not interested persons of the Adviser, interest
charges, taxes, legal expenses, association membership dues, auditing services,
insurance premiums, brokerage commissions and expenses in connection with
portfolio transactions, fees and expenses of the custodian of the Funds' assets,
printing and mailing expenses and charges and expenses of dividend disbursing
agents, accounting services agents, registrars and stock transfer agents.
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
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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, 2000, and did so for the fiscal years ended June
30, 1999, 1998 and 1997 for each of the Funds operating at such times. Effective
September 30, 1999 WCM will assume the Adviser's voluntary reimbursement
obligation with respect to the Growth Fund and KB will assume the voluntary
reimbursement obligation with respect to the Emerging Growth Fund. 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
fiscal years ended June 30, 1999, 1998 and 1997, the Adviser reimbursed the
Total Return Fund $25,397, $27,489 and $35,832, respectively, for excess
expenses. During the fiscal years ended June 30, 1999, 1998 and 1997, the
Adviser reimbursed the Growth Fund $0, $0 and $14,325, respectively, for excess
expenses. The Regional Small Capitalization Value Fund did not begin operations
until September 16, 1996. During the fiscal years ended June 30, 1999 and 1998
and during the period from September 16, 1996 through September 30, 1997, the
Adviser reimbursed the Regional Small Capitalization Value Fund $0, $0 and
$45,235, respectively, for excess expenses. The Contrarian Value Fund did not
begin operations until December 30, 1997. During the fiscal year ended June 30,
1999 and during the period from December 30, 1997 through June 30, 1998, the
Adviser reimbursed the Contrarian Value Fund $37,434 and $17,544, respectively,
for excess expenses. The Emerging Growth Fund will commence operations on
September 30, 1999.
As of the date hereof, PBIA is the sole portfolio manager of the Total
Return Fund, WCM is the sole portfolio manager of the Growth Fund, KB is the
sole portfolio manager for the Emerging Growth Fund, WP is the sole portfolio
manager of the Regional Small Capitalization Value Fund and Sasco is the sole
portfolio manager of the Contrarian Value Fund. Each of PBIA, WCM, KB, 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, each of the portfolio managers makes specific portfolio
investments in accordance with such Fund's investment objective and the
portfolio manager's investment approach and strategies.
Portfolio managers of the Funds, including PBIA, WCM, KB, 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
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<PAGE>
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.
The administrator to each of the Funds is Fiduciary Management, Inc.
(the "Administrator"), 225 East Mason Street, Milwaukee, Wisconsin 53202. 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 prepares
and 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 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. The Administrator at its own expense and
without reimbursement from any of the Funds, furnishes office space and all
necessary office facilities, equipment and executive personnel for performing
the services required to be performed by it under the Administration Agreements.
For the foregoing, the Administrator receives from each of the Funds a fee of
0.2% per annum on the first $25,000,000 of the daily net assets of such Fund,
0.1% per annum on the next $20,000,000 of the daily net assets of such Fund and
0.05% per annum of the daily net assets of such Fund over $45,000,000, subject
to a fiscal year minimum of $20,000. The Administrator separately charges the
Funds for blue sky filings. During the fiscal years ended June 30, 1999, 1998
and 1997, the Total Return Fund paid the Administrator $49,530 $47,236 and
$38,238, respectively, pursuant to such Fund's Administration Agreement. During
the fiscal years ended June 30, 1999, 1998 and 1997, the Growth Fund paid the
Administrator $70,745, $76,677 and $75,438, respectively, pursuant to such
Fund's Administration Agreement. The Regional Small Capitalization Value Fund
did not commence operations until September 16, 1996. During the fiscal years
ended June 30, 1999 and 1998 and during the period from September 16, 1996
through June 30, 1997, the Regional Small Capitalization Value Fund paid the
Administrator $72,409, $77,094 and $28,875, respectively pursuant to such Fund's
Administration Agreement. The Contrarian Value Fund did not commence operations
until December 30, 1997. During the fiscal year ended June 30, 1999 and during
the period from December 30, 1997 through June 30, 1998, the Contrarian Value
Fund paid the Administrator
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<PAGE>
$31,647 and $18,080, respectively, pursuant to such Fund's Administration
Agreement. The Emerging Growth Fund will commence operations on September 30,
1999.
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, PBIA, WCM, KB, WP and 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, PBIA, WCM, KB, WP and 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
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.
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<PAGE>
The per share net asset value of each Fund is determined by dividing
the total value of such Fund's net assets (i.e. its assets less its liabilities)
by the total number of its shares outstanding at that time. Securities traded on
any national stock exchange or quoted on the Nasdaq National Market System will
be 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
securities will be valued by an independent pricing service at the most recent
bid price, if market quotations are readily available. Any securities for which
there are no readily available market quotations and other assets will be valued
at their fair value as determined in good faith by the Corporation's Board of
Directors.
Each of the Funds may provide from time to time, in advertisements,
reports to shareholders and other communications with shareholders, its average
annual compounded rate of return. A Fund's average annual compounded rate of
return refers to the rate of return which, if applied to an initial investment
in such Fund at the beginning of a stated period and compounded over the period,
would result in the redeemable value of the investment in such Fund at the end
of the stated period. The calculation assumes reinvestment of all dividends and
distributions and reflects the effect of all recurring fees. Each Fund may also
provide "aggregate" total return information for various periods, representing
the cumulative change in value of an investment in a 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 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.
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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 Total Return Fund's average annual compounded returns for the
one-year, five-year and ten-year periods ended June 30, 1999 and for the period
from the Fund's commencement of operations (December 30, 1986) through June 30,
1999 were 21.72%, 23.93%, 15.91% and 16.13%, respectively. The Growth Fund's
average annual compounded return for the one-year period ended June 30, 1999 was
8.22%, and for the period from the Growth Fund's commencement of operations
(July 1, 1995) through June 30, 1999 was 19.18%. The Regional Small
Capitalization Value Fund's average annual compounded return for the one-year
period ended June 30, 1999 was -1.17%, and for the period from the Regional
Small Capitalization Value Fund's commencement of operations (September 16,
1996) through June 30, 1999 was 11.44%. The Contrarian Value Fund's average
annual compounded return for the one-year period ended June 30, 1999 was -5.29%,
and for the period from the Contrarian Value Fund's commencement of operations
(December 30, 1997) through June 30, 1999 was -0.94%. The Emerging Growth Fund
will commence operations on September 30, 1999.
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,
1999, assuming reinvestment of all dividends and distributions.
Value of $10,000 Cumulative % Change
Date Investment (i.e. total return)
- ---- ---------------- -------------------
December 31, 1986 $ 10,000 ---
December 31, 1987 11,225 +12.2%
December 31, 1988 13,554 +35.5
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<PAGE>
Value of $10,000 Cumulative % Change
Date Investment (i.e. total return)
- ---- ---------------- -------------------
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
December 31, 1997 44,214 +342.1
December 31, 1998 61,321 +513.2
June 30, 1999 64,787 +547.9
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, 1999, 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
December 31, 1997 15,533 +55.3
December 31, 1998 20,074 +100.7
June 30, 1999 20,164 +101.6
The results below show the value of an assumed initial investment in
the Regional Small Capitalization Value Fund of $10,000 made on September 16,
1996 through June 30, 1999, assuming reinvestment of all dividends and
distributions.
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<PAGE>
Value of $10,000 Cumulative % Change
Date Investment (i.e. total return)
- ---- ---------------- -------------------
December 31, 1996 $ 10,908 + 9.1%
December 31, 1997 13,207 +32.1
December 31, 1998 12,697 +27.0
June 30, 1999 13,522 +35.2
The results below show the value of an assumed initial investment in
the Contrarian Value Fund of $10,000 made on December 30, 1997 through June 30,
1999, assuming reinvestment of all dividends and distributions.
Value of $10,000 Cumulative % Change
Date Investment (i.e. total return)
- ---- ---------------- -------------------
December 31, 1997 $10,030 +0.3%
December 31, 1998 9,120 -8.8%
June 30, 1999 9,860 -1.4%
The foregoing performance results are based on historical earnings and
should not be considered as representative of the performance of the Total
Return Fund, the Growth Fund, the Regional Small Capitalization Value Fund, the
Contrarian Value Fund or the Emerging Growth 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 each of the Total Return Fund, the Growth Fund, the Emerging
Growth Fund, the Regional Small Capitalization Value Fund and the Contrarian
Value Fund will fluctuate in value and at redemption its value may be more or
less than the initial investment.
Each of the Funds may compare its performance to other mutual funds
with similar investment objectives and to the industry as a whole, as reported
by Morningstar, Inc. and Lipper Analytical Services, Inc., Money, Forbes,
Business Week and Barron's magazines; and The Wall Street Journal. (Morningstar,
Inc. and Lipper Analytical Services, Inc. are independent ranking services that
rank over 1,000 mutual funds based upon total return performance.) Each of the
Funds may also compare its performance to the Dow Jones Industrial Average,
Nasdaq Composite Index, Nasdaq Industrials Index, Value Line Composite Index,
the S&P 500 Index, S&P 400 Mid-Cap Growth Index, S&P 600 Small Cap Growth Index,
Lehman Intermediate Corporate Bond Index, Russell 1000 Growth Index, Russell
2000 Index, Russell 2000 Growth Index, Russell Midcap Index and the Consumer
Price Index. Such comparisons may be made in advertisements, shareholder reports
or other communications to shareholders.
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<PAGE>
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. The Plan
provides that each Fund may incur certain costs which may not exceed a maximum
amount equal to 1% per annum of such Fund's average daily net assets. 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, 2000. Payments made pursuant to the
Plan may only be used to pay distribution expenses incurred in the current year.
Amounts paid under the Plan by a Fund may be spent by such Fund on any
activities or expenses primarily intended to result in the sale of shares of
such Fund, including but not limited to, advertising, compensation for sales and
sales marketing activities of financial institutions and others, such as dealers
or distributors, shareholder account servicing, the printing and mailing of
prospectuses to other than current shareholders, and the printing and mailing of
sales literature. Distribution expenses will be authorized by the officers of
the Corporation as the Funds do not currently employ a distributor. To the
extent any activity financed by the Plan is one which a Fund may finance without
a 12b-1 plan, such Fund may also make payments to finance such activity outside
of the Plan and not be subject to its limitations.
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. Engh, 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.
None of the Funds incurred any distribution costs pursuant to the Plan during
the fiscal year ended June 30, 1999.
RETIREMENT PLANS
Each of the Funds offers the following retirement plans that may be
funded with purchases of shares of such Fund and may allow investors to reduce
their income taxes:
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<PAGE>
Individual Retirement Accounts
Individual shareholders may establish their own Individual Retirement
Account ("IRA"). Each of the Funds 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
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
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<PAGE>
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 $160,000 per year). The $160,000 compensation
limit applies for 1999 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 1999 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.
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").
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<PAGE>
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 any
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 $10,000 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 Corporation 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 $160,000 (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
appropriate 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 Corporation. Because a retirement program may involve
commitments covering future years, it is important that the investment objective
of the Funds 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.
AUTOMATIC INVESTMENT PLAN
Shareholders wishing to invest fixed dollar amounts in a particular
Fund monthly or quarterly can make automatic purchases in amounts of $50 or more
on any day they choose by using the Corporation's Automatic Investment Plan. If
such day is a weekend or
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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 Corporation's office at (612) 336-1444. The Automatic Investment
Plan must be implemented with a financial institution that is a member of the
Automated Clearing House. The Corporation 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 Funds 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 Funds to dispose of their securities or fairly to determine
the value of their net assets.
SYSTEMATIC WITHDRAWAL PLAN
The Corporation has available to shareholders a Systematic Withdrawal
Plan, pursuant to which a shareholder who owns shares of any Fund worth at least
$10,000 at current net asset value may provide that a fixed sum will be
distributed to him at regular intervals. To participate in the Systematic
Withdrawal Plan, a shareholder deposits his shares of a particular Fund with the
Corporation and appoints it as his agent to effect redemptions of shares of such
Fund held in his account for the purpose of making monthly or quarterly
withdrawal payments of a fixed amount to him out of his 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 any 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 Corporation's office at (612) 336-1444.
The minimum amount of a withdrawal payment is $100. These payments
will be made from the proceeds of periodic redemption of shares of a particular
Fund 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 shares
of the such Fund, at net asset value, all income dividends and
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capital gains distributions payable by the Corporation on shares held in such
account, and shares so acquired will be added to such account. The shareholder
may deposit additional shares of such Fund in his 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 applicable
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 are made (i) for the Total Return
by the Adviser and PBIA; (ii) for the Growth Fund by the Adviser and WCM; (iii)
for the Emerging Growth Fund by the Adviser and KB; (iv) for the Regional Small
Capitalization Value Fund by the Adviser and WP; and (v) for the Contrarian
Value Fund 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, PBIA, WCM,
KB, 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, PBIA, WCM, KB, 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 (i.e. "markups" when the market maker sells a security and
"markdowns" when the market maker buys a security). In some instances, the
Adviser, PBIA, WCM, KB, WP or Sasco may feel that better prices are available
from non-principal market makers who are paid commissions directly. Each of the
Funds may place portfolio orders with broker-dealers who recommend the purchase
of such Fund's shares to clients if the Adviser, PBIA, WCM, KB, 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, PBIA,
WCM, KB, 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
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technical information, and the availability of the brokerage firm's analysts for
consultation. While each of the Adviser, PBIA, WCM, KB, WP and Sasco believes
these services have substantial value, they are considered supplemental to the
efforts of the Adviser, PBIA, WCM, KB, WP or Sasco in the performance of its
duties under the applicable Management Agreement or Sub-Advisory Agreement.
Other clients of the Adviser, PBIA, WCM, KB, WP or Sasco may indirectly benefit
from the availability of these services to the Adviser, PBIA, WCM, KB, WP or
Sasco, and the Funds may indirectly benefit from services available to the
Adviser, PBIA, WCM, KB, WP or Sasco as a result of transactions for other
clients. Each of the Management Agreements and Sub-Advisory Agreements provides
that the Adviser, PBIA, WCM, KB, 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, PBIA, WCM, KB, 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, PBIA, WCM, KB, 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, PBIA, WCM, KB, WP or Sasco with respect
to the applicable Fund and the other accounts as to which it exercises
investment discretion. Brokerage commissions paid by the Total Return Fund
totaled $19,854 on transactions having a total market value of $15,590,327,
$7,130 on transactions having a total market value of $6,703,149 and $17,544 on
transactions having a total market value of $17,137,464 for the fiscal years
ended June 30, 1997, 1998 and 1999, respectively. During the fiscal years ended
June 30, 1997, 1998, and 1999, the Growth Fund paid brokerage commissions of
$43,545 on transactions having a total market value of $25,936,201, $75,062 on
transactions having a total market value of $60,131,748 and $97,106 on
transactions having a total market value of $61,555,579, respectively. The
Regional Small Capitalization Value Fund did not commence operations until
September 16, 1996. During the period from September 16, 1996 through June 30,
1997, the Regional Small Capitalization Value Fund paid brokerage commissions of
$50,392 on transactions having a total market value of $15,758,909, and for the
fiscal years ended June 30, 1998 and 1999 paid $77,720 on transactions having a
market value of $34,327,567 and $62,797 on transactions having a total market
value of $24,551,852, respectively. The Contrarian Value Fund did not commence
operations until December 30, 1997. During the period from December 30, 1997
through June 30, 1998, The Contrarian Value Fund paid brokerage Commission of
$40,438 on transactions having a total market value of $22,255,053 and for the
fiscal year ended June 30, 1999 paid $34,597 on transactions having a market
value of $16,927,593. All of the brokers to whom commissions were paid by the
Total Return Fund, the Growth Fund, the Regional Small Capitalization Value Fund
and the Contrarian Value Fund provided research services to the Adviser. The
Emerging Growth Fund will commence operations on September 30, 1999.
CUSTODIAN
Firstar Bank Milwaukee, N.A., 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as custodian for the Funds. As such, Firstar Bank
Milwaukee, N.A. 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
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other duties, all as directed by officers of the Corporation. Firstar Bank
Milwaukee, N.A. 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 Mutual Fund Services LLC, an affiliate of
Firstar Bank Milwaukee, N.A., also acts as the Funds' transfer agent and
dividend disbursing agent.
TAXES
Each of the Funds will endeavor to qualify for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Internal
Revenue Code.
Each of the Funds has so qualified in each of its fiscal years. If a
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 a Fund that did not qualify as a
regulated investment company under Subchapter M 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 gain, would be treated as taxable
dividends to the extent of accumulated earnings and profits of the Fund.
Each of the Funds intends to distribute substantially all of its net
investment income and net capital gains each fiscal year. Dividends from each
Fund's net investment income, including short-term capital gains, are taxable to
shareholders as ordinary income, while distributions from each Fund's net
realized long-term capital gains are taxable as long-term capital gains
regardless of the shareholder's holding period for the shares. Such dividends
and distributions are taxable to shareholders, whether received in cash or
additional shares of a Fund. A portion of the income distributions of the Funds
may be eligible for the 70% dividends-received deduction for domestic corporate
shareholders.
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.
Redemptions of shares will generally result in a capital gain or loss
for income tax purposes. Such capital gain or loss will be long term or short
term, depending upon the holding period. However, if a loss is realized on
shares held for six months or less, and the shareholder 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.
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
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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.
This section is not intended to be a complete discussion of present or
proposed federal income tax laws and the effect of such laws on an investor.
Investors may also be subject to state and local taxes. Investors are urged to
consult with their respective advisers for a complete review of the tax
ramifications of an investment in a Fund.
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
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expenses of mailing, shall, with reasonable promptness, mail such material to
all shareholders of record at their addresses as recorded on the books unless
within five business days after such tender the Secretary shall mail to such
applicants and file with the Securities and Exchange Commission, together with a
copy of the material to be mailed, a written statement signed by at least a
majority of the Board of Directors to the effect that in their opinion either
such material contains untrue statements of fact or omits to state facts
necessary to make the statements contained therein not misleading, or would be
in violation of applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the Securities and Exchange Commission may, and if
demanded by the Board of Directors or by such applicants shall, enter an order
either sustaining one or more of such objections or refusing to sustain any of
them. If the Securities and Exchange Commission shall enter an order refusing to
sustain any of such objections, or if, after the entry of an order sustaining
one or more of such objections, the Securities and Exchange Commission shall
find, after notice and opportunity for hearing, that all objections so sustained
have been met, and shall enter an order so declaring, the Secretary shall mail
copies of such material to all shareholders with reasonable promptness after the
entry of such order and the renewal of such tender.
CAPITAL STRUCTURE
The Corporation's authorized capital consists of 10,000,000,000 shares
of Common Stock of which 300,000,000 are allocated to the Total Return Fund,
300,000,000 are allocated to the Growth Fund, 300,000,000 are allocated to the
Emerging Growth Fund, 300,000,000 are allocated to the Regional Small
Capitalization Value Fund and 300,000,000 are allocated to the Contrarian Value
Fund. Each share outstanding entitles the holder to one vote. Generally shares
are voted in the aggregate and not by each Fund, except where class voting by
each Fund is required by Wisconsin law or the Act (e.g., a change in investment
policy or approval of an investment advisory agreement).
The shares of each Fund have the same preferences, limitations and
rights, except that all consideration received from the sale of shares of each
Fund, together with all income, earnings, profits and proceeds thereof, belong
to that Fund and are charged with the liabilities in respect of that Fund and of
that Fund's share of the general liabilities of the Corporation in the
proportion that the total net assets of the Fund bears to the total net assets
of all of the Funds. However the Board of Directors of the Corporation may, in
its discretion direct that any one or more general liabilities of the
Corporation be allocated among the Funds on a different basis. The net asset
value per share of each Fund is based on the assets belonging to that Fund less
the liabilities charged to that Fund, and dividends are paid on shares of each
Fund only out of lawfully available assets belonging to that Fund. In the event
of liquidation or dissolution of the Corporation, the shareholders of each Fund
will be entitled, out of the assets of the Corporation available for
distribution, to the assets belonging to such Fund.
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There are no conversion or sinking fund provisions applicable to the
shares of any Fund, 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 Corporation's shares 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 of each Fund are redeemable and are freely transferable.
All shares issued and sold by the Corporation will be fully paid and
nonassessable, except as provided in Section 180.0622(2)(b) of the Wisconsin
Business Corporation Law. Fractional shares of each Fund entitle the holder to
the same rights as whole shares of such Fund.
The Corporation will not issue certificates evidencing shares
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 shares of each Fund. 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 without charge.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500,
Milwaukee, Wisconsin 53202, currently serves as the independent accountants for
the Corporation and has so served since the fiscal year ended September 30,
1989.
DESCRIPTION OF SECURITIES RATINGS
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.
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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
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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:
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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
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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.
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