STATEMENT OF ADDITIONAL INFORMATION April 30, 1997
THE YACKTMAN FUNDS, INC.
303 West Madison Street
Chicago, Illinois 60606
Call Toll-Free 1-800-525-8258
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of The Yacktman Funds,
Inc. (the "Company") dated April 30, 1997 (the "Prospectus"), for The
Yacktman Fund and The Yacktman Focused Fund (each referred to individually
as a "Fund" and collectively as the "Funds"). Requests for copies of the
Prospectus should be made by writing to The Yacktman Funds, Inc., 303 West
Madison Street, Chicago, Illinois 60606, Attention: Corporate Secretary,
or by calling 1-800-525-8258.
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THE YACKTMAN FUNDS, INC.
TABLE OF CONTENTS
Page
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . 1
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . 7
DIRECTORS AND OFFICERS OF THE COMPANY . . . . . . . . . . . . . . . . . 7
INVESTMENT ADVISER AND ADMINISTRATOR . . . . . . . . . . . . . . . . . 10
EXCHANGE PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . 12
REDEMPTIONS IN KIND . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SYSTEMATIC WITHDRAWAL PLAN . . . . . . . . . . . . . . . . . . . . . . 13
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . 14
DISTRIBUTION PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ALLOCATION OF PORTFOLIO BROKERAGE . . . . . . . . . . . . . . . . . . . 15
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
STOCKHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . 18
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 19
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 20
DESCRIPTION OF SECURITIES RATINGS . . . . . . . . . . . . . . . . . . . 21
<PAGE>
INVESTMENT RESTRICTIONS AND CONSIDERATIONS
THE YACKTMAN FUND
As set forth in the Prospectus under the caption "OBJECTIVE AND
INVESTMENT APPROACH," the investment objective of The Yacktman Fund is to
produce long-term growth of capital, with current income as a secondary
objective. Consistent with this investment objective, The Yacktman Fund
has adopted the following investment restrictions which are matters of
fundamental policy and cannot be changed without approval of the holders
of the lesser of: (i) 67% of The Yacktman Fund's shares present or
represented at a stockholder's meeting at which the holders of more than
50% of such shares are present or represented; or (ii) more than 50% of
the outstanding shares of The Yacktman Fund.
1. The Yacktman Fund will diversify its assets in
different companies and will not purchase securities of any
issuer if, as a result of such purchase, The Yacktman Fund would
own more than 10% of the outstanding voting securities of such
issuer or more than 5% of The Yacktman Fund's assets would be
invested in securities of such issuer (except that up to 25% of
the value of The Yacktman Fund's total assets may be invested
without regard to this limitation). This restriction does not
apply to obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities.
2. The Yacktman Fund will not sell securities short, buy
securities on margin, purchase warrants, participate in a joint-
trading account, or deal in options.
3. The Yacktman Fund will not borrow money, except for
temporary or emergency purposes, and then only from banks, in an
amount not exceeding 10% of the value of The Yacktman Fund's
total assets. The Yacktman Fund will not borrow money for the
purpose of investing in securities, and The Yacktman Fund will
not purchase any portfolio securities for so long as any
borrowed amounts remain outstanding.
4. The Yacktman Fund will not pledge or hypothecate its
assets, except to secure borrowings for temporary or emergency
purposes.
5. The Yacktman Fund will not invest more than 5% of The
Yacktman Fund's total assets in securities of any issuer which
has a record of less than three (3) years of continuous
operation, including the operation of any predecessor business
of a company which came into existence as a result of a merger,
consolidation, reorganization or purchase of substantially all
of the assets of such predecessor business.
6. The Yacktman Fund will not purchase securities of
other investment companies (as defined in the Investment Company
Act of 1940 (the "Act")), except as part of a plan of merger,
consolidation, reorganization or acquisition of assets.
7. The Yacktman Fund will not act as an underwriter or
distributor of securities other than shares of The Yacktman Fund
(except to the extent that The Yacktman Fund may be deemed to be
an underwriter within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), in the disposition of
restricted securities).
8. The Yacktman Fund will not purchase securities for
which there is no established market if, as a result of such
purchase, more than 5% of the total value of its total assets
would be invested in such securities.
9. The Yacktman Fund will not make loans, except it may
acquire debt securities from the issuer or others which are
publicly distributed or are of a type normally acquired by
institutional investors and except that it may make loans of
portfolio securities if any such loans are secured continuously
by collateral at least equal to the market value of the
securities loaned in the form of cash and/or securities issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities and provided that no such loan will be made if
upon the making of that loan more than 30% of the value of The
Yacktman Fund's total assets would be the subject of such loans.
10. The Yacktman Fund will not concentrate 25% or more of
its total assets in securities of any one industry. This
restriction does not apply to obligations issued or guaranteed
by the United States Government, its agencies or
instrumentalities.
11. The Yacktman Fund will not make investments for the
purpose of exercising control or management of any company.
12. The Yacktman Fund will not purchase or sell real
estate or real estate mortgage loans and will not make any
investments in real estate limited partnerships.
13. The Yacktman Fund will not purchase or sell
commodities or commodity contracts, including futures contracts.
14. The Yacktman Fund will not purchase or sell any
interest in any oil, gas or other mineral exploration or
development program, including any oil, gas or mineral leases.
The Yacktman Fund has adopted certain other investment
restrictions which are not fundamental policies and which may be changed
by the Company's Board of Directors without stockholder approval. These
additional restrictions are as follows:
1. The Yacktman Fund will not acquire or retain any
security issued by a company, an officer or director of which is
an officer or director of The Yacktman Fund or an officer,
director or other affiliated person of The Yacktman Fund's
investment adviser, without authorization of the Board of
Directors of the Company.
The aforementioned percentage restrictions on investment or
utilization of assets refer to the percentage at the time an investment is
made. If these restrictions are adhered to at the time an investment is
made, and such percentage subsequently changes as a result of changing
market values or some similar event, no violation of The Yacktman Fund's
fundamental restrictions will be deemed to have occurred. Any changes in
The Yacktman Fund's investment restrictions made by the Board of Directors
will be communicated to stockholders prior to their implementation, which
communication may be made in an amendment to the Statement of Additional
Information incorporated by reference into the Prospectus.
THE YACKTMAN FOCUSED FUND
As set forth in the Prospectus under the caption "OBJECTIVE AND
INVESTMENT APPROACH," the investment objective of The Yacktman Focused
Fund is to produce long-term growth of capital, with current income as a
secondary objective. Consistent with this investment objective, The
Yacktman Focused Fund has adopted the following investment restrictions
which are matters of fundamental policy and cannot be changed without
approval of the holders of the lesser of: (i) 67% of The Yacktman Focused
Fund's shares present or represented at a stockholder's meeting at which
the holders of more than 50% of such shares are present or represented; or
(ii) more than 50% of the outstanding shares of The Yacktman Focused Fund.
1. The Yacktman Focused Fund may issue senior securities to
the extent permitted under the Act.
2. The Yacktman Focused Fund will not sell securities
short, buy securities on margin, purchase warrants or
participate in a joint trading account. The Yacktman Focused
Fund may invest in and commit its assets to writing and
purchasing put and call options on securities and stock indexes
to the extent permitted by the Act.
3. The Yacktman Focused Fund may borrow money to the
extent permitted by the Act. The Yacktman Focused Fund may
pledge or hypothecate its assets to secure its borrowings.
4. The Yacktman Focused Fund will not act as an
underwriter or distributor of securities other than shares of
The Yacktman Focused Fund (except to the extent that The
Yacktman Focused Fund may be deemed to be an underwriter within
the meaning of the Securities Act in the disposition of
restricted securities).
5. The Yacktman Focused Fund will not concentrate 25% or
more of its total assets in securities of any one industry.
This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities.
6. The Yacktman Focused Fund will not purchase or sell
real estate or real estate mortgage loans and will not make any
investments in real estate limited partnerships.
7. The Yacktman Focused Fund will not purchase or sell
commodities or commodity contracts, including futures contracts.
8. The Yacktman Focused Fund will not make loans, except
it may acquire debt securities from the issuer or others which
are publicly distributed or are of a type normally acquired by
institutional investors and except that it may make loans of
portfolio securities if any such loans are secured continuously
by collateral at least equal to the market value of the
securities loaned in the form of cash and/or securities issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities and provided that no such loan will be made if
upon the making of that loan more than 30% of the value of The
Yacktman Focused Fund's total assets would be the subject of
such loans.
9. The Yacktman Focused Fund will not purchase securities
of any issuer if, as a result of such purchase, The Yacktman
Focused Fund would own more than 10% of the outstanding voting
securities of such issuer or more than 5% of The Yacktman
Focused Fund's assets would be invested in securities of such
issuer, except that up to 50% of the value of The Yacktman
Focused Fund's total assets may be invested without regard to
this limitation. This restriction does not apply to obligations
issued or guaranteed by the United States Government, its
agencies or instrumentalities.
10. The Yacktman Focused Fund will not purchase securities
for which there is no established market if, as a result of such
purchase, more than 5% of the value of its total assets would be
invested in such securities.
11. The Yacktman Focused Fund will not make investments
for the purpose of exercising control or management of any
company.
12. The Yacktman Focused Fund will not purchase or sell
any interest in any oil, gas or other mineral exploration or
development program, including any oil, gas or mineral leases.
The Yacktman Focused Fund has adopted certain other investment
restrictions which are not fundamental policies and which may be changed
by the Company's Board of Directors without stockholder approval. These
additional restrictions are as follows:
1. The Yacktman Focused Fund will not purchase securities
of other investment companies (as defined in the Act), except:
(a) as part of a plan of merger, consolidation, reorganization
or acquisition of assets; (b) securities of registered open-end
investment companies that invest exclusively in high quality,
short-term debt securities; or (c) securities of registered
investment companies on the open market where no commission
results, other than the usual and customary broker's commission.
No purchase described in (b) and (c) will be made if as a result
of such purchases (i) The Yacktman Focused Fund and its
affiliated persons would hold more than 3% of any class of
securities, including voting securities, of any registered
investment company; (ii) more than 5% of The Yacktman Focused
Fund's net assets would be invested in shares of any one
registered investment company; and (iii) more than 10% of The
Yacktman Focused Fund's net assets would be invested in shares
of registered investment companies.
2. The Yacktman Focused Fund will not acquire or retain
any security issued by a company, an officer or director of
which is an officer or director of The Yacktman Focused Fund or
an officer, director or other affiliated person of The Yacktman
Focused Fund's investment adviser, without authorization of the
Board of Directors of the Company.
The aforementioned percentage restrictions on investment or
utilization of assets refer to the percentage at the time an investment is
made. If these restrictions are adhered to at the time an investment is
made, and such percentage subsequently changes as a result of changing
market values or some similar event, no violation of The Yacktman Focused
Fund's fundamental restrictions will be deemed to have occurred. Any
changes in The Yacktman Focused Fund's investment restrictions made by the
Board of Directors will be communicated to stockholders prior to their
implementation, which communication may be made in an amendment to the
Statement of Additional Information incorporated by reference into the
Prospectus.
High Yield Convertible Securities
Each Fund may invest up to five percent of its net assets in
convertible securities rated less than investment grade. Investments in
such securities are subject to the risk factors outlined below. The
market for high yield convertible securities is subject to substantial
volatility. Issuers of high yield convertible securities may be of low
creditworthiness and the high convertible securities are likely to be
subordinated to the claims of senior lenders. The secondary market for
high yield convertible debt securities may at times become less liquid or
respond to adverse publicity or investor perceptions making it more
difficult for the Funds to value accurately such securities or dispose of
them.
Options on Securities
When The Yacktman Focused Fund wishes to terminate The Yacktman
Focused Fund's obligation with respect to a put option it has written, The
Yacktman Focused Fund may effect a "closing purchase transaction." The
Yacktman Focused Fund accomplishes this by buying a put option of the same
series as the put option previously written by The Yacktman Focused Fund.
The effect of the purchase is that the writer's position will be canceled.
However, a writer may not effect a closing purchase transaction after the
writer has been notified of the exercise of an option. When The Yacktman
Focused Fund is the holder of a put option, it may liquidate its position
by effecting a "closing sale transaction." The Yacktman Focused Fund
accomplishes this by selling a put option of the same series as the put
option previously purchased by The Yacktman Focused Fund. There is no
guarantee that either a closing purchase or a closing sale transaction can
be effected.
The Yacktman Focused Fund will realize a gain (or a loss) on a
closing purchase transaction with respect to a put option previously
written by it if the premium, plus commission costs, paid by The Yacktman
Focused Fund to purchase the put option is less (or greater) than the
premium, less commission costs, received by The Yacktman Focused Fund on
the sale of the put option. The Yacktman Focused Fund will realize a gain
(or a loss) on a closing sale transaction with respect to a put option
previously purchased by it if the premium, less commission costs, paid by
The Yacktman Focused Fund on the sale of the put option is greater (or
less) than the premium, plus commission costs, paid by The Yacktman
Focused Fund to purchase the put option.
Exchanges generally have established limitations governing the
maximum number of call or put options on the same index which may be
bought or written (sold) by a single investor, whether acting alone or in
concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written on one or more accounts
or through one or more brokers). Under these limitations, options
positions of certain other accounts advised by the same investment adviser
are combined for purposes of these limits. Pursuant to these limitations,
an exchange may order the liquidation of positions and may impose other
sanctions or restrictions. These position limits may restrict the number
of listed options which The Yacktman Focused Fund may buy or sell;
however, the Adviser intends to comply with all limitations.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "DETERMINATION
OF NET ASSET VALUE," the net asset value of the Funds will be determined
as of the close of regular trading (currently 4:00 p.m. Eastern time) on
each day the New York Stock Exchange is open for trading. The New York
Stock Exchange is open for trading Monday through Friday except New Year's
Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Additionally, if any of
the aforementioned holidays falls on a Saturday, the New York Stock
Exchange will not be open for trading on the succeeding Monday, unless
unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period.
DIRECTORS AND OFFICERS OF THE COMPANY
The name, age, address, principal occupations during the past
five years, and other information with respect to each of the directors
and officers of the Company are as follows:
Ronald W. Ball -- Vice President. Mr. Ball, 56, has been Senior
Vice President of Yacktman Asset Management Co. (the "Adviser") since
April, 1992. Prior to that time, he was a Senior Vice President and
Portfolio Manager at Selected Financial Services, Inc., a Chicago,
Illinois investment advisory firm, (since October, 1983) and President and
Portfolio Manager of Selected Special Shares, an investment company (since
October, 1986). Mr. Ball holds a B.S. in Business Administration from The
Ohio State University. His address is c/o Yacktman Asset Management Co.,
303 West Madison Street, Chicago, Illinois 60606.
*Jon D. Carlson -- Director, Vice President and Secretary. Mr.
Carlson, 55, has been the Executive Vice President of the Adviser since
May 14, 1992. Prior to this date he was a Senior Vice President of the
Kemper Securities Group, Inc., which he joined in March, 1989 from Kidder,
Peabody and Co. A graduate of The University of Michigan and the Michigan
Law School, Mr. Carlson has been admitted to the practice of law in
Michigan, New York and Illinois and served from 1972 to 1978 on the
Employee Benefits Committee of the Taxation Section of the American Bar
Association. His address is c/o Yacktman Asset Management Co., 303 West
Madison Street, Chicago, Illinois 60606.
Thomas R. Hanson -- Director. Mr. Hanson, 59, is a Partner of
Fleming/Hanson Sales, a manufacturers representative firm in the
commercial and industrial air conditioning industry. Prior to
establishing this firm in 1991, Mr. Hanson was President of Thermal Air
Systems, Inc., Bensenville, Illinois. He also serves on the Corporate
Member Board of Advocate Health Care, Inc., Oak Brook, Illinois, and on
the Advisory Board for the College of Engineering of the University of
Iowa from which he earned a B.S. in Mechanical Engineering. His address
is c/o Fleming/Hanson Sales, 3010 Woodcreek Drive, Downers Grove, Illinois
60515.
Stanislaw Maliszewski -- Director. Mr. Maliszewski, 52, has
been a Managing Director of Gateway Asset Management, Inc., an investment
management and marketing company for large institutional investors since
August, 1993. Prior to joining Gateway Asset Management, Inc. Mr.
Maliszewski was President of Princeton Futures Management Incorporated, an
investment advisory firm for large institutional investors. Neither
Gateway Asset Management, Inc. nor Princeton Futures Management
Incorporated is affiliated with, or a service provider to, the Adviser.
However, Mr. Maliszewski has been retained by the Adviser as a client
solicitor pursuant to Rule 206(4)-3 under the Investment Advisers Act of
1940. Prior to establishing Princeton Futures Management Incorporated in
1991, Mr. Maliszewski was with the Rosenberg Real Estate Equity Funds,
LaSalle Advisors Ltd., and the Investment Banking Services Group of
Goldman Sachs and Company. He holds an A.B. degree from Princeton
University and an MBA from Harvard University. His address is c/o Gateway
Asset Management, Inc., Suite 1420, 180 North LaSalle Street, Chicago,
Illinois 60601.
Stephen E. Upton -- Director. Mr. Upton, 72, is the retired
President of the Whirlpool Foundation, Benton Harbor, Michigan, a position
he held until 1993. He retired in 1988 as a Senior Vice President for
Whirlpool Corporation, a manufacturer of major household appliances. Mr.
Upton had been an officer and employee of Whirlpool since 1955. He has
served as Chairman of the Board of Trustees of Olivet College in Michigan
and as Chairman of the Consumer Affairs Committee for the United States
Chamber of Commerce and is a Trustee of the Michigan Colleges Foundation.
Mr. Upton holds a B.B.A. degree from The University of Michigan. His
address is 100 Ridgeway Road, St. Joseph, Michigan 49085.
*Donald A. Yacktman -- Director, President and Treasurer. Mr.
Yacktman, 55, has been the President of the Adviser since April 24, 1992.
Prior to that time, he was Senior Vice President of Selected Asset
Management, Inc., a Chicago, Illinois investment advisory firm, and the
President and portfolio manager from January 1, 1983 through March 11,
1992 of the Selected American Shares mutual fund. Prior to joining the
predecessor firm of Selected Asset Management, Inc., Mr. Yacktman was a
partner and portfolio manager for fourteen years at Stein Roe & Farnham,
an independent investment counseling firm based in Chicago. Mr. Yacktman
has served as a Bishop in the Church of Jesus Christ of Latter-Day Saints
and is a member of the Financial Analysts Society of Chicago. He holds a
B.S. Magna Cum Laude and Phi Beta Kappa from The University of Utah and an
MBA with distinction from Harvard University. His address is c/o Yacktman
Asset Management Co., 303 West Madison Street, Chicago, Illinois 60606.
*Messrs. Carlson and Yacktman are directors who are "interested
persons" of the Funds (as defined in the Act).
The Funds' standard method of compensating directors is to pay
each disinterested director an annual fee of $5,000 ($8,000 commencing
January 1, 1997) for services rendered, including attending meetings of
the Board of Directors. The Funds also may reimburse their directors for
travel expenses incurred in order to attend meetings of the Board of
Directors. For the fiscal year ended December 31, 1996 the disinterested
directors received aggregate fees (excluding $347 in reimbursements of
travel expenses) of $15,000. The table below sets forth the compensation
paid by The Yacktman Fund to each of the current directors of the Company
during the fiscal year ended December 31, 1996:
<TABLE>
COMPENSATION TABLE
<CAPTION>
Total
Aggregate Pension or Retirement Estimated Annual Compensation
Name of Compensation Benefits Accrued As Part Benefits Upon from Company
Person from Company* of Fund Expenses Retirement Paid to Directors*
<S> <C> <C> <C> <C>
Jon D. Carlson $0 $0 $0 $0
Thomas R. Hanson $5,000 $0 $0 $5,000
Stanislaw Maliszewski $5,000 $0 $0 $5,000
Stephen E. Upton $5,000 $0 $0 $5,000
Donald A. Yacktman $0 $0 $0 $0
*The Yacktman Focused Fund did not commence operations until April 30, 1997.
</TABLE>
As of January 31, 1997, all officers and directors of The
Yacktman Fund as a group beneficially owned 332,027 shares of The Yacktman
Fund or 0.57% of the then outstanding shares. At such date, Charles
Schwab & Co., 101 Montgomery Street, San Francisco, California 94104,
owned of record 32,420,301 shares of The Yacktman Fund, or 55.55% of the
then outstanding shares and National Financial Services Corp., c/o
Fidelity Investments, 82 Devonshire Street R20A, Boston, Massachusetts
02109, owned of record 4,174,660 shares of The Yacktman Fund, or 7.15% of
the then outstanding shares. All of the shares owned by Charles Schwab &
Co. and National Financial Services Corp. were owned of record only.
Other than the foregoing, The Yacktman Fund was not aware of any person
who, as of January 31, 1997, owned of record or beneficially 5% or more of
the shares of The Yacktman Fund. The Yacktman Focused Fund did not
commence operations until April 30, 1997.
INVESTMENT ADVISER AND ADMINISTRATOR
As set forth in the Prospectus under the caption "MANAGEMENT OF
THE FUNDS," the investment adviser to the Funds is Yacktman Asset
Management Co., 303 West Madison Street, Chicago, Illinois 60606 (the
"Adviser"). Pursuant to the investment advisory agreements entered into
between the Company, on behalf of each of the Funds, and the Adviser (the
"Advisory Agreements"), the Adviser furnishes continuous investment
advisory services to each of the Funds.
The Adviser has undertaken to reimburse each Fund to the extent
that the aggregate annual operating expenses, including the investment
advisory fee and the administration fee but excluding interest, taxes,
brokerage commissions and other costs incurred in connection with the
purchase or sale of portfolio securities, and extraordinary items, exceed
that percentage of the average net assets of such Fund for such year, as
determined by valuations made as of the close of each business day of the
year, which is the most restrictive percentage provided by the state laws
of the various states in which the shares of such Fund are qualified for
sale. As of the date of this Statement of Additional Information, no such
state law provision was applicable to the Funds. Additionally, the
Adviser has voluntarily agreed to reimburse The Yacktman Focused Fund to
the extent aggregate annual operating expenses as described above do not
exceed specified percentages of such Fund's daily net assets as set forth
in the Prospectus. The Funds monitor their expense ratios on a monthly
basis. If the accrued amount of the expenses of either Fund exceeds the
expense limitation, the Fund creates an account receivable from the
Adviser for the amount of such excess. In such a situation the monthly
payment of the Adviser's fee will be reduced by the amount of such excess
(and if the amount of such excess in any month is greater than the monthly
payment of the Adviser's fee, the Adviser will pay each Fund the amount of
such difference), subject to adjustment month by month during the balance
of each Fund's fiscal year if accrued expenses thereafter fall below this
limit.
For services provided by the Adviser under the Advisory
Agreement for the fiscal years ended December 31, 1996, 1995 and 1994 The
Yacktman Fund paid the Adviser $4,086,939, $3,400,202 and $1,207,294,
respectively. The Adviser was not required to reimburse The Yacktman Fund
for excess expenses during such years. The Yacktman Focused Fund did not
commence operations until April 30, 1997.
Each Advisory Agreement will remain in effect as long as its
continuance is specifically approved at least annually (i) by the Board of
Directors of the Company or by the vote of a majority (as defined in the
Act) of the outstanding shares of the applicable Fund, and (ii) by the
vote of a majority of the directors of the Company who are not parties to
the Advisory Agreement or interested persons of the Adviser, cast in
person at a meeting called for the purpose of voting on such approval.
Each Advisory Agreement provides that it may be terminated at any time
without the payment of any penalty, by the Board of Directors of the
Company or by vote of the majority of the applicable Fund's stockholders
on sixty (60) days' written notice to the Adviser, and by the Adviser on
the same notice to the applicable Fund, and that it shall be automatically
terminated if it is assigned.
As set forth in the Prospectus under the caption "MANAGEMENT OF
THE FUNDS," the administrator to the Funds is Sunstone Financial Group,
Inc. (the "Administrator"). The administration agreement entered into
between the Funds and the Administrator (the "Administration Agreement")
will remain in effect as long as its continuance is approved at least
annually by the Board of Directors of the Company and the Administrator.
The Administration Agreement may be terminated on not less than 90 days'
notice, without the payment of any penalty, by the Board of Directors of
the Company or by the Administrator. For the fiscal years ended December
31, 1996, 1995 and 1994, The Yacktman Fund paid the Administrator
$235,034, $206,258 and $121,247, respectively, pursuant to the
Administration Agreement. Effective January 1, 1995, the Administration
Agreement was amended to provide that in addition to the services
previously provided by the Administrator, the Administrator will provide
fund accounting services. The Yacktman Focused Fund did not commence
operations until April 30, 1997.
The Advisory Agreements and the Administration Agreement provide
that the Adviser and Administrator, as the case may be, shall not be
liable to the Funds or its stockholders for anything other than willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties. The Advisory Agreements and the Administration
Agreement also provide that the Adviser and Administrator, as the case may
be, and their officers, directors and employees may engage in other
businesses, devote time and attention to any other business whether of a
similar or dissimilar nature, and render services to others.
EXCHANGE PRIVILEGE
Investors may exchange shares of either Fund having a value of
$1,000 or more for shares of the Portico Money Market Fund, the Portico
U.S. Government Money Market Fund or the Portico Tax-Exempt Money Market
Fund (collectively the "Portico Money Funds") at their net asset value and
at a later date exchange such shares and shares purchased with reinvested
dividends for shares of the Funds at net asset value. Investors who are
interested in exercising the exchange privilege should first contact the
Funds to obtain instructions and any necessary forms. The exchange
privilege does not in any way constitute an offering of, or recommendation
on the part of the Funds or the Adviser of, an investment in any of the
Portico Money Funds. Any investor who considers making such an investment
through the exchange privilege should obtain and review the Prospectus of
the applicable Portico Money Fund before exercising the exchange
privilege.
The exchange privilege will not be available if (i) the proceeds
from a redemption of shares are paid directly to the investor or at his or
her discretion to any persons other than the Funds or (ii) the proceeds
from redemption of the shares of the Portico Money Market Fund are not
immediately reinvested in shares of the Funds or another Portico Money
Fund through a subsequent exercise of the exchange privilege. There is
currently no limitation on the number of exchanges an investor may make.
The exchange privilege may be terminated by the Funds upon at least 60
days prior notice to investors.
For federal income tax purposes, a redemption of shares of a
Fund pursuant to the exchange privilege will result in a capital gain if
the proceeds received exceed the investor's tax-cost basis of the shares
redeemed. Such a redemption may also be taxed under state and local tax
laws, which may differ from the Code.
REDEMPTIONS IN KIND
Each of the Funds has reserved the right to pay the redemption
price of its shares in assets other than cash. In accordance with Rule
18f-1 under the Act, the Company has filed Form N-18F-1 with the
Securities and Exchange Commission pursuant to which each Fund has
committed to pay in cash all requests for redemption by any shareholder of
record, limited in amount with respect to each shareholder during any
ninety-day period to the lesser of (i) $250,000, or (ii) 1% of the net
asset value of the Fund at the beginning of the ninety-day period.
SYSTEMATIC WITHDRAWAL PLAN
An investor who owns shares of a Fund worth at least $10,000 at
the current net asset value may, by completing an application which may be
obtained from the Funds or Firstar Trust Company, create a Systematic
Withdrawal Plan from which a fixed sum will be paid to the investor at
regular intervals through redemption of shares of such Fund. To establish
the Systematic Withdrawal Plan, the investor deposits shares of the Funds
with the Company and appoints it as agent to effect redemptions of Fund
shares held in the account for the purpose of making monthly or quarterly
withdrawal payments of a fixed amount to the investor out of the account.
Fund shares deposited by the investor in the account need not be endorsed
or accompanied by a stock power if registered in the same name as the
account; otherwise, a properly executed endorsement or stock power,
obtained from any bank, broker-dealer or the Funds is required. The
investor's signature should be guaranteed by a bank, a member firm of a
national stock exchange or other eligible guarantor.
The minimum amount of a withdrawal payment is $100. These
payments will be made from the proceeds of periodic redemptions of shares
in the account at net asset value. Redemptions can be made monthly or
quarterly on any day the investor chooses or, if that day is a weekend day
or a holiday, on the following business day. Establishment of a
Systematic Withdrawal Plan constitutes an election by the investor to
reinvest in additional shares of the Funds, at net asset value, all income
dividends and capital gains distributions payable by the applicable Fund
on shares held in such account, and shares so acquired will be added to
such account. The investor may deposit additional shares in his account
at any time.
Withdrawal payments cannot be considered as yield or income on
the investor's investment, since portions of each payment will normally
consist of a return of capital. Depending on the size or the frequency of
the disbursements requested, and the fluctuation in the value of the
applicable Fund's portfolio, redemptions for the purpose of making such
disbursements may reduce or even exhaust the investor's account.
The investor may vary the amount or frequency of withdrawal
payments, temporarily discontinue them, or change the designated payee or
payee's address, by notifying Firstar Trust Company in writing prior to
the 15th day of the month preceding the next payment.
CUSTODIAN
Firstar Trust Company, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as custodian for the Funds. As such, Firstar Trust
Company holds all securities and cash of the Funds, delivers and receives
payment for securities sold, receives and pays for securities purchased,
collects income from investments and performs other duties, all as
directed by officers of the Company. Firstar Trust Company does not
exercise any supervisory function over the management of the Funds, the
purchase and sale of securities or the payment of distributions to
stockholders. Firstar Trust Company also acts as each Fund's transfer
agent and dividend disbursing agent.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 100 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, serves as the independent accountants for the Funds.
DISTRIBUTION PLAN
As set forth in the Prospectus under the caption "PURCHASE OF
SHARES," The Yacktman Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. The Plan permits The Yacktman Fund
to employ one or more distributors of its shares. Payments under the Plan
may be made only to distributors so employed by The Yacktman Fund.
Payments under the Plan in any year are limited to 0.25% of the average
daily net assets of The Yacktman Fund. Under the Plan, The Yacktman Fund
paid distributors fees for the fiscal year ended December 31, 1996
totaling $476,920, representing 0.07% of The Yacktman Fund's average net
assets.
The Yacktman Fund will pay to each distributor a monthly fee for
distribution of The Yacktman Fund's shares at the rate of 0.65% per annum
of the aggregate average daily net asset value of The Yacktman Fund shares
beneficially owned by such distributor's existing brokerage clients who
established their Yacktman Fund accounts prior to December 31, 1992. For
purposes of the Plan, a client shall include (a) with respect to
individuals, the individual's spouse, children, trust or retirement
accounts for the benefit of any of the foregoing, the individual's estate
and any corporation of which the individual is an affiliate, (b) with
respect to corporations, its retirement plans and its affiliates, and (c)
with respect to clients who are investment advisers, financial planners or
others who exercise investment discretion or make recommendations
concerning the purchase or sale of securities, accounts for which they
exercise investment discretion or make recommendations concerning the
purchase or sale of securities. Beneficial ownership shall not include
ownership solely as a nominee. If after December 31, 1992, a client
ceases to be a client of a distributor and thereafter becomes a client of
another distributor, such client shall continue to be considered a client
whose Yacktman Fund account was established prior to December 31, 1992 if
the client beneficially owned shares of The Yacktman Fund at all times
after ceasing to be a client of the former distributor and prior to
becoming a client of the latter distributor except as may be necessary to
affect a transfer of the account. The Yacktman Fund shares owned by a
client will be deemed to include all shares purchased and not redeemed;
provided, however, that if at any time no shares of The Yacktman Fund are
beneficially owned by a client whose Yacktman Fund account was established
prior to December 31, 1992, no distribution fees thereafter will be paid
with respect to shares beneficially owned by such client.
The Plan was adopted in anticipation that The Yacktman Fund will
benefit from the Plan through increased sales of its shares, thereby
reducing The Yacktman Fund's expense ratio and providing an asset size
that allows the Adviser greater flexibility in management. The Plan may
be terminated at any time by a vote of the directors of the Company who
are not interested persons of the Company and who have no direct or
indirect financial interest in the Plan or any agreement related thereto
(the "Rule 12b-1 Directors") or by a vote of a majority of the outstanding
shares of Common Stock. Messrs. Hanson, Maliszewski and Upton are
currently the Rule 12b-1 Directors. The Plan will be automatically
terminated upon the closing of all Fund accounts established by existing
brokerage clients of distributors prior to December 31, 1992. Any change
in the Plan that would materially increase the distribution expenses of
the Funds provided for in the Plan requires approval of the stockholders
and the Board of Directors of each Fund, including the Rule 12b-1
Directors.
While the Plan is in effect, the selection and nomination of
directors who are not interested persons of the Company will be committed
to the discretion of the directors of the Company who are not interested
persons of the Company. The Board of Directors of the Company must review
the amount and purposes of expenditures pursuant to the Plan quarterly as
reported to it by the distributors, if any, or officers of the Company.
Unless otherwise terminated, the Plan will continue in effect for as long
as its continuance is specifically approved at least annually by the Board
of Directors of the Company, including the Rule 12b-1 Directors.
ALLOCATION OF PORTFOLIO BROKERAGE
The Funds' securities trading and brokerage policies and
procedures are reviewed by and subject to the supervision of the Board of
Directors of the Company. Decisions to buy and sell securities for each
Fund are made by the Adviser subject to review by the Company's Board of
Directors. In placing purchase and sale orders for portfolio securities
for the Funds, it is the policy of the Adviser to seek the best execution
of orders at the most favorable price in light of the overall quality of
brokerage and research services provided, as described in this and the
following paragraph. Many of these transactions involve payment of a
brokerage commission by the Funds. In some cases, transactions are with
firms who act as principals of their own accounts. In selecting brokers
to effect portfolio transactions, the determination of what is expected to
result in best execution at the most favorable price involves a number of
largely judgmental considerations. Among these are the Adviser's
evaluation of the broker's efficiency in executing and clearing
transactions, block trading capability (including the broker's willingness
to position securities) and the broker's reputation, financial strength
and stability. The most favorable price to a Fund means the best net
price without regard to the mix between purchase or sale price and
commission, if any. Over-the-counter securities are generally purchased
and sold directly with principal market makers who retain the difference
in their cost in the security and its selling price. In some instances,
the Adviser feels that better prices are available from non-principal
market makers who are paid commissions directly. Although the Funds do
not initially intend to market their shares through intermediary broker-
dealers, the Funds may place portfolio orders with broker-dealers who
recommend the purchase of shares of the Funds to clients (if the Adviser
believes the commissions and transaction quality are comparable to that
available from other brokers) and may allocate portfolio brokerage on that
basis.
In allocating brokerage business for the Funds, the Adviser also
takes into consideration the research, analytical, statistical and other
information and services provided by the broker, such as general economic
reports and information, reports or analyses of particular companies or
industry groups, market timing and technical information, and the
availability of the brokerage firm's analysts for consultation. While the
Adviser believes these services have substantial value, they are
considered supplemental to the Adviser's own efforts in the performance of
its duties under the Advisory Agreements. Other clients of the Adviser
may indirectly benefit from the availability of these services to the
Adviser, and the Funds may indirectly benefit from services available to
the Adviser as a result of transactions for other clients. The Advisory
Agreements provide that the Adviser may cause the Fund to pay a broker
which provides brokerage and research services to the Adviser a commission
for effecting a securities transaction in excess of the amount another
broker would have charged for effecting the transaction, if the Adviser
determines in good faith that such amount of commission is reasonable in
relation to the value of brokerage and research services provided by the
executing broker viewed in terms of either the particular transaction or
the Adviser's overall responsibilities with respect to the Fund and the
other accounts as to which he exercises investment discretion. For the
fiscal years ended December 31, 1996, 1995 and 1994 The Yacktman Fund paid
brokerage commissions of $998,728, $1,170,042 and $506,695, respectively,
on total transactions of $652,310,636, $652,217,150 and $296,409,925,
respectively. All of the brokers to whom commissions were paid during
such fiscal years provided research services to the Adviser. The Yacktman
Focused Fund did not commence operations until April 30, 1997.
In the fiscal year ended December 31, 1996 and 1995, the Adviser
allocated brokerage to a broker that provides sub-transfer agency services
to The Yacktman Fund. Pursuant to a directed brokerage arrangement, this
broker reduced its sub-transfer agency fees by $363,016 and $422,748,
respectively, in the fiscal years ended December 31, 1996 and 1995, as a
result of Fund brokerage allocated to it.
TAXES
As set forth in the Prospectus under the caption "TAXES," each
Fund will endeavor to qualify annually for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the
Code.
Each Fund intends to distribute all of its net investment income
and net capital gain each fiscal year. Dividends from net investment
income (including any excess of net short-term capital gain over net long-
term capital loss) are taxable to investors as ordinary income, while
distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss) are taxable as long-term capital
gain regardless of the shareholder's holding period for the shares.
Distributions from the Funds are taxable to investors, whether received in
cash or in additional shares of the respective Funds. A portion of the
Funds' income distributions may be eligible for the 70% dividends-received
deduction for domestic corporate shareholders.
Any dividend or capital gain distribution paid shortly after a
purchase of shares of a Fund will have the effect of reducing the per
share net asset value of such shares by the amount of the dividend or
distribution. Furthermore, even if the net asset value of the shares of a
Fund immediately after a dividend or distribution is less than the cost of
such shares to the investor, the dividend or distribution will be taxable
to the investor.
Redemption of shares will generally result in a capital gain or
loss for income tax purposes. Such capital gain or loss will be long term
or short term, depending upon the holding period. However, if a loss is
realized on shares held for six months or less, and the investor received
a capital gain distribution during that period, then such loss is treated
as a long-term capital loss to the extent of the capital gain distribution
received.
Investors may also be subject to state and local taxes.
Each Fund will be required to withhold federal income tax at a
rate of 31% ("backup withholding") from dividend payments and redemption
and exchange proceeds if an investor fails to furnish such Fund with his
social security number or other tax identification number or fails to
certify under penalty of perjury that such number is correct or that he is
not subject to backup withholding due to the underreporting of income.
The certification form is included as part of the share purchase
application and should be completed when the account is opened.
This section is not intended to be a full discussion of present
or proposed federal income tax laws and the effect of such laws on an
investor. Investors are urged to consult with their respective tax
advisers for a complete review of the tax ramifications of an investment
in a Fund.
STOCKHOLDER MEETINGS
The Maryland General Corporation Law permits registered
investment companies, such as the Funds, to operate without an annual
meeting of stockholders under specified circumstances if an annual meeting
is not required by the Act. The Company has adopted the appropriate
provisions in its Bylaws and may, at its discretion, not hold an annual
meeting in any year in which the election of directors is not required to
be acted on by stockholders under the Act.
The Company's Bylaws also contain procedures for the removal of
directors by its stockholders. At any meeting of stockholders, duly
called and at which a quorum is present, the stockholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be
cast thereon, remove any director or directors from office and may elect a
successor or successors to fill any resulting vacancies for the unexpired
terms of removed directors.
Upon the written request of the holders of shares entitled to
not less than ten percent (10%) of all the votes entitled to be cast at
such meeting, the Secretary of the Company shall promptly call a special
meeting of stockholders for the purpose of voting upon the question of
removal of any director. Whenever ten or more stockholders of record who
have been such for at least six months preceding the date of application,
and who hold in the aggregate either shares having a net asset value of at
least $25,000 or at least one percent (1%) of the total outstanding
shares, whichever is less, shall apply to the Company's Secretary in
writing, stating that they wish to communicate with other stockholders
with a view to obtaining signatures to a request for a meeting as
described above and accompanied by a form of communication and request
which they wish to transmit, the Secretary shall within five business days
after such application either: (1) afford to such applicants access to a
list of the names and addresses of all stockholders as recorded on the
books of the Funds; or (2) inform such applicants as to the approximate
number of stockholders of record and the approximate cost of mailing to
them the proposed communication and form of request.
If the Secretary elects to follow the course specified in clause
(2) of the last sentence of the preceding paragraph, the Secretary, upon
the written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall,
with reasonable promptness, mail such material to all stockholders of
record at their addresses as recorded on the books unless within five
business days after such tender the Secretary shall mail to such
applicants and file with the Securities and Exchange Commission, together
with a copy of the material to be mailed, a written statement signed by at
least a majority of the Board of Directors to the effect that in their
opinion either such material contains untrue statements of fact or omits
to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the
basis of such opinion.
After opportunity for hearing upon the objections specified in
the written statement so filed, the Securities and Exchange Commission
may, and if demanded by the Board of Directors or by such applicants
shall, enter an order either sustaining one or more of such objections or
refusing to sustain any of them. If the Securities and Exchange
Commission shall enter an order refusing to sustain any of such
objections, or if, after the entry of an order sustaining one or more of
such objections, the Securities and Exchange Commission shall find, after
notice and opportunity for hearing, that all objections so sustained have
been met, and shall enter an order so declaring, the Secretary shall mail
copies of such material to all stockholders with reasonable promptness
after the entry of such order and the renewal of such tender.
PERFORMANCE INFORMATION
Average annual total return measures both the net investment
income generated by, and the effect of any realized or unrealized
appreciation or depreciation of, the underlying investments in a Fund's
investment portfolio. A Fund's average annual total return figures are
computed in accordance with the standardized method prescribed by the
Securities and Exchange Commission by determining the average annual
compounded rates of return over the periods indicated, that would equate
the initial amount invested to the ending redeemable value, 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 at the end of
the period of a hypothetical $1,000
payment made at the beginning of such
period
This calculation (i) assumes all dividends and distributions are
reinvested at net asset value or the appropriate reinvestment dates as
described in the Prospectus, and (ii) deducts all recurring fees, such as
advisory fees, charged as expenses to all investor accounts.
Total return is the cumulative rate of investment growth which
assumes that income dividends and capital gains are reinvested. It is
determined by assuming a hypothetical investment at the net asset value at
the beginning of the period, adding in the reinvestment of all income
dividends and capital gains, calculating the ending value of the
investment at the net asset
value as of the end of the specified time period, subtracting the amount
of the original investment, and dividing this amount by the amount of the
original investment. This calculated amount is then expressed as a
percentage by multiplying by 100.
The Yacktman Fund's average annual compounded returns for the
one-year period ended December 31, 1996 and for the period from the Fund's
commencement of operations (July 6, 1992) through December 31, 1996 were
26.02% and 13.25%, respectively. Such performance results reflect
reimbursements made by the Adviser during the fiscal year ended December
31, 1993 and the period from July 6, 1992 through December 31, 1992 to
keep aggregate annual operating expenses at or below 1.2% of average daily
net assets. The Yacktman Focused Fund did not commence operations until
April 30, 1997. The foregoing performance results are based on historical
earnings and should not be considered as representative of the performance
of the Funds in the future. An investment in either Fund will fluctuate
in value and at redemption its value may be more or less than the initial
investment.
FINANCIAL STATEMENTS
The following audited financial statements are incorporated by
reference to the Annual Report, dated December 31, 1996, of the Company
(File No. 811-06628), as filed with the Securities and Exchange Commission
on February 3, 1997:
- Report of Independent Accountants
- Portfolio of Investments
- Statement of Assets & Liabilities
- Statement of Operations
- Statement of Changes in Net Assets
- Financial Highlights
- Notes to the Financial Statements
DESCRIPTION OF SECURITIES RATINGS
As set forth in the Prospectus under the caption "OBJECTIVE AND
INVESTMENT APPROACH," The Yacktman Fund may invest in non-convertible
bonds and debentures assigned one of the two highest ratings of either
Standard & Poor's Corporation ("Standard & Poor's") or Moody's Investors
Service, Inc. ("Moody's"). As also set forth therein, The Yacktman
Focused Fund may invest in non-convertible bonds and debentures assigned
at least an investment grade by Standard & Poor's or Moody's (or unrated
but deemed by the Adviser to be of comparable quality), and up to 5% of
the assets of each of The Yacktman Fund and The Yacktman Focused Fund may
be invested in convertible bonds and debentures rated below investment
grade. As also set forth therein, the Funds may invest in commercial
paper and commercial paper master notes rated A-2 or better by Standard &
Poor's or P-2 by Moody's. A brief description of the ratings symbols and
their meanings follows.
Standard & Poor's Debt Ratings. A Standard & Poor's corporate
debt rating is a current assessment of the creditworthiness of an obligor
with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform any audit in connection with
any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes
in, or unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the
obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of the
obligation in the event of bankruptcy, reorganization or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights;
Investment Grade
AAA - Debt rated 'AAA' has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in small
degree.
A - Debt rated 'A' has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB - Debt rated 'BBB' is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to
pay interest and repay principal for debt in this category than in higher
rated categories.
Speculative Grade
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 large
uncertainties or major risk exposures to adverse conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure 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.
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 - Debt rated 'CC' typically is applied to debt subordinated
to senior debt that is assigned an actual or implied 'CCC' rating.
C - Debt rated '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 period.
The 'D' rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
Moody's Bond Ratings.
Investment Grade
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are protected by
a large, or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Speculative Grade
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of time
may be small.
Caa - Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each of the
foregoing generic rating classifications. The modifier 1 indicates that
the company ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates
that the company ranks in the lower end of its generic rating category.
Standard & Poor's Commercial Paper Ratings. A Standard & Poor's
commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from A-1 for the
highest quality obligations to D for the lowest. The three highest
categories are as follows:
A-1. This highest category indicates that the degree of safety
regarding timely payment is strong. Those issuers determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2. Capacity for timely payment on issues with this
designation is satisfactory. However the relative degree of safety is not
as high as for issuers designated "A-1".
A-3. Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying a higher
designation.
Moody's Commercial Paper Ratings. Among the factors considered
by Moody's in assigning ratings are the following: (1) evaluation of the
management of the issuer; (2) economic evaluation of the issuer's industry
or industries which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of
earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8)
recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet
such obligations. Relative differences in these factors determine whether
the issuer's commercial is rated P-1, P-2 or P-3.
