STATEMENT OF ADDITIONAL INFORMATION April 30, 1999
for THE YACKTMAN FUNDS
THE YACKTMAN FUND
THE YACKTMAN FOCUSED FUND
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, 1999 (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.
The following financial statements are incorporated by reference to the
Annual Report, dated December 31, 1998, of The Yacktman Funds, Inc. (File No.
811-6628) as filed with the Securities and Exchange Commission on February 24,
1999:
Portfolio of Investments
The Yacktman Fund
The Yacktman Focused Fund
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Financial Highlights
Notes to the Financial Statements
Report of Independent Accountants
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THE YACKTMAN FUNDS, INC.
TABLE OF CONTENTS
Page
FUND HISTORY AND CLASSIFICATION ...............................................1
INVESTMENT RESTRICTIONS AND CONSIDERATIONS ....................................1
DETERMINATION OF NET ASSET VALUE .............................................10
DIRECTORS AND OFFICERS OF THE COMPANY ........................................10
INVESTMENT ADVISER AND ADMINISTRATOR .........................................13
EXCHANGE PRIVILEGE ...........................................................15
REDEMPTIONS ..................................................................16
SYSTEMATIC WITHDRAWAL PLAN ...................................................16
AUTOMATIC INVESTMENT PLAN, TELEPHONE PURCHASES AND RETIREMENT PLANS ..........17
CUSTODIAN ....................................................................19
INDEPENDENT ACCOUNTANTS ......................................................19
DISTRIBUTION PLAN ............................................................20
ALLOCATION OF PORTFOLIO BROKERAGE ............................................20
TAXES ........................................................................22
STOCKHOLDER MEETINGS .........................................................23
CAPITAL STRUCTURE ............................................................24
PERFORMANCE INFORMATION ......................................................25
DESCRIPTION OF SECURITIES RATINGS ............................................26
(i)
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FUND HISTORY AND CLASSIFICATION
The Yacktman Funds, Inc. (the "Company") is an open-end management
investment company consisting of a diversified portfolio, The Yacktman Fund, and
a nondiversified portfolio, The Yacktman Focused Fund. The Company is registered
under the Investment Company Act of 1940 (the "Act"). The Company was
incorporated as a Maryland corporation on April 6, 1992.
INVESTMENT RESTRICTIONS AND CONSIDERATIONS
THE YACKTMAN FUND
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.
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6. The Yacktman Fund will not purchase securities of other investment
companies (as defined in 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
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.
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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 Funds, Inc. or an officer, director or other affiliated person of
the investment adviser to The Yacktman Fund or The Yacktman Focused Fund,
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
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
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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
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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 Funds, Inc. or an officer, director or other
affiliated person of the investment adviser to The Yacktman Fund or The
Yacktman Focused Fund, 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.
Money Market Instruments
Each Fund may invest in money market instruments such as United States
Treasury bills, certificates of deposit of U.S. banks, commercial paper, and
commercial paper master notes, which are demand instruments without a fixed
maturity bearing interest at rates that are fixed to known lending rates and
automatically adjusted when such lending rates change, rated A-2 or better by
Standard & Poor's Corporation ("Standard & Poor's") or Prime-2 by Moody's
Investors Service, Inc. ("Moody's"). The Yacktman Focused Fund may also invest
in securities issued by other investment companies that invest in high-quality,
short-term debt securities (i.e., money market funds). In addition to the
advisory fees and other expenses The Yacktman Focused Fund bears directly in
connection with its own operations, as a shareholder of another investment
company, The Yacktman Focused Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses and such fees and other
expenses will be borne indirectly by The Yacktman Focused Fund's stockholders.
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Fixed Income Funds
Both Funds may invest in U.S. government securities and publicly
distributed corporate bonds and debentures to generate current income and
possible capital gains at those times when Yacktman Asset Management Co. (the
"Adviser") believes such securities offer opportunities for long-term growth of
capital, such as during periods of declining interest rates when the market
value of such securities generally rises. The Yacktman Fund will limit its
investments in non-convertible bonds and debentures to those which have been
assigned one of the two highest ratings of either Standard & Poor's (AAA and AA)
or Moody's (Aaa and Aa). In the event a bond or debenture is downgraded after
investment, The Yacktman Fund may retain such security unless it is rated less
than investment grade (i.e., less than BBB by Standard & Poor's or Baa by
Moody's). The Yacktman Focused Fund will limit its investments in
non-convertible bonds and debentures to those which have been assigned a rating
of at least investment grade. Securities rated BBB by Standard & Poor's or Baa
by Moody's, although investment grade, exhibit speculative characteristics and
are more sensitive than higher rated securities to changes in economic
conditions. If a bond or debenture is downgraded below investment grade, both
Funds will promptly dispose of such bond or debenture, unless the Adviser
believes it disadvantageous to the Fund to do so. A description of the foregoing
ratings is included at the end of the Statement of Additional Information. Both
Funds may invest in fixed income securities of any length maturity. The value of
fixed income securities will tend to decrease when interest rates rise and
increase when interest rates fall. Fixed income securities with shorter
maturities, while generally offering lower yields, generally provide greater
price stability than longer-term securities and are less affected by changes in
interest rates.
Foreign Securities
The Funds may also invest in U.S. dollar-denominated securities of
foreign issuers in the form of American Depositary Receipts ("ADRs") that are
regularly traded on recognized U.S. exchanges or in the U.S. over-the-counter
("OTC") market. Investments in securities of foreign issuers may involve risks
which are in addition to the usual risks inherent in domestic investments. In
many countries, there is less publicly available information about issuers than
is available in the reports and ratings published about companies in the United
States. Additionally, foreign companies may not be subject to uniform
accounting, auditing and financial reporting standards.
Convertible Securities
The Funds may also invest in convertible securities (debt securities or
preferred stocks of corporations which are convertible into or exchangeable for
common stocks). The Adviser will select only those convertible securities for
which it believes (a) the underlying common stock is a suitable investment for
each Fund and (b) a greater potential for total return exists by purchasing the
convertible security because of its higher yield and/or favorable market
valuation. Each Fund may invest up to 5% of its net assets in convertible debt
securities rated less than investment grade. Debt securities rated less than
investment grade are commonly referred to as "junk bonds."
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Investments in convertible securities rated less than investment grade
("high yield convertible securities") are subject to a number of risk factors.
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 yield 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
The Yacktman Fund may not purchase or write (sell) put or call options,
but The Yacktman Focused Fund may purchase and write put (but not call) options
on stocks. The Yacktman Focused Fund may purchase put options on specific stocks
to hedge against losses caused by declines in the prices of stocks in its
portfolio. The Yacktman Focused Fund may write (sell) put options on stocks to
generate income. The Yacktman Focused Fund will only write put options if it is
willing to purchase the stock at the exercise price.
When writing a put option and receiving a premium payment, The Yacktman
Focused Fund may become obligated during the term of the option to purchase the
securities underlying the option at a specific price (exercise price). This
event is unlikely to occur unless the market price of such securities is less
than the exercise price. To cover its obligation, The Yacktman Focused Fund will
maintain with its custodian in a segregated account cash or liquid securities
equal in value to the exercise price. When purchasing a put option, The Yacktman
Focused Fund has the right, in return for a premium paid, during the term of the
option, to sell the securities underlying the option at the exercise price. If a
put option which The Yacktman Focused Fund has purchased is not exercised, the
option will become worthless on the expiration date, and The Yacktman Focused
Fund will realize a loss in the amount of the premium paid, plus commission
costs. The stocks underlying put options purchased by The Yacktman Focused Fund
need not be stocks in The Yacktman Focused Fund's portfolio if the Adviser
believes that the put options purchased can provide an effective hedge for
stocks held by The Yacktman Focused Fund. However in such situations, there may
be an imperfect correlation between movements in the prices of the stocks
underlying the put options and movements in the prices of the stocks held by The
Yacktman Focused Fund. It is possible that The Yacktman Focused Fund could
suffer losses on both the put options it purchases and on the stocks held in its
portfolio. No assurances can be given that a market will exist at all times for
all outstanding put options purchased or sold by The Yacktman Focused Fund. If
no such market exists, The Yacktman Focused Fund would be unable to realize its
profits or limit its losses until it could exercise the put options it holds and
it would remain obligated until the put options it wrote were exercised or had
expired.
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.
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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, received 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.
Portfolio Turnover
The Funds do not trade actively for short-term profits. However, if the
objectives of the Funds would be better served, short-term profits or losses may
be realized from time to time. The annual portfolio turnover rate indicates
changes in a Fund's portfolio and is calculated by dividing the lesser of
purchases or sales of portfolio securities (excluding securities having
maturities at acquisition of one year or less) for the fiscal year by the
monthly average of the value of the portfolio securities (excluding securities
having maturities at acquisition of one year or less) owned by the Fund during
the fiscal year. The annual portfolio turnover rate may vary widely from year to
year depending upon market conditions and prospects. Increased portfolio
turnover necessarily results in correspondingly heavier transaction costs (such
as brokerage commissions or mark-ups or mark-downs) which the Fund must pay and
increased realized gains (or losses) to investors. Distributions to stockholders
of realized gains, to the extent that they consist of net short-term capital
gains, will be considered ordinary income for federal income tax purposes.
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Lending Securities
For income purposes, a Fund may lend its portfolio securities. The
Funds' investment restrictions provide that no such loan may be made if
thereafter more than 30% of the value of a Fund's total assets would be subject
to such loans. Income may be earned on collateral received to secure the loans.
Cash collateral would be invested in money market instruments. U.S. government
securities collateral would yield interest or earn discount. Part of this income
might be shared with the borrower. Alternatively, a Fund could allow the
borrower to receive the income from the collateral and charge the borrower a
fee. In either event, the Fund would receive the amount of dividends or interest
paid on the loaned securities.
Usually these loans would be made to brokers, dealers or financial
institutions. Loans would be fully secured by collateral deposited with the
Funds' custodian in the form of cash and/or securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities. This collateral must be
increased within one business day in the event that its value shall become less
than the market value of the loaned securities. Because there may be delays in
recovery or even loss of rights in the collateral should the borrower fail
financially, the loans will be made only to firms deemed by the Adviser to be of
good standing. Loans will not be made unless, in the judgment of the Adviser,
the consideration which can be earned from such loans justifies the risk.
The borrower, upon notice, must deliver the loaned securities within
three business days. In the event that voting rights with respect to the loaned
securities pass to the borrower and a material proposal affecting the securities
arises, the loan may be called or the Fund will otherwise secure or be granted a
valid proxy in time for it to vote on the proposal. In making such loans, a Fund
may utilize the services of a loan broker and pay a fee for these services. A
Fund may incur additional custodian fees for services in connection with the
lending of securities.
Borrowing
The Yacktman Focused Fund may borrow money for investment purposes.
Borrowing for investment purposes is known as leveraging. Leveraging
investments, by purchasing securities with borrowed money, is a speculative
technique which increases investment risk, but also increases investment
opportunity. Since substantially all of The Yacktman Focused Fund's assets will
fluctuate in value, whereas the interest obligations on borrowings may be fixed,
the net asset value per share of The Yacktman Focused Fund when it leverages its
investments will increase more when The Yacktman Focused Fund's assets increase
in value and decrease more when the portfolio assets decrease in value than
would otherwise be the case. Interest costs on borrowings may partially offset
or exceed the returns on the borrowed funds. Under adverse conditions, The
Yacktman Focused Fund might have to sell portfolio securities to meet interest
or principal payments at a time investment considerations would not favor such
sales. As required by the Act, The Yacktman Focused Fund must maintain
continuous asset coverage (total assets, including assets acquired with borrowed
funds, less liabilities exclusive of borrowings) of 300% of all amount borrowed.
If,
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at any time, the value of The Yacktman Focused Fund's assets should fail to
meet this 300% coverage test, The Yacktman Focused Fund within three business
days will reduce the amount of The Yacktman Focused Fund's borrowings to the
extent necessary to meet this 300% coverage. Maintenance of this percentage
limitation may result in the sale of portfolio securities as a time when
investment considerations otherwise indicate that it would be disadvantageous to
do so.
DETERMINATION OF NET ASSET VALUE
The net asset value of the Funds will be determined as of the close of
regular trading (normally 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, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the succeeding Monday, unless unusual business conditions exist, such
as the ending of a monthly or the yearly accounting period.
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange on which such securities are
primarily traded or at last sale price on the national securities market.
Exchange-traded securities for which there were no transactions are valued at
the current bid prices. Securities traded on only over-the-counter markets are
valued on the basis of closing over-the-counter bid prices. Put options are
valued at the last sales price on the valuation date if the last sales price is
between the closing bid and asked prices. Otherwise, put options are valued at
the mean of the closing bid and asked prices. Debt securities (other than
short-term instruments) are valued at prices furnished by a national pricing
service, subject to review by the Adviser and determination of the appropriate
price whenever a furnished price is significantly different from the previous
day's furnished price. Debt instruments maturing within 60 days are valued by
the amortized cost method. Any securities for which market quotations are not
readily available are valued at their fair value as determined in good faith by
the Board of Directors.
DIRECTORS AND OFFICERS OF THE COMPANY
As a Maryland corporation, the business and affairs of the Company are
managed by its officers under the direction of its Board of Directors. The name,
age, address, principal occupations during the past five years, and other
information with respect to each of the directors and officers of the Company
are as follows:
*Ronald W. Ball - Director, Vice President and Secretary. Mr. Ball, 58,
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
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*Messrs. Ball and Yacktman are directors who are "interested persons" of the
Funds (as defined in the Act).
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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.
Bruce B. Bingham -- Director. Mr. Bingham, 50, has been a partner in
Hamilton Partners, a real estate development firm, for more than five years. His
address is c/o Yacktman Asset Management Co., 303 West Madison Street, Chicago,
Illinois 60606.
Albert J. Malwitz -- Director. Mr. Malwitz, 62, has been owner and chief
executive officer of Arlington Fastener Co., a manufacturer and distributor of
industrial fasteners, for more than five years. His address is c/o Yacktman
Asset Management Co., 303 West Madison Street, Chicago, Illinois 60606.
George J. Stevenson, III -- Director. Mr. Stevenson, 59, has been
President of Stevenson & Company, a registered business broker, and President of
Healthmate Products Co., a fruit juice concentrate manufacturing company, for
more than five years. His address is c/o Yacktman Asset Management Co., 303 West
Madison Street, Chicago, Illinois 60606.
*Donald A. Yacktman -- Director, President and Treasurer. Mr. Yacktman,
57, 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.
The Funds' standard method of compensating directors is to pay each
disinterested director an annual fee of $8,000 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, 1998 the disinterested
directors received aggregate fees of $18,000. The table below sets forth the
compensation paid by the Funds to each of the then directors of the Company
during the fiscal year ended December 31, 1998:
- ---------------
*Messrs. Ball and Yacktman are directors who are "interested persons" of the
Funds (as defined in the Act).
11
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Total
Aggregate Pension or Retirement Estimated Annual Compensation
Name of Compensation Benefits Accrued As Benefits Upon from Company
Person from Company Part of Fund Expenses Retirement Paid to Directors
------ ------------ --------------------- ---------- -----------------
<S> <C> <C> <C> <C>
Ronald W. Ball(1) $0 $0 $0 $0
Bruce B. Bingham (2) $0 $0 $0 $0
Albert J. Malwitz(2) $0 $0 $0 $0
George J. Stevenson, III(2) $0 $0 $0 $0
Donald A. Yacktman $0 $0 $0 $0
Jon D. Carlson(3) $0 $0 $0 $0
Thomas R. Hanson(3) $6,000 $0 $0 $6,000
Stanislaw Maliszewski(3) $6,000 $0 $0 $6,000
Stephen E. Upton(3) $6,000 $0 $0 $6,000
- ------------
(1)Mr. Ball was elected as a director of the Company on February 13, 1998.
(2)Messrs. Bingham, Malwitz and Stevenson were elected as directors of the
Company on November 24, 1998.
(3)Messrs. Carlson, Hanson, Maliszewski and Upton were removed as directors
by the Company's stockholders on November 24, 1998.
</TABLE>
As of January 31, 1999, all officers and directors of the Company as a
group beneficially owned 267,698 shares of The Yacktman Fund or 1.11% of the
then outstanding shares. At such date, Charles Schwab & Co., 101 Montgomery
Street, San Francisco, California 94104, owned of record 7,523,133 shares of The
Yacktman Fund, or 31.21% of the then outstanding shares, and National Financial
Services Corp., c/o Fidelity Investments, 82 Devonshire Street R20A, Boston,
Massachusetts 02109, owned of record 1,990,032 shares of The Yacktman Fund, or
8.26% 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, 1999, owned of record or beneficially 5% or more of the shares of
The Yacktman Fund.
As of January 31, 1999, all officers and directors of the Company as a
group beneficially owned 213,747 shares of The Yacktman Focused Fund or 9.55% of
the then outstanding shares. At such date Charles Schwab & Co. owned of record
685,858 shares of The Yacktman Focused Fund, or 30.65% of the then outstanding
shares, Donaldson Lufkin Jenrette Securities Corporation Inc., P.O. Box 2052,
Jersey City, New Jersey 07303, owned of record 325,205 shares of The Yacktman
Focused Fund, or 14.53% of the then outstanding shares, Donald A. Yacktman, 303
West Madison Street, Chicago, Illinois 60606, owned of
12
<PAGE>
record 200,789 shares of The Yacktman Focused Fund, or 8.97% of the then
outstanding shares, National Financial Services Corp. owned of record 139,513
shares of The Yacktman Focused Fund, or 6.24% of the then outstanding shares,
and Saxon & Co., P.O. Box 7780-1888, Philadelphia, Pennsylvania 19182, owned of
record 118,296 shares of The Yacktman Focused Fund, or 5.29% of the outstanding
shares. All of the shares owned by Charles Schwab & Co., National Financial
Services Corp. and Donaldson Lufkin Jenrette Securities Corporation Inc. were
owned of record only. Other than the foregoing, The Yacktman Focused Fund was
not aware of any person who, as of January 31, 1999, owned of record or
beneficially 5% or more of the shares of The Yacktman Focused Fund.
INVESTMENT ADVISER AND ADMINISTRATOR
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 is controlled by Donald A. Yacktman, its President and sole stockholder.
The Adviser supervises and manages the investment portfolios of the
Funds and, subject to such policies as the Board of Directors of the Company may
determine, directs the purchase or sale of investment securities in the
day-to-day management of the Funds' investment portfolios. Under the Advisory
Agreements, the Adviser, at its own expense and without reimbursement from the
Funds, furnishes office space and all necessary office facilities, equipment and
executive personnel for managing the investments of the Funds and pays the
salaries and fees of all officers and directors of the Funds (except the fees
paid to directors who are not interested persons of the Adviser). For the
foregoing, the Adviser receives a monthly fee from The Yacktman Fund based on
The Yacktman Fund's average daily net assets at the annual rate of .65 of 1% on
the first $500,000,000 of average daily net assets, .60 of 1% on the next
$500,000,000 of average daily net assets and .55 of 1% on average daily net
assets in excess of $1,000,000,000, and a monthly fee from The Yacktman Focused
Fund based on The Yacktman Focused Fund's average daily net assets at the annual
rate of 1% on average daily net assets.
The Funds pay all of their own expenses, including, without limitation,
the cost of preparing and printing the registration statement required under the
Securities Act of 1933 and any amendments thereto, the expense of registering
shares with the Securities and Exchange Commission and in the various states,
the printing and distribution costs of prospectuses mailed to existing
investors, reports to investors, reports to government authorities and proxy
statements, fees paid to directors who are not interested persons of the
Adviser, interest charges, taxes, legal expenses, association membership dues,
auditing services, insurance premiums, brokerage commissions and expenses in
connection with portfolio transactions, fees and expenses of the custodian of
the Funds' assets, printing and mailing expenses and charges and expenses of
dividend disbursing agents, accounting services agents, registrars and stock
transfer agents.
13
<PAGE>
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 exceed specified percentages of such Fund's daily net assets as set forth
in the Prospectus. For the fiscal year ended December 31, 1998 such specified
percentage was 1.25%. 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 applicable Advisory
Agreement for the fiscal years ended December 31, 1998, 1997 and 1996 The
Yacktman Fund paid the Adviser $4,644,643, $6,360,037 and $4,086,939
respectively. The Adviser was not required to reimburse The Yacktman Fund for
excess expenses during such years. During the fiscal years ended December 31,
1998 and 1997 for services provided under the applicable Advisory Agreement The
Yacktman Focused Fund paid the Adviser $584,540 and $218,380, respectively, and
the Adviser reimbursed The Yacktman Focused Fund $328,543 and $101,060,
respectively, for excess expenses.
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.
The administrator to the Funds is Sunstone Financial Group, Inc. (the
"Administrator"), 207 East Buffalo Street, Suite 400, Milwaukee, Wisconsin
53202-5712. As administrator, the Administrator provides clerical, compliance,
regulatory and other administrative services. As fund accountant, the
Administrator calculates each Fund's net asset value. For administrative
services, the Administrator receives from The Yacktman Fund
14
<PAGE>
a fee, computed daily and payable monthly, based on The Yacktman Fund's average
daily net assets at the annual rate of .15 of 1% on the first $50,000,000 of
average daily net assets, .05 of 1% on the next $50,000,000 of average daily net
assets and .025 of 1% on average daily net assets in excess of $100,000,000. And
for fund accounting services, the Administrator receives from The Yacktman Fund
a fee, computed daily and payable monthly, based on The Yacktman Fund's average
daily net assets at the annual rate of $20,000 on the first $100,000,000 of
average daily net assets, .010% on the next $100,000,000 of average daily net
assets, and .005% of average daily net assets in excess of $200,000,000.
For administrative and fund accounting services, The Yacktman Focused
Fund pays the Administrator a fee, computed daily and payable monthly, at the
annual rate of .05% of The Yacktman Focused Fund's average daily net assets,
subject to a minimum annual fee of $50,000.
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, 1998, 1997 and 1996, The Yacktman Fund paid the Administrator
$314,789, $401,002 and $287,053, respectively, pursuant to the Administration
Agreement. For the fiscal years ended December 31, 1998 and 1997 The Yacktman
Focused Fund paid the Administrator $50,000 and $33,563, respectively, pursuant
to the Administration Agreement.
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 Firstar Money Market Fund, the Firstar U.S. Government
Money Market Fund or the Firstar Tax-Exempt Money Market Fund (collectively the
"Firstar 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 Firstar Money Funds. Any investor who considers making
such an investment
15
<PAGE>
through the exchange privilege should obtain and review the Prospectus of the
applicable Firstar 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 Firstar Money Market Fund are not immediately
reinvested in shares of the Funds or another Firstar 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 Internal Revenue Code of 1986 (the "Code").
REDEMPTIONS
The Funds reserve the right to suspend redemptions during any period
when the New York Stock Exchange is closed because of financial conditions or
any other extraordinary reason and to postpone redemptions for any period during
which (a) trading on the New York Stock Exchange is restricted pursuant to rules
and regulations of the Securities and Exchange Commission, (b) the Securities
and Exchange Commission has by order permitted such suspension or (c) an
emergency, as defined by rules and regulations of the Securities and Exchange
Commission, exists as a result of which it is not reasonably practicable for a
Fund to dispose of its securities or fairly to determine the value of its net
assets.
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 Mutual Fund Services, LLC 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
16
<PAGE>
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 Mutual Fund Services, LLC in writing prior to the 15th day
of the month preceding the next payment.
AUTOMATIC INVESTMENT PLAN, TELEPHONE
PURCHASES AND RETIREMENT PLANS
Automatic Investment Plan
The Funds offer an Automatic Investment Plan whereby an investor may
automatically make purchases of shares of the Funds on a regular, convenient
basis ($100 minimum per transaction). A $500 minimum initial investment must be
met before the Automatic Investment Plan may be established. Under the Automatic
Investment Plan, an investor's designated bank or other financial institution
debits a preauthorized amount on the investor's account each month and applies
the amount to the purchase of shares of the Funds. The Automatic Investment Plan
must be implemented with a financial institution that is a member of the
Automated Clearing House ("ACH"). No service fee is currently charged by the
Funds for participating in the Automatic Investment Plan. A $20 fee will be
imposed by Firstar Mutual Fund Services, LLC if sufficient funds are not
available in the investor's account at the time of the automatic transaction.
Applications to establish the Automatic Investment Plan are available from the
Funds. Investors who wish to make a change in investments made through an
automatic investment plan may do so by calling Firstar Mutual Fund Services, LLC
at 1-800-457-6033.
17
<PAGE>
Telephone Purchases
An investor may make additions to the investor's account by telephone
($100 minimum) using the investor's bank account to clear the purchase via
electronic funds transfer ("EFT"). Only bank accounts held at domestic financial
institutions that are ACH members can be used for telephone transactions.
Telephone transactions may not be used for initial purchases of shares of the
Funds. Fund shares will be purchased at the net asset value determined as of the
close of trading on the date that Firstar Mutual Fund Services, LLC receives
payment for shares purchased by EFT through the ACH system. Most transfers are
completed within three business days. No fee is currently charged for this
service. To establish the telephone purchase option, please complete the
appropriate section of the purchase application. Inquiries concerning this
option may be directed to Firstar Mutual Fund Services, LLC at 1-800-457-6033.
Retirement Plans
The Funds offer the following retirement plans that may be funded with
purchases of shares of the Funds and may allow investors to shelter some of
their income from taxes:
Individual Retirement Account ("IRA")
Individual stockholders may establish their own tax-sheltered Individual
Retirement Accounts ("IRA"). The minimum initial investment for an IRA is $500.
The Funds currently offer a prototype IRA plan and a prototype Roth IRA plan.
There is currently no charge for establishing an account, although there is an
annual maintenance fee. (See the applicable IRA Custodial Agreement and
Disclosure Statement for a discussion of the annual maintenance fee, other fees
associated with the account, eligibility requirements and related tax
consequences.)
Simplified Employee Pension Plan ("SEP-IRA")
The Funds also offer a Simplified Employee Pension (SEP) plan for
employers, including self-employed individuals, who wish to purchase shares of
the Funds with tax-deductible contributions. Under the SEP plan, employer
contributions are made directly to the IRA accounts of eligible participants.
Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE")
The Funds also offer a SIMPLE plan for employers, including
self-employed individuals, with 100 or fewer employees who wish to purchase
shares of the Funds with tax-deductible contributions. A SIMPLE plan allows
employees to elect to reduce their compensation and have such amounts
contributed to the plan. Under the SIMPLE plan, employer and employee
contributions are made directly to the SIMPLE IRA accounts of eligible
participants.
18
<PAGE>
Defined Contribution Retirement Plan (Keogh or Corporate Profit-sharing and
Money-Purchase Plans)
A prototype defined contribution retirement plan is available for
employers, including self-employed individuals, who wish to purchase shares of
the Funds with tax-deductible contributions.
Cash or Deferred 401(k) Plan
A prototype cash or deferred 401(k) arrangement is also available as
part of the Defined Contribution Retirement Plan for employers who wish to allow
employees to elect to reduce their compensation and have such amounts
contributed to the plan.
Model 403(b)(7) Plan
A model 403(b)(7) plan is available for employees of certain charitable,
educational and governmental entities.
A description of applicable service fees and certain limitations on
contributions and withdrawals, as well as application forms, are available from
the Funds upon request. The IRA documents contain a disclosure statement which
the Internal Revenue Service requires to be furnished to individuals who are
considering adopting the IRA. Because a retirement program involves commitments
covering future years, it is important that the investment objectives of the
Funds be consistent with the participant's retirement objectives. Premature
withdrawals from a retirement plan will result in adverse tax consequences.
Consultation with a competent financial and tax adviser regarding the foregoing
retirement plans is recommended.
CUSTODIAN
Firstar Bank Milwaukee, N.A., 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as custodian for the Funds. As such, Firstar Bank
Milwaukee, N.A. holds all securities and cash of the Funds, delivers and
receives payment for securities sold, receives and pays for securities
purchased, collects income from investments and performs other duties, all as
directed by officers of the Company. Firstar Bank Milwaukee, N.A. does not
exercise any supervisory function over the management of the Funds, the purchase
and sale of securities or the payment of distributions to stockholders. Firstar
Mutual Fund Services, LLC, an affiliate of Firstar Bank Milwaukee, N.A., acts as
each Fund's transfer agent and dividend disbursing agent.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500,
Milwaukee, Wisconsin 53202, serves as the independent accountants for the Funds.
19
<PAGE>
DISTRIBUTION PLAN
The Yacktman Fund has adopted a Distribution Plan (the "Plan") pursuant
to Rule 12b-1 under the Act. The Plan was terminated effective November 24,
1998. The Plan permitted The Yacktman Fund to employ one or more distributors of
its shares. Payments under the Plan could be made only to distributors so
employed by The Yacktman Fund. Payments under the Plan in any year were 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,
1998 totaling $405,796, representing 0.06% of The Yacktman Fund's average net
assets.
The Yacktman Fund would 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 included (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 did not include ownership
solely as a nominee. If after December 31, 1992, a client ceased to be a client
of a distributor and thereafter became a client of another distributor, such
client could 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 would be deemed to include all shares purchased and not
redeemed; provided, however, that if at any time no shares of The Yacktman Fund
were beneficially owned by a client whose Yacktman Fund account was established
prior to December 31, 1992, no distribution fees thereafter would be paid with
respect to shares beneficially owned by such client. The Plan was adopted in
anticipation that The Yacktman Fund would 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.
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
20
<PAGE>
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 (i.e. "markups" when the market maker sells a security and "markdowns"
when the market maker buys a security). In some instances, the Adviser feels
that better prices are available from non-principal market makers who are paid
commissions directly. The Funds may place portfolio orders with broker-dealers
who place orders for, or 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, computer hardware and software, market quotations, 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, 1998, 1997 and 1996, The Yacktman Fund
paid brokerage commissions of $1,365,757, $1,821,839 and $998,728, respectively,
on total transactions of $711,404,460, $1,074,679,740 and $652,310,636,
respectively. During the fiscal year ended December 31, 1998, The Yacktman Fund
paid brokerage commissions of $697,494 on transactions of $335,955,983 to
brokers who provided research services to the Adviser. For the fiscal years
ended December 31, 1998 and 1997, The Yacktman Focused Fund paid brokerage
commissions of $96,612 and $112,677, respectively, on total transactions of
$60,843,314 and $58,538,149, respectively. During the fiscal year ended December
31, 1998, the Yacktman Focused Fund paid brokerage commissions of $26,160 on
transactions of $13,058,872 to brokers who provided research services to the
Adviser.
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In the fiscal year ended December 31, 1998, 1997 and 1996, 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 $144,424, $364,752 and $363,016,
respectively, in the fiscal years ended December 31, 1998, 1997 and 1996, as a
result of The Yacktman Fund brokerage allocated to it.
TAXES
Each Fund annually will endeavor to qualify for and elect tax treatment
applicable to a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986 (the "Code"). Each Fund has so qualified in each of its
fiscal years. If a Fund fails to qualify as a regulated investment company under
Subchapter M in any fiscal year, it will be treated as a corporation for federal
income tax purposes. As such the Fund would be required to pay income taxes on
its net investment income and net realized capital gains, if any, at the rates
generally applicable to corporations. Stockholders of a Fund that did not
qualify as a regulated investment company under Subchapter M would not be liable
for income tax on the Fund's net investment income or net realized capital gains
in their individual capacities. Distributions to stockholders, whether from the
Fund's net investment income or net realized capital gains, would be treated as
taxable dividends to the extent of current or accumulated earnings and profits
of the Fund.
Each Fund intends to distribute all of its net investment income and net
capital gain each fiscal year. Dividends from net investment income (including
short-term capital gain) are taxable to investors as ordinary income, whereas
distributions of net realized long-term capital gains are taxable as long-term
capital gains regardless of the stockholder's holding period for the shares.
Such dividends and distributions are taxable to stockholders, 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 stockholders.
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,
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. The tax treatment of such capital gain or loss will depend
upon the stockholder's holding period. However, if a loss is realized on shares
held for six months or less, and the stockholder 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
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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
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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.
CAPITAL STRUCTURE
The Company's authorized capital consists of 1,000,000,000 shares of
Common Stock, $0.0001 par value. The Common Stock is divisible into an unlimited
number of "series," each of which is a separate Fund. Stockholders are entitled:
(i) to one vote per full share of Common Stock; (ii) to such distributions as
may be declared by the Company's Board of Directors out of funds legally
available; and (iii) upon liquidation, to participate ratably in the assets
available for distribution. There are no conversion or sinking fund provisions
applicable to the shares, and the holders have no preemptive rights and may not
cumulate their votes in the election of directors. Consequently the holders of
more than 50% of the shares of Common Stock voting for the election of directors
can elect the entire Board of Directors and, in such event, the holders of the
remaining shares voting for the election of directors will not be able to elect
any person or persons to the Board of Directors.
Shares of Common Stock are redeemable and are transferable. All shares
issued and sold by the Funds will be fully paid and nonassessable. Fractional
shares of Common Stock entitle the holder to the same rights as whole shares of
Common Stock.
Pursuant to the Company's Articles of Incorporation, the Board of
Directors may classify or reclassify any unissued shares of the Funds and may
designate or redesignate the name of any outstanding class of shares of the
Funds. As a general matter, shares are voted in the aggregate and not by class,
except where class voting is required by Maryland law or the Act (e.g., a change
in investment policy or approval of an investment advisory agreement). All
consideration received from the sale of shares of any class of the Funds'
shares, together with all income, earnings, profits and proceeds thereof, belong
to that class and are charged with the liabilities in respect of that class and
of that class' share of the general liabilities of the Funds in the proportion
that the total net assets of the class bear to the
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total net assets of all classes of the Funds' shares. The net asset value of a
share of any class is based on the assets belonging to that class less the
liabilities charged to that class, and dividends may be paid on shares of any
class of Common Stock only out of lawfully available assets belonging to that
class. In the event of liquidation or dissolution of the Funds, the holders of
each class would be entitled, out of the assets of the Funds available for
distribution, to the assets belonging to that class.
PERFORMANCE INFORMATION
Each of the Funds may provide from time to time in
advertisements, reports to stockholders and other communications with investors
its average annual total return and its total return. 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 on the applicable reinvestment dates, 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, 1998, for the five year period ended December 31, 1998
and for the period from the Fund's commencement of operations (July 6, 1992)
through December 31, 1998 were 0.64%, 16.31% and 11.96%, respectively. Such
performance results reflect reimbursements made by the Adviser during the fiscal
year ended December 31, 1993 and the
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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's average annual compounded returns for the
one-year period ended December 31, 1998 and for the period May 1, 1997 through
December 31, 1998 were 4.58% and 11.90%, respectively. Such performance results
reflect reimbursements made by the Adviser during these periods to keep
aggregate annual operating expenses at or below 1.25% of average daily net
assets. 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.
The Funds may compare their performance to the Consumer Price Index, the
Dow Jones Industrial Average, the Standard & Poor's 500 Stock Index and to the
performance of mutual fund indexes as reported by Lipper Analytical Services,
Inc. ("Lipper"), CDA Investment Technologies, Inc. ("CDA") or Morningstar, Inc.
("Morningstar"), three widely recognized independent mutual fund reporting
services. Lipper, CDA and Morningstar performance calculations include
reinvestment of all capital gain and income dividends for the periods covered by
the calculations. The Consumer Price Index is generally considered to be a
measure of inflation. The Dow Jones Industrial Average and the Standard & Poor's
500 Stock Index are unmanaged indices of common stocks which are considered to
be generally representative of the United States stock market. The market prices
and yields of these stocks will fluctuate. A Fund may also quote performance
information from publications such as The Wall Street Journal, Kiplinger's
Personal Finance Magazine, Money Magazine, Forbes, Smart Money, Barron's, Worth
Magazine, USA Today, and local newspapers.
DESCRIPTION OF SECURITIES RATINGS
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"). 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. 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.
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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.
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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.
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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:
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A-1. This highest category indicates that the degree of safety regarding
timely payment is strong. Those issuers determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However the relative degree of safety is not as high as for
issuers designated "A-1".
A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying a higher designation.
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.
