Filing by Rule 497(c) of the 1933 Act
File No. 33-36324
December 13, 2000
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 30, 2000
RANSON MANAGED PORTFOLIOS
THE KANSAS MUNICIPAL FUND
THE KANSAS INSURED INTERMEDIATE FUND
THE NEBRASKA MUNICIPAL FUND
THE OKLAHOMA MUNICIPAL FUND
1 North Main
Minot, North Dakota 58703
(701) 852-5292
(800) 601-5593/Transfer Agent
(800) 276-1262/Marketing
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for The Kansas Municipal Fund, The
Kansas Insured Intermediate Fund, The Nebraska Municipal Fund and The
Oklahoma Municipal Fund (the "Funds") dated November 30, 2000, (the
"Prospectus"). A copy of the Prospectus may be obtained without charge by
calling the Funds at (800) 276-1262.
TABLE OF CONTENTS
PAGE
Investment Objective, Policies and Restrictions......................1
Investments..........................................................8
Portfolio Turnover..................................................14
Bond Insurance for The Kansas Insured Intermediate Fund.............15
Additional Risk Considerations......................................16
Management of the Funds.............................................18
Control Persons and Principal Holders of Securities.................22
Custodian and Transfer Agent........................................22
Independent Auditors................................................23
Management and Investment Advisory Agreement........................23
Portfolio Transactions..............................................24
The Distributor.....................................................26
Shareholder Services Plans..........................................28
Additional Information on the Purchase and Redemption of Shares.....30
Sales Charge Reductions.............................................32
Sales Load Waivers..................................................34
Special Programs....................................................35
Redemption of Shares................................................37
Dividends and Taxes.................................................37
Additional Information Regarding Organization and Share Attributes..43
Expenses of the Fund................................................46
Performance Data....................................................46
Financial Statements................................................51
APPENDIX A-RATINGS OF INVESTMENTS.................................... A-1
-I-
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Funds are each series of The Ranson Managed Portfolios (the "Trust"),
an open-end, non-diversified management series investment company. The
investment objective and certain investment policies of each Fund are
described in the Funds' Prospectus. The following supplements that
information and should be read in conjunction with the Funds' Prospectus.
Investment Policies
THE KANSAS MUNICIPAL FUND. It is a fundamental investment policy of The
Kansas Municipal Fund, which may not be changed without the approval of the
majority of the Fund's shares, that under normal market conditions, at least
80% of the Fund's assets will be invested in "Kansas Municipal Securities"
which generate income that is exempt, in the opinion of bond counsel, from
both federal income tax and Kansas income tax. Kansas Municipal Securities has
the same definition and includes the same type of securities as set forth for
such term under "Investment Policies-The Kansas Insured Intermediate Fund."
THE KANSAS INSURED INTERMEDIATE FUND. It is a fundamental investment
policy of The Kansas Insured Intermediate Fund, which may not be changed
without the approval of a majority of the Fund's shares, to invest, under
normal market conditions, at least 95% of its total assets in "Kansas Municipal
Securities" which are either covered by insurance guaranteeing the timely
payment of principal and interest thereon or backed by an escrow or trust
account containing sufficient U.S. Government or U.S. Government agency
securities to ensure timely payment of principal and interest. Kansas
Municipal Securities refers to debt obligations the interest payable on which
is, in the opinion of bond counsel to the issuer, exempt from both federal
income taxation and Kansas income taxation. Kansas Municipal Securities
generally include debt obligations of the State of Kansas, its political
subdivisions, municipalities, agencies and authorities, and certain industrial
development and other revenue bonds, short-term municipal notes, municipal
leases, and tax-exempt commercial paper issued by such entities and obligations
of the Commonwealth of Puerto Rico, the United States Virgin Islands, and Guam.
The Kansas Insured Intermediate Fund will not invest more than 15% of its total
assets in Kansas Municipal Securities which are obligations of the Commonwealth
of Puerto Rico, the U.S. Virgin Islands or Guam. The Fund may also only invest
up to 15% of the Fund's total assets in Kansas Municipal Securities rated "Aaa"
or "AAA" that are entitled to the benefit of an escrow or trust account which
contains securities issued or guaranteed by the U.S. Government or U.S.
Government agencies and backed by the full faith and credit of the United
States sufficient in amount to ensure the payment of interest and principal on
the original interest payment and maturity dates ("collateralized
obligations"). Such collateralized obligations generally will not be insured
and will include, but are not limited to, Kansas Municipal Securities that have
been (1) advance refunded where the proceeds of the refunding have been used
to purchase U.S. Government or U.S. Government agency securities that are
placed in escrow and whose interest or maturing principal payments, or both,
are sufficient to cover the remaining scheduled debt service on the Kansas
Municipal Securities, or (2) issued under state or local housing finance
programs which use the issuance proceeds to fund mortgages that are then
exchanged or U.S. Government or U.S. Government agency securities and deposited
with a trustee as security for the Kansas Municipal Securities. Such
collateralized obligations are normally regarded as having the credit
characteristics of the underlying U.S. Government or U.S. Government agency
securities.
THE NEBRASKA MUNICIPAL FUND. It is a fundamental policy of The Nebraska
Municipal Fund, which may not be changed without the approval of the majority
of the Fund's shares, that, under normal circumstances, at least 80% of the
Fund's assets will be invested in "Nebraska Municipal Securities" which
generate income that is exempt, in the opinion of bond counsel, from both
federal income tax and Nebraska income tax.
Nebraska Municipal Securities refers to debt obligations the interest
payable on which is, in the opinion of bond counsel to the issuer, exempt from
both federal income taxation and Nebraska income taxation. Nebraska Municipal
Securities generally include debt obligations of the State of Nebraska, its
political subdivisions, municipalities, agencies and authorities, and certain
industrial development and other revenue bonds, short-term municipal notes,
municipal leases and tax-exempt commercial paper issued by such entities.
Nebraska Municipal Securities also include obligations of the Commonwealth of
Puerto Rico, the United States Virgin Islands, and Guam, the interest on which
is, in the opinion of bond counsel to the issuer, exempt from federal income
taxation. The Fund will not invest more than 15% of its total assets in
Nebraska Municipal Securities which are obligations of the Commonwealth of
Puerto Rico, the U.S. Virgin Islands or Guam.
THE OKLAHOMA MUNICIPAL FUND. It is a fundamental policy of this Fund, which
may not be changed without the approval of the majority of the Fund's shares,
that under normal market circumstances, at least 70% of the Fund's assets will
be invested in "Oklahoma Municipal Securities" which generate income that is
exempt, in the opinion of bond counsel, from both federal income tax and
Oklahoma income tax and at least 80% of the Fund's assets will be invested in
Oklahoma Municipal Securities which generate income that is exempt, in the
opinion of bond counsel, from federal income tax. Oklahoma Municipal
Securities refers to debt obligations of Oklahoma, its political subdivisions,
municipalities and authorities the interest payable on which is, in the
opinion of bond counsel to the issuer, exempt from federal income taxation.
Oklahoma Municipal Securities generally include debt obligations of the State
of Oklahoma, its political subdivisions, municipalities, agencies and
authorities, and certain industrial development and other revenue bonds, short-
term municipal notes, municipal leases, and commercial paper issued by such
entities. Oklahoma Municipal Securities include obligations of the
Commonwealth of Puerto Rico, the United States Virgin Islands, and Guam, the
interest payable on which is, in the opinion of bond counsel to the issuer,
exempt from federal income taxation. The Fund will not invest more than 30%
of its total assets in Oklahoma Municipal Securities which are obligations of
the Commonwealth of Puerto Rico, the United States Virgin Islands, or Guam.
The Fund may invest up to 30% of its total assets in Oklahoma Municipal
Securities, the interest on which is subject to Oklahoma income tax.
Investment Restrictions
Each of the Funds, as a fundamental policy, may not, without the approval
of a majority of the shares of that Fund:
-2-
1. Borrow money, except from banks for temporary or emergency (not
leveraging) purposes and then in an amount not exceeding 10% of the value of
the Fund's total assets (including the amount borrowed). Each Fund will not
borrow for leveraging purposes, and securities will not be purchased while
borrowings are outstanding. Interest paid on any money borrowed will reduce
the Fund's net income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 10% of the value of its total assets (taken at the lower of cost or
current value) and then only to secure borrowings for temporary or emergency
purposes.
3. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of purchases and sales of securities. The
deposit of initial or maintenance margin by the Fund in connection with
financial futures contracts and related options transactions, including
municipal bond index futures contracts or related options transactions, is not
considered the purchase of a security on margin.
4. Make short sales of securities or maintain a short position for the
account of the Fund including any short sales "against the box."
5. Underwrite the securities of other issuers, except to the extent
that in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under federal securities laws.
6. Purchase or sell real estate, but this shall not prevent the Fund
from investing in securities which are secured by real estate or interest
therein.
7. Purchase or sell commodities or commodity contracts except to the
extent the options and futures contracts a Fund may trade in are considered to
be commodities or commodities contracts.
8. With respect to The Kansas Municipal Fund and The Kansas Insured
Intermediate Fund, make loans to others except through the purchase of
qualified debt obligations and the entry into repurchase agreements referred
to in the Prospectus. With respect to The Nebraska Municipal Fund and The
Oklahoma Municipal Fund, make loans to others except through the purchase of
qualified debt obligations and the entry into repurchase agreements.
9. With respect to The Kansas Municipal Fund and The Kansas Insured
Intermediate Fund, invest more than 25% of its total assets in the securities
of issuers in any single industry; provided that there shall be no such
limitation on the purchase of securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. With respect to The Nebraska
Municipal Fund and The Oklahoma Municipal Fund, invest more than 25% of its
assets in the securities of issuers in any single issuer; provided that there
shall be no such limitation on the purchase of securities issued or guaranteed
by the U.S. Government, its agencies, or instrumentalities or by the state
after which the Fund was named or their political subdivisions, municipalities,
agencies, and authorities.
-3-
(Each Fund may, from time to time, invest more than 25% of its assets in
a particular segment of the municipal bond market; however, the Fund will not
invest more than 25% of its assets in industrial development bonds in a single
industry.)
10. Invest in securities of any issuer if, to the knowledge of the
Fund, officers and Trustees of the Fund or officers and directors of Ranson
Capital Corporation (the "Adviser" or the "Distributor") who beneficially own
more than 1/2 of 1% of the securities of that issuer together own more than 5%.
11. Purchase securities restricted as to resale, if, as a result, such
investment would exceed 5% of the value of such Fund's net assets.
12. Invest in (a) securities which at the time of such investment are
not readily marketable, including participation interests in municipal leases,
(b) securities the disposition of which is restricted under federal securities
laws (as described in fundamental restriction (11) above) and (c) repurchase
agreements maturing in more than seven days, if, as a result, more than 10%
(15% in the case of the Nebraska Municipal Fund) of such Fund's net assets
(taken at current value) would be invested in securities described in (a), (b),
and (c) above.
13. With respect to The Kansas Insured Intermediate Fund, issue senior
securities, except as described in paragraph 4 above. With respect to The
Nebraska Municipal Fund, issue senior securities, except that the Fund may
borrow money (as described in fundamental restriction (1) above).
14. With respect to The Oklahoma Municipal Fund and The Kansas
Municipal Fund, invest more than 5% of its total assets in securities of any
one issuer, except that this limitation shall not apply to securities of the
U.S. Government, its agencies and instrumentalities and except that with
respect to 50% of the Fund's total assets, the Fund may invest up to 25% of
its total assets in securities of any one issuer.
Each Fund may not change any of these investment restrictions without
the approval of the lesser of (i) more than 50% of the Fund's outstanding
shares or (ii) 67% of the Fund's shares present or represented by proxy at a
meeting at which the holders of more than 50% of the outstanding shares are
present or represented by proxy. Except for restriction (1), if the percentage
restrictions described under "Investment Restrictions" above are satisfied at
the time of the investment, a Fund will be considered to have abided by those
restrictions even if, at a later time, a change in values or net assets causes
an increase or decrease in percentage beyond that allowed. However, with
respect to The Oklahoma Municipal Fund, restrictions (1) and (12) may not be
exceeded at any time.
The following investment restrictions of each Fund may be changed by the
Board of Trustees of the Fund.
-4-
Each Fund will not:
1. Invest more than 5% of its total assets in the securities of any
other single investment company, nor more than 10% of its total assets in the
securities of two or more other investment companies, except as part of a
merger, consolidation, or acquisition of assets.
2. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
An advisory fee will be charged for assets invested in securities of other
investment companies. However, each Fund will not invest more than 10% of its
total assets in such securities. Any investment by a Fund in securities
issued by other investment companies will result in duplication of certain
expenses.
Diversification and Concentration Policies
Each Fund is a non-diversified investment company under the Investment
Company Act of 1940. This means that more than 5% of a Fund's assets may be
invested in the obligations of any issuer. The Funds, however, intend to
comply with Subchapter M of the Internal Revenue Code (the "Code") that limits
the aggregate value of all holdings (except U.S. Government and cash items, as
defined in the Code) that exceed 5% of the Fund's total assets to an aggregate
amount of 50% of such assets. Also, holdings of a single issuer (with the same
exceptions) may not exceed 25% of a Fund's total assets. These limits are
measured at the end of each quarter. Under the Subchapter M limits, up to 50%
of a Fund's total assets may be invested in as few as two single issuers. In
the event of decline of creditworthiness or default upon the obligations of one
or more such issuers exceeding 5%, an investment in a Fund will entail greater
risk than in a portfolio having a policy of "diversification" because a high
percentage of the Fund's assets may be invested in municipal obligations of one
or two issuers. Furthermore, a high percentage of investments among few
issuers may result in a greater degree of fluctuation in the market value of
the assets of a Fund and consequently a greater degree of fluctuation of the
Fund's net asset value, because the Fund will be more susceptible to economic,
political, or regulatory developments affecting these securities than would be
the case with a portfolio composed of varied obligations of more issuers.
In addition, because of the relatively small number of issuers of municipal
securities in Kansas, Nebraska and Oklahoma, each Fund is more likely to invest
a higher percentage of its assets in the securities of a single issuer than an
investment company which invests in a broad range of tax-exempt securities.
This practice involves an increased risk of loss to the Fund if the issuer is
unable to make interest or principal payments or if the market value of such
securities declines.
As noted in item 9 under "Investment Limitations," a fund will not invest
25% or more of its total assets in any industry. Governmental issuers of
municipal securities are not considered part of an "industry." However,
municipal securities backed only by the assets and revenues of non-governmental
users will for this purpose be deemed to be issued by such non-governmental
users, in which case the 25% limitation would apply to such obligations.
Accordingly, a Fund will not invest 25% or more of its assets in obligations
deemed to be issued by non-governmental users in any one industry.
-5-
Over 25% of the municipal securities in a Fund's portfolio may be health
care revenue bonds. Ratings of bonds issued for health care facilities are
often based on feasibility studies that contain projections of occupancy
levels, revenues and expenses. A facility's gross receipts and net income
available for debt service may be affected by future events and conditions
including, among other things, demand for services, the ability of the
facility to provide the services required, physicians' confidence in the
facility, management capabilities, competition with other hospitals, efforts
by insurers and government agencies to limit rates, legislation establishing
state rate-setting agencies expenses, government regulation, the cost and
possible unavailability of malpractice insurance and the termination or
restriction of governmental financial assistance, including that associated
with Medicare, Medicaid and other similar third party pay or programs.
Medicare reimbursements are currently calculated on a prospective basis
utilizing a single nationwide schedule of rates. Prior to this nationwide
approach, Medicare reimbursements were based on the actual costs incurred by
the health facility. The current legislation may adversely affect
reimbursements to hospitals and other facilities for services provided under
the Medicare program.
Over 25% of the municipal securities in a Fund's portfolio may derive their
payment from mortgage loans. Certain of these municipal securities in a
Fund may be single family mortgage revenue bonds issued for the purpose of
acquiring from originating financial institutions notes secured by mortgages
on residences located within the issuer's boundaries and owned by persons of
low or moderate income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities, as a result of events such as the
sale of the mortgaged premises, default condemnation or casualty loss.
Because these bonds are subject to extraordinary mandatory redemption, in
whole or in part, from such prepayments on mortgage loans, a substantial
portion of such bonds will probably be redeemed prior to their scheduled
maturities or even prior to their ordinary call dates. The redemption price
of such issues may be more or less than the offering price of such bonds.
Extraordinary mandatory redemption without premium could also result from the
failure of the originating financial institutions to make mortgage loans in
sufficient amounts within a specified time period or, in some cases, from the
sale by the Bond issuer of the mortgage loans. Failure of the originating
financial institutions to make mortgage loans would be due principally to the
interest rates on mortgage loans funded from other sources becoming
competitive with the interest rates on the mortgage loans funded with the
proceeds of the single family mortgage revenues available for the payment of
the principal of or interest on such mortgage revenue bonds. Single family
mortgage revenue bonds issued after December 31, 1980, were issued under
Section 103A of the Internal Revenue Code, which Section contains certain
ongoing requirements relating to the use of the proceeds of such bonds in
order for the interest on such bonds to retain its tax-exempt status. In
each case the issuer of the bonds has covenanted to comply with applicable
requirements and bond counsel to such issuer has issued an opinion that the
interest on the bonds is exempt from federal income tax under existing laws
and regulations. There can be no assurance that such ongoing requirements
will be met. The failure to meet these requirements could cause the interest
on the bonds to become taxable, possibly retroactively from the date of
issuance.
-6-
Certain of the municipal securities in a Fund's portfolio may be obligations
of issuers whose revenues are primarily derived from mortgage loans to housing
projects for low to moderate income families. The ability of such issuers to
make debt service payments will be affected by events and conditions affecting
financed projects including, among other things, the achievement and
maintenance of sufficient occupancy levels and adequate rental income,
increases in taxes, employment and income conditions prevailing in local labor
markets, utility costs and other operating expenses, the managerial ability of
project managers, changes in laws and governmental regulations, the
appropriation of subsidies and social and economic trends affecting the
localities in which the projects are located. The occupancy of housing
projects may be adversely affected by high rent levels and income limitations
imposed under federal and state programs. Like single family mortgage revenue
bonds, multi-family mortgage revenue bonds are subject to redemption and call
features, including extraordinary mandatory redemption features, upon
prepayment, sale or non-origination of mortgage loans as well as upon the
occurrence of other events. Certain issuers of single or multi-family housing
bonds have considered various ways to redeem bonds they have issued prior to
the stated first redemption dates for such bonds. In one situation, the New
York City Housing Development Corporation, in reliance on its interpretation
of certain language in the indenture under which one of its bond issues was
created, redeemed all of such issue at par in spite of the fact that such
indenture provided that the first optional redemption was to include a premium
over par and could not occur prior to 1992.
Over 25% of the municipal securities in a Fund's portfolio may be
obligations of issuers whose revenues are primarily derived from the sale of
electric energy. Utilities are generally subject to extensive regulation by
state utility commissions which, among other things, establish the rates
which may be charged and the appropriate rate of return on an approved assets
based. The problems faced by such issuers include the difficulty in obtaining
approval for timely and adequate rate increases from the governing public
utility commission, the difficulty in financing large construction programs,
the limitations on operations and increased costs and delays attributable to
environmental considerations, increased competition, recent reductions in
estimates of future demand for electricity in certain areas of the country,
the difficulty of the capital market in absorbing utility debt, the
difficulty in obtaining fuel at reasonable prices and the effect of energy
conservation. All of such issuers have been experiencing certain of these
problems in varying degrees. In addition, federal, state and municipal
governmental authorities may from time to time review existing and impose
additional regulations governing the licensing, construction and operation
of nuclear power plants, which may adversely affect the ability of the
issuers of such bonds to make payments of principal and/or interest of such
bonds.
Over 25% of the municipal securities in a Fund's portfolio may be
university and college revenue obligations. University and college revenue
obligations are obligations of issuers whose revenues are derived mainly from
tuition, dormitory revenues, grants and endowments. General problems faced by
such issuers include declines in the number of "college" age individuals,
possible inability to raise tuitions and fees, the uncertainty of continued
receipt of federal grants and state funding, and government legislation or
regulations which may adversely affect the revenues or costs of such issuers.
-7-
INVESTMENTS
Municipal Securities
Each Fund seeks to invest in a portfolio of investment grade municipal
securities which generate interest income that is exempt from both federal
income tax and income tax of the state after which the Fund was named (e.g.,
Nebraska income tax for The Nebraska Municipal Fund). Notwithstanding the
foregoing, The Oklahoma Municipal Fund may invest up to 30% of its total assets
in Oklahoma Municipal Securities which are subject to Oklahoma state income
taxes.
Municipal securities are debt obligations issued by the state, its political
subdivisions, municipalities, agencies and authorities issued to obtain funds
for various public purposes, including the construction or improvement of a
wide range of public facilities such as airports, bridges, highways, hospitals,
housing, jails, mass transportation, nursing homes, parks, public buildings,
recreational facilities, school facilities, streets and water and sewer works.
Other public purposes for which municipal securities may be issued include the
refunding of outstanding obligations, the anticipation of taxes or state aids,
the payment of judgments, the funding of student loans, community
redevelopment, the purchase of street maintenance and firefighting equipment,
or any authorized corporate purpose of the issuer except for the payment of
current expenses. In addition, certain types of industrial development and
other revenue bonds may be issued by or on behalf of public corporations to
finance privately operated housing facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal. Other types of industrial development bonds,
the proceeds of which are used for the construction, equipping, repair or
improvement of privately operated industrial, commercial or office facilities,
constitute municipal securities, although current federal income tax laws
place substantial limitations on the size of such issues.
The municipal securities in which a Fund invests consist of its respective
state's tax-exempt bonds, notes, commercial paper and participation interests
in municipal leases, except to the extent The Oklahoma Fund may invest its
assets in Oklahoma Municipal Securities, subject to Oklahoma income tax, as
described in the Funds' Prospectus. Tax-exempt notes and commercial paper are
generally used to provide for short-term capital needs and ordinarily have a
maturity of up to one year. These include notes issued in anticipation of tax
revenue, revenue from other government sources or revenue from bond offerings
and short-term, unsecured commercial paper, which is often used to finance
seasonal working capital needs or to provide interim construction financing.
Tax-exempt leases are obligations of state and local government units incurred
to lease or purchase equipment or other property utilized by such governments.
Each Fund will not originate leases as a lessor, but will instead purchase a
participation interest in the regular payment stream of the underlying lease
from a bank, equipment lessor or other third party. General obligation bonds
are secured by the issuer's pledge of its faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are payable from the
revenue derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source,
but not from the general taxing power. Tax-exempt industrial development bonds
are in most cases revenue bonds and generally do not carry the pledge of the
credit of the issuing municipality. The revenues from which such bonds are
paid generally constitute an obligation of the corporate entity on whose
behalf the bonds are issued.
-8-
Although the participation in municipal leases which a Fund may purchase
(hereinafter called "lease obligations") do not constitute general obligations
of the municipality for which the municipality's taxing power is pledged, a
lease obligation is ordinarily backed by the municipality's covenant to budget
for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease payments in
future years unless money is appropriated for such purpose on a yearly basis.
In addition to the "non-appropriation" risk, these securities represent a
relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds and therefore may be less
liquid than other municipal securities. Although "non-appropriation" lease
obligations are secured by the leased property, disposition of the property
in the event of foreclosure might prove difficult. A Fund will only purchase
lease obligations which are rated in the top category by either Standard &
Poor's Corporation ("S&P") or Moody's Investor Service, Inc. ("Moody's").
Each Fund will not invest more than 10% (15% in the case of The Nebraska
Municipal Fund) of its net investment assets in lease obligations (including,
but not limited to those lease obligations which contain "non-appropriation
clauses"), or any other illiquid securities.
Each Fund will only purchase lease obligations which are covered by an
existing opinion of legal counsel experienced in municipal lease transactions
that, as of the date of issue or purchase of each participation interest in a
municipal lease, the interest payable on such obligation is exempt from both
federal income tax and the relevant state's income tax and that the underlying
lease was the valid and binding obligation of the governmental issuer.
Each Fund also may purchase floating and variable rate demand notes from
municipal and non-governmental issuers. These notes normally have a stated
maturity in excess of one year, but permit the holder to demand payment of
principal plus accrued interest upon a specified number of days notice.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Use of letters of credit or other
credit support arrangements will generally not adversely affect the tax-exempt
status of these obligations. Ranson Capital Corporation, the Funds' Adviser,
will rely upon the opinion of the issuer's bond counsel to determine whether
such notes are exempt from federal and the relevant State's income taxation.
The issuer of floating and variable rate demand notes normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the note plus accrued interest upon a specified
number of days notice to the noteholders. The interest rate on a floating rate
demand note is based on a known lending rate, such as a bank's prime rate, and
is adjusted automatically each time such rate is adjusted. The interest rate
on a variable rate demand note is adjusted at specified intervals, based upon a
known lending rate. The Adviser will monitor the creditworthiness of the
issuers of floating and variable rate demand notes. Each Fund will not invest
in derivative financial instruments other than in connection with its hedging
activities.
-9-
As noted, the Funds invest a substantial portion of their assets in
investment grade municipal securities. Lower quality securities involve a
greater risk of default, including nonpayment of principal and interest, than
investment grade securities; however, the risk of default is present in
investment grade securities. Municipal securities rated in the lowest category
of investment grade debt may have speculative characteristics. Investment in
medium-quality debt securities (rated BBB or A by S&P or Baa or A by Moody's)
involves greater investment risk, including the possibility of issuer default
or bankruptcy, than investment in higher-quality debt securities. Medium-
quality municipal securities are considered to possess adequate, but not
outstanding, capacities to service its obligations. An economic downturn could
severely disrupt this market and adversely affect the value of outstanding
bonds and the ability of the issuers to repay principal and interest. During
a period of adverse economic changes, including a period of rising interest
rates, issuers of such bonds are more likely to experience difficulty in
servicing their principal and interest payment obligations than is the case with
higher grade bonds. The principal trading market for the municipal securities
will generally be in the over-the-counter market. As a result, the existence
of a liquid trading market for the municipal securities may depend on whether
dealers will make a market in such securities. There can be no assurance that
a market will be made for any of the municipal securities, that any market for
the municipal securities will be maintained or of the liquidity of the
municipal securities in any markets made. Medium-quality debt securities tend
to be less marketable than higher-quality debt securities because the market is
less liquid. The market for unrated debt securities is even narrower. During
periods of thin trading in these markets, the spread between bid and asked
prices is likely to increase significantly, and a Fund may have greater
difficulty selling the medium-quality debt securities in its portfolio.
In addition, certain of the municipal securities in which a Fund invests may
be subject to extraordinary optional and/or mandatory redemptions at par if
certain events should occur. To the extent securities were purchased at a
price in excess of the par value thereof and are subsequently redeemed at par
as a result of an extraordinary redemption, a Fund would suffer a loss of
principal.
In addition to the foregoing, the yields on municipal securities are
dependent on a variety of factors, including general money market conditions,
the financial condition of the issuer, general conditions of the state's tax-
exempt obligation market, the size of a particular offering, the maturity of
the obligation and the rating of the issue or issuer. The ratings of Moody's
and S&P represent their opinions as to the quality of the municipal securities
which they undertake to rate. It should be emphasized, however, that ratings
are general, and not absolute, standards of quality. Consequently, municipal
securities of the same maturity, interest rate and rating may have different
yields, while municipal securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to their purchase by a
Fund, particular municipal securities or other investments may cease to be
rated or their ratings may be reduced below the minimum rating required for
purchase by a Fund.
Future Contracts, Options on Futures and Municipal Bond Index Futures
Each Fund may purchase or sell financial futures contracts ("futures
contracts") and related options thereon. These futures contracts and related
options thereon will be used only as a hedge against anticipated interest rate
changes. Each Fund may sell a futures contract or a call option thereon or
-10-
purchase a put option on such futures contract, if the Adviser anticipates that
interest rates will rise, as a hedge against a decrease in the value of the
Fund's portfolio securities. If the Adviser anticipates that interest rates
will decline, a Fund may purchase a futures contract or a call option thereon
or sell a put option on such futures contract, to protect against an increase
in the price of the securities the Fund intends to purchase. In general, a
futures contract sale creates an obligation by the Fund, as seller, to deliver
the specific type of instrument called for in the contract at a specified
future time for a specified price. A futures contract purchase would
generally create an obligation by the Fund, as purchaser, to take delivery of
the specific type of financial instrument at a specified future time at a
specified price. A purchaser or seller of a futures contract is required to
make daily payments of cash to reflect the change in the value of the
underlying contract. The specific securities delivered or taken,
respectively, at settlement date would not be determined until on or near that
date. The determination would be in accordance with the rules of the exchange
on which the futures contract sale or purchase was effected.
Although the terms of futures contracts specify actual delivery or receipt
of securities, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the securities.
Closing out a futures contract is usually effected by entering into an
offsetting transaction prior to the expiration of the contract. An offsetting
transaction for a futures contract sale is effected by a Fund entering into a
futures contract purchase for the same aggregate amount of the specific type
of financial instrument at the same delivery date. If the price in the sale
exceeds the price in the offsetting purchase, the Fund immediately is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by a Fund entering
into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the offsetting sale price is
less than the purchase price, the Fund realizes a loss.
Unlike a futures contract, which requires the parties to buy and sell an
instrument on a set date, the purchase of an option on a futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract (a long position in the case of a call option and short
position in the case of a put option). If the holder decides not enter into
the contract, the premium paid for the contract is lost. Since the cost of the
option is fixed, there are no daily payments of cash by the purchaser to
reflect the change in the value of the underlying contract, as discussed below
for futures contracts. The seller of the option, however, may be required to
make daily maintenance margin payments to reflect the change in the value of
the underlying contract. The value of the option is reflected in the net
asset value of the Fund.
A Fund is required to maintain margin deposits with brokerage firms through
which it effects futures contracts and options thereon. The initial margin
requirements vary according to the type of underlying instrument. In addition,
due to current industry practice, daily variations in gains and losses on open
contracts are required to be reflected in cash in the form of variation margin
payments. A Fund may be required to make additional margin payments during the
term of the contract.
A Fund may purchase or sell interest rate futures contracts covering these
types of financial instruments as well as new types of contracts that become
available in the future.
-11-
Financial futures contracts and related options contracts are traded in an
auction environment on the floors of several futures exchanges - principally,
the Chicago Board of Trade, the Chicago Mercantile Exchange, and the New York
Futures Exchange.
A risk in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities subject to
futures contracts may not correlate perfectly with the behavior of the cash
prices of the Fund's portfolio securities. The correlation may be distorted
in part by the fact that the futures market is influenced by short-term
traders seeking to profit from the difference between a contract or security
price objective and their cost of borrowed funds. This would reduce the value
of futures contracts for hedging purposes over a short time period. The
correlation may be further distorted since the futures contracts that are being
used to hedge are not based on municipal obligations. In this regard, the risk
of imperfect correlation may be increased by the fact that a Fund may trade in
futures contracts on taxable securities, and there is no guarantee that the
prices of taxable securities will move in a manner similar to the prices of
tax-exempt securities.
Another risk is that the Adviser could be incorrect in its expectations as
to the direction or extent of various interest rate movements or the time span
within which the movements take place. For example, if the Fund sold futures
contracts in anticipation of an increase in interest rates, and then interest
rates went down, causing bond prices to rise, the Fund would lose money,
including transaction costs, on the sale.
In addition to the risks associated with investing in futures, there are
particular risks associated with trading in options on futures. In particular,
the ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid market in such options.
It is not certain that this market will develop.
A substantial majority (i.e., approximately 75%) of all anticipatory hedge
transactions (transactions in which the Fund does not own, at the time of the
transaction, but expects to acquire the securities corresponding to the
relevant futures contract) involving the purchase of futures contracts, call
options or written put options thereon will be completed by the purchase of
securities which are the subject of the hedge.
A Fund may not enter into futures contracts or related options thereon if,
immediately thereafter, the amount committed to initial margin plus the amount
paid for option premiums on open contracts exceeds 5% of the value of the
Fund's total assets. In instances involving the purchase of futures contracts
by a Fund, an amount equal to the gross market value of the futures contract
will be deposited in a segregated account of cash and cash equivalents and
thereby ensure that the use of such futures is unleveraged. A Fund may not
purchase or sell futures contracts or related positions if, immediately
thereafter, more than one-third of its net assets would be hedged.
A Fund may utilize trading in municipal bond index futures contracts for
hedging purposes. The strategy in employing such contracts will be similar to
that discussed above with respect to financial futures and options thereon. A
municipal bond index is a method of reflecting in a single number the market
value (based on an average of quotations from certain dealers) of many
-12-
different municipal bonds. The index fluctuates in response to changes in the
market values of the bonds included within the index. Unlike futures
contracts on particular financial instruments, futures on a municipal bond
index will be settled in cash if held until the close of trading in the
contract. However, as in any other futures contracts, a position in the
contract may be closed out by purchase or sale of an offsetting contract for
the same delivery month prior to expiration of the contract. Because trading
in municipal bond index futures contracts has been taking place only for a
short time, a Fund's ability to utilize such contracts will be dependent upon
the development and maintenance of a market in such contracts.
The Securities and Exchange Commission generally requires that when
investment companies, such as a Fund, effect transactions of the foregoing
nature, such funds must either segregate cash or high quality, readily
marketable portfolio securities with its custodian in the amount of its
obligation under such transactions or cover such obligations by maintaining
positions in portfolio securities, futures contracts or options that would
serve to satisfy or offset the risk of such obligations. When effecting
transactions of the foregoing nature, a Fund will comply with such segregation
or cover requirements.
Repurchase Agreements
Each Fund may enter into repurchase agreements with respect to not more than
10% of its total assets (taken at current value), except when investing for
temporary defensive purposes during times of adverse market conditions. A
repurchase agreement is a contract under which a Fund would acquire a security
for a relatively short period, and the seller would agree to repurchase such
security at the Fund's cost plus interest within a specified time (generally
one day). Under the Investment Company Act of 1940, repurchase agreements are
considered loans by the Fund. A Fund will not enter into any repurchase
agreement in an amount which would jeopardize the Fund's status as a regulated
investment company or its ability to distribute tax-exempt dividends. Although
a Fund may enter into repurchase agreements with respect to any securities
which it may acquire consistent with its investment policies and restrictions,
it is each Fund's present intention to enter into repurchase agreements only
with respect to obligations of the U.S. Government or its agencies or
instrumentalities and with respect to its relevant state's municipal
securities. The Funds' custodian will hold the securities underlying any
repurchase agreement in a segregated account. In investing in repurchase
agreements, a Fund's risk is limited to the ability of the seller to pay the
agreed-upon price at the maturity of the repurchase agreement. In the opinion
of the Adviser, the risk is not material, since in the event of default,
barring extraordinary circumstances, a Fund would be entitled to sell the
underlying securities or otherwise receive adequate protection under federal
bankruptcy laws for its interest in such securities. To the extent that
proceeds from any sale upon a default are less than the repurchase price,
however, a Fund could suffer a loss. In addition, a Fund may incur certain
delays in obtaining direct ownership of the collateral.
Forward Commitments
As described in the Funds' Prospectus, each Fund may purchase securities on
a "when issued" or delayed delivery basis, with delivery and payment for the
securities normally taking place within 45 days after the date of the
commitment to purchase. The payment obligation and the interest rate that will
-13-
be received on such securities are fixed at the time the buyer enters into the
commitment. Each Fund may enter into such "forward commitments" if it holds,
and maintains until the settlement date in a segregated account with its
custodian, cash or high-grade, short-term obligations in an amount sufficient
to meet the purchase price. There is no percentage limitation on a Fund's
total assets which may be invested in forward commitments. Forward
commitments involve a risk of loss if the value of the municipal securities or
other security to be purchased declines prior to the settlement date, which
risk is in addition to the risk of decline in the value of the Fund's other
assets. Forward commitments also involve the risk that should the securities
ultimately not be issued or delivered and the price of comparable securities
has increased, the cost of substitute securities having comparable par amounts,
ratings and yields will be greater than originally contracted for. Although
each Fund will generally enter into forward commitments with the intention of
acquiring the securities for its portfolio, a Fund may dispose of a commitment
prior to settlement if the Adviser deems it appropriate to do so. Each Fund
may realize short-term profits or losses upon the sale of forward commitments,
which profits or losses may constitute capital gains or ordinary income
depending upon a number of factors, including the number of sales of such
commitments.
Temporary Investments
Taxable obligations which a Fund may purchase for temporary liquidity
purposes, or for temporary defensive purposes, may include: obligations of
the U.S. Government, its agencies or instrumentalities; other debt securities
of issuers having, at the time of purchase, a rating within the four highest
grades (the highest grade with respect to The Kansas Insured Intermediate Fund)
of Moody's or S&P; commercial paper rated P-1 or better by Moody's or A-1 or
better by S&P; certificates of deposit of domestic banks, including foreign
branches of domestic banks, which have capital, surplus and undivided profits
of over $100 million; time deposits; bankers' acceptances, repurchase
agreements and obligations of the Fund's relevant state with respect to any of
the foregoing investments.
PORTFOLIO TURNOVER
Portfolio transactions will be undertaken principally to accomplish a Fund's
objective in relation to anticipated movements in the general level of interest
rates, but a Fund may also engage in short-term trading consistent with its
objective. Securities may be sold in anticipation of a market decline (a rise
in interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold. In addition, a security may be sold and
another purchased at approximately the same time to take advantage of what the
Adviser believes to be a temporary disparity in the normal yield relationship
between the two securities. Yield disparities may occur for reasons not
directly related to the investment quality of particular issues or the general
movement of interest rates, due to such factors as changes in the overall
demand for or supply of various types of municipal securities or changes in the
investment objectives of investors.
Each Fund's investment policies may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest rates. A change in
securities held by a Fund is known as "portfolio turnover" and may involve the
-14-
payment by the Fund of dealer mark-ups or underwriting commissions, and other
transaction costs, on the sale of securities, including municipal securities,
as well as on the reinvestment of the proceeds in other securities. Each Fund
anticipates that its annual portfolio turnover rate will not exceed 75%.
Portfolio turnover rate for a fiscal year is the ratio of the lesser of the
dollar amount of the purchases or sales of portfolio securities to the monthly
average of the value of portfolio securities excluding securities whose
maturities at acquisition were one year or less. Each Fund's portfolio
turnover rate will not be a limiting factor when the Fund deems it desirable
to sell or purchase securities. Frequent changes in a Fund's portfolio
securities may result in higher transaction costs for the Fund.
BOND INSURANCE FOR THE KANSAS INSURED INTERMEDIATE FUND
Each insured Kansas Municipal Security in which The Kansas Insured
Intermediate Fund will invest, will be covered by Original Issue Insurance or
Secondary Market Insurance. In any event, the Fund will invest in Kansas
Municipal Securities insured by insurers having total admitted assets of at
least $75 million, capital and surplus of at least $50 million and claims-
paying ability ratings of "Aaa" by Moody's, "AAA" by S&P, "AAA" by Fitch IBCA,
Inc., or "AAA" by Duff & Phelps. There is no limitation on the percentage of
the Fund's assets that may be invested in Kansas Municipal Securities insured
by any given insurer.
ORIGINAL ISSUE INSURANCE. Original Issue Insurance is purchased with
respect to a particular issue of municipal obligations by the issuer thereof
or a third party in conjunction with the original issuance of such municipal
obligations. Under such insurance, the insurer unconditionally guarantees, to
the holder of the municipal obligation, the timely payment of principal and
interest on such obligation when and as such payments shall become due, but
shall not be paid by the issuer, except that in the event of any acceleration
of the due date of the principal by reason of mandatory or optional redemption
(other than acceleration by reason of a mandatory sinking fund payment),
default or otherwise, the payments guaranteed may be made in such amounts and
at such times as payments of principal would have been due had there not been
such acceleration. The insurer is responsible for such payments less any
amounts received by the holder from any trustee for the municipal obligation
issuers or from any other source. Original Issue Insurance does not guarantee
payment on an accelerated basis, the payment of any redemption premium (except
with respect to certain premium payments in the case of certain small issue
industrial development and pollution control municipal obligations), the value
of the shares of a Fund, or the market value of municipal obligations or
payments of any tender purchase price upon the tender of the municipal
obligations. Original Issue Insurance also does not insure against nonpayment
of principal of or interest on municipal obligations resulting from the
insolvency, negligence or any other act or omission of the trustee, or other
paying agent for such obligations.
In the event that interest on or principal of a Kansas Municipal Security,
covered by insurance is due for payment but is unpaid by reason of nonpayment
by the issuer thereof, the applicable insurer will make payments to its fiscal
agent (the "Fiscal Agent") equal to such unpaid amounts or principal and
interest not later than one business day after the insurer has been notified
that such nonpayment has occurred (but not earlier than the date such payment
is due). The Fiscal Agent will disburse to the Fund the amount of principal
-15-
and interest which is then due for payment but is unpaid upon receipt by the
Fiscal Agent of (i) evidence of the Fund's right to receive payment of such
principal and interest and (ii) evidence, including any appropriate
instruments of assignment, that all of the rights of payment of such principal
or interest then due for payment shall thereupon vest in the insurer. Upon
payment by the insurer of any principal or interest payments with respect to
any Kansas Municipal Securities, the insurer shall succeed to the rights of
the Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the Kansas Municipal
Securities covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such Kansas
Municipal Securities. Consequently, Original Issue Insurance may be considered
to represent an element of market value with respect to the Kansas Municipal
Securities so insured, but the exact effect, if any, of this insurance on such
market value cannot be estimated.
SECONDARY MARKET INSURANCE. Subsequent to the time of original issuance of
a Kansas Municipal Security, the Fund, or a third party may, upon the payment
of a single premium, purchase insurance on such Kansas Municipal Security.
Secondary Market Insurance generally provides the same type of coverage as is
provided by Original Issue Insurance and, as is the case with Original Issue
Insurance, Secondary Market Insurance remains in effect as long as the Kansas
Municipal Securities covered thereby remain outstanding and the insurer
remains in business, regardless of whether the Fund ultimately disposes of such
Kansas Municipal Securities.
ADDITIONAL RISK CONSIDERATIONS
An investment in the Funds are subject to a number of risks, some of which
have been described in the Funds' Prospectus under "Fund Summary" for each Fund
and the "Principal Risk Factors" Section. See also "Investments" and
"Investment Objective, Policies and Restrictions" above for some of the risks
associated with the Funds' investment policies. In addition to the foregoing,
you should note that each Fund is a series of a registered investment company
the shares of which are being offered through the same prospectus.
Accordingly, one Fund could be liable for any misstatement, inaccuracy, or
incomplete disclosure in the prospectus concerning another Fund.
As described in the Prospectus, each of the Funds invests primarily in
municipal securities from a specific state. Each Fund is therefore more
susceptible to political, economic or regulatory factors adversely affecting
issuers of municipal securities in its state. Brief summaries of these factors
are contained in the Prospectus. Set forth below is additional information
that bears upon the risk of investing in municipal securities issued by public
authorities in the states of currently offered Funds. This information was
obtained from official statements of issuers located in the respective states
as well as from other publicly available official documents and statements.
The Funds have not independently verified any of the information contained in
such statements and documents. The information below is intended only as a
general summary, and is not intended as a discussion of any specific factor
-16-
that may affect any particular obligation or issuer. Additionally, many
factors including national economic, social and environmental policies and
conditions, which are not within the control of issuers of municipal
securities, could affect or could have an adverse impact on the financial
condition of a Fund's state and its various agencies and political
subdivisions. The Adviser is unable to predict whether or to what extent
such factors or other factors may affect issuers of municipal securities in
which a Fund invests, the market value or marketability of these municipal
securities or the ability of the respective issuers of these municipal
securities or the ability of the respective issuers of the municipal
securities acquired by a Fund to pay interest on or principal of the municipal
securities.
FACTORS PERTAINING TO KANSAS. Since The Kansas Municipal Fund and The
Kansas Insured Intermediate Fund will invest substantially all of its assets
in Kansas Municipal Securities, such Funds are susceptible to political and
economic factors affecting issuers of Kansas Municipal Securities. Kansas is
a largely rural state with a population of approximately 2.6 million. In 1999,
Kansas experienced another year of strong economic growth with stability in the
areas of agricultural services, construction, transportation and public
utilities and Finance, Insurance and Real Estate (or FIRE). During 1999,
Kansas' average unemployment rate fell to 3.3%, down slightly from 3.8% in
1997 and 1998. Nationally, the average unemployment rate was 4.2% for 1999.
Agriculture is one of the most important sectors of the state's economy.
Kansas leads the nation in wheat and sorghum production and is a major producer
of sunflowers, hay and soybeans. In 1999, continuing problems in the farm
economy caused farm employment to fall 4.9% compared to a 1.6% increase in
1998. In 2000, the agriculture sector is expected to remain soft, but overall,
the economy should remain strong and experience moderate growth. The Kansas
Constitution provides for the issuance of general obligation bonds subject to
certain restrictions, but no bonds have been issued under this provision for
many years.
FACTORS PERTAINING TO NEBRASKA. Since The Nebraska Municipal Fund will
invest substantially all of its assets in Nebraska Municipal Securities, the
Fund is susceptible to political and economic factors affecting the issuers of
Nebraska Municipal Securities. Along with positive population growth,
Nebraska has enjoyed regular economic growth during the past few years.
Historically, the state's economy is less cyclical than the national economy;
that is, it typically does not grow as quickly as the national economy during
periods of expansion but also does not contract as much during periods of
recession. Nebraska's economy was hesitant during 1999. Growth in business
incorporations, retail sales, non-farm income, tourism and population were
offset by declines in labor force, employment, and non-residential construction
activity. Overall, the state's economy will continue to experience slow,
steady growth through 2000 although businesses have indicated weaknesses tied
to the agriculture sector. As land values continue to rise, crop prices were
down for the second straight year in 1999. This could increase migration
from rural areas to the cities of Nebraska.
-17-
FACTORS PERTAINING TO OKLAHOMA.Since The Oklahoma Municipal Fund will invest
substantially all of its assets in Oklahoma Municipal Securities, the Fund is
susceptible to political and economic factors affecting the issuers of Oklahoma
Municipal Securities. Oklahoma's economy has undergone significant
diversification over the past two decades. Since the oil bust of the early
eighties, the state has broadened its economic base to rely less on petroleum
and agriculture. There have been sizable employment increases in the state's
manufacturing and service sectors over the past ten years. Current economic
performance is much better than that experienced during the mid-1980s, but is
expected to slow in 2000 and 2001 due to tightening labor markets as well as a
projected national economy slowdown. All major sectors of the state's economy,
with the exception of mining, improved during 1999. The state had 1.4% annual
employment growth during 1999. Oklahoma also has one of the lowest
unemployment rates in its region at 3.5%, compared to the national average of
4.2% for 1999.
Governmental expense budgeting provisions in Oklahoma are conservative,
basically requiring a balanced budget each fiscal year unless a debt is
approved by a vote of the people providing for the collection of a direct
annual tax to pay the debt. Certain limited exceptions include: deficiency
certificates issued at the discretion of the Governor (however, the
deficiency certificates may not exceed $500,000 in any fiscal year) and
debts to repel invasion, suppress insurrection or to defend the State in the
event of war.
To ensure a balanced annual budget, the State Constitution provides
procedures for certification by the State Board of Equalization of revenues
received in the previous fiscal year and amounts available for appropriation
based on a determination of revenues to be received by the State in the General
Revenue Fund in the next ensuing fiscal year.
Beginning July 1, 1985, surplus funds were to be placed in a Constitutional
Reserve Fund until the Reserve Fund equals 10% of the General Revenue Fund, as
certification for the preceding fiscal year. Half of the Reserve Fund may then
be appropriated under restricted conditions and will be considered special
appropriations.
MANAGEMENT OF THE FUNDS
The management of each Fund, including general supervision of the duties
performed for a Fund under its Investment Advisory Agreement, is the
responsibility of the Trust's Board of Trustees. The number of trustees of the
Trust is four, one of whom is as "interested person" (as the term "interested
person" is defined in the Investment Company Act of 1940 (the "1940 Act") and
three of whom are "disinterested persons." The names and business addresses
of the trustees and officers of the Trust and their principal occupations and
other affiliations during the past five years are set forth below, with the
trustees or officers who are "interested persons" of the Trust indicated by an
asterisk.
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH REGISTRANT (1) DURING PAST 5 YEARS (2)
<S> <C> <C>
Lynn W. Aas Trustee Retired; Attorney; Director, ND Holdings,
904 NW 27th Inc. (May 1988 to August 1994), ND Insured Income Fund, Inc.
Minot, ND 58703 (December 1994 to August 1999), ND Tax-Free Fund, Inc.,
79 (since December 1994) Montana Tax-Free Fund, Inc., (since
December 1994) South Dakota Tax-Free Fund, Inc., (since
December 1994) Integrity Fund of Funds, Inc., and Integrity
Small-Cap Fund of Funds, Inc. (since September 1998); Director,
First Western Bank & Trust
-18-
Orlin W. Backes Trustee Attorney, McGee, Hankla, Backes & Wheeler, P.C.;
15 2nd Ave., SW - Ste. 305 Director, ND Tax-Free Fund, Inc. (since April 1995),
Minot, ND 58701 ND Insured Income Fund, Inc. (March 1995 to August 1999),
65 Montana Tax-Free Fund, Inc. (since April 1995), South Dakota
Tax-Free Fund, Inc. (since April 1995), Integrity Fund of
Funds, Inc. (since April 1995), and Integrity Small-Cap Fund of
Funds, Inc. (since September 1998); Director, First Western
Bank & Trust
R. James Maxson Trustee Attorney, McGee, Hankla, Backes & Wheeler, P.C.
15 2nd Ave., SW - Ste. 305 (since April 2000); Attorney, Farhart, Lian and Maxson, P.C.
Minot, ND 58701 (March 1976 to March 2000); ND Tax-Free Fund, Inc.
52 (since January 1999), Montana Tax-Free Fund, Inc. (since
January 1999), South Dakota Tax-Free Fund, Inc. (since January
1999), Integrity Fund of Funds, Inc. (since January 1999), and
Integrity Small-Cap Fund of Funds, Inc. (since January 1999)
*Peter A. Quist Vice President Attorney; Director and Vice President, ND Holdings, Inc.;
1 North Main and Secretary Director, Vice President and Secretary, ND Money Management,
Minot, ND 58703 Inc., ND Capital, Inc., ND Resources, Inc., ND Tax-Free Fund,
66 Inc., ND Insured Income Fund, Inc. (November 1990 to August
1999), Montana Tax-Free Fund, Inc., South Dakota Tax-Free Fund,
Inc. (since April 1995), Integrity Fund of Funds, Inc.,
Integrity Small-Cap Fund of Funds, Inc. (since September 1998),
The Ranson Company, Inc. (January 1996 to February 1997),
Ranson Capital Corporation (since January 1996), and
Director, ARM Securities Corporation (since May 2000)
*Robert E. Walstad Trustee, Chairman, Director and President, ND Holdings, Inc, Director,
1 North Main President, and Treasurer President and Treasurer, ND Money Management, Inc., ND Capital,
Minot, ND 58703 Inc.,ND Resources, Inc., ND Tax-Free Fund, Inc., ND Insured
56 Income Fund, Inc. (November 1990 to August 1999), Montana Tax-
Free Fund, Inc., South Dakota Tax-Free Fund, Inc., Integrity
Fund of Funds, Inc., and Integrity Small-Cap Fund of Funds,
Inc. (since September 1998); Director, President, CEO, and
Treasurer, The Ranson Company, Inc. (January 1996 to February
1997), Ranson Capital Corporation (since January 1996);
Director, President and Treasurer, Magic Internet Services,
Inc. (since October 1999); Director, President, CEO and
Chairman, ARM Securities Corporation (since May 2000)
--------------------
<FN>
(1) Other than Mr. Maxson, Messrs. Aas, Backes and Walstad were elected to
the Board of Trustees at a joint special meeting of the shareholders of The
Kansas Municipal Fund, The Kansas Insured Municipal Fund-Limited Maturity and
The Nebraska Municipal Fund of Ranson Managed Portfolios held on December 11,
1995, but did not assume office until January 5, 1996. Mr. R. James Maxson was
elected to the Board of Trustees on December 4, 1998, effective January 1,
1999, following the retirement of Arthur A. Link.
-19-
(2) Except as otherwise indicated, each individual has held the office(s)
shown for the past five years.
</FN>
</TABLE>
Trustees, who are not "interested persons" as that term is defined in the
1940 Act of the Trust, are paid an annual fee of $10,000 for serving as a
director or trustee, as the case may be, on the boards of all the funds in the
Fund complex. In addition to the Trust (which includes the four Funds which
are series of the Trust), the trustees are also directors of five open-end
investment companies advised by ND Money Management, Inc., an affiliate of the
Adviser. The annual fee paid to the trustees is allocated among the funds in
the complex (including each Fund) as follows: Each fund pays a minimum of
$500, and the remainder of the fee is allocated among the funds on the basis
of their relative net asset values. Messrs. Quist and Walstad, who are the
only "interested persons" of such funds, receive no compensation from the
funds.
-21-
The following tables set forth compensation paid by each Fund to each of the
trustees and total compensation paid to each trustee by all the funds in the
complex for the calendar year ended December 31, 1999. The Funds have no
retirement or pension plans.
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE*
COMPENSATION AGGREGATE* AGGREGATE* TOTAL**
AGGREGATE* FROM THE KANSAS COMPENSATION COMPENSATION COMPENSATION
COMPENSATION INSURED FROM THE FROM THE FROM FUNDS AND
NAME OF PERSON, FROM THE KANSAS INTERMEDIATE NEBRASKA OKLAHOMA FUND COMPLEX
POSITION(S) MUNICIPAL FUND FUND MUNICIPAL FUND MUNICIPAL FUND PAID TO TRUSTEES
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lynn W. Aas
Trustee $2,290.30 $854.81 $1,087.51 $774.21 $10,000.00
Orlin W. Backes
Trustee $2,290.30 $854.81 $1,087.51 $774.21 $10,000.00
R. James Maxson(1)
Trustee $2,290.30 $854.81 $1,087.51 $774.21 $10,000.00
Peter A. Quist
Vice President, and
Secretary -0- -0- -0- -0- -0-
Robert E. Walstad
Trustee, Chairman,
President,
and Treasurer -0- -0- -0- -0- -0-
-----------------------------------------------------------------------------------------------------------------------------
TOTALS $6,870.90 $2,564.43 $3,262.53 $2,322.63 $30,000.00
--------------------
<FN>
(1) Mr. Maxson was appointed to the board of each Fund on December 4, 1998,
effective January 1, 1999.
* Based on compensation paid to the directors for the one-year period
ended December 31, 1999 for services to the respective Fund.
** Based on the compensation paid to the trustees for the one-year period
ended December 31, 1999 for services to the Funds and five other open-end funds
advised by ND Money Management, Inc., an affiliate of the Adviser.
</FN>
</TABLE>
-21-
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of November 15, 2000, the officers and Trustees of each Fund owned, as a
group, less than 1% of the shares of each Fund.
To the best of the knowledge of the respective Fund, as of November 15,
2000, the following persons owned, of record or beneficially 5%, or more of the
shares of the Funds:
THE KANSAS INSURED INTERMEDIATE FUND
Name Address Percent Ownership
SEI TRUST COMPANY One Freedom Valley Drive, 15.72%
Oakes, PA 19456
THE OKLAHOMA MUNICIPAL FUND
Name Address Percent Ownership
RSPS Investments, 4712 Tamarisk Drive 5.95%
Inc. L.P. Oklahoma City, OK 73120
As of November 15, 2000, no person owned of record or was known by the
respective Fund to own of record or beneficially 5% or more of the outstanding
shares of The Kansas Municipal Fund or The Nebraska Municipal Fund.
CUSTODIAN AND TRANSFER AGENT
First Western Bank & Trust, 900 South Broadway, Minot, North Dakota 58701,
serves as the custodian of the Funds and has custody of all securities and cash
of the Funds. The custodian, among other things, attends to the collection of
principal and income and payment for and collection of proceeds of securities
bought and sold by the Funds.
ND Resources, Inc. ("Resources" or the "Transfer Agent"), a wholly-owned
subsidiary of ND Holdings, Inc. ("ND Holdings"), a North Dakota corporation,
also provides each Fund with accounting services. Resources is located at 1
North Main, Minot, North Dakota 58703. For these services, Resources receives
an accounting services fee payable monthly from each Fund equal to the sum of
(i) $2,000 per month and (ii) 0.05% of the respective Fund's average daily net
assets on an annual basis for such Fund's first $50 million of average daily
net assets, 0.04% of such Fund's average daily net assets on an annual basis
for the Fund's next $50 million of average daily net assets, 0.03% of such
Fund's average daily net assets on an annual basis for the Fund's next $100
million of average daily net assets, 0.02% of such Fund's average daily net
assets on an annual basis for the Fund's next $300 million of average daily
net assets, and 0.01% of such Fund's average daily net assets on an annual
basis for the Fund's average daily net assets in excess of $500 million,
together with reimbursement of Resource's out-of-pocket expenses.
-22-
For the years ended July 31, 1998, July 30, 1999, and July 31, 2000 The
Kansas Municipal Fund paid $76,138 $74,511, and $71,668 respectively, in
administrative and accounting fees. For the year ended July 31, 1998,
July 30, 1999, and July 31, 2000 The Kansas Insured Intermediate Fund paid
Resources $38,166, $34,563, and $34,052 respectively, in administrative and
accounting services fees. For the years ended July 31, 1998, July 30, 1999,
and July 31, 2000 The Nebraska Municipal Fund paid Resources $40,831 $39,190,
and $43,607 respectively, in administrative and accounting services fees.
For the years ended July 31, 1998, July 30, 1999, and July 31, 2000 The
Oklahoma Municipal Fund paid Resources $29,198, $31,978, and $32,149
respectively, in administrative and accounting services fees, of which $0,
$5,686, and $0 respectively, was waived by Resources.
INDEPENDENT AUDITORS
Each Fund's independent public accountant is Brady Martz & Associates,
P.C., 24 West Central Avenue, Minot, North Dakota 58701. Shareholders will
receive annual financial statements, together with a report of independent
auditors, and semiannual unaudited financial statements of the Funds. The
independent auditors will report on the Funds' annual financial statements,
review certain regulatory reports and the Funds' income tax returns, and
perform other professional accounting, auditing, tax and advisory services
when engaged to do so by the Funds.
MANAGEMENT AND INVESTMENT ADVISORY AGREEMENT
Ranson Capital Corporation (the "Adviser") has been retained by each Fund
under a Management and Investment Advisory Agreement (each an "Agreement") to
act as each Fund's investment adviser, subject to the authority of the Board
of Trustees. The Adviser is a wholly-owned subsidiary of ND Holdings, Inc., a
venture capital corporation organized under the laws of North Dakota on
September 22, 1987. The address of the Adviser is 1 North Main, Minot, North
Dakota 58703.
The Adviser will supply investment research and portfolio management,
including the selection of securities for each Fund to purchase, hold or sell,
and the selection of brokers through whom a Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of each Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees and officers of a Fund if duly elected to such positions.
For the management services and facilities furnished by the Adviser, each of
the Funds has agreed to pay the Investment Adviser an annual management fee,
payable monthly, of 0.50% of the respective Fund's average daily net assets.
Under the terms of each Agreement, the Adviser has agreed to pay all expenses
of a Fund, including the Fund's management and investment advisory fee and the
Fund's dividend disbursing, administrative and accounting services fees (but
-23-
excluding taxes and brokerage fees and commissions, if any) that exceed 1.25%
(.75% with respect to The Kansas Insured Intermediate Fund) of the Fund's
average daily net assets on an annual basis (up to the amount of the
investment advisory and management fee payable by the Fund to the Adviser in
the case of The Kansas Municipal Fund, The Nebraska Municipal Fund and The
Oklahoma Municipal Fund). Reimbursements by the Adviser for such Fund expenses
will be paid monthly based on annualized year to date expenses. All other
expenses shall be paid by the respective Fund. In addition, the Adviser may
at its own discretion from time to time waive fees and reimburse expenses.
The table below sets forth the advisory fees paid by the Funds, net of any
expenses reimbursements, and the fees waived and expenses reimbursed by the
Adviser for the periods indicated.
<TABLE>
<CAPTION>
MANAGEMENT FEES
NET OF EXPENSE REIMBURSEMENT FEE WAIVERS AND EXPENSE
TO RANSON FOR THE YEAR ENDED REIMBURSEMENTS FOR THE YEAR ENDED
-------------------------------------------------------------------------------------
7/31/98 7/30/99 7/31/00 7/31/98 7/30/99 7/31/00
<S> <C> <C> <C> <C> <C> <C>
The Kansas Municipal Fund $619,124 $592,103 $544,815 $ 0 $ 0 $ 0
The Kansas Insured Intermediate Fund $ 95,378 $ 76,432 $ 70,147 $16,567 $29,229 $30,414
The Nebraska Municipal Fund $ 80,205 $107,311 $169,506 $56,537 $44,196 $26,643
The Oklahoma Municipal Fund $ 3,899 $ 4,998 $ 332 $47,045 $70,643 $81,264
</TABLE>
------------------------
The Agreement with each Fund will continue in effect from year to year if
specifically approved by the Fund's trustees or the Fund's shareholders and by
the Fund's disinterested trustees in compliance with the requirements of the
1940 Act. The Agreement may be terminated without penalty upon 60 days'
written notice by either party and will automatically terminate in the event
of assignment.
Robert E. Walstad, a trustee and officer of the Trust, and Peter A. Quist,
an officer of the Trust, are also directors and officers of the Adviser as
indicated under "Management of the Funds."
Code of Ethics
You should also note that the Investment Adviser, Ranson Capital
Corporation (the Funds' underwriter), and the Funds have adopted codes of
ethics under Rule 17j-1 of the 1940 Act. The purpose of a code is to avoid
potential conflicts of interest and to prevent fraud, deception or misconduct
with respect to the Fund. Such codes of ethics permit personnel covered by the
codes to invest in securities, subject to the restrictions of the code.
PORTFOLIO TRANSACTIONS
Allocation of portfolio transactions to various brokers is determined by the
Adviser in its best judgment and in a manner deemed fair and reasonable to
shareholders. The Adviser may consider a number of factors in determining
brokers to use for a Fund's portfolio transactions including the quality,
quantity, price and nature of each firm's professional services. The primary
consideration is prompt and efficient execution of orders in an effective
manner at the most favorable price. The Adviser may consider a broker's
services including execution, clearance procedures, and wire service
quotations. The Adviser may also consider statistical and other investment
research information provided to the Funds and the Adviser. Research services
may include advice as to the value of securities; quotes to value a Fund's
assets; the advisability of investing in purchasing, or selling securities;
the availability of securities or purchasers or sellers of securities;
furnishing analyses and reports concerning issues, industries, securities,
economic factors and trends, portfolio strategy, and performance of accounts.
Any research benefits derived are available for all clients of the Adviser and
not all the services may be used by the Adviser in connection with a Fund.
Since statistical and other research information is only supplementary to the
research efforts of the Adviser and still must be analyzed and reviewed by one
of its staff, the receipt of research information is not expected to materially
-24-
reduce the Adviser's expenses. In selecting among the firms believed to meet
the criteria for handling a particular transaction, the Adviser may take into
consideration that certain firms have sold or are selling shares of a Fund and
that certain firms provide market, statistical or other research information to
the Funds and the Adviser. The Adviser and the Funds may place orders to
effect purchases and sales of portfolio securities with and pay brokerage
commissions to brokers that are affiliated with the Funds, the Adviser or
Distributor, or selected dealers participating in the offering of a Fund's
shares. Subject to rules adopted by the Securities and Exchange Commission, a
Fund may also purchase municipal securities from other members of underwriting
syndicates of which the Distributor or other affiliates of the Funds are
members.
If it is believed to be in the best interests of a Fund, the Adviser may
place portfolio transactions with brokers who provide the types of service
described above, even if it means the respective Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security,
will have to pay a higher price for the security) than would be the case if no
weight were given to the broker's furnishing of their services. This will be
done, however, only if, in the opinion of the Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of the
services.
If purchases or sales of securities for a Fund, for one or more Funds of
the Trust, investment companies or clients supervised by the Adviser are
considered at or about the same time, transactions in such securities will be
allocated among the Funds, investment companies and other clients in a manner
deemed equitable to all by the Adviser, taking into account the respective
sizes of the funds and the amount of securities to be purchased or sold. A
lthough it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as a Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial
to the Funds.
The Funds expect that their portfolio transactions in municipal securities
will generally be effected on a principal (as opposed to agency) basis and,
accordingly, do not expect to incur significant brokerage commissions. Each
Fund's cost of portfolio transactions will consist primarily of dealer or
underwriter spreads. The Funds may also pay mark-ups on principal
transactions. Commissions will be paid on the Funds futures and option
transactions, if any.
While the Adviser will be primarily responsible for the placement of the
Funds' business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Trustees
of the Funds.
The Board of Trustees has adopted certain policies incorporating the
standards of Rule 17e-1 issued by the Securities and Exchange Commission under
the 1940 Act which require that the commissions paid to the Distributor and
other affiliates of the Fund must be reasonable and fair compared to the
commissions, fees or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
-25-
during a comparable period of time. The Rule and procedures also contain
review requirements and require the Adviser to furnish reports to the Board
of Trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the Board of Trustees will
consider from time to time whether the advisory fee will be reduced by all or
a portion of the brokerage commissions given to affiliated brokers.
The table below reflects the aggregate commissions paid by the Funds for the
periods indicated:
<TABLE>
<CAPTION>
COMMISSIONS PAID FOR FISCAL YEAR ENDED
-----------------------------------
7/31/98 7/30/99 7/31/00
<S> <C> <C> <C>
The Kansas Municipal Fund $84,775 $ 0 $0
The Kansas Insured Intermediate Fund $ 3,963 $625 $0
The Nebraska Municipal Fund $ 1,875 $ 0 $0
The Oklahoma Municipal Fund $ 9,056 $ 0 $0
</TABLE>
-------------------
Ranson Capital Corporation, the Funds' Distributor, was the only dealer
through which transactions involving the payment of commissions was effected.
Accordingly, 100% of the brokerage commissions paid by the Funds (as reflected
above) were paid to Ranson Capital Corporation. Fluctuation in commissions
were due to changes in procedures in the purchase and sale of municipal
securities.
THE DISTRIBUTOR
Shares of each Fund are offered on a continuous basis through Ranson Capital
Corporation (the Distributor), a wholly-owned subsidiary of ND Holdings, Inc.,
1 North Main, Minot, North Dakota 58703. Robert E. Walstad is a trustee,
chairman, president and treasurer of the Trust, and Peter A. Quist is vice
president and secretary of the Trust. Both Mr. Walstad and Mr. Quist are also
directors and officers of the Distributor. Pursuant to a Distribution and
Services Agreement with each Fund, the Distributor will purchase shares of the
Funds for resale to the public, either directly or through securities brokers,
dealers, banks or other agents, and is obligated to purchase only those shares
for which it has received purchase orders. The distributor has agreed to use
its best efforts to solicit orders for the sale of the applicable Fund's
shares. The Distributor receives for its services the excess, if any, of the
sales price of a Fund's shares less the net asset value of those shares, and
reallows a majority or all of such amounts to the dealers who sold the shares;
the Distributor may act as such a dealer. The staff of the Securities and
Exchange Commission takes the position that dealers who receive 90% or more of
the applicable sales charge may be deemed underwriters under the Securities
Act of 1933, as amended.
Under the Distribution and Services Agreement between the respective Fund
and the Distributor, the Distributor pays the expenses of distribution of a
Fund's shares, including preparation and distribution of literature relating to
a Fund and its investment performance and advertising and public relations
-26-
material. Each Fund bears the expenses of registration of its shares with the
Securities and Exchange Commission and of sending prospectuses to existing
shareholders. The Distributor will permit its officers and employees to serve
without compensation as Trustees and officers of the Funds if duly elected to
such positions. Each Fund will pay the cost of qualifying and maintaining
qualification of the shares for sale under the securities laws of the various
states after the initial qualification of the shares. In addition, The Kansas
Municipal Fund, The Nebraska Municipal Fund and The Oklahoma Municipal Fund
have each adopted a plan pursuant to Rule 12b-1 under the 1940 Act pursuant to
which the respective Fund will pay some costs of the distribution of its
shares. The Kansas Municipal Fund, The Oklahoma Municipal Fund and The
Nebraska Municipal Fund will each pay the Distributor annually 0.25% of the
average daily net assets of respective Fund and the Distributor may in turn
pay firms that sell the respective Fund's shares an annual service fee of up
to 0.25% of average daily net assets of their customer accounts in existence
for more than one year for administrative and shareholder services or use
some or all of such payment to pay other distribution expenses which
otherwise would be payable by the Distributor. See "Shareholder Services Plan"
below.
Each Distribution and Services Agreement continues in effect from year to
year if specifically approved at least annually by the shareholders or Board
of Trustees of the Fund and by the Fund's Disinterested Trustees in compliance
with the Investment Company Act of 1940. Each agreement applicable to The
Kansas Municipal Fund, The Nebraska Municipal Fund, and The Oklahoma Municipal
Fund may be terminated without penalty upon sixty days' written notice by the
majority of the Disinterested Trustees or outstanding voting securities or
ninety days' written notice by the Distributor and will automatically
terminate if it is assigned. The agreement applicable to The Kansas Insured
Intermediate Fund may be terminated by the Distributor or the Fund upon
ninety days' written notice and will automatically terminate if it is
assigned.
-27-
The following table reflects the amount of underwriting commissions for each
Fund and the amount retained by the Distributor for each of the last three
fiscal years.
<TABLE>
<CAPTION>
AMOUNT RETAINED
UNDERWRITING COMMISSIONS BY THE DISTRIBUTOR
FUND FOR THE FISCAL YEAR ENDED FOR THE FISCAL YEAR ENDED
--------------------------------------------------------------------------------
7/31/98 7/30/99 7/31/00 7/31/98 7/30/99 7/31/00
<S> <C> <C> <C> <C> <C> <C>
The Kansas Municipal Fund $240,890 $223,614 $128,669 $37,441 $34,200 $19,679
The Kansas Insured Intermediate Fund $9,327 $29,792 $9,353 $1,019 $2,708 $850
The Nebraska Municipal Fund $102,856 $128,966 $66,395 $15,842 $19,724 $10,155
The Oklahoma Municipal Fund $196,274 $235,985 $88,312 $29,538 $36,092 $13,507
</TABLE>
-----------------------
The following table sets forth the amount of underwriting commissions,
brokerage commissions, compensation on redemptions and any other compensation
received by the Distributor from the respective Fund during the most recent
fiscal year.
<TABLE>
<CAPTION
NET UNDERWRITING
FUND DISCOUNTS AND BROKERAGE
COMMISSIONS COMMISSIONS OTHER
<S> <C> <C> <C>
The Kansas Municipal Fund $19,679 $0 $233,827*
The Kansas Insured Intermediate Fund $850 $0 $0
The Nebraska Municipal Fund $10,155 $0 $0
The Oklahoma Municipal Fund $13,507 $0 $0
-----------------
<FN>
* The Distributor received this amount under the 12b-1 plan of The Kansas
Municipal Fund.
</FN>
</TABLE>
SHAREHOLDER SERVICES PLANS
The Kansas Municipal Fund, The Nebraska Municipal Fund and The Oklahoma
Municipal Fund have each adopted a shareholder services plan (the "Plan")
pursuant to Rule 12b-1 of the 1940 Act.
-28-
Rule 12b-1 provides that any payments made by a Fund in connection with
the distribution of its shares may be made only pursuant to a written plan
describing all material aspects of the proposed financing of the distribution
and also requires that all agreements with any person relating to the
implementation of a plan must be in writing. Each Fund has also entered into
a related Distribution and Services Agreement with the Distributor.
Under each Fund's Plan, The Kansas Municipal Fund, The Nebraska Municipal
Fund, and The Oklahoma Municipal Fund will each pay the Distributor an annual
fee of up to 0.25% of the average daily net assets of the respective Fund
(the "12b-1 Fee"). The Distributor may use this 12b-1 Fee to pay a fee on
a quarterly basis to broker-dealers, including the Distributor and affiliates
of the adviser, banks and savings and loan institutions and their affiliates
and associated broker-dealers that have entered into Service Agreements with
the Distributor ("Service Organizations") of annual amounts of up to 0.25% of
the average net asset value of all shares of the respective Fund owned by
shareholders with whom the Service Organization has a servicing relationship
(the "Accounts"), provided that no such payment with respect to an Account
shall be made until the Service Organization has been servicing such account
for more than one year. To the extent any of the 12b-1 Fee is not paid to
Service Organizations as a service fee, the Distributor may use such fee for
its expenses of distribution of Fund shares. The 12b-1 Fee to the
Distributor is calculated and paid monthly and the service fee to Service
Organizations is calculated quarterly and paid the month following the
calculation.
Each Fund's Plan continues in effect from year to year, provided that each
such continuance is approved at least annually by a vote of the Funds' Board
of Trustees, including a majority of the trustees who are not "interested
persons" of such Fund and have no direct or indirect financial interest in
the operation of the Plan or in any agreements entered into in connection with
the Plan (the "Qualified Trustees"). Each Fund's Plan may be terminated at
any time, without penalty, by vote of a majority of the Qualified Trustees of
the Fund or by vote of a majority of the outstanding shares of the Fund. Any
amendment to a Plan to increase materially the amount the Fund is authorized
to pay thereunder would require approval by a majority of the outstanding
shares of the respective Fund. Other material amendments to a Fund's Plan
would be required to be approved by vote of the Board of Trustees, including
a majority of the Qualified Trustees.
The Distributor may at its own discretion waive a portion of its fees from
time to time, although such waiver is not required. The table below provides
the fees paid by Funds, under the Plan, net of waivers, for the period
indicated, and the amount of fees waived by the Distributor.
<TABLE>
<CAPTION>
12b-1 FEES PAID
AFTER WAIVERS AMOUNT OF 12b-1 FEES WAIVED
FOR FISCAL YEAR BY DISTRIBUTOR FOR
ENDED 7/31/00 FISCAL YEAR ENDED 7/31/00
<S> <C> <C>
The Kansas Municipal Fund $233,827 $0
The Nebraska Municipal Fund $0 $129,731
The Oklahoma Municipal Fund $0 $100,382
</TABLE>
-29-
The 12b-1 Fees paid by The Kansas Municipal Fund during the fiscal year
ended July 31, 2000 were spent as follows: $182,243 as compensation to
broker-dealers for services; $1,829 on promotion and advertising; $10,240
on distribution-related overhead; $68,033 for salaries and payroll taxes
and $-28,519 was absorbed by the Distributor.
The Distributor is a wholly-owned subsidiary of ND Holdings. Robert E.
Walstad and Peter A. Quist are directors and president and vice president,
respectively, of Holdings. Mr. Walstad is also a trustee and officer of the
Funds and a director and officer of the Distributor. Mr. Quist is an officer
of the Funds and a director and officer of the Distributor. See "Management
of the Funds." Mr. Walstad and Mr. Quist are also shareholders of ND Holdings
and, accordingly, may indirectly benefit from the payment of 12b-1 Fees or
brokerage commissions by the Funds to the Distributor.
ADDITIONAL INFORMATION ON THE PURCHASE AND REDEMPTION OF SHARES
You may purchase shares of a Fund at the public offering price equal to the
applicable net asset value per share plus an up-front sales charge imposed at
the time of purchase as set forth in the Prospectus. Set forth below is an
example of the method of computing the offering price of the shares of each of
the Funds. The examples assume a purchase on July 31, 2000 of shares from the
Fund aggregating less than $50,000, subject to the schedule of sales charges
set forth in the Prospectus, at a price based on net asset value of the shares:
<TABLE>
<CAPTION>
THE KANSAS THE NEBRASKA THE OKLAHOMA
MUNICIPAL MUNICIPAL MUNICIPAL
FUND FUND FUND
<S> <C> <C> <C>
Net asset value per share $11.58 $10.71 $10.99
Per Share Sales Charge ___ 4.25% of public
offering price (4.44% of net asset value
per share) $.51 $.48 $.49
Per Share Offering Price to the Public $12.09 $11.19 $11.48
Shares Outstanding (July 31, 2000) 8,945,410 3,564,086 1,443,951
</TABLE>
<TABLE>
<CAPTION>
THE KANSAS INSURED
INTERMEDIATE FUND
<S> <C>
Net asset value per share $11.69
Per Share Sales Charge __ 2.75% of public offering price
(2.83% of net asset value per share) $.33
Per Share Offering Price to the Public $12.02
Shares Outstanding (July 31,2000) 1,627,778
</TABLE>
-30-
Shares may be purchased at the public offering price through any securities
dealer having a sales agreement with the Distributor. Shares may also be
purchased through banks and certain other financial institutions that have
agency agreements with the Distributor. These financial institutions will
receive transaction fees that are the same as the commissions to dealers and
may charge their customers service fees relating to investments in the Fund.
Purchase requests should be addressed to the dealer or agent from which this
Prospectus was received which has a sales agreement with the Distributor.
Such dealer or agent may place a telephone order with the Distributor for the
purchase of Fund shares. It is a dealer's or broker's responsibility to
promptly forward payment and registration instructions (or completed
applications) to the Transfer Agent for shares being purchased in order for
investors to receive the next determined net asset value. Reference should
be made to the wire order to ensure proper settlement of the trade. Payment
for shares purchased by telephone should be received within three business
days. Payment must be received within seven days of the order or the trade
may be canceled, and the dealer or broker placing the trade will be liable
for any losses.
Each Fund receives the net asset value of all its respective shares that
are sold. The Distributor retains the full applicable sales charge (the
excess of the offering price over the net amount invested) from which it
pays the uniform reallowances shown in the Prospectus to investment dealers
and to its salesmen who sell Fund shares. From time to time the Distributor
may implement programs under which dealers and their representatives may be
eligible to participate in which such firms may win nominal awards for
certain sales efforts or under which the Distributor will reallow additional
concessions to any dealer that sponsors sales contests or recognition
programs conforming to criteria established by the Distributor or participates
in sales programs sponsored by the Distributor. These programs will not
change the price that an investor pays for shares or the amount that a Fund
will receive from such sale.
Each Fund reserves the right to withdraw all or any part of the offering
of its shares and to reject purchase orders. Also, from time to time, a Fund
may temporarily suspend the offering of its shares to new investors. During
the period of such suspension, persons who are already shareholders of the
respective Fund normally will be permitted to continue to purchase additional
shares and to have dividends reinvested.
In order to facilitate redemptions and to eliminate the need for
safekeeping, the Transfer Agent will not issue certificates for shares unless
requested to do so by notifying the Transfer Agent in writing that the investor
elects not to be enrolled in the open account program. You may write to the
Transfer Agent, ND Resources, Inc., at 1 North Main, Minot, North Dakota 58703.
The Transfer Agent will send share certificates representing the full and
fractional shares of the respective Fund and you will be required to surrender
the certificates to redeem or exchange such shares. Fund share certificates
will be mailed within 10 days of an investor's request. Certificates will not
be sent outside of the United States. Investors should promptly notify the
respective Fund if certificates are not received. A Fund will not file a mail
loss claim later than one year after the issuance of Fund share certificates.
After one year, investors requesting replacement certificates may be required
to post an insurance bond in the amount of 2% of the market value of the
certificated shares.
-31-
Minimum Investment
The minimum initial investment is $1,000, and there is a $50 minimum on all
additional investments (excluding reinvestment of dividends and capital gains).
Each Fund reserves the right to redeem its Fund accounts that are reduced to a
value of less than $1,000 (for any reason other than fluctuation in the market
value of the Fund's portfolio securities). Should a Fund elect to exercise
this right, the investor will be notified before such redemption is processed
that the value of the investor's account is less than $1,000 and that the
investor will have sixty days to increase the account to at least the $1,000
minimum amount before the account is redeemed.
SALES CHARGE REDUCTIONS
Letters of Intent
An investor may qualify for a reduced sales charge immediately by stating
his or her intention to invest in one or more of the Funds, during a 13-month
period, an amount that would qualify for a reduced sales charge and by signing
a nonbinding Letter of Intent, which may be signed at any time within 90 days
after the first investment to be included under the Letter of Intent. After
signing the Letter of Intent, each investment made by an investor will be
entitled to the sales charge applicable to the total investment indicated in
the Letter of Intent. If an investor does not complete the purchases under
the Letter of Intent within the 13-month period, the sales charge will be
adjusted upward, corresponding to the amount actually purchased. When an
investor signs a Letter of Intent, shares of a Fund with a value of up to 5%
of the amount specified in the Letter of Intent will be restricted. If the
total purchases made by an investor under the Letter of Intent, less
redemptions, equals or exceeds the amount specified in the Letter of Intent,
the restriction on the shares will be removed. In addition, if the total
purchases exceed the amount specified and qualify for a further quantity
discount, the Distributor will make a retroactive price adjustment and will
apply the adjustment to purchase additional shares at the then current
applicable offering price. If an investor does not complete purchases under
a Letter of Intent, the sales charge is adjusted upward, and, if after written
notice to the investor, he or she does not pay the increased sales charge,
sufficient restricted shares will be redeemed at the current net asset value
to pay such charge. In connection with the determination of sales charges
applicable to the purchase of shares of a Fund, the Letter of Intent program
will take into account investments in shares of any other mutual fund carrying
a sales load of which Ranson Capital Corporation is the Distributor.
Group Program
Each Fund has a group investment and reinvestment program (the "Group
Program") which allows investors to purchase shares of a Fund with a lower
minimum initial investment and with a lower sales charge if the investor and
the Group Program of which he or she is a participant meet the cost saving
criteria set forth below.
Description of Group Program. If the investor's Group Program (such as an
employee investment program) meets the requirements described below, a Fund
will modify the $1,000 initial investment requirement to such minimum
-32-
investment as may be determined by the Fund. The sales charge set forth in the
Funds' Prospectus for each purchase by a participant of a Group Program will
be based on (i) the combined current purchases of such group of shares together
with (ii) the combined net asset value of shares of such group at the time of
such investment. The dealer or agent, if any, through which the Group Program
was initiated will be entitled to a dealer concession or agency commission
based on the sales charges paid by participants of such Group Program.
CRITERIA FOR THE GROUP PROGRAM. The cost savings criteria to a Fund that
must be met in order for a Group Program to qualify for the benefits set
forth above are:
(a) The administrator of an investor's investment program must have
entered into an agreement with the Distributor.
(b) Such agreement must provide that the administrator must submit a
single order and make payment with a single remittance for all investments
during each investment period (e.g., each pay period or distribution period)
by all investors who choose to invest through the Group Program.
(c) Such agreement must provide that the administrator will provide
the Transfer Agent with appropriate backup data for each participating investor
in a computerized format compatible with the Transfer Agent's processing
system.
ADDITIONAL CRITERIA FOR THE GROUP PROGRAM. As further requirements for
obtaining these special benefits under the Group Program, each Fund requires
that investments be in the form of an open account (with no share certificates
being issued), that all dividends and other distributions be reinvested in
additional shares without any systematic withdrawal program described herein
and that the minimum new investment in shares of a Fund by each participant in
an employee investment program be at least $25 per month. Each Fund reserves
the right to modify or terminate this program at any time.
Rights of Accumulation
A purchase of shares may qualify for a cumulative quantity discount. The
applicable sales charge will be based on the total of:
(a) the investor's current purchase; and
(b) the net asset value (at the close of business on the previous
day) of the shares of the Funds held by an investor.
For example, if an investor owned shares worth $40,000 at the current net
asset value and purchased an additional $10,000 of shares, the sales charge for
the $10,000 purchase would be at the rate applicable to a single $50,000
purchase.
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To qualify for the cumulative quantity discount on a purchase through a
broker-dealer, when each purchase is made, the investor or broker-dealer
must provide the respective Fund with sufficient information to verify that
the purchase qualifies for the discount.
Concurrent Purchases
An investor who concurrently purchases shares of The Kansas Insured
Intermediate Fund and shares of The Kansas Municipal Fund will be charged the
sales charge on the respective purchase at the level specified in the
respective prospectus based on the aggregate dollar value of the combined
purchases.
An investor or his or her dealer or agent must notify the Transfer Agent
whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated by the Distributor at any
time. For more information about quantity discounts, contact the dealer or
agent from which the Funds' Prospectus was obtained or the Distributor.
SALES LOAD WAIVERS
Shares of the Funds may be sold at net asset value to the officers and
Trustees of the Funds, to any subsidiary companies of Ranson Capital
Corporation and to any employees of Ranson Capital Corporation or to members
of their immediate families. Immediate family members shall include spouses,
children, fathers, mothers, brothers or sisters. Shares of the Funds may
also be sold at their net asset value to broker-dealers having sales
agreements with Ranson Capital Corporation, and registered representatives
and other employees of such broker-dealers, including their spouses and
children; to financial institutions having sales agreements with Ranson
Capital Corporation, and employees of such financial institutions, including
their spouses and children; and to any broker-dealer, financial institution,
or other qualified firm which receives no commissions for selling shares to
its clients. The elimination of sales loads to these classes of persons is
provided because of reduced sales efforts required and to encourage
participation in the Funds.
Financial institutions may purchase shares of The Kansas Insured
Intermediate Fund for their own account or as a record owner on behalf of
fiduciary or custody accounts subject to a sales charge equal to 0.75% of
the public offering price (0.76% of the net amount invested), which includes
a dealer allowance of 0.70% of the public offering price. State securities
laws may require financial institutions purchasing for their customers to
register as dealers. Financial institutions which purchase shares of the
Funds for accounts of their customers may impose separate charges on these
customers for account services. Corporate payroll plans which qualify as
Group Programs as described above may also purchase shares of the Fund.
Unit Investment Trust Reinvestment
Investors in any Series of The Kansas Tax-Exempt Trust formerly sponsored
by Ranson may reinvest distributions of principal and interest from such trust
in shares of The Kansas Municipal Fund or The Kansas Insured Intermediate Fund
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with no sales charge and no minimum investment. Investors in any Series of
The Nebraska Tax-Exempt Trust formerly sponsored by Ranson may reinvest
distributions of principal and interest from such trust in shares of The
Nebraska Municipal Fund with no sales charge and no minimum investment.
Such Funds reserve the right to modify or terminate this program at any time.
Redemptions from Other Funds
Shares of the Funds may be purchased at net asset value where the amount
invested is documented to the Fund to be proceeds from the redemption of
shares of an unrelated investment company which does not impose a contingent
deferred sales charge or redemption fee and where the investor paid an initial
sales charge. Purchases must be made within 60 days of the redemption date.
Each Fund reserves the right to modify or terminate this privilege at any time.
In addition, shares of The Kansas Insured Intermediate Fund may be purchased
at net asset value where the amount invested is documented to the Fund to be
proceeds from the redemption of shares of The Kansas Municipal Fund.
Similarly, where the amount invested is documented to be proceeds from the
redemption of shares of The Kansas Insured Intermediate Fund, shares of The
Kansas Municipal Fund may be purchased at net asset value plus a sales charge
equal to the difference between the sales charge set forth under "The Shares
We Offer" in the Prospectus and the sales charge originally paid with respect
to the redeemed shares of The Kansas Insured Intermediate Fund. Purchases must
be made within 60 days of the redemption date. The Kansas Municipal Fund and
The Kansas Insured Intermediate Fund reserve the right to modify or terminate
these privileges at any time.
SPECIAL PROGRAMS
Exchange Privilege
By contacting the Transfer Agent, a shareholder may exchange some or all of
his shares into any of the funds underwritten by ND Capital, Inc., or Ranson
Capital Corporation at net asset value, subject to these conditions: (1) When
exchanging into shares of a back-end load fund, no contingent deferred sales
charge will be imposed upon redemption of the newly acquired shares, (2) Shares
must be held for at least six months prior to exchange when exchanging into a
higher-load fund, and (3) When exchanging into another single-state municipal
fund, the shareholder must be a resident of that state or any other state in
which the Fund is registered.
Each exchange involves the redemption of fund shares to be exchanged and the
purchases of fund shares. As a result, any gain or loss on the redemption of
fund shares exchanged is reportable on the shareholder's federal income tax
return. The exchange privilege may be changed or discontinued upon 60 days'
written notice to shareholders and is available only to shareholders in states
where such exchanges may be legally made. A shareholder considering an
exchange should obtain and read the prospectus of the fund and consider the
differences between it and the fund whose shares he owns before making an
exchange.
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For further information on how to exercise the exchange privilege, contact
the Transfer Agent.
Systematic Withdrawal Program
The owner of $5,000 or more of shares of a Fund (which may not be in
certificated form) may provide for the payment from his or her account of any
requested dollar amount to his or her designated payee monthly, quarterly or
annually. Sufficient shares will be redeemed from the investor's account for
the designated amount so that the payee will receive it approximately the
first of each month. Dividend distributions automatically will be reinvested
under this program. Depending upon the size of the payments requested,
redemptions for the purpose of making such payments may reduce or even exhaust
the account. The program may be terminated at any time by the investor.
It ordinarily will be disadvantageous to an investor to purchase shares
(except through reinvestment of distributions) while participating in a
systematic withdrawal program because he or she will be paying a sales charge
to purchase shares at the same time that shares are being redeemed upon which
such investor may already have paid a sales charge. Therefore, a Fund will not
knowingly permit an investor to make additional investments of less than
$5,000 if an investor is at the same time making systematic withdrawals at a
rate greater than the dividend distributions being paid on such investor's
shares. Each Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice, and investors may withdraw from the
program at any time. For additional information, see "Systematic Withdrawal
Plan" in the Funds' Prospectus.
Preauthorized Investment Program
An investor may establish an automatic investment program with his or her
Fund account. With the Preauthorized Investment Program, monthly investments
(minimum $50) are made automatically from an investor's account at a bank,
savings and loan or credit union into such investor's Fund account. The
Preauthorized Investment Program may not be used with passbook savings
accounts. Each Fund reserves the right to modify or terminate this program
at any time. See "Systematic Investing-The Preauthorized Investment Program"
in the Funds' Prospectus for additional information.
Reinstatement Privilege
An investor who has redeemed shares of a Fund may reinvest up to the full
amount of such redemption at net asset value at the time of reinvestment. An
investor using this privilege a year or more after such investor redeemed
shares of the respective Fund must file a new account application and provide
proof that such investor was a shareholder of the Fund. See "Taxes" regarding
the potential tax implications of exercising this privilege. Each Fund
reserves the right to modify or terminate this privilege at any time.
REDEMPTION OF SHARES
Any shareholder may require its respective Fund to redeem shares.
Redemption requests must be in writing, accompanied by any issued certificates
(for investor protection, certificates should be sent by registered mail).
Redemption requests over $50,000 and any certificates or stock power must be
endorsed by all registered owners with signatures guaranteed by a member firm
of a national securities exchange or by a commercial bank, savings and loan
association or trust company. Further documentation may be requested from
corporations, executors, administrators, trustees or guardians.
Alternatively, an investor may place an order to sell shares (whether in
certificate or book entry form) through his or her dealer or agent which has
a sales agreement with the Distributor and from which this Prospectus was
received, which dealer or agent will telephone such request to the Distributor.
The investor will receive the net asset value next determined after the
Distributor receives such sell order from the dealer or agent. A Fund does
not charge for this transaction. Authorized Dealers may charge additional fees
for shareholder transactions or for advisory services.
Whether shares are redeemed by the Fund or sold through an investor's dealer
or agent, a check for the proceeds ordinarily will be mailed to an investor or
his or her dealer or agent as promptly as practicable but in no event later
than seven days after a redemption request or repurchase order and share
certificates (if any) are received in proper form as set forth above.
DIVIDENDS AND TAXES
Dividends
All of the net investment income of each Fund is declared daily as a
dividend on shares for which the applicable Fund has received payment. Net
investment income of a Fund consists of all interest income earned on
portfolio assets less all expenses of such Fund. Income dividends will be
distributed monthly, and dividends of net realized short-term and long-term
capital gains, if any, will normally be paid out once a year at or around the
end of the Fund's fiscal year. Each Fund may at any time vary the foregoing
dividend practices and, therefore, each Fund reserves the right from time to
time to either distribute or retain for reinvestment such of its net
investment income and its net short-term and long-term capital gains as the
Board of Trustees of the Fund determines appropriate under the then current
circumstances. In particular, and without limiting the foregoing, each Fund
may make additional distributions of net investment income or capital gain net
income in order to satisfy the minimum distribution requirements contained in
the Internal Revenue Code of 1986, as amended (the "Code").
Each Fund automatically will credit monthly distributions and any capital
gain distributions to an investor's account in additional shares of the
respective Fund valued at net asset value on the date such distributions are
payable, without sales charge, unless an investor notifies the Transfer Agent
to have distributions received in cash. Distributions that are reinvested are
treated as cash distributions for income tax purposes.
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A check will be generated on the date on which distributions are payable for
dividends to be received in cash. A shareholder can expect to receive this
check within seven days. If the U.S. Postal Service cannot deliver the check
or if the check remains uncashed for six months, a letter will be sent to the
shareholder. If the shareholder has not cashed the check or called within a
month and if the shareholder has shares in his or her account, the check will
be reinvested in the shareholder's account at the then-current net asset
value. If the shareholder has a zero balance, we will contact the shareholder
by phone or contact his or her broker. If the shareholder has misplaced or
lost the check, we will then issue a new check.
Distribution checks may be sent to parties other than the investor. The
Transfer Agent of the Fund will accept a letter from the shareholder. Please
attach a voided check if payable to your bank account (signature guarantee is
not required). If payable to a person or address other than the person or
address under which the shares are registered, a signature guarantee is
required.
Taxes
Each Fund has elected and intends to qualify each year as a regulated
investment company ("RIC") under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). If the Fund so qualifies, and timely
distributes to shareholders 90% or more of its taxable income (without regard
to its net capital gain, i.e., the excess of its long-term capital gain over
its short-term capital loss), it will not be subject to federal income tax on
the portion of its taxable income (including any net capital gain) that it
distributes to shareholders. In addition, to the extent the Fund distributes
to shareholders at least 98% of its taxable income (including any net capital
gain), it will not be subject to the 4% excise tax on certain undistributed
income of RICs. The Fund intends to timely distribute its taxable income
(including any net capital gains) to avoid imposition of federal income tax
or the excise tax. If in any year a Fund should fail to qualify under
Subchapter M for tax treatment as a regulated investment company, a Fund would
incur a regular corporate federal income tax upon its taxable income for that
year, and distributions to shareholders of the respective Fund would be
taxable to such shareholders as ordinary income to the extent of the earnings
and profits of the Fund, including distributions that would otherwise qualify
as exempt-interest dividends.
In addition, each Fund intends to invest in sufficient municipal securities
so that it will qualify to pay "exempt-interest dividends" (as defined in the
Code) to shareholders. Each Fund's dividends payable from net tax-exempt
interest earned from municipal securities will qualify as exempt-interest
dividends if, at the close of each quarter of the taxable year of the Fund,
at least 50% of the value of the respective Fund's total assets consists of
tax-exempt municipal securities. Insurance proceeds received by a Fund under
any insurance policies which represent maturing interest on defaulted
obligations held by the Fund will be excludable from federal gross income if
and to the same extent as such interest would have been so excludable if paid
by the issuer of the defaulted obligation, provided that at the time such
policies are purchased, the amounts paid for such policies are reasonable,
customary and consistent with the reasonable expectation that the issuer of
the obligation, rather than the insurer, will pay debt service on the bonds.
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Exempt-interest dividends distributed to shareholders generally are
excluded from gross income for federal income tax purposes except in the
case of certain substantial users of facilities financed with the proceeds of
bonds owned by the Fund and related persons. Such exempt-interest dividends
may be taken into account in determining the alternative minimum tax, as
discussed hereinafter. The percentage of income that is tax-exempt is applied
uniformly to all distributions made during each calendar year and thus is an
annual average for a Fund rather than a day-by-day determination for each
shareholder whether received in shares or in cash. The percentage of all
distributions of earnings other than exempt-interest dividends paid by a Fund,
such as net realized investment income received from investments in debt
securities other than municipal securities, and any net realized short-term
capital gains (including certain amounts deemed distributed) will generally
be taxable to the shareholders as ordinary income. Any distribution of net
realized long-term capital gains (including amounts deemed distributed) which
are properly designated as capital gains dividends by the Fund will generally
be subject to federal taxation as long-term capital gains ("long-term capital
gain distributions"), regardless of the length of time the investor has held
such shares. The Internal Revenue Service Restructuring and Reform act of
1998 (the "1998 Tax Act") provides that for taxpayers other than corporations,
net capital gain realized from property (with certain exclusions) is generally
subject to a maximum marginal stated rate of 20% (10% in the case of certain
taxpayers in the lowest tax bracket). Capital gain or loss is long-term if
the holding period for the asset is more than one year, and is short-term if
the holding period is one year or less. The date on which a share is
acquired (i.e., the "trade date") is excluded for purposes of determining the
holding period of the shares. Capital gains realized from assets held for one
year or less are taxed at the same rates as ordinary income.
Distributions to shareholders will be taxable to shareholders in the manner
described above, regardless of whether the shareholder receives the dividends
or reinvests them in additional shares of the Fund. All taxpayers are required
to report to the Internal Revenue Service on their tax returns the amount of
tax-exempt interest earned during the year, including exempt interest dividends
from a Fund.
"The Revenue Reconciliation Act of 1993" (the "1993 Tax Act") subjects tax
-exempt municipal securities to the market discount rules of the Code effective
for municipal securities purchased after April 30, 1993. In general, market
discount is the amount (if any) by which the stated redemption price at
maturity exceeds an investor's purchase price (except to the extent that
such difference, if any, is attributable to original issue discount not yet
accrued), subject to a statutory de minimus rule. Market discount can arise
based on the price a Fund pays for municipal securities. Under the 1993 Tax
Act, accretion of market discount is taxable as ordinary income; under prior
law the accretion had been treated as capital gain. Market discount that
accretes while a Fund holds a municipal security would be recognized as
ordinary income by the Fund when principal payments are received on the
municipal security or upon sale or at redemption (including early redemption),
unless the Fund elects to include market discount in taxable income as it
accrues. Distributions to shareholders of a Fund, to the extent of any
market discount that is included in the Fund's taxable income, would be
taxable to shareholders as ordinary income.
-39-
For both individuals and corporations, interest paid on certain "private
activity bonds" issued on or after August 8, 1986, will be treated as an item
of tax preference and may, therefore, be subject to the alternative minimum
tax. To the extent provided by regulations to be issued by the Secretary of
the Treasury, exempt-interest dividends paid by a Fund will be treated as
interest on private activity bonds to the extent of the proportionate amount
of interest on such private activity bonds received by the Fund. Such exempt-
interest dividends constitute a tax preference item subject to both the
individual and corporate alternative minimum tax. Each Fund will annually
supply shareholders with a report indicating the percentage of Fund income
attributable to bonds subject to the alternative minimum tax.
Exempt-interest dividends received by a shareholder which are not with
respect to certain "private activity bonds" are not treated as a tax preference
item. However, for certain corporate shareholders such dividends will be
included in the computation of an adjustment item used in determining such
corporation's alternative minimum tax. The adjustment item is 75% of the
excess of such corporate shareholder's "adjusted current earnings" over its
other alternative minimum taxable income with certain adjustments. Although
exempt-interest dividends received by a shareholder will not be included in
the gross income of corporations for federal income tax purposes, "adjusted
current earnings" include all tax-exempt interest, including exempt-interest
dividends received from the Fund. Corporate shareholders are advised to
consult their tax advisers with respect to the tax consequences of the
alternative minimum tax and the branch profits tax under Section 884 of the
Code.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders
of record on a specified date in one of those months and paid during January
of the following year, will be treated as having been distributed by the Fund
(and received by the shareholders) on December 31 of the year such dividends
are declared.
Distributions from a Fund will not generally be eligible for the dividends
received deduction for corporations.
A Fund is required by law to withhold a specified percentage of taxable
dividends and certain other payments, including redemption payments, paid to
non-corporate investors who do not certify to the Fund their correct taxpayer
identification number (in the case of individuals, their social security
number) and in certain other circumstances.
Under Section 86 of the Code, up to 85% of a social security recipient's
benefits may be included in gross income for a benefit recipient if the sum of
his adjusted gross income, income from tax-exempt sources such as tax-exempt
bonds and distributions made by a Fund, plus 50% of his social security
benefits exceeds certain base amounts. Exempt interest dividends from the Fund
are still excluded from gross income to the extent described above; they are
only included in the calculation of whether a recipient's income exceeds
certain established amounts.
Redemption of shares of a Fund will be a taxable transaction for federal
income tax purposes, and such investors will generally recognize gain or loss
in an amount equal to the difference between the basis of the shares and the
amount received. Assuming that investors hold such shares as a capital asset,
-40-
the gain or loss will be a capital gain or loss and will generally be long-
term if investors have held such shares for a period of more than one year.
In the case of shareholders holding shares of a Fund for six months or less
and subsequently selling those shares at a loss after receiving an exempt-
interest dividend, the loss will be disallowed to the extent of the exempt-
interest dividends received. If such loss is not entirely disallowed, it
will be treated as a long-term capital loss to the extent any long-term
capital gain distribution is made with respect to such shares during the six-
month period or less that the investor owns the shares. If a loss is
realized on the redemption of Fund shares, the reinvestment in additional Fund
shares or the acquisition of a contract or option to acquire securities that
are substantially identical to the respective Fund shares within 30 days
before or after the redemption may be subject to the "wash sale" rules of
the Code, resulting in a postponement of the recognition of such loss for
federal income tax purposes. In addition, an investor cannot take into account
any sales or similar charge incurred in acquiring shares of a Fund (a "load
charge," such charge does not include amounts paid with respect to the
reinvestment of mutual fund share dividends) in computing gain or loss on the
sale of shares of a Fund if the investor sells such shares within 90 days of
the date the shares are acquired and the investor obtains and subsequently
exercises the right to reinvest in shares of any mutual fund without the
payment of a load charge or with the payment of a reduced charge (However,
such charges shall be treated as incurred in connection with the reinvestment
in shares).
The 1993 Tax Act, the Tax Act includes a provision that may recharacterize
capital gains as ordinary income in the case of certain financial transactions
that are "conversion transactions" effective for transactions entered into
after April 30, 1993. It is possible that this provision could result in the
recharacterization of amounts or distributions otherwise characterized as
capital gains by a Fund or a shareholder as ordinary income. Shareholders of
a Fund should consult with their advisers regarding the potential effect of
this provision on their investment in shares of the Fund.
Under the Code, certain miscellaneous itemized deductions, such as
investment expenses, tax return preparation fees, and employee business
expenses, will be deductible by individuals only to the extent they exceed 2%
of adjusted gross income. Miscellaneous itemized deductions subject to this
limitation do not include expenses incurred by a Fund so long as shares of the
Fund are held by 500 or more persons at all times during the taxable year or
another exception is met. In the event the shares of the Fund are held by less
than 500 persons, additional taxable income may be realized by individual
(and other noncorporate) shareholders in excess of the distributions received
from the Fund.
The Taxpayer Relief Act of 1997 includes provisions that treat certain
transactions designed to reduce or eliminate risk of loss and opportunities for
gain (e.g., short sales, offsetting notional principal contracts, futures or
forward contracts, or similar transactions) as constructive sales for purposes
of gain (but not loss) recognition and for purposes of measuring the holding
period. Shareholders should consult their own tax advisors with regard to any
such constructive sales rules.
Except to the extent described in the Funds' Prospectus under "Appendix-
Additional State Information" regarding Kansas, Nebraska, and Oklahoma income
taxation, the exemption from federal income tax for exempt-interest dividends
-41-
does not necessarily result in exemption for such dividends under the income or
other tax laws of any state or local taxing authority. Taxpayers should
consult their own advisers regarding the consequences under such taxes with
respect to the purchase, ownership and disposition of shares of the Funds.
Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund which distributes exempt-interest dividends during the year is not
deductible for federal income tax purposes. Further, a Fund may not be an
appropriate investment for persons who are "substantial users" of facilities
financed by industrial development bonds held by the respective Fund or are
"related persons" to such users; such persons should consult their tax advisers
before investing in the respective Fund.
State Taxes
THE KANSAS MUNICIPAL FUND AND THE KANSAS INSURED INTERMEDIATE FUND. To the
extent that exempt-interest dividends are derived from interest on Kansas
Municipal Securities or insurance proceeds under any insurance policies which
represent maturing interest on defaulted Kansas Municipal Securities that are
exempt from Kansas income taxes, such dividends will also qualify as exempt
from Kansas income taxes. Otherwise, both the nonqualifying exempt-interest
dividends and dividends taxable for federal income tax purposes as ordinary
income will be subject to income tax in the hands of the shareholders of The
Kansas Municipal Fund and The Kansas Insured Intermediate Fund. Distributions
treated as long-term capital gains for federal income tax purposes will
generally receive the same characterization under Kansas law. Corporations and
banks are urged to consult their own tax advisers before investing in The
Kansas Municipal Fund and The Kansas Insured Intermediate Fund.
THE NEBRASKA MUNICIPAL FUND. To the extent that exempt-interest dividends
are derived from interest on Nebraska Municipal Securities that is exempt from
the Nebraska income tax and the Nebraska alternative minimum tax, such
dividends will also qualify as exempt from the Nebraska income tax and the
Nebraska alternative minimum tax. To the extent that exempt interest dividends
are derived from interest on Nebraska Municipal Securities that is included in
the computation of the Nebraska alternative minimum tax, such dividends will
also be included in the computation of the Nebraska alternative minimum tax.
Any nonqualifying exempt-interest dividends and dividends taxable for federal
income tax purposes as ordinary income will be taxable for Nebraska income tax
purposes to the shareholders of The Nebraska Municipal Fund. Distributions
treated as long-term capital gains for federal income tax purposes will
generally receive the same characterization under Nebraska law. In the case of
shareholders that are subject to the Nebraska financial institutions franchise
tax, dividends from the Fund may affect the determination of such shareholders'
maximum franchise tax. Financial institutions are urged to consult their own
advisers before investing in The Nebraska Municipal Fund.
THE OKLAHOMA MUNICIPAL FUND. To the extent that exempt-interest dividends
are derived from interest on Oklahoma Municipal Securities that is exempt from
the Oklahoma income tax, such dividends will also qualify as exempt from the
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Oklahoma income tax. However, to the extent that exempt-interest dividends
are derived from interest on Oklahoma Municipal Securities that is not exempt
from Oklahoma income tax, such dividends will be taxable for Oklahoma income
tax purposes to the shareholders of The Oklahoma Municipal Fund. As discussed
earlier such Fund may invest up to 30% of its total assets in Oklahoma
Municipal Securities which are subject to Oklahoma state income taxes. Any
nonqualifying exempt-interest dividends and dividends taxable for federal
income tax purposes as ordinary income will be taxable for Oklahoma income
tax purposes to the shareholders of The Oklahoma Municipal Fund.
Distributions treated as long-term capital gains for federal income tax
purposes will generally receive the same characterization under Oklahoma
law.
The tax discussion set forth above is for general information only.
Annually, shareholders of a Fund receive information as to the tax status
of distributions made by the Fund in each calendar year. The foregoing
relates to federal income taxation as in effect as of the date of this
Statement of Additional Information. Investors should consult their own
tax advisers regarding the federal, state, local, foreign and other tax
consequences of an investment in a Fund, including the effects of any change
or any proposed change, in the tax laws.
ADDITIONAL INFORMATION REGARDING ORGANIZATION AND SHARE ATTRIBUTES
Ranson Managed Portfolios is a non-diversified, open-end investment company
established under Massachusetts law by an Agreement and Declaration of Trust
("Trust Agreement") dated August 10, 1990, and is the type of organization
commonly known as a "Massachusetts business trust." It is a series company as
contemplated under Rule 18f-2 under the 1940 Act. Each of the Funds is a non-
diversified management investment company organized as a series of the Trust.
Each Fund is a separate series issuing its own shares. The Funds currently are
the only outstanding series of the Trust. The Trust Agreement provides that
each shareholder, by virtue of becoming such, will be held to have expressly
assented and agreed to the terms of the Trust Agreement and to have become a
party thereto.
The Trust Agreement permits the Trustees to issue an unlimited number of
full and fractional shares, without par value, from each series that is
designated by the Board of Trustees. Each share of a Fund represents an equal
proportionate interest in the assets and liabilities belonging to such
portfolio with each other share of such portfolio and to such dividends and
distributions out of the income belonging to such portfolio as are declared by
the Trustees. The shares do not have cumulative voting rights nor any
preemptive rights or conversion rights. In case of a liquidation, subject to
the rights of creditors, the holders of shares of each portfolio being
liquidated will be entitled to receive as a Series an equal proportionate
interest in the distribution out of the net assets belonging only to that
portfolio. Under the Trust Agreement, expenses attributable to any specific
portfolio (whether start-up for a new portfolio or on-going operating expenses)
will be borne by that portfolio. Any general expenses of the Fund not readily
identifiable as belonging to a particular portfolio are allocated by or under
the direction of the Trustees in such manner as the Trustees determine to be
fair and equitable, usually in proportion to the portfolio's relative net
assets. The net asset value of the shares of any portfolio will be computed
based only upon the net assets of such portfolio.
Under Massachusetts law, if certain conditions prevail, shareholders of a
Massachusetts business trust could be deemed to have the same type of personal
-43-
liability for the obligations of a Fund as does a partner of a partnership.
The Trust Agreement contains an express disclaimer of liability on the part of
Fund shareholders and provides that the Fund shall assume the defense on
behalf of its shareholders. Thus, the risk of Fund shareholder liability is
slight and limited to a circumstance where a Fund itself is unable to meet its
obligations.
As a general matter, each Fund is not required to and does not intend to
hold annual or other meetings of the respective Fund's shareholders. However,
the Trust Agreement provides for Fund shareholder voting with respect to
certain matters, including: (a) the election or removal of one or more
Trustees if a meeting is called for that purpose; (b) any contract as to which
shareholder approval is required by the 1940 Act (such as a Fund's Management
and Investment Advisory Agreement and the Distribution and Services Agreement);
(c) any termination or reorganization of the Trust or any Fund to the extent
and as provided in the Trust Agreement; (d) any amendment of the Trust
Agreement (other than amendments establishing and designating new series,
changing the name of the Trust or the name of any series, supplying any
omission, curing any ambiguity, or curing, correcting, or supplementing any
provision thereof which is internally inconsistent with the 1940 Act or with
the requirements of the Internal Revenue Code and applicable regulations for a
Fund to obtain the most favorable treatment thereunder available to regulated
investment companies), which amendments require approval by more than 50% of
the shares entitled to vote; (e) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court action,
proceeding, or claim should or should not be brought or maintained derivatively
or as a class action on behalf of a Fund or the shareholders; and (f) with
respect to such additional matters relating to the respective Fund as may be
required by the 1940 Act (such as changes in a Fund's investment policies and
restrictions), the Trust Agreement, the by-laws of a Fund, or any registration
of a Fund with the Securities and Exchange Commission or any state or as the
Trustees may consider necessary or desirable.
Meetings of shareholders may be called upon written application specifying
the purpose of the meeting by shareholders holding at least 25% (or 10% if the
purpose of the meeting is to determine if a Trustee is to be removed from
office) of the shares then outstanding. In connection with the shareholders'
right to remove a Trustee, shareholders will be assisted with their
communication in such manner.
Each Trustee serves until the next meeting of shareholders, if any, called
for the purpose of considering the election or reelection of such Trustee or of
a successor to such Trustee, and until the election and qualification of his
successor, if any, elected at such meeting, or until such Trustee sooner dies,
resigns, retires, or is removed by the shareholders or two-thirds of the
Trustees.
The Trust Agreement provides that on any matter submitted to a vote of the
shareholders, all Fund shares entitled to vote, irrespective of portfolio,
shall be voted in the aggregate and not by portfolio except that (a) as to any
matter with respect to which a separate vote of any portfolio is required by
the 1940 Act, such requirements as to a separate vote by that portfolio shall
apply in lieu of the aggregate voting as described above, and (b) when the
Trustees have determined that the matter affects only the interests of one or
more portfolios, then only shareholders of the affected portfolios shall be
entitled to vote thereon.
-44-
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted by the provisions of the 1940 Act or applicable state law, or
otherwise, to the holders of the outstanding voting securities of an investment
company with separate portfolios like this Trust, shall not be deemed to have
been effectively acted upon unless approved by the holders of a majority of the
outstanding shares (as defined below) of each portfolio "affected by" such
matter. Rule 18f-2 further provides that a portfolio shall be deemed to be
affected by a matter unless the interests of each portfolio in the matter are
substantially identical or the matter does not affect any interests of such
portfolio. The Rule specifically exempts the selection of independent
auditors, the approval of principal underwriting contracts and the election of
trustees from such separate voting requirements. In addition, the Rule
provides that a majority vote of a portfolio's shareholders is effective
approval of an advisory contract for that series, unless state law requires
otherwise. In addition, changes in certain investment policies of an
investment company are also subject to separate voting requirements.
The Trust Agreement provides that the presence at a meeting of shareholders
in person or by proxy of shareholders entitled to vote at least thirty percent
(30%) of the votes entitled to be cast on a matter (or if voting is to be by
portfolio, shareholders of each portfolio entitled to vote at least thirty
percent (30%) of the votes entitled to be cast by each portfolio) shall
constitute a quorum. This permits a meeting of shareholders of a Fund to
take place even if less than a majority of the shareholders are present on its
scheduled date. Shareholders would in such a case be permitted to take action
which does not require a larger vote than a majority of a quorum (the election
of Trustees and the ratification of the selection of independent public
accountants are examples). Some matters requiring a larger vote under the
Trust Agreement, such as termination or reorganization of a Fund and certain
amendments of the Trust Agreement, would not be affected by this provision.
This is also true with respect to matters which under the 1940 Act require
the vote of a majority of the outstanding voting shares (as defined below) of
the Trust or a particular portfolio.
As used in this Statement of Additional Information, the term "majority of
the outstanding shares" of either the Trust or a particular portfolio of the
Trust means the vote of the lesser of (i) 67% or more of the shares of the
Trust or such portfolio present or represented by proxy at a meeting, if the
holders of more 50% of the outstanding shares of the Trust or of such
portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Trust or such portfolio.
Under the terms of the Trust Agreement, a Trustee is liable for his own
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, and for nothing else, and shall
not be liable for errors of judgment or mistakes of fact or of law. The Trust
Agreement provides for indemnification by the Trust of the Trustees and the
officers of the Trust except with respect to any matter as to which such person
did not act in good faith in the reasonable belief that his action was in or
not opposed to the best interests of the Trust (or the predecessor corporation)
but such person may not be indemnified against any liability to the Trust or
the Trust shareholders to which he would otherwise be subject by reason of
-45-
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. The Trust Agreement also
provides that any agreement or undertaking by the Trustees on behalf of the
Trust is binding upon the Trust only and not on the Trustees personally.
EXPENSES OF THE FUND
Each Fund's expenses include, among others, management and investment
advisory fees, accounting and administrative fees, taxes, brokerage fees and
commissions, if any, fees of Disinterested Trustees, any Rule 12b-1
distribution or service fees, expenses of Trustees' and shareholders'
meetings, insurance premiums, expenses of redemption of shares, expenses
of issue and sale of shares (to the extent not borne by the Distributor),
expenses of printing and mailing certificates, association membership dues,
charges of a Fund's custodian, and bookkeeping, auditing and legal expenses,
and the fees and expenses of registering a Fund and its shares with the
Securities and Exchange Commission, registering or qualifying its shares
under state securities laws and the expenses of preparing and mailing
prospectuses and reports to shareholders.
PERFORMANCE DATA
From time to time, a Fund may advertise several types of performance
information. These are "current yield," "tax equivalent yield," "distribution
rate," "average annual total return," and "total return" figures. Each of
these figures is based upon historical results and is not necessarily
representative of the future performance of a Fund. These various measures
of performance are described below.
In addition, from time to time, a fund's performance may be compared to that
of the Consumer Price Index or various unmanaged bond indexes and may also be
compared to the performance of other fixed income or government bond mutual
funds or mutual fund indexes as reported by entities such as Lipper Analytical
Services, Inc. ("Lipper"). Lipper is a widely recognized independent mutual
fund reporting service. Lipper performance calculations are based upon changes
in net asset value with all dividends reinvested and do not include the effect
of any sales charges.
Yield
Yield reflects the income per share deemed earned by a Fund's portfolio
investments. The current yield for the one-month period ending July 31, 2000,
for The Kansas Municipal Fund, The Kansas Insured Intermediate Fund, The
Nebraska Municipal Fund, and The Oklahoma Municipal Fund was 4.73%, 4.38%,
4.77% and 4.76%, respectively. Absent fee waivers and expense assumptions,
the 30-day SEC yield as of July 31, 2000 for The Kansas Municipal Fund, The
Kansas Insured Intermediate Fund, The Nebraska Municipal Fund, and The Oklahoma
Municipal Fund was 4.614%, 4.034%, 4.963% and 5.293%, respectively.
Current yield is determined in accordance with a standardized method
prescribed by rules of the Securities and Exchange Commission by dividing the
-46-
net investment income earned per share for a stated period (normally one month
or thirty days) and by the maximum public offering price on the last day of
the evaluation period according to the following formula:
CY = 2{(a-b/cd + 1)6 -1}
Where:
a = Dividends and interest earned during the period
b = Expenses accrued for the period (net of reimbursements)
c = Average daily number of shares outstanding during the period that
were entitled to receive dividends
d = The maximum offering price per share on the last day of the period
The Securities and Exchange Commission's rules for calculating current yield
require the use of certain standardized accounting practices which are not
necessarily consistent with those used by a Fund in the preparation of its
audited financial statements or federal tax return. A Fund's yield may
therefore not equal its distribution rate, the income paid to an investor's
account or the income reported in the Fund's financial statements. Each
Fund's current yield figure is based upon historical results and is not
necessarily representative of future performance.
Tax Equivalent Yield
Tax equivalent yield shows the yield from a taxable investment which would
produce an after tax yield equal to that of a fund that invests in tax-exempt
securities. The tax equivalent yield for The Kansas Municipal Fund, The
Kansas Insured Intermediate Fund, The Nebraska Municipal Fund, and The Oklahoma
Municipal Fund, for the one-month period ending July 31, 2000, was 8.74%,
8.07%, 8.86% and 8.86%, respectively. The tax equivalent yield is determined
by dividing that portion of current yield which is tax-exempt by the remainder
of one minus a stated combined federal and state income tax rate and adding
the product to that portion of current yield, if any, that is not tax-exempt.
The tax equivalent yield for each Fund for the one-month period ending July 31,
2000, was calculated as follows:
TEY = CY
(1-SITR)
-47-
Where:
<TABLE>
<CAPTION>
THE KANSAS THE KANSAS THE NEBRASKA THE OKLAHOMA
MUNICIPAL FUND INTERMEDIATE MUNICIPAL FUND MUNICIPAL FUND
INSURED FUND
<S> <C> <C> <C> <C>
TEY = Tax equivalent yield 8.74% 8.07% 8.86% 8.86%
CY = Current yield 4.73% 4.38% 4.77% 4.76%
SITR = Combined Federal and State
Income tax rate* 46.1% 46.1% 46.6% 46.6%
------------------
<FN>
* The calculations were based on the highest marginal federal and state tax
rates for 2000.
</FN>
</TABLE>
Distribution Rate
The distribution return for The Kansas Municipal Fund, The Kansas Insured
Intermediate Fund, The Nebraska Municipal Fund, and The Oklahoma Municipal
Fund, for the one-month period ending July 31, 2000, was 4.88%, 4.49%, 4.78%
and 4.91%, respectively. A Fund's distribution return is computed by dividing
the income per share by the number of days in the current month, and the
quotient is multiplied by 360. The result is divided by the offering price per
share on the last day of the month. The distribution rate differs from yield
and total return and therefore is not intended to be a complete measure of
performance. Distribution return may sometimes differ from yield because a
Fund may be paying out more than it is earning and because it may include the
effect of amortization of bond premiums to the extent such premiums arise
after the bonds were purchased.
Accordingly, the distribution return for each Fund for the one-month period
ending July 30, 1999, was calculated as follows:
DR = IPS(360)/30
POP
Where:
<TABLE>
<CAPTION>
THE KANSAS THE KANSAS INSURED THE NEBRASKA THE OKLAHOMA
MUNICIPAL FUND INTERMEDIATE FUND MUNICIPAL FUND MUNICIPAL FUND
<S> <C> <C> <C> <C>
DR = Distribution return 4.88% 4.49% 4.78% 4.91%
IPS = Income per share $.049100 $.044914 $.044474 $.046992
POP = Public offering price per share $12.09 $12.02 $11.19 $11.48
</TABLE>
-48-
Average Annual Total Return
Average annual total return reflects the hypothetical annually compounded
return that would have produced the same cumulative total return if a Fund's
performance had been constant over the entire period. A Fund's average annual
total return quotation is computed in accordance with a standardized method
prescribed by rules of the Securities and Exchange Commission according to the
following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1-, 5- or 10-year periods at the end of the
1-, 5- or 10-year periods (or fractional portion), assuming
reinvestment of all dividends and distributions
Pursuant to the formula, the average annual total return for a Fund for a
specific period is found by first taking a hypothetical $1,000 investment
("initial investment") in the Fund's shares on the first day of the period
reduced by the maximum sales charge in effect on that date and computing the
"redeemable value" of that investment at the end of the period. The
redeemable value is then divided by the initial investment, and the quotient
is taken to the nth root (n representing the number of years in the period)
and 1 is subtracted from the result, which is then expressed as a percentage.
The calculation assumes that all income and capital gains dividends paid by
the Fund have been reinvested at net asset value on the reinvestment dates
during the period.
The following table reflects the average annual total return for each of the
Funds for the periods indicated:
-49-
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
ONE YEAR1 FIVE YEARS1 FROM INCEPTION1&2
ENDED ENDED THROUGH
JULY 31, 2000 JULY 31, 2000 JULY 31, 2000
<S> <C> <C> <C>
The Kansas Municipal Fund (2.63%) 3.35% 5.28%
The Kansas Insured Intermediate Fund (0.65%) 3.32% 4.20%
The Nebraska Municipal Fund (2.06%) 3.75% 3.49%
The Oklahoma Municipal Fund (4.36%) N/A% 2.87%
----------------------
<FN>
1 The return includes the effect of the maximum front-end sales load of 4.25%
(2.75% with respect to The Kansas Insured Intermediate Fund).
2 The inception date for The Kansas Municipal Fund, The Kansas Insured
Intermediate Fund, The Nebraska Municipal Fund, and The Oklahoma Municipal Fund
is November 15, 1990, November 23, 1992, November 17, 1993, and September 25,
1996, respectively.
</FN>
</TABLE>
All performance figures are based on historical results and are not intended
to indicate future performance.
Total Return
Cumulative total return reflects a Fund's performance over a stated period
of time and is computed as follows:
TR = ERV - P
P
Where:
TR = Total return
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the base period, assuming
reinvestment of all dividends and distributions
P = a hypothetical initial payment of $1,000
Calculation of cumulative total return is not subject to a prescribed
formula. Cumulative total return for a specific period is calculated by first
taking a hypothetical initial investment in Fund shares on the first day of the
period, deducting (in some cases) the maximum sales charge, and computing the
"redeemable value" of that investment at the end of the period. The cumulative
total return percentage is then determined by subtracting the initial
investment from the redeemable value and dividing the remainder by the initial
investment and expressing the result as a percentage. The calculation assumes
that all income and capital gains distributions by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Cumulative total return may also be shown as the increased dollar value of the
hypothetical investment over the period. Cumulative total return calculations
that do not include the effect of the sales charge would be reduced if such
charge were included. The following table shows the total return for the
Funds, without including the effect of the sales charge, for the periods
indicated:
-50-
<TABLE>
<CAPTION>
FUNDS PERIOD TOTAL RETURN
<S> <C> <C>
The Kansas Municipal Fund November 15, 1990 - July 31, 2000 72.22%
The Kansas Insured Intermediate Fund November 23, 1992 - July 31, 2000 41.12%
The Nebraska Municipal Fund November 17, 1993 - July 31, 2000 31.46%
The Oklahoma Municipal Fund September 25, 1996 - July 31, 2000 16.48%
</TABLE>
These cumulative total return figures would be reduced if the calculation
took into account the effect of the sales charge. Cumulative total returns may
be presented in advertising and sales literature taking into account the effect
of sales charges. The Fund's performance figures are based upon historical
results and are not necessarily representative of future performance. A
Fund's shares are sold at net asset value plus a maximum sales charge set
forth in the Funds' Prospectus. Returns and net asset value will fluctuate.
Factors affecting a Fund's performance include general market conditions,
operating expenses and investment management. Any additional fees charged by
a dealer or other financial services firm would reduce the returns described
in this section. Shares of a Fund are redeemable at net asset value, which
may be more or less than original cost.
FINANCIAL STATEMENTS
The audited financial statements for the Fund's most recent fiscal year
appear in the Fund's Annual Report and are incorporated by reference. The
Annual Report accompanies this Statement of Additional Information.
-51-
APPENDIX A
RATINGS OF INVESTMENTS
Standard & Poor's Ratings Group-A brief description of the applicable
Standard & Poor's Ratings Group ("S&P") rating symbols and their meanings
(as published by S&P) follows:
LONG TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers
or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does nor
perform an 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 based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. 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;
2. Nature of and provisions of the obligation;
3. 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.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by S&P. 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 highest rated issues only in
small degree.
A-1
A Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
SPECULATIVE GRADE RATING
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics these are outweighed by major uncertainties or
major exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The 'BB' rating
category is also used for debt subordinated to senior debt that is
assigned in actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely
impair capacity or willingness to pay interest and repay principal.
The 'B' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial or
economic conditions, it is not likely to have the capacity to pay
interest and repay principal.
The 'CCC' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied 'B' or 'B-'
rating.
CC The rating 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' debt rating.
A-2
C The rating 'C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt rating.
The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such grace
period. The 'D' rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter 'L' indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is federally insured by the Federal Savings & Loan
Insurance Corp. or the Federal Deposit Insurance Corp.* and interest
is adequately collateralized. In the case of certificates of
deposit the letter 'L' indicates that the deposit, combined with
other deposits being held in the same right and capacity will be
honored for principal and accrued pre-default interest up to the
federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a
successor insured institution, upon maturity.
[FN]
( Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments
and cash flow.
</FN>
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
-Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt
service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with
some vulnerability to adverse financial and economic changes
over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A note 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 to S&P by the issuer or obtained by S&P from other sources it
considers reliable. S&P does not perform an 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 based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A-l' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign
(+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated 'A-1.'
A-4
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B Issues rated 'B' are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period.
A commercial 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 to S&P by the issuer or obtained by S&P from other sources it
considers reliable. S&P does not perform an 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 based on other circumstances.
Moody's Investors Service, Inc.-A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
LONG TERM DEBT
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligors such as guarantors,
insurers or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not
perform an 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 based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. 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;
A-5
2. Nature of and provisions of the obligation;
3. 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.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by S&P. 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 highest rated issues only in small
degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
SPECULATIVE GRADE RATING
Debt rated 'BB', 'B', 'CCC, 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics these are outweighed by major uncertainties or
major exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to meet
timely interest and principal payments. The 'BB' rating category is
also used for debt subordinated to senior debt that is assigned an
actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely
impair capacity or willingness to pay interest and repay principal.
The 'B' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'BB' or 'BB-' rating.
A-6
CCC Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial or
economic conditions, it is not likely to have the capacity to pay
interest and repay principal.
The 'CCC' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied 'B' or 'B-'
rating.
CC The rating 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' debt rating.
C The rating 'C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt rating.
The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest
is being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace
period. The 'D' rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes; the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise judgment with respect to such likelihood and risk.
L The letter 'L' indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is federally insured by the Federal Savings & Loan
Insurance Corp. or the Federal Deposit Insurance Corp.* and interest
is adequately collateralized. In the case of certificates of
deposit the letter 'L' indicates that the deposit, combined with
other deposits being held in the same right and capacity will be
honored for principal and accrued pre-default interest up to the
federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a
successor insured institution, upon maturity.
[FN]
( Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments
and cash flow.
</FN>
A-7
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-
term debt rating. The following criteria will be used in making that
assessment:
-Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1 Strong capacity to pay principal and interest. An issue determined
to possess a very strong capacity to pay debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A note 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 to S&P by the issuer or obtained by S&P from other sources it
considers reliable. S&P does not perform an 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 based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
A-8
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign
(+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B Issues rated 'B' are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period.
A commercial 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
to S&P by the issuer or obtained by S&P from other sources it considers
reliable. S&P does not perform an 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 based on other circumstances.
Moody's Investors Service, Inc.-A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
LONG TERM DEBT
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." 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.
A-9
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess may 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.
Moody's bond rating symbols may contain numerical modifiers of a
generic rating classification. The modifier 1 indicates that the
bond ranks at the high end of its category; the modifier 2
indicates a mid-range ranking, and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
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.
Con(..)Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed,
or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
A-10
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aal, Al, Baal, Bal and Bl.
MUNICIPAL SHORT-TERM LOANS
MIG 1/VMIG 1 This designation denotes best quality. There is present
strong protection by established cash flows, superior
liquidity support or demonstrated broad based access to the
market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins or protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All security
elements are accounted for but there is lacking the
undeniable strength of the preceding grades. Liquidity and
cash flow protection may be narrow and market access for
refinancing is likely to be less well-established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is
present and although not distinctly or predominantly
speculative, there is specific risk.
COMMERCIAL PAPER
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will often be evidenced by many of the following
characteristics:
-Leading market positions in well-established industries.
-High rates of return on Fund employed.
-Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
A-11
-Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of senior short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of senior short-term promissory
obligations. The effect of industry characteristics and market compositions
may be more pronounced. Variability in earnings and profitability may result
in changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Duff & Phelps, Inc.-A brief description of the applicable Duff & Phelps,
Inc. ("D&P") ratings symbols and their meanings (as published by D&P) follows:
LONG TERM DEBT
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related
to such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security, (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent
of rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security
classes in the capital structure, the overall credit strength of the issuer
and the nature of covenant protection.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities. Structured finance issues, including real estate,
asset-backed and mortgage-backed financings, use this same rating scale.
Duff & Phelps Credit Rating claims paying ability ratings of insurance
companies use the same scale with minor modification in the definitions.
Thus, an investor can compare the credit quality of investment alternatives
across industries and structural types. A "Cash Flow Rating" (as noted for
specific ratings) addresses the likelihood that aggregate principal and
interest will equal or exceed the rated amount under appropriate stress
conditions.
A-12
Rating Scale Definition
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
AA+ High credit quality. Protection factors are strong.
AA Risk is modest, but may vary slightly from time to time
AA- because of economic conditions.
A+ Protection factors are average but adequate. However,
AA risk factors are more variable and greater in periods
AA- of economic stress.
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
B+ Below investment grade but deemed likely to meet
B obligations when due. Present or prospective
B- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this
category.
CCC Below investment grade and possessing risk that
obligations will not be met when due. Financial
protection factors will fluctuate widely according
to economic cycles, industry conditions and/or company
fortunes. Potential exists for frequent changes in the
rating within this category or into a higher or lower
rating grade.
Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal,
interest or preferred dividends. Protection factors
are narrow and risk can be substantial with unfavorable
economic/industry conditions and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
A-13
SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating criteria
used by money market participants. The ratings apply to all obligations with
maturities of under one year, including commercial paper, the uninsured
portion of certificates of deposit, unsecured bank loans, master notes,
bankers acceptances, irrevocable letters of credit and current maturities
of long-term debt. Asset-backed commercial paper is also rated according
to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of Fund including trade
credit, bank lines and the capital markets. An important consideration is
the level of an obligor's reliance on short-term Fund on an ongoing basis.
The distinguishing feature of Duff & Phelps Credit Ratings' short-term
ratings is the refinement of the traditional '1' category. The majority of
short-term debt issuers carry the highest rating, yet quality differences
exist within that tier. As a consequence, Duff & Phelps Credit Rating has
incorporated gradations of '1+' (one plus) and 'l-' (one minus) to assist
investors in recognizing those differences.
These ratings are recognized by the SEC for broker-dealer requirements,
specifically capital computation guidelines. These ratings meet Department
of Labor ERISA guidelines governing pension and profit sharing investments.
State regulators also recognize the ratings of Duff & Phelps Credit Rating
for insurance company investment portfolios.
Rating Scale Definition
HIGH GRADE
D-1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or
access to alternative sources of Fund, is outstanding
and safety is just below risk-free U.S. Treasury short-
term obligations.
D-1 Very high certainty of timely payment. Liquidity factors
are excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection
factors. Risk factors are very small.
GOOD GRADE
A-14
D-2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
SATISFACTORY GRADE
D-3 Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless,
timely payment is expected.
NON-INVESTMENT GRADE
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insured against disruption in debt service.
Operating factors and market access may be subject to a
high degree of variation.
DEFAULT
D-5 Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA, Inc.-A brief description of the applicable Fitch IBCA, Inc.
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
LONG TERM DEBT
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor or the tax-exempt nature or taxability of
payments made in respect of any security.
A-15
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated 'AAA'.
Because bonds rated in the 'AAA' and 'AA' categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of the issuers is generally rated 'F-1+'.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact
on these bonds and, therefore, impair timely payment. The
likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings ('BB' to 'C') represent Fitch's assessment of the likelihood of
timely payment of principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted bonds, the rating
('DDD' to 'D') is an assessment of the ultimate recovery value through
reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any
guarantor, as well as the economic and political environment that might
affect the issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect
the differences in the degrees of credit risk.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying
its debt service requirements.
A-16
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, Bonds are in default on interest and/or principal payments.
DD Such bonds are extremely speculative and should be valued on the
and basis of their ultimate recovery value in liquidation or
D reorganization of the obligor. 'DDD' represents the highest
potential for recovery of these bonds, and 'D' represents the
lowest potential for recovery.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes and municipal
and investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in
a timely manner.
F-l+ Exceptionally Strong Credit Quality Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated 'F-1+'.
F-2 Good Credit Quality Issues assigned this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is
not as great as for issues assigned 'F-1+' and 'F-l' ratings.
F-3 Fair Credit Quality Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
A-17
