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TO LEARN MORE ABOUT THE FUND KEELEY
SMALL CAP VALUE FUND, INC.
Ask for a free copy of the following:
A mutual fund investing in
STATEMENT OF ADDITIONAL INFORMATION (SAI).
The SAI gives you more details on other small market cap companies
aspects of the Fund. It's filed with the
Securities and Exchange Commission (SEC) for capital appreciation
and by this reference is incorporated in
this prospectus.
ANNUAL/SEMI-ANNUAL REPORT. These reports
describe the Fund's performance, list its
holdings, and discuss market conditions,
economic trends and Fund strategies that
significantly affected the Fund's performance Prospectus
during its last fiscal year.
January 29, 1999
Here's how you can get this information
without charge.
BY TELEPHONE
Call Toll Free 1-888-933-5391
BY MAIL
Write to:
KEELEY Small Cap Value Fund, Inc.
401 South LaSalle Street, Suite 1201
Chicago, IL 60605
BY E-MAIL
Send your request to [email protected]
ON THE INTERNET
View online or download Fund prospectus
and application at
KEELEY Website: www.keeleyfunds.com
or
SEC's Website: www.sec.gov
You can also get copies at the SEC Public Neither the SEC nor any state securities
Reference Room in Washington, D.C. Call commission has approved or disapproved
1-800-SEC-0330 for details. Or send your these securities, or determined if this
request and a duplicating fee to the SEC's Prospectus is truthful or complete. Any
Public Reference Section, Washington, representation to the contrary is a
D.C. 20549-6009. criminal offense.
SEC file number 811-7760
</TABLE>
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CONTENTS
THE FUND
Investment objective ................................... 2
Principal investment strategy and policies ............. 2
Main risks ............................................. 3
Performance ............................................ 3
Expenses ............................................... 4
Financial highlights ................................... 5
Management ............................................. 6
YOUR INVESTMENT
How shares are priced .................................. 7
How to buy, sell, and exchange shares .................. 8
Distributions and taxes ................................ 12
Shareholder privileges ................................. 13
Right of Accumulation ................................ 13
Letter of Intent ..................................... 13
Automatic Investment Plan ............................ 13
Individual Retirement Accounts ......................... 13
Year 2000 Issues ...................................... 13
TO LEARN MORE ABOUT THE FUND .................... Back cover
1
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THE FUND
KEELEY SMALL CAP VALUE FUND, INC.
INVESTMENT OBJECTIVE
This Fund seeks capital appreciation by investing at least 65% of its
total assets in companies with small market capitalization (less than $1 billion
at the time of initial investment).
PRINCIPAL INVESTMENT STRATEGY AND POLICIES
The Fund will invest at least 65% of its total assets in common stocks
and other equity type securities (including preferred stock, convertible debt
securities, and warrants) of small cap companies.
While many mutual funds look for undervalued stocks, the Fund takes a
unique approach: we concentrate on companies going through major changes,
including:
- corporate spin-offs (a tax-free distribution of a parent company's
division to shareholders)
- financial restructuring, including acquisitions, recapitalizations
and companies emerging from bankruptcy
- companies selling at or below actual or perceived book value
We don't concentrate on any sector or industry. Current dividend or
interest income is not a factor when choosing securities. Each stock is judged
on its potential for above-average capital appreciation, using a value approach
that emphasizes:
- equities with positive cash flow
- low market capitalization-to-revenue ratio
- desirable EBITDA (earnings before interest, taxes, depreciation, and
amortization)
- motivated management
- little attention from Wall Street
Research sources include company documents, subscription research
services, select broker/dealers, and direct company contact.
It is our initial intention to typically hold securities for more than
two years to allow the corporate restructuring process to yield results. But we
may sell securities when a more attractive opportunity emerges, when a company
becomes overweighted in the portfolio, or when operating difficulties or other
circumstances make selling desirable.
In times of adverse equity markets, we may take temporary defensive
positions in U.S. Treasury bills and commercial paper of major U.S.
corporations. This could reduce the benefit from an upswing in the market.
The investment strategy and policies are not fundamental; they may be
changed without shareholder approval. You'll get advance notice if we change
that policy. For more about the Fund's investment policies, see the SAI.
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MAIN RISKS
The Fund is subject to the typical risks of equity investing, including
the effects of interest rate fluctuations, investor psychology, and other
factors. The value of your investment will increase or decrease so your shares
may be worth more or less money than your original investment.
The Fund may be suitable for the more aggressive section of an
investor's portfolio. It's designed for people who want to grow their capital
over the long term and who are comfortable with possible frequent short-term
changes in the value of their investment. An investment in the Fund should not
be considered a complete investment program.
In addition, small cap investing presents more risk than investing in
large cap or more established company securities. Small cap companies often have
more limited resources and greater variation in operating results, leading to
greater price volatility. Trading volumes may be lower, making such securities
less liquid. The focus on corporate restructures means these securities are more
likely than others to remain undervalued.
Other than company-specific problems, the factor most likely to hurt
Fund performance would be a sharp increase in interest rates, which generally
causes equity prices to fall.
PERFORMANCE
The first chart below shows annual total returns for the Fund. The
second compares Fund performance with that of both the Russell 2000 Index, an
unmanaged index made up of smaller capitalization issues and the S&P 500 Index,
a broad market-weighted index dominated by blue-chip stocks. While these two
charts give you some idea of the risks involved in investing in the Fund, please
remember that past performance doesn't guarantee future results.
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YEAR-BY-YEAR TOTAL RETURN AS OF 12/31 EACH YEAR (%)
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1994 1995 1996 1997 1998
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(8.71)% 32.47% 25.99% 41.01% 0.62%
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The bar chart and Best and Worst quarters do not reflect the maximum 4.50% sales
load. If these charts reflected the sales load, returns would be less than those
shown.
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Best Quarter Worst Quarter
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Q3 '97 21.56% Q3 '98 (20.25)%
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AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
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INCEPTION
1 YEAR 5 YEARS (10/1/93)
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FUND* (3.91)% 14.54% 15.77%
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Russell 2000 (2.55)% 11.87% 11.82%
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S&P 500 28.58% 24.06% 23.32%
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*This performance table reflects the payment of the 4.50% sales load on the
purchase of new shares.
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EXPENSES
The table below shows what fees and expenses you could face as a Fund
shareholder. Keep in mind that future expenses may be higher or lower than those
shown.
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SHAREHOLDER TRANSACTION EXPENSES
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Maximum Sales Load on Purchases (as a percentage of offering price)(a) 4.50%
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Maximum Sales Load on Reinvested Dividends (as a percentage of offering price) None
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Deferred Sales Load (as a percentage of original purchase price or redemption proceeds as applicable) None
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Redemption Fees (as a percentage of amount redeemed, as applicable)(b) None
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Exchange Fees(b) None
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ANNUAL FUND OPERATING EXPENSES (As a Percentage of Average Net Assets)
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Management Fees 1.00%
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Distribution (12b-1) Fees(c) 0.25%
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Other Expenses 0.77%
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Total Fund Operating Expenses(d) 2.02%
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EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. It does not represent the
Fund's actual expenses and returns, either past or future. Actual expenses may
be greater or less than those shown.
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<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
You would pay the following expenses on a $10,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
$646 $1,055 $1,489 $2,692
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</TABLE>
(a) Sales charges are reduced for purchases of $50,000 or more. See "How shares
are priced."
(b) The Fund's Transfer Agent charges a fee of $12 for each wire redemption and
$5 for each telephone exchange. At the discretion of the adviser or transfer
agent these fees may be waived.
(c) The Rule 12b-1 Fee is an annual fee paid by the Fund (and indirectly by
shareholders). See "How Shares are Priced." Over time, long-term
shareholders may pay more in distribution-related charges through the
imposition of the Rule 12b-1 Fee than the economic equivalent of the maximum
front-end sales charge applicable to mutual funds sold by members of the
National Association of Securities Dealers, Inc. (the "NASD").
(d) The Adviser has agreed to waive a portion of its fee to the extent that
total ordinary operating expenses during the current fiscal year as a
percentage of average net assets exceed 2.50%.
The Management Fee to be paid by the Fund is higher than that paid by
many other investment companies. The Board of Directors believes that the Fund's
Management Fee is appropriate in light of the Fund's investment objective and
policies.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance for the past 5 years. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report, along with the Fund's financial
statements, are included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1998 1997 1996 1995 1994(2)
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<S> <C> <C> <C> <C> <C>
Per Share Data(1)
Net asset value, beginning of period $ 21.48 $ 14.52 $ 12.52 $10.26 $10.00
Income from investment operations:
Net investment loss (0.16) (0.25) (0.19) (0.13) (0.06)
Net realized and unrealized gains (losses)
on investments (2.00) 7.77 2.22 2.39 0.32
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations (2.16) 7.52 2.03 2.26 0.26
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions: Net realized gains (1.01) (0.56) (0.03) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $18.31 $21.48 $14.52 $12.52 $10.26
- ----------------------------------------------------------------------------------------------------------------------------
Total return(3) (10.50)% 53.51% 16.23% 22.03% 2.60%
Supplemental data and ratios:
Net assets, end of period (in 000's) $ 39,747 $20,824 $10,815 $7,616 $4,503
Ratio of expenses to average net assets 2.02% 2.45% 2.50% 2.50% 2.49%
Ratio of net investment loss to average net assets (1.17)% (1.66)% (1.61)% (1.46)% (0.96)%
Ratio of expenses to average net assets(4) 2.02% 2.45% 2.94% 3.94% 5.98%
Ratio of net investment loss to average net assets(4) (1.17)% (1.66)% (2.05)% (2.90)% (4.45)%
Portfolio turnover rate 33.40% 36.40% 52.43% 70.59% 63.20%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per share data is for a share outstanding throughout the period.
(2) The Fund commenced operations on October 1, 1993.
(3) The total return calculation does not reflect the 4.50% sales load imposed
on the purchase of shares.
(4) During the period, certain fees were waived. If such fee waivers had not
occurred, the ratios would have been as indicated.
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MANAGEMENT
INVESTMENT ADVISER - The Fund's investment adviser is Keeley Asset
Management Corp., 401 South LaSalle Street, Suite 1201, Chicago, IL 60605. The
adviser supervises, administers and continuously reviews the Fund's investment
program, following policies set by the Board of Directors. As of December 31,
1998, the adviser had more than $465 million in assets under management.
John L. Keeley, Jr., president and director of the Fund, is the
adviser's sole shareholder. He has been president and primary investment manager
for the adviser since its incorporation in 1981. He has also been primarily
responsible for day-to-day management of the Fund's portfolio since its
incorporation in 1993.
The Fund pays the adviser a monthly fee at an annual rate of 1.00% of
average daily net assets. While this rate is higher than what most mutual funds
pay, the directors consider it appropriate in light of the Fund's investment
objectives and policies. The adviser will waive part of its fee or reimburse the
Fund if its annual operating expenses exceed 2.50% of net assets. This
limitation excludes taxes, interest charges, litigation and other extraordinary
expenses, and brokerage commissions and other charges from buying and selling
Fund securities.
OTHER SERVICE PROVIDERS
ADMINISTRATOR - Sunstone Financial Group, Inc. oversees the Fund's
custodian and transfer agent; handles required tax returns and various filings;
monitors Fund expenses and compliance issues; and generally administers the
Fund.
DISTRIBUTOR - Keeley Investment Corp. is the general distributor of the
Fund's shares.
CUSTODIAN, TRANSFER AGENT, AND ACCOUNTING SERVICES - Firstar Bank
Milwaukee, N.A. provides for the safekeeping of the Fund's assets. Firstar
Mutual Fund Services, LLC maintains shareholder records and disburses dividends
and other distributions.
6
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YOUR INVESTMENT
HOW SHARES ARE PRICED
The public offering price of Fund shares is the net asset value (the
value of one share in the Fund) plus a SALES CHARGE based on the amount of your
purchase.
NET ASSET VALUE - Net asset value (NAV) is calculated by dividing the
Fund's total assets, minus any liabilities, by the number of shares outstanding.
It's determined daily Monday through Friday as of the end of trading hours on
the New York Stock Exchange (currently 4 p.m. Eastern Time), except on these
holidays:
New Year's Day Martin Luther King Jr. Day Presidents' Day
Good Friday Memorial Day Independence Day
Labor Day Thanksgiving Day Christmas Day
The day's NAV will be used for all buy or sell orders received since
the preceding computation.
Here's how the value of Fund assets is determined:
- A security listed on an exchange or quoted on a national market
system is valued at the last sale price or, if it wasn't traded
during the day, at the most recent bid price.
- Securities traded only on over-the-counter markets are valued at the
last sale price on days when the security is traded; otherwise,
they're valued at closing over-the-counter bid prices.
- If a security is traded on more than one exchange, it's valued at the
last sale price on the exchange where it's principally traded.
- Debt securities (other than short-term obligations) in normal
institutional-size trading units are valued by a service that uses
electronic data processing methods, avoiding exclusive reliance on
exchange or over-the-counter prices.
- Short-term obligations (debt securities purchased within 60 days of
their stated maturity date) are valued at amortized cost, which
approximates current value.
- Securities for which market quotes aren't readily available, and
other Fund assets, are valued at their fair value as determined by
the Board of Directors.
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SALES CHARGE - The chart below shows how the sales charge varies with
the amount of your purchase.
<TABLE>
<CAPTION> Dealer
Reallowance
Sales Charge as a Percentage of as a Percentage of
Single Transaction Amount Offering Price Net Amount Invested Offering Price
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.50% 4.71% 4.00%
- ---------------------------------------------------------------------------------------------------------
$50,000 - less than $100,000 4.00% 4.17% 3.50%
- ---------------------------------------------------------------------------------------------------------
$100,000 - less than $250,000 3.00% 3.09% 2.50%
- ---------------------------------------------------------------------------------------------------------
$250,000 - less than $500,000 2.50% 2.56% 2.00%
- ---------------------------------------------------------------------------------------------------------
$500,000 and over 2.00% 2.04% 1.50%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Various individuals and organizations who meet Fund requirements may
buy shares at NAV - that is, without the sales charge. For a list of those who
may qualify for fee waivers, plus a description of the requirements, see the
SAI.
The Fund has adopted a plan under Rule 12b-1 that allows the Fund to
pay distribution and other fees for the sale and distribution of its shares and
for services provided to shareholders. Under this Plan, the fee is 0.25% per
year of the Fund's Net Asset Value (calculated on a daily basis). Because these
fees are paid out of the Fund's assets on an ongoing basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
See also "Right of Accumulation" and "Letter of Intent" under
"Shareholder Privileges."
HOW TO BUY, SELL AND EXCHANGE SHARES
BUYING SHARES
You can buy Fund shares directly from the distributor, Keeley
Investment Corp., or from selected broker/dealers. If you invest through a third
party, policies and fees may differ from those described here.
The minimum initial investment is $1,000 ($250 for IRAs and Automatic
Investment Plan accounts), and the minimum for additional investments is $50 and
is subject to change at any time.
Your order will be priced at the next NAV calculated after the Fund
receives your order. All purchases must be made in U.S. dollars and checks drawn
on U.S. banks. We don't accept cash. If your check is returned for any reason,
you'll be charged a $25 fee as well as for any loss to the Fund.
While we don't issue stock certificates for shares purchased, you will
receive a statement confirming your purchase.
WE RESERVE THE RIGHT TO REJECT ANY PURCHASE ORDER IF WE BELIEVE IT'S IN
THE FUND'S BEST INTEREST TO DO SO.
8
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By wire transfer
OPENING AN ACCOUNT
- Call the Fund's transfer agent at 1-888-933-5391 to get a Fund
account number.
- Have your bank wire the amount you want to invest to:
Firstar Bank Milwaukee, N.A.
ABA routing number 075000022
Credit Firstar Mutual Fund Services, LLC, account number 112952137
further credit KEELEY Small Cap Value Fund, Inc.
Be sure to include your name, address, account number, and taxpayer ID
or Social Security Number. Your bank may charge a wire transfer fee.
- As soon as possible, mail a completed purchase application (included
with this prospectus) to:
KEELEY Small Cap Value Fund, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
ADDING TO YOUR ACCOUNT
You can add to your account anytime in investments of $50 or more. Have
your bank wire the amount as described above.
By mail
OPENING AN ACCOUNT
- Write a check or money order for the amount you want to invest,
payable to KEELEY Small Cap Value Fund, Inc.
- Mail your payment with a completed purchase application (included
with this prospectus) to:
<TABLE>
<S><C>
KEELEY Small Cap Value Fund, Inc. For overnight delivery, use this address:
c/o Firstar Mutual Fund Services, LLC KEELEY Small Cap Value Fund, Inc.
P.O. Box 701 c/o Firstar Mutual Fund Services, LLC
Milwaukee, WI 53201-0701 615 E. Michigan Street, 3rd Floor
Milwaukee, WI 53202
</TABLE>
If your check is returned for any reason, your account will be charged
a $25 processing fee. You will be responsible for any loss to the Fund.
ADDING TO YOUR ACCOUNT
You can add to your account anytime in investments of $50 or more. Mail
your order as described above, including your name, address, and account number.
9
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Automatically
OPENING AN ACCOUNT
Complete the Automatic Investment Plan section on the purchase
application, or, after your account is established, complete an AIP application
(available from the Fund).
ADDING TO YOUR ACCOUNT
Each month the amount you specify is automatically withdrawn from your
bank account to purchase Fund shares. There is a $50 minimum to use this
privilege.
The Fund charges no service fee for the AIP. If the designated amount
isn't available in your account, however, you'll be charged a $25 processing
fee. You will be responsible for any loss to the Fund.
See also "Automatic Investment Plan" under "Shareholder Privileges."
SELLING SHARES
You can redeem your shares in the Fund anytime by mail or telephone for
shares you hold directly at the Fund.
If your account is with the distributor or a selected broker/dealer,
you must give your request to that firm. The broker/dealer is responsible for
placing your request and may charge you a fee.
Otherwise, here's how to sell your shares:
By mail
Send the transfer agent a written redemption request in proper order,
including:
- your account name and number
- the number of shares or dollar amount to be redeemed
- the signature of each registered owner, exactly as the shares are
registered
- documentation required from corporations, executors, administrators,
trustees, guardians, agents, and attorneys-in-fact
<TABLE>
<CAPTION>
<S> <C>
Mail to:
KEELEY Small Cap Value Fund, Inc. For overnight delivery, use this address:
c/o Firstar Mutual Fund Services, LLC KEELEY Small Cap Value Fund, Inc.
P.O. Box 701 c/o Firstar Mutual Fund Services, LLC
Milwaukee, WI 53201-0701 615 E. Michigan Street, 3rd Floor
Milwaukee, WI 53202
</TABLE>
10
<PAGE> 12
SIGNATURE GUARANTEES - If you request a direct redemption of more than
$25,000, or you want the proceeds sent to a location other than the address of
record, or the request comes within 15 days of an address change, we require
signature guarantees. These guarantees may seem inconvenient, but they're
intended to protect you against fraud. The guarantor pledges your signature is
genuine and, unlike a notary public, is financially responsible if it's not.
Eligible guarantors include qualified:
- Banks, credit unions and savings associations
- Broker/dealers
- National securities exchanges
- Registered securities associations
- Clearing agencies
A notary public is not acceptable.
By phone
To redeem shares by phone, call the transfer agent at 1-888-933-5391.
The Fund follows procedures to confirm that telephone instructions are genuine
and sends payment only to the address of record or the designated bank account.
We aren't liable for following telephone instructions reasonably believed to be
genuine.
If you don't want telephone transaction privileges, check the box on
the purchase application.
PAYMENT - When you sell your shares, the amount of money you receive is
based on the NAV next calculated after your request is received. This amount may
be more or less than what you paid for the shares.
When you sell your shares of the Fund, it is a taxable event for
federal tax purposes. You may realize a capital gain or loss. You may want to
check with your tax adviser.
We'll mail payment within five business days of the transfer agent's
receiving your redemption request in proper order. You can also ask to have
redemption proceeds wired to you. The transfer agent charges a $12 wire fee.
The Fund won't send redemption proceeds until checks for the purchase
of the shares have cleared - up to 15 days.
We may suspend redemptions if the New York Stock Exchange closes or for
other emergencies. See the SAI for details.
SMALL ACCOUNTS - If the value of your account falls below $250, we
reserve the right to redeem your shares and send you the proceeds. Currently,
however, the Fund's practice is to maintain small accounts instead of closing
them out. If we change that policy, you'll get advance notice.
11
<PAGE> 13
EXCHANGING SHARES
You can exchange some or all of your Fund shares for Firstar Money
Market Fund shares. The minimum exchange amount is $250, and there's a maximum
of four exchanges over 12 months. The exchange must be between identically
registered accounts.
Fund shares will be redeemed at the next determined NAV after your
request is received, and Firstar Money Market shares will be purchased at the
per share NAV next determined at or after redemption.
You can also move your exchanged shares, plus any Firstar Money Market
Fund shares purchased with reinvested dividends, back into the Fund with no
sales charge (as long as your investment remained continuously in the Firstar
Money Market Fund between withdrawal and reinvestment).
Your exchange is subject to the terms of the Firstar Money Market Fund.
Ask us for a copy of their prospectus, and read it carefully before investing.
Exchanges can be requested by mail or telephone (unless you refuse
telephone transaction privileges on your purchase application). There is a $5
fee for telephone exchanges. The Fund follows procedures to confirm that
telephone instructions are genuine. We aren't liable for following telephone
instructions reasonably believed to be genuine.
An exchange is a taxable event for federal tax purposes. You may
realize a capital gain or loss. Be sure to check with your tax adviser before
making an exchange.
WE RESERVE THE RIGHT TO CHANGE OR ELIMINATE THE EXCHANGE PRIVILEGE. IF
WE CHANGE THAT PRIVILEGE, YOU'LL GET ADVANCE NOTICE.
DISTRIBUTIONS AND TAXES
The Fund distributes its net investment income and realized capital
gains, if any, to shareholders at least once a year. Your dividends and capital
gains will be invested in additional Fund shares unless you write the transfer
agent to request otherwise. There's no sales charge on reinvestments.
If your mailed distribution check can't be delivered by the U.S. Postal
Service, or it remains outstanding for at least six months, we reserve the right
to reinvest the distribution amount at the current NAV until you give us other
instructions.
Dividends and distributions, in the form of cash or additional shares,
are generally taxable. You'll receive an annual statement showing which of your
Fund distributions are taxable as ordinary income and which are capital gains.
It's important you consult with your tax adviser on federal, state and local tax
consequences.
12
<PAGE> 14
SHAREHOLDER PRIVILEGES
RIGHT OF ACCUMULATION (ROA) - Once you've purchased shares in the Fund,
you can qualify for a discount on the sales charge. When you purchase additional
shares at the public offering price, you'll pay the sales charge corresponding
to the total of your current purchase plus either the value of shares you
already own, or their original cost-whichever is greater. (Remember, sales
charges go down as the amount of the transaction increases.) To receive this
discount, you must notify the Fund in writing of your previous purchases when
you make your current purchase. For this purpose, you and your husband or wife
can combine your purchases.
LETTER OF INTENT (LOI) - If you buy more than $50,000 in shares at one
time, your sales charge is lower than 41/2%. There is a table on page 7 which
shows the reductions. If you expect to purchase $50,000 or more of Fund shares
over a period of time (up to 13 months), you can get the same reduced sales
charge as you would if you bought all the shares at once. You do this by signing
a LOI. In the LOI, you fill in the dollar amount of the shares you will buy in
the next 13 months, and the sales charge is based on that amount. Some of your
shares are held by the transfer agent in escrow. If you don't buy all the shares
as indicated in the LOI, and your sales charge should have been higher based on
what you actually bought, some of the shares held by the transfer agent will be
redeemed to pay the difference in the sales charge. To establish a LOI, complete
the appropriate section of the purchase application or, if your account is
established, ask us for a LOI application.
AUTOMATIC INVESTMENT PLAN (AIP) - Buy shares automatically each month,
by having $50 or more withdrawn from your bank account and invested in the Fund.
The minimum to open an AIP account is $250. There's no service fee for this
account. If the designated amount is not available in your bank account,
however, there is a $25 processing fee. To establish the AIP, complete the
appropriate section of the purchase application or, if your account is
established, ask us for an AIP application.
THE FUND RESERVES THE RIGHT TO MODIFY OR ELIMINATE THESE PRIVILEGES
WITH AT LEAST 30 DAYS NOTICE.
INDIVIDUAL RETIREMENT ACCOUNTS
The Fund offers a variety of retirement plans that may help you shelter
part of your income from taxes. For complete information, including
applications, call 1-888-933-5391.
YEAR 2000 ISSUES
We could be adversely affected if our service providers' computer
systems do not properly process and calculate date-related information from and
after January 1, 2000, commonly called Y2K problems. We do not have any of our
own systems, and we rely on our service providers for all of our services. Our
investment adviser and distributor have both told us that their internal systems
are all Y2K compliant, and our other service providers are working to fix Y2K
problems prior to January 1, 2000. If any provider fails to adequately address
the problem, we could change service providers. We have no other contingency
plans in place. Any unanticipated change in service providers could be adverse
to our share price. The Y2K problem could also have an adverse effect on
companies whose stock we hold as investments, and on global markets or economies
generally.
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<TABLE>
<S> <C>
must be received at least month or the first business day thereafter. I understand that I will be assessed a $20 fee if the
15 business days prior to automatic purchase cannot be made due to insufficient funds, stop payment, or any other reason.
initial transaction.
An unsigned voided check Name(s) on Bank Account
(for CHECKING accounts) or -------------------------------------------------------------------------------
a savings account deposit
slip is required With your Bank Name Account Number
Application. -------------------------------- ----------------------------------------------
Bank Address
-----------------------------------------------------------------------------------------
Bank Routing Number
----------------------------------------------------------------------------------
Signature of Bank Account Owner
-----------------------------------------------------------------------
Signature of Joint Owner
-----------------------------------------------------------------------------
====================================================================================================================================
G. RIGHTS OF [ ] I or my spouse currently have the following account(s) which may make me eligible for sales charge
ACCUMULATION discounts through Rights of Accumulation as described in the Prospectus.
Account Number Account Number
----------------------------------- --------------------------------
====================================================================================================================================
H. LETTER OF INTENT I agree to the terms of the Letter of Intent set forth in the prospectus. Although I am not obligated
to do so, it is my intention to invest over a 13-month period in shares of the KEELEY Small Cap Value
Fund, Inc. an aggregate amount at least equal to that which is checked below.
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000
I agree that Firstar Mutual Fund Services, LLC (the "transfer agent") may escrow up to 4-1/2% of the
dollar amount specified above. If my total investments are less than the amount specified after the
13-month period, and the sales charge should have been higher based on my actual purchases, the
transfer agent may redeem the amount necessary from the escrowed amount to pay the difference in sales
charges.
SIGNATURE OF OWNERS
Signature Signature
------------------------------------------- --------------------------------------
====================================================================================================================================
I. SIGNATURE AND I have received and read the Prospectus for the KEELEY Small Cap Value Fund (the "Fund"), I understand
CERTIFICATION the Fund's investment objective and policies and agree to be bound by the terms of the Prospectus. I
REQUIRED BY THE am of legal age in my state of residence and have full authority to purchase shares of the Fund and to
INTERNAL REVENUE establish and use any related privileges.
SERVICE
Neither the Fund nor its Transfer Agent will be responsible for the authenticity of transaction
instructions received by telephone, provided that reasonable security procedures have been followed.
If an account has multiple owners, the Fund may rely on the telephone instructions of any one account
owner.
By selecting the option in Section F, I hereby authorize the Fund to initiate debits to my account at
the bank indicated and for the bank to debit the same to such account through the Automated Clearing
House ("ACH") system.
UNDER THE PENALTY OF PERJURY, I CERTIFY THAT: (1) THE SOCIAL SECURITY NUMBER OR TAXPAYER
IDENTIFICATION NUMBER SHOWN ON THIS FORM IS MY CORRECT SOCIAL SECURITY NUMBER OR TAXPAYER
IDENTIFICATION NUMBER, AND (2) I AM NOT SUBJECT TO BACKUP WITHHOLDING EITHER BECAUSE I AM EXEMPT FROM
BACKUP WITHHOLDING, I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE (IRS) THAT I AM SUBJECT
TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT ALL INTEREST OR DIVIDENDS, OR THE IRS HAS
NOTIFIED ME THAT I AM NO LONGER SUBJECT TO BACKUP WITHHOLDING. CERTIFICATION INSTRUCTIONS: I MUST
CROSS OUT ITEM (2) ABOVE IF THE IRS HAS PROVIDED NOTIFICATION THAT I AM CURRENTLY SUBJECT TO BACKUP
WITHHOLDING BECAUSE OF UNDERREPORTING INTEREST OR DIVIDENDS ON MY TAX RETURN. THE IRS DOES NOT
REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID
BACKUP WITHHOLDING.
Signature of Owner* Date
------------------------------------------------- ---------------------------
Signature of Joint Owner (if any) Date
----------------------------------- ---------------------------
*If shares are to be registered in: (1) joint names, both persons should sign; (2) a custodian for a
minor, the custodian should sign; (3) a trust, the trustee(s) or (4) a corporation or other entity,
an officer should sign and print name and title on the space provided below.
Print name and title of officer signing for a corporation or other entity
----------------------------
------------------------------------------------------------------------------------------------------
====================================================================================================================================
J. DEALER Dealer Name
INFORMATION -------------------------------------------------------------------------------------------
DEALER MAIN OFFICE
(Please be sure to com-
plete representative's Address
first name and middle ----------------------------------------------------------------------------------------------
initial.)
City/State/Zip
---------------------------------------------------------------------------------------
Telephone Number ( )
---- -------------------------------------------------------------------------------
Representative Name (Last) (First) (Initial)
---------------------------------- ----------------- ----
REPRESENTATIVE BRANCH OFFICE
Address
----------------------------------------------------------------------------------------------
City/State/Zip
---------------------------------------------------------------------------------------
Telephone Number ( ) Rep's A.E. Number
--- -------------------------------- ---------------------------
====================================================================================================================================
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
KEELEY SMALL CAP VALUEFUND, INC.
==================================================================================================================
PURCHASE APPLICATION
Mail To: KEELEY Small Cap Value Fund, Inc. Overnight Express Mail To: KEELEY Small Cap Value Fund, Inc.
c/o Firstar Mutual Fund Services, LLC c/o Firstar Mutual Fund Services, LLC
P.O. Box 701 615 E. Michigan St., 3rd Floor
Milwaukee, WI 53201-0701 Milwaukee, WI 53202-5207
Use this Application for individual, custodial, trust, profit sharing or pension plan accounts. Do not use
this Application for KEELEY Small Cap Value Fund sponsored IRA, Roth IRA or SEP-IRA accounts. For any
additional information. please call KEELEY Small Cap Value Fund, Inc. at 1-898-933-5391.
====================================================================================================================================
A. INVESTMENT [ ] KEELEY Small Cap Value Fund Please indicate the amount you wish to invest $ ($1000 minimum)
-------------
[ ] Firstar Money Market Fund Please indicate the amount you wish to invest $ ($250 minimum)
-----------------
[ ] By check: Payable to KEELEY Small Cap Value Fund. Amount $
----------------------------------------------------
[ ] By wire: Call 1-888-933-539 1. Indicate total amount and date of wire $ Date
------------------- --------------
====================================================================================================================================
B. REGISTRATION [ ] Individual
Name (First) (Initial) (Last)
------------------------------- ---------- -------------------------------------
Social Security Number Birthdate Citizen of [ ] U.S. [ ]Other
------------- ---------- -------------------------
COUNTRY OF TAX RESIDENCY
[ ] Joint Owner*
Name (First) (Initial) (Last)
------------------------------- ---------- -------------------------------------
Social Security Number Birthdate Citizen of [ ] U.S. [ ]Other
------------- ---------- -------------------------
COUNTRY OF TAX RESIDENCY
*Registration will be Joint Tenants With Rights Of Survivorship. unless otherwise specified.
[ ] Transfer to Minor
Name of Custodian (only one permitted) (First) (Initial) (Last)
------------------- ----- ---------------------
Name of Minor (only one permitted) (First) (Initial) (Last)
------------------------ ----- ---------------------
Minor's Social Security Number Minor's Birthdate (Mo/Day/Yr)
------------------------------------ --------------
State of Residence Minor is citizen of [ ] U.S. [ ] Other
---------------------------- ------------------------
COUNTRY OF TAX RESIDENCY
[ ] Corporation/Trust**. Partnership*** or Other Entity***
Name of Trustee(s) (if to be included in registration)
--------------------------------------------------------
Name of Trust/Corporation/Partnership
-------------------------------------------------------------------------
Social Security or Taxpayer Identification Number
-------------------------------------------------------------
Date of Agreement (Mo/Day/Yr)
---------------------------------------------------------------------------------
*Corporate Resolution is required. ***Additional documentation and certification may be required.
====================================================================================================================================
C. MAILING Address
-----------------------------------
ADDRESS City/State/Zip
----------------------------
Daytime Phone Number Evening Phone Number
---------------------- ---------------------
[ ] Duplicate Confirmation to:
------------
Name
----------------------------------
Address
-------------------------------
City/State/Zip
------------------------
====================================================================================================================================
D. DISTRIBUTION Capital gains and dividends will be reinvested if no option is selected.
OPTIONS Dividends and Dividends and
Capital Gains Capita) Gains
Reinvested in Cash
------------------------------------------------------------------------------------------------------------------
[ ] KEELEY Small Cap Value Fund [ ] [ ]
------------------------------------------------------------------------------------------------------------------
[ ] Firstar Money Market Fund [ ] [ ]
------------------------------------------------------------------------------------------------------------------
Unless otherwise indicated, cash distributions will be mailed to the address in Section C.
====================================================================================================================================
E. TELEPHONE THE TELEPHONE EXCHANGE AND REDEMPTION OPTIONS WILL BE AUTOMATICALLY ADDED TO YOUR ACCOUNT IF YOU DO NOT CHECK THE
EXCHANGE AND "NO" BOX. The Fund will employ reasonable procedures to confirm that telephone instructions are genuine, including
REDEMPTION requiring that payment be made only to the address registered an the account or to the bank account designated.
OPTIONS The Fund will not be liable for following instructions communicated by telephone that are reasonably believed to
be genuine.
TELEPHONE EXCHANGE [ ] NO
Allows exchanges between identically registered KEELEY Small Cap Value Fund and Firstar Money Market Fund
accounts. A $1,000 minimum for regular accounts applies to new accounts opened by exchange; a $250 minimum applies
to exchanges between existing accounts. (A $5 charge will apply.)
TELEPHONE REDEMPTION [ ] NO
The proceeds will be (check one): [ ] Mailed to your address of record [ ] Deposited to the bank account below
[ ] Wired to the bank account below (A $12 wire charge will apply).
Names(s) on Bank Account
------------------------------------------------------------------------------------------
Bank Name Account Number
---------------------------------- -------------------------------------------------------
Bank Address
------------------------------------------------------------------------------------------------------
Bank Routing Number
-----------------------------------------------------------------------------------------------
Signature of Bank Account Owner
-----------------------------------------------------------------------------------
Signature of Joint Owner
------------------------------------------------------------------------------------------
====================================================================================================================================
</TABLE>
<PAGE> 20
STATEMENT OF ADDITIONAL INFORMATION
January 29, 1999
KEELEY SMALL CAP VALUE FUND, INC. 401 SOUTH LASALLE STREET
SUITE 1201
CHICAGO, ILLINOIS 60605
312-786-5050
888-933-5391
This Statement of Additional Information is not a prospectus, but provides
expanded and supplemental information contained in the current prospectus of
KEELEY Small Cap Value Fund, Inc. (the "Fund") dated January 29, 1999 and
should be read in conjunction with the Fund's Prospectus and any additional
supplements to the Prospectus and the Fund's financial statements. Investors
should note, however, that a Statement of Additional Information is not itself
a prospectus and should be read carefully in conjunction with the Fund's
Prospectus and retained for future reference. A copy of the Prospectus and
Annual/Semi-Annual Report to Shareholders may be obtained free of charge from
the Fund at the address and telephone number listed above.
1
<PAGE> 21
TABLE OF CONTENTS
Page
Introduction 3
General Information and History 3
Investment Objective, Policies, and Risk Considerations 3
Investment Objective 3
Investment Policies and Risk Considerations 4
Investment Restrictions 6
Portfolio Turnover 6
Performance Information 8
Cumulative Total Return 9
Average Annual Total Return 9
Management of the Fund 10
General 10
Directors and Officers 10
Control Persons and Principal Holders of Securities 12
Investment Adviser 12
Administrative Services 13
Custodian, Transfer Agent and Dividend Disbursing Agent 14
Custodian 14
Transfer Agent and Dividend Disbursing Agent 14
Net Asset Value 15
Purchases and Redemptions of Shares 15
Sales at Net Asset Value 15
Exchange Privilege 16
Taxation 16
Distribution of Shares 17
Rule 12b-1 Distribution Plan 17
Portfolio Transactions and Brokerage 19
Portfolio Transactions 19
Brokerage 19
Additional Information 21
Shareholder Meetings 21
Removal of Directors by Shareholders 21
Independent Accountants 22
Financial Statements and Reports 22
Appendix A: Description of Bond Ratings Appendix A
2
<PAGE> 22
INTRODUCTION
This Statement of Additional Information is designed to elaborate upon the
discussion of certain securities and investment techniques which are described
in the Prospectus. The more detailed information contained in this document is
intended solely for investors who have read the Prospectus and are interested in
a more detailed explanation of certain aspects of the Fund's securities and
investment techniques. Captions and defined terms in the Statement of Additional
Information generally correspond to like captions and terms in the Prospectus.
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus dated January 29, 1999, and, if given or made,
such information or representations may not be relied upon as having been
authorized by the Fund. This Statement of Additional Information does not
constitute an offer to sell securities in any state or jurisdiction in which
such offering may not lawfully be made. The delivery of the Statement of
Additional Information at any time shall not imply that there has been no change
in the affairs of the Fund since the date hereof.
GENERAL INFORMATION AND HISTORY
The Fund is an open-end diversified management investment company, as
defined under the Investment Company Act of 1940. It was incorporated in
Maryland on May 17, 1993, registered under the Investment Company Act of 1940
(the "1940 Act") on July 27, 1993 and commenced operations on October 1, 1993.
The Fund has an authorized capital of 10,000,000 shares of $0.01 par value
common stock. There is no other class of securities authorized or outstanding.
All shares have equal voting and liquidation rights, and each share is entitled
to one vote on any matters which are presented to shareholders.
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek capital appreciation. The Board
of Directors may not change the Fund's investment objective without shareholder
approval.
The Fund seeks to achieve this objective by investing primarily in companies
that have a relatively small market capitalization, less than $1 billion at time
of initial investment. Under normal market conditions, the Fund will have at
least 65% of its total assets invested in common stocks and other equity-type
securities of such companies. Other equity-type securities include preferred
stock, convertible debt securities and warrants. Within this group of companies,
the Fund will emphasize two basic categories. The first category is companies
involved in various types of corporate reorganizations, such as spin-offs,
recapitalizations, and companies emerging from bankruptcy. From time to time,
the Fund may invest a significant portion of its net assets in this first
category. The second category is companies that are trading at prices at or
below actual or perceived book value and companies that are undergoing
substantial changes, such as significant changes in markets or technologies,
management and financial structure. The Adviser believes that this strategy
allows the Fund to purchase equity shares with above-average potential for
capital appreciation at relatively favorable market prices. Current dividend or
interest income is not a factor when choosing securities.
INVESTMENT POLICIES AND RISK CONSIDERATIONS
DEBT SECURITIES
The Fund may invest in debt securities, including debt securities that are
not rated or are rated below investment grade, commonly referred to as "junk
bonds" by the recognized rating agencies (i.e., Baa or higher by Moody's
Investor Services, Inc. ("Moody's") or BBB or higher by Standard & Poor's
Corporation ("S&P"). However, the Fund will not invest in or hold more than 5%
of its net assets in debt securities other than U.S. Treasury bills and notes,
short-term corporate fixed income securities, including master demand
3
<PAGE> 23
notes (rated Aa or higher by Moody's or AA or higher by S&P, or unrated but
determined by the Adviser to be of comparable quality).
Securities rated Baa or BBB are considered to be medium grade and to have
speculative characteristics. Lower-rated debt securities are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer default or
bankruptcy. An economic downturn could severely disrupt the market for such
securities and adversely affect the value of such securities. In addition,
lower-quality bonds are less sensitive to interest rate changes than
higher-quality instruments and generally are more sensitive to adverse economic
changes or individual corporate developments. During a period of adverse
economic changes, including a period of rising interest rates, issuers of such
bonds may experience difficulty in servicing their principal and interest
payment obligations.
To the extent the Fund invests in lower-rated debt securities, achievement
by the Fund of its investment objective will be more dependent on the Adviser's
credit analysis than would be the case if the Fund were investing in
higher-quality debt securities. Since the ratings of rating services (which
evaluate the safety of principal and interest payments, not market risks) are
used only as preliminary indicators of investment quality, the Adviser employs
its own credit research and analysis. These analyses may take into consideration
such quantitative factors as an issuer's present and potential liquidity,
profitability, internal capability to generate funds, debt/equity ratio and debt
servicing capability, and such qualitative factors as an assessment of
management, industry characteristics, accounting methodology, and foreign
business exposure.
Medium-and lower-quality debt securities tend to be less marketable than
higher-quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and the Fund may have greater difficulty selling this
type of security. The market value of these securities and their liquidity may
be affected by adverse publicity and investor perceptions.
A description of the ratings used by Moody's and S&P is included as Appendix
A to this Statement of Additional Information.
FOREIGN SECURITIES
The Fund may invest in foreign securities, which may entail a greater degree
of risk (including risks relating to exchange rate fluctuations, tax provisions,
or expropriation of assets) than does investment in securities of domestic
issuers.
To the extent positions in portfolio securities are denominated in foreign
currencies, the Fund's investment performance is affected by the strength or
weakness of the U.S. dollar against these currencies. For example, if the dollar
falls in value relative to the Japanese yen, the dollar value of a Japanese
stock held in the portfolio will rise even though the price of the stock remains
unchanged. Conversely, if the dollar rises in value relative to the yen, the
dollar value of the Japanese stock will fall.
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, which are generally
denominated in foreign currencies, and utilization of forward foreign currency
exchange contracts involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S. securities. These
considerations include: fluctuations in exchange rates of foreign currencies;
possible imposition of exchange control regulation or currency restrictions that
would prevent cash from being brought back to the United States; less public
information with respect to issuers of securities; less governmental supervision
of stock exchanges, securities brokers, and issuers of securities; lack of
uniform accounting, auditing, and financial reporting standards; lack of uniform
settlement periods and trading practices; less liquidity and frequently greater
price volatility in foreign markets than in the United States; possible
imposition of foreign taxes; possible investment in securities of companies in
developing as well as developed countries; and sometimes less advantageous
legal, operational, and financial protection applicable to foreign subcustodial
arrangements.
4
<PAGE> 24
Although the Fund intends to invest in companies and governments of
countries having stable political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the adoption
of foreign government restrictions, or other adverse political, social or
diplomatic developments that could affect investment in these nations.
UNSEASONED ISSUERS
The Fund may invest up to 5% of its net assets in the securities of
unseasoned issuers, that is, issuers that, together with predecessors, have been
in operation less than three years. The Adviser believes that investment in
securities of unseasoned issuers may provide opportunities for long-term capital
growth, although the risks of investing in such securities are greater than with
common stock of more established companies because unseasoned issuers have only
a brief operating history and may have more limited markets and financial
resources.
ILLIQUID SECURITIES
The Fund may invest up to 5% of its net assets in securities for which there
is no ready market ("illiquid securities"), including any securities that are
not readily marketable either because they are restricted securities or for
other reasons. Restricted securities are securities that have not been
registered under the Securities Act of 1933 and are thus subject to restrictions
on resale. Under the supervision of the Board of Directors, the Adviser
determines the liquidity of the Fund's investments. Securities that may be sold
pursuant to Rule 144A under the Securities Act may be considered liquid by the
Adviser. A position in restricted securities might adversely affect the
liquidity and marketability of a portion of the Fund's portfolio, and the Fund
might not be able to dispose of its holdings in such securities promptly or at
reasonable prices. In those instances where the Fund is required to have
restricted securities held by it registered prior to sale by the Fund and the
Fund does not have a contractual commitment from the issuer or seller to pay the
costs of such registration, the gross proceeds from the sale of securities would
be reduced by the registration costs and underwriting discounts.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions. Unless otherwise
noted, whenever an investment restriction states a maximum percentage of the
Fund's assets that may be invested in any security or other asset, such
percentage restriction will be determined immediately after and as a result of
the Fund's acquisition of such security or other asset. Accordingly, any
subsequent change in values, net assets, total assets, or other circumstances
will not be considered when determining whether the investment complies with the
Fund's investment limitations.
The Fund has adopted the following fundamental investment restrictions,
which cannot be changed without the approval of the holders of the lesser of (i)
67% of the Fund's shares present or represented at a shareholders' meeting at
which the holders of more than 50% of such shares are present or represented; or
(ii) more than 50% of the outstanding shares of the Fund:
1. With respect to 75% of the Fund's net assets, the Fund will not invest
more than 5% of such net assets (valued at the time of investment) in securities
of any one issuer, except in U.S. government obligations.
2. With respect to 75% of the Fund's net assets, the Fund will not acquire
securities of any one issuer which at the time of investment represent more than
10% of the voting securities of the issuer.
3. The Fund will not act as an underwriter or distributor of securities
other than its own capital stock, except insofar as it may be deemed an
underwriter for purposes of the Securities Act of 1933 on disposition of
securities acquired subject to legal or contractual restrictions on resale.
5
<PAGE> 25
4. The Fund will not lend money, but this restriction shall not prevent the
Fund from investing in (i) a portion of an issue of debt securities or (ii)
repurchase agreements.
5. The Fund will not purchase or sell real estate, interests in real estate
or real estate limited partnerships, although it may invest in marketable
securities of issuers that invest in real estate or interests in real estate.
6. The Fund will not pledge any of its assets, except to secure
indebtedness permitted by the Fund's investment restrictions.
7. The Fund will not concentrate its investments by investing 25% or more
of the value of the Fund's total assets taken at market value at the time of the
investment (other than U.S. government securities) in companies of any one
industry.
8. The Fund will not purchase and sell commodities or commodity contracts
except that it may enter into forward contracts to hedge securities transactions
made in foreign currencies. This limitation does not apply to financial
instrument futures and options on such futures.
9. The Fund will not borrow, except that the Fund may borrow from banks as
a temporary measure amounts up to 10% of its total assets, provided (i) that the
total of reverse repurchase agreements and such borrowings will not exceed 10%
of the Fund's total assets and (ii) the Fund will not purchase securities when
its borrowings (including reverse repurchase agreements) exceed 5% of total
assets. The Fund does not currently intend to enter into reverse repurchase
agreements.
10. The Fund will not issue senior securities, except for reverse repurchase
agreements and borrowings as permitted by the Fund's other investment
restrictions.
In addition to the fundamental restrictions listed above, the Fund has
adopted the following restrictions that may be changed by the Board of Directors
without shareholder approval:
1. The Fund will not invest in interests in oil, gas or other mineral
exploration or development programs or leases, although it may invest in
marketable securities of issuers engaged in oil, gas or mineral exploration.
2. The Fund will not purchase or hold securities of an issuer if all of the
officers and Directors of the Fund and its Adviser who individually own
beneficially more than one-half of 1% of the securities of such issuer
collectively own beneficially more than 5% of such securities.
3. The Fund will not invest more than 5% of its net assets (valued at the
time of investment) in securities of issuers with less than three years'
operation (including predecessors).
4. The Fund will not invest more than 5% of its net assets in securities
for which there is no ready market (including restricted securities and
repurchase agreements maturing in more than seven days).
5. The Fund will not participate in a joint trading account, purchase
securities on margin (other than short-term credits as necessary for the
clearance of purchases and sales of securities) or sell securities short (unless
the Fund owns an equal amount of such securities, or owns securities that are
convertible or exchangeable without payment of further consideration into an
equal amount of such securities). The Fund does not currently intend to sell
securities short even under the conditions described in Investment Restrictions.
6. The Fund will not invest for the purpose of exercising control or
management of any company.
7. The Fund will not invest more than 2% of its net assets (valued at the
time of investment) in warrants not listed on the New York or American stock
exchanges, nor more than 5% of its net assets in warrants. Warrants acquired by
the Fund in units or attached to securities are not subject to this restriction.
6
<PAGE> 26
8. The Fund will not acquire securities of other investment companies
except (i) by purchase in the open market, where no commission or profit to a
sponsor or dealer results from such purchase other than the customary broker's
commission and (ii) where the acquisition results from a dividend or a merger,
consolidation or other reorganization. In addition to this investment
restriction, the 1940 Act provides that the Fund may neither purchase more than
3% of the voting securities of any one investment company nor invest more than
10% of the Fund's assets (valued at time of investment) in all investment
company securities purchased by the Fund.
9. The Fund will not invest in, or write, options, puts, calls, straddles
or spreads.
10. The Fund will not invest more than 5% of its net assets in foreign
securities.
11. The Fund will not invest more than 5% of its net assets in forward
contracts, financial instrument futures and options on such futures.
The Fund may make commitments more restrictive than the restrictions listed
above so as to permit the sale of shares of the Fund in certain states. Should
the Fund determine that a commitment is no longer in the best interest of the
Fund and its shareholders, the Fund reserves the right to revoke the commitment
by terminating the sale of Fund shares in the state involved.
PORTFOLIO TURNOVER
The Fund calculates portfolio turnover rate by dividing the value of the
lesser of purchases or sales of portfolio securities for the fiscal year by the
monthly average of the value of portfolio securities owned by the Fund during
the fiscal year. A 100% portfolio turnover rate would occur, for example, if all
of the portfolio securities (other than short term securities) were replaced
once during the fiscal year. The portfolio turnover rate will vary from year to
year, depending on market conditions. Increased portfolio turnover may result in
greater brokerage commissions. For the fiscal year ending September 30, 1998,
the Fund's portfolio turnover rate was 33.40%.
PERFORMANCE INFORMATION
CUMULATIVE TOTAL RETURN
Cumulative Total Return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
CTR = ERV - P * 100
-------
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period; and,
P = initial payment of $1,000.
This calculation assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The cumulative total return for the year ended September 30, 1998 was
(14.51)%.
7
<PAGE> 27
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of change
in value represented by the total return for the period.
Average annual total return is computed as follows:
1/N
ERV
T = ( ) -1
--------
P
Where: P = the amount of an assumed initial investment in Fund shares
T = average annual total return
N = number of years from initial investment to the end of the
period
ERV = ending redeemable value of shares held at the end of the
period
The Fund imposes a maximum 4.50% sales charge and pays distribution expenses
equal to 0.25% of net assets. Income taxes payable by shareholders are not taken
into account. The Fund's performance is a result of conditions in the securities
market, portfolio management, and operating expenses. Although information such
as that described above may be useful in reviewing the Fund's past performance
and in providing some basis for comparison with other investment alternatives,
it is not necessarily indicative of future performance and should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
After deduction of the initial sales charge, the Fund's average annual total
return for the one year ended September 30, 1998 was (14.51)%. Because the Fund
commenced operations on October 1, 1993, no ten-year period average annual total
return figures are reported. As of September 30, 1998, the life of the Fund
average annual total return and the five-year average annual total return cover
the same period. For the five years ended September 30, 1998, the average annual
return was 13.81%.
COMPARATIVE PERFORMANCE INFORMATION
The Fund may from time to time include figures indicating the Fund's
cumulative total return or average annual total return in advertisements or
reports to shareholders or prospective investors. Average annual total return
and cumulative total return figures represent the increase (or decrease) in the
value of an investment in the Fund over a specified period. Both calculations
assume that all income dividends and capital gain distributions during the
period are reinvested at net asset value in additional Fund shares. Quotations
of the average annual total return may reflect the deduction of the maximum
sales charge and a proportional share of Fund expenses on an annual basis. The
results, which are annualized, represent an average annual compounded rate of
return on a hypothetical investment in the Fund over a period of one, five, or
ten years ending on the most recent calendar quarter (but not for a period
greater than the life of the Fund). Quotations of cumulative total return, which
are not annualized, represent historical earnings and asset value fluctuations.
Cumulative total return figures used in advertisements or sales literature will
not usually reflect the deduction of the maximum sales charges which, if
deducted, would reduce the Fund's total return. Average annual total returns and
cumulative total returns are based on past performance which is not a guarantee
of future results. Performance information for the Fund may be compared in
reports and promotional literature to: (a) the S&P 500, the Russell 2000, the
Value Line Index, the Dow Jones Industrial Average, New York Stock Exchange
Composite Index, the Nasdaq Composite Index or other appropriate unmanaged
indices of performance of various types of investments, so that investors may
compare the Fund's results with those of indices widely regarded by investors as
representative of securities markets in general; (b) other groups of mutual
funds tracked by Lipper Analytical Services, Inc., Morningstar, Inc., Value Line
Publishing, Inc., Micropal Data, Inc. or CDA Investment Technologies, Inc.; and
(c) the Consumer Price Index (measure of inflation) to assess the real rate of
return from an investment in the Fund. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses. Performance information for
the Fund
8
<PAGE> 28
reflects only the performance of a hypothetical investment in the Fund during
the particular time period on which the calculations are based. Performance
information should be considered in light of the Fund's investment objective and
policies, the types and quality of the Fund's portfolio investments, market
conditions during the particular time period and operating expenses. Such
information should not be considered as a representation of the Fund's future
performance.
MANAGEMENT OF THE FUND
GENERAL
The Fund's Board of Directors oversees and reviews the Fund's management,
administrator and other companies who provide services to the Fund to ensure
compliance with investment policies. Fund officers and the administrator are
responsible for day-to-day operations. The Adviser is responsible for investment
management under the Investment Advisory Agreement.
DIRECTORS AND OFFICERS
The Directors and officers of the Fund and their principal business
activities during the past five years are:
<TABLE>
<CAPTION>
Positions Held Principal Occupations
Name and Address with Fund And Other Affiliations
------------------------- ---------------- -------------------------------------
<S> <C> <C>
John L. Keeley, Jr.(1) Director and Director, President and Treasurer of
401 South LaSalle Street President Keeley Asset Management Corp. and of
Suite 1201 Keeley Investment Corp.
Chicago, Illinois 60605
Michael J. O'Brien(3) Director President, O'Brien Bros. Trading Co.
875 N. Dearborn #22A (Commodities Trading), Registered
Chicago, Illinois 60610 Commodity Trading Advisor and Commodity
Pool Operator
John F. Lesch(2)(3) Director Attorney, Nisen & Elliott, a partnership
200 West Adams Street
Suite 2500
Chicago, Illinois 60606
John G. Kyle(3) Director Owner and operator, Shell Oil Service
10 Skokie Highway Stations and Gasoline Distributor
Highland Park, Illinois
60035
Elwood P. Walmsley(3) Director Director of Sales, Miles Laboratories
166 East Hillside Road
Barrington, Illinois 60010
Mark Zahorik Vice President Vice President, Keeley Asset Management
401 South LaSalle Street Corp. and of Keeley Investment Corp.
Suite 1201
Chicago, Illinois 60605
Mary A. Ferrari Secretary Corporate Secretary, Keeley Asset
401 South LaSalle Street Management Corp. and of Keeley
Suite 1201 Investment Corp. since 1992
Chicago, Illinois 60605
Emily Viehweg Treasurer Assistant Treasurer, Keeley Asset
401 South LaSalle Street Management Corp. and of Keeley
Suite 1201 Investment Corp. since 1994; Prior thereto,
Chicago, Illinois 60605 Portfolio Assistant at Lincoln Capital
Management Corp. of Chicago
</TABLE>
- --------------------------
(1) John L. Keeley, Jr., is an "interested person" of the Fund as defined in
the 1940 Act.
9
<PAGE> 29
(2) Mr. Lesch has performed legal services (principally related to Federal
income tax matters) for Mr. Keeley on an individual basis, unrelated to
the business of Keeley Asset Management Corp. or Keeley Investment Corp.
Fees paid by Mr. Keeley to Mr. Lesch were approximately $10,700 for the
last three years.
(3) Mr. O'Brien, Mr. Lesch, Mr. Kyle and Mr. Walmsley maintain brokerage
accounts with Keeley Investment Corp., the Fund's principal underwriter.
At December 31, 1998, the Directors and officers owned 277,754 shares,
representing 11.28% of the outstanding shares of the Fund.
The officers are "interested persons" of the Fund and are also officers of
Keeley Asset Management Corp., Keeley Investment Corp. or its Affiliates, and
receive compensation from those companies. They do not receive any compensation
from the Fund. Each "non-interested" Fund Director receives $500 for each
meeting which he attends. Regular Board meetings are held quarterly. For the
fiscal year ended September 30, 1998, the Fund paid Directors' fees of $7,500.
The table below shows the compensation which the Fund paid to each of its
Directors for the fiscal year ended September 30, 1998:
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Annual Total Compensation
Name of Person, Compensation Benefits Accrued As Part Benefits Upon From Fund Paid to
Position From Fund of Fund Expenses Retirement Directors
-------------------- ------------- ------------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
John L. Keeley, $ 0 $ 0 $ 0 $ 0
Jr.,
Director
Michael J. O'Brien, $ 1,500 $ 0 $ 0 $ 1,500
Director
<CAPTION>
Aggregate Pension or Retirement Estimated Annual Total Compensation
Name of Person, Compensation Benefits Accrued As Part Benefits Upon From Fund Paid to
Position From Fund of Fund Expenses Retirement Directors
-------------------- ------------- ----------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
John F. Lesch, $ 2,000 $ 0 $ 0 $ 2,000
Director
John G. Kyle, $ 2,000 $ 0 $ 0 $ 2,000
Director
Elwood P. Walmsley, $ 2,000 $ 0 $ 0 $ 2,000
Director
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
For this purpose "control" means: (i) the beneficial ownership, either
directly or through one or more controlled companies, of more than 25% of the
voting securities of a company; (ii) the acknowledgment or assertion by either
the controlled or controlling party of the existence of control; or (iii) an
adjudication under the terms and conditions of the Investment Company Act of
1940 ("the Act"), which has become final, that control exists.
No one person beneficially owned more than 25% of the Fund's outstanding
shares at December 31, 1998. On that date, Mr. John L. Keeley, Jr. owned 250,051
shares, and his ownership represented 10.15% of the issued and outstanding
shares of common stock of the Fund.
INVESTMENT ADVISER
Keeley Asset Management Corp., organized in the State of Illinois on
December 28, 1981, is the Fund's investment adviser (the "Adviser"). John L.
Keeley, Jr. owns all of the stock of the Adviser. Under the Investment Advisory
Agreement between the Adviser and the Fund, the Adviser is responsible for
administering the Fund's affairs and supervising its investment program and must
do so in accordance with applicable laws and regulations. The Adviser also
furnishes the Fund's Board of Directors with periodic reports on the Fund's
investment performance.
10
<PAGE> 30
The Investment Advisory Agreement was re-approved by the Board of Directors,
including a majority of the Directors who are not parties to the Agreement, or
interested persons of such parties, at a meeting held on November 10, 1998. The
Agreement will continue in effect indefinitely, provided such continuance is
approved annually by (i) the holders of a majority of the outstanding voting
securities of the Fund or by the Board, and (ii) a majority of the Directors who
are not parties to such Advisory Agreement or "interested persons" (as defined
in the Investment Company Act of 1940) of any such party. The Agreement may be
terminated upon sixty days written notice by either party to the Agreement and
will terminate automatically if assigned.
For its services, the Adviser receives a monthly fee at an annual rate of
1.00% of the average daily net assets of the Fund. The Investment Advisory
Agreement provides that the Adviser will waive a portion of its management fee,
or reimburse the Fund, to the extent that its total annual operating expenses
exceed 2.50%, exclusive of (i) taxes, (ii) interest charges, (iii) litigation
and other extraordinary expenses, and (iv) brokers' commissions and other
charges relating to the purchase and sale of the Fund's portfolio securities.
The Investment Advisory Agreement also provides that the Adviser shall not be
liable to the Fund or its shareholders from or as a consequence of any act or
omission of the Adviser, or of any of the directors, officers, employees or
agents of the Adviser, in connection with or pursuant to this Agreement, except
by willful misfeasance, bad faith or gross negligence on the part of the Adviser
in the performance of its duties or by reason of reckless disregard by the
Adviser of its obligations and duties under this Agreement. For the last three
fiscal year periods (October 1 through September 30) the Adviser earned the
following fees: 1998 - $308,025; 1997 - $142,919; 1996 - $50,569 (net of fee
waivers of $40,643).
ADMINISTRATIVE SERVICES
Sunstone Financial Group, Inc., 207 East Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202, is the Fund's administrator. The Administrator
oversees the Fund's Custodian, Transfer Agent and insurance relationships,
prepares and files the Fund's Federal and state tax returns and required tax
filings (other than those required to be made by the Fund's Custodian or
Transfer Agent), participates in the preparation of the Fund's registration
statement, proxy statements and reports, prepares state securities law
compliance filings, compiles data for and prepares notices to the Securities and
Exchange Commission, prepares annual and semi-annual reports to the Securities
and Exchange Commission and current shareholders, monitors the Fund's expense
accounts, the Fund's status as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"), the Fund's
arrangements with respect to services provided pursuant to the Fund's
Distribution Plan, compliance with the Fund's investment policies and
restrictions and generally assists in the Fund's administrative operations.
The Administrator, at its own expense and without reimbursement from the
Fund, furnishes office space and all necessary office facilities, equipment,
supplies and clerical and executive personnel for performing the services
required to be performed by it under the Administration Agreement. For its
services the Administrator receives a fee based upon the average daily net
assets of the Fund. The fee is computed at the annual rate of 0.15% on the first
$50 million of the Fund's average daily net assets, and 0.05% on the Fund's
average daily net assets in excess of $50 million. The fee is computed daily and
paid monthly. The minimum fee is $38,500 per year. Sunstone received fees of
$45,896 from the Fund for the year ended September 30, 1998.
The Administrator provides services to the Fund under an Administration
Agreement which is renewable from year to year if the Fund's Board of Directors
(including a majority of the Fund's disinterested Directors) approves the
renewal. Either Sunstone or the Fund may terminate the Administrative Agreement
on sixty (60) days written notice to either party. Amendments to the
Administrative Agreement require the approval of the Fund's Board of Directors
(including a majority of the Fund's disinterested Directors). The Administration
Agreement cannot be assigned by the Fund or Sunstone without consent of the
other party.
11
<PAGE> 31
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
CUSTODIAN
Firstar Bank Milwaukee, N.A.,(the "Custodian") 615 East Michigan Avenue,
Milwaukee, Wisconsin 53201-0701, is the custodian for the Fund. As Custodian to
the Fund it is responsible for holding all securities and cash of the Fund,
receiving and paying for securities purchased, delivering against payment for
securities sold, receiving and collecting income from investments, making all
payments covering expenses of the Fund, and performing other administrative
duties, all as directed by authorized persons of the Fund. The Custodian does
not exercise any supervisory function in such matters as purchase and sale of
portfolio securities, payment of dividends, or payment of expenses of the Fund.
The Fund has authorized the Custodian to deposit certain portfolio securities in
central depository systems as permitted under federal law. The Fund may invest
in obligations of the Custodian and may purchase or sell securities from or to
the Custodian.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Firstar Mutual Fund Services, LLC ("Firstar") acts as the Transfer and
Dividend Disbursing Agent for the Fund. Firstar's principal business address is
615 East Michigan Avenue, Milwaukee, WI, 53201-0701. Firstar services include
printing, postage, forms, stationary, record retention, mailing, insertion,
programming, labels, shareholder lists, and proxy expenses. These fees and
reimbursable expenses may be changed from time to time subject to mutual written
agreement between Firstar and the Fund and with the approval of the Board of
Directors.
Under this Agreement, Firstar receives orders for the purchase of shares;
processes purchase orders and issues the appropriate number of uncertificated
shares; processes redemption requests; pays money in accordance with the
instructions of redeeming shareholders; transfers shares; processes exchanges
between funds within the same family of funds; transmits payments for dividends
and distributions; maintains current shareholder records; files U.S. Treasury
Department Form 1099s and other appropriate information required with respect to
dividends and distributions for all shareholders; provides shareholder account
information upon request; mails confirmations and statements of account to
shareholders for all purchases, redemptions and other confirmable transactions
as agreed upon with the Fund; and, monitors the total number of shares sold in
each state.
NET ASSET VALUE
For purposes of computing the net asset value of a share of the Fund,
securities listed on an exchange, or quoted on a national market system are
valued at the last sales price at the time of valuation or lacking any reported
sales on that day, at the most recent bid quotations. Securities traded on only
the over-the-counter markets are valued on the basis of the closing
over-the-counter bid prices when there is no last sale price available.
Securities for which quotations are not available and any other assets are
valued at a fair value as determined in good faith by the Board of Directors.
Money market instruments having a maturity of 60 days or less from the valuation
date are valued on an amortized cost basis.
The Fund's net asset value will not be determined on any day on which the
New York Stock Exchange is not open for trading. That Exchange is regularly
closed on Saturdays and Sundays and on New Year's Day, the third Monday in
January, the third Monday in February, Good Friday, the last Monday in May,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. If one of these
holidays falls on a Saturday or Sunday, the Exchange will be closed on the
preceding Friday or the following Monday, respectively.
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act. As a
result of this election, the Fund must redeem shares solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund during any 90 day
period for any one shareholder. Redemptions in excess of those above amounts
will normally be paid in cash, but may be paid wholly or partly by a
distribution of Fund portfolio securities.
12
<PAGE> 32
Investments by corporations must include a certified copy of corporate
resolutions indicating which officers are authorized to act on behalf of the
account. Investments by trustees must include a copy of the title and signature
page of the trust agreement and pages indicating who is authorized to act.
On September 30, 1998, the net asset value per share of the Fund was
calculated as follows:
Net Assets $39,746,837
= $18.31 Net Asset Value Per Share
-----------
Shares Outstanding 2,170,884
PURCHASES AND REDEMPTION OF SHARES
For information on purchase and redemption of shares, see "How to buy, sell
and exchange shares" in the Fund's Prospectus. The Fund may suspend the right of
redemption of shares of the Fund for any period: (i) during which the New York
Stock Exchange is closed other than customary weekend and holiday closing or
during which trading on the New York Stock Exchange is restricted; (ii) when the
Securities and Exchange Commission determines that a state of emergency exists
which may make payment or transfer not reasonably practicable; (iii) as the
Securities and Exchange Commission may, by order, permit for the protection of
the security holder of the Fund; or (iv) at any other time when the Fund may,
under applicable laws and regulations, suspend payment on the redemption of its
shares.
Sales at Net Asset Value
Purchases of the Fund's shares at net asset value may be made by the
following persons: (a) nondealer assisted (or assisted only by the Distributer)
tax-exempt entities (including pension and profit sharing plans) whose minimum
initial investment is $25,000 or more, (b) nondealer assisted (or assisted only
by the Distributor) purchases by a bank or trust company in a single account
where such bank or trust company is named as trustee and the minimum initial
investment is over $25,000, (c) nondealer assisted (or assisted only by the
Distributor) purchases by banks, insurance companies, insurance company separate
accounts and other institutional purchasers, (d) a registered investment adviser
purchasing shares on behalf of a client or on his or her own behalf through an
intermediary service institution offering a separate and established program for
registered investment advisers and notifying the Fund and its Distributor of
such arrangement, (e) any current or retired Officer, Director or employee, or
any member of the immediate family of such person, of the Fund, Adviser,
Distributor or any affiliated company thereof, (f) the Fund's Adviser,
Distributor or any affiliated company thereof, (g) any employee benefit plan
established for employees of the Adviser, Distributor, or its affiliates, (h)
advisory clients of the Adviser, (i) registered representatives and their
spouses and minor children and employees of Selected Dealers, (j) for-fee
clients of investment advisers registered under the Investment Advisers Act of
1940, who have for-fee clients with at least $25,000 of net asset value of
shares in the Fund after giving effect to the purchase, and who have directed
their for-fee clients to the Fund, (k) shareholders of the Fund, solely with
respect to their reinvestment of dividends and distributions from the Fund, (l)
shares exchanged in accordance with the Fund's exchange privilege on which a
sales charge has been paid in connection with the previous purchase of shares of
the Fund (see "Exchange Privilege"), (m) employees, pension, profit sharing and
retirement plans of the Administrator of the Fund, (n) consultants to the
Adviser of the Fund, their employees and pension, profit sharing and retirement
plans for those employees, (o) pension, profit sharing and retirement plans for
employees of Directors and employees of business entities owned and controlled
by Directors of the Fund and (p) sales to broker-dealers who conduct their
business with their customers principally through the Internet and who do not
have registered representatives who actively solicit those customers to purchase
securities, including shares of the Fund; and (q) sales through a broker-dealer
to its customer under an arrangement in which the customer pays the
broker-dealer a fee based on the value of the account, in lieu of transaction
based brokerage fees. In the opinion of the Fund's management, these sales will
result in less selling effort and expense. In order to qualify for these
waivers, sufficient information must be submitted at the time of purchase with
the application to determine whether the account is entitled to the waiver of
the sales charge.
13
<PAGE> 33
EXCHANGE PRIVILEGE
Investors may exchange shares of the Fund having a value of $250 or more for
shares of the Firstar Money Market Fund (the "Money Market Fund") at their net
asset value and at a later date exchange such shares and shares purchased with
reinvested dividends for shares of the Fund at net asset value. An Investor is
limited to 4 exchanges in each 12 month period. Investors who are interested in
exercising the exchange privilege should first contact the Fund to obtain
instructions and any necessary forms. The exchange privilege does not in any way
constitute an offering or recommendation on the part of the Fund or the Adviser
of an investment in the Money Market Fund. Any investor who considers making
such an investment through the exchange privilege should obtain and review the
prospectus of the Money Market Fund before exercising the exchange privilege.
The Distributor is entitled to receive a fee from the Money Market Fund for
certain distribution and support services at the annual rate of 0.20 of 1% of
the average daily net asset value of the shares for which it is the holder or
dealer of record.
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 Money Market Fund or (ii) the proceeds
from redemption of the shares of the Money Market Fund are not immediately
reinvested in shares of the Fund. The exchange privilege may be terminated by
the Fund at any time.
For federal income tax purposes, a redemption of shares pursuant to the
exchange privilege will result in a capital gain if the proceeds received exceed
the investor's tax-cost basis of the shares redeemed. Such a redemption may also
be taxed under state and local tax laws, which may differ from the Code.
TAXATION
The Fund intends to qualify annually and elects to be treated as a regulated
investment company under the Internal Revenue Code of 1986 (the "Code").
To qualify as a regulated investment company, the Fund must, among other
things: (i) derive in each taxable year at least ninety percent (90%) of its
gross income from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of stock, securities or
foreign currencies or other income derived with respect to its business of
investing in such stock, securities or currencies; (ii) diversify its holdings
so that, at the end of each quarter of the taxable year, (a) at least fifty
percent (50%) of the market value of the Fund's assets are represented by cash,
U.S. government securities, the securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than five
percent (5%) of the value of the Fund's total assets and 10 percent (10%) of the
outstanding voting securities of such issuer, and (b) not more than twenty-five
percent (25%) of the value of its total assets is invested in the securities of
any one issuer (other than U.S. government securities of the securities of other
regulated investment companies); and (iii) distribute at least ninety percent
(90%) of its net investment income (which includes dividends, interest, and net
short-term capital gains in excess of and net long-term capital losses) each
taxable year.
As a regulated investment company, the Fund will not be subject to U.S.
federal income tax on its net investment income and net capital gains (any net
long-term capital gains in excess of the sum of net short-term capital losses
and capital loss carryovers from prior years), if any, that it distributes to
shareholders. The Fund intends to distribute to its shareholders, at least
annually, substantially all of its net investment income and any net capital
gains. In addition, amounts not distributed by the Fund on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible four percent (4%) excise tax. To avoid the tax, the Fund must
distribute during each calendar year, (i) at least ninety-eight percent (98%) of
its ordinary income (not taking into account any capital gains or losses) for
the calendar year, (ii) at least ninety-eight percent (98%) of its capital gains
in excess of its capital losses for the twelve-month period ending October 31 of
the calendar year, and (iii) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make these distributions in accordance with the
calendar year distribution requirement. A
14
<PAGE> 34
distribution will be treated as paid during the calendar year if it is declared
by the Fund before December 31 of the year and paid by the Fund by January 31 of
the following year. Such distribution will be taxable to shareholders in the
year the distributions are declared, rather than the year in which the
distributions are received.
If the Fund fails to qualify as a regulated investment company under the
Internal Revenue Code, its income will be subject to federal income tax, and
dividends paid to shareholders will also be subject to federal income tax.
DISTRIBUTION OF SHARES
Keeley Investment Corp. (the "Distributor") acts as the principal
underwriter for the Fund under an Underwriting Agreement between it and the
Fund. The Distributor is a registered broker-dealer under the Securities Act of
1934, member of the National Association of Securities Dealers, Inc. (NASD), the
Securities Investor Protection Corporation (SIPC), and an affiliate of the
Adviser.
The Underwriting Agreement provides that the Distributor will use its best
efforts to distribute the shares of the Fund on a continuous basis and will
receive commissions on such sales as described in the Prospectus under "How
Shares are Priced." The Distributor bears the costs of advertising and any other
costs attributable to the distribution of the shares of the Fund. (A portion of
these costs may be reimbursed by the Fund pursuant to the Fund's Distribution
Plan (the "Plan") described below. The Distributor may receive brokerage
commissions for executing portfolio transactions for the Fund. The Distributor
may enter into sales agreements with other entities to assist in the
distribution effort. Any compensation to these other entities will be paid by
the Distributor from the proceeds of the sales charge. The Distributor may also
compensate these entities out of the distribution fee received from the Fund.
For the years ended September 30, 1998, 1997, and 1996 the Distributor received
$565,499, $78,493, and $52,077 respectively, in front-end sales commissions and
paid $358,754,$21,622 and $20,311, respectively, of such proceeds to dealers as
sales concessions as described in the Prospectus.
RULE 12b-1 DISTRIBUTION PLAN
The Fund adopted a Plan of Distribution pursuant to Rule 12b-1 of the
Investment Company Act of 1940 (the "Plan"). The Plan was adopted in
anticipation that the Fund will benefit from the Plan through increased sales of
shares of the Fund thereby reducing the Fund's expense ratio and providing an
asset size that allows the Adviser greater flexibility in management. The Plan
may be terminated at any time by a vote of the Directors of the Fund who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the Plan or any agreement related thereto (the "Rule 12b-1
Directors") or by a vote of a majority of the outstanding shares of the Fund.
Any change in the Plan that would materially increase the distribution expenses
of the Fund provided for in the Plan requires the approval of the shareholders
and the Board of Directors, including the Rule 12b-1 Directors.
While the Plan is in effect, the selection and nomination of Directors who
are not interested persons of the Fund will be committed to the discretion of
the Directors of the Fund who are not interested persons of the Fund. The Board
of Directors of the Fund must review the amount and purposes of expenditures
pursuant to the Plan quarterly as reported to it by the Adviser. The Plan will
continue in effect for as long as its continuance is specifically approved at
least annually by a majority of the Directors, including the Rule 12b-1
Directors.
For the years ended September 30, 1998, 1997 and 1996 the Distributor
received $49,520, $25,674 and $18,354, respectively, under the Plan. During the
same periods, the Fund paid an additional $27,486, $10,056 and $3,780,
respectively, pursuant to the Plan, all of which represented compensation to
dealers.
Amounts paid under the Plan (which may not exceed a maximum monthly
percentage of 1/12 of 0.25% (0.25% per annum) of the Fund's average daily net
assets) are paid to the Distributor in connection with its services as
distributor. Payments, if any, are made monthly and are based on reports
submitted by the Distributor to the Fund which sets forth all amounts expended
by the Distributor pursuant to the Plan.
15
<PAGE> 35
Under no circumstances will the Fund pay a fee, pursuant to the Plan, the effect
of which would be to exceed the National Association of Securities Dealers'
("NASD") limitations on asset based compensation described below.
The NASD has rules which may limit the extent to which the Fund may make
payments under the Plan. Although the NASD's rules do not apply to the Fund
directly, the rules apply to members of the NASD such as the Distributor and
prohibit them from offering or selling shares of the Fund if the sale charges
(including 12b-1 fees) imposed on such shares exceed the NASD's limitations.
The rules impose two related limits on 12b-1 fees paid by investors: an
annual limit and a rolling cap. The annual limit is 0.75% of assets (with an
additional 0.25% permitted as a service fee). The rolling cap on the total of
all sales charges (including front end charges, contingent deferred sales
charges and asset based charges such as 12b-1 payments) is 6.25% of new sales
(excluding sales resulting from the reinvestment of dividends and distributions)
for funds that charge a service fee and 7.25% of new sales for funds that do not
assess a service fee.
Whether the rolling applicable maximum sales charge has been exceeded
requires periodic calculations of the Fund's so-called "remaining amount." The
remaining amount is the amount to which the Fund's total sales charges are
subject for purposes of ensuring compliance with the NASD limits. The Fund's
remaining amount is generally calculated by multiplying the Fund's new sales by
its appropriate NASD maximum sales charge (6.25% or 7.25%). From this amount is
subtracted the Fund's sales charges on the new sales and the 12b-1 payments
accrued or paid over the period. The Fund's remaining amount increases with new
sales of the Fund (because the Fund's front-end sales charge is less than the
applicable NASD maximum) and decreases as the 12b-1 charges are accrued. The
NASD rules permit the remaining amount to be credited periodically with interest
based on the rolling balance of the remaining amount. If the Fund's remaining
amount reaches zero, it must stop accruing its 12b-1 charges until it has new
sales that increase the remaining amount. The Fund's remaining amount may be
depleted as a result of the payment of 12b-1 fees if, for example, the Fund
experiences an extended period of time during which no new sales are made or
during which new sales are made but in an amount insufficient to generate
increases in the remaining amount to offset the accruing 12b-1 charges.
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TRANSACTIONS
The Adviser has discretion to select brokers and dealers to execute
portfolio transactions initiated by the Adviser and to select the markets in
which such transactions are to be executed. The primary responsibility regarding
portfolio transactions is to select the best combination of price and execution
for the Fund. When executing transactions for the Fund, the Adviser will
consider all factors it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker or dealer and the reasonableness of the commission. The
Adviser will select the Distributor from time to time to execute portfolio
transactions, subject to best price and execution. In any such transaction, the
Distributor will charge commissions at a substantial discount from retail rates,
regardless of the size of the transaction. Portfolio transactions executed by
the Distributor will comply with all applicable provisions of Section 17(e) of
the 1940 Act. Transactions of the Fund in the over-the-counter market may be
executed with primary market makers acting as principal except where the Adviser
believes that better prices and execution may be obtained elsewhere.
BROKERAGE
In selecting brokers or dealers to execute particular transactions and in
evaluating the best price and execution available, the Adviser is authorized to
consider "brokerage and research services" (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934), statistical quotations,
specifically the quotations necessary to determine the Fund's asset value, and
other information provided to the Fund or the Adviser. The Adviser is also
authorized to cause the Fund to pay a broker or dealer who provides such
16
<PAGE> 36
brokerage and research services a commission for executing a portfolio
transaction which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction. The Adviser must
determine in good faith, however, that such commission was reasonable in
relation to the value of the brokerage and research services provided, viewed in
terms of that particular transaction or in terms of all the accounts over which
the Adviser exercises investment discretion. It is possible that certain of the
services received by the Adviser attributable to a particular transaction will
benefit one or more other accounts for which the Adviser has investment
discretion. The "bunching" of orders for the sale or purchase of marketable
portfolio securities with other accounts under management of the Adviser to save
brokerage costs or average prices among them is not deemed to result in a
securities trading account.
In valuing research services, the Adviser makes a judgment of the usefulness
of research and other information provided by a broker to the Adviser in
managing the Fund's investment portfolio. In some cases, the information, (e.g.,
data or recommendations concerning particular securities) relates to the
specific transaction placed with the broker but for greater part the research
consists of a wide variety of information concerning companies, industries,
investment strategy and economic, financial and political conditions and
prospects, useful to the Adviser in advising the Fund.
The Adviser is the principal source of information and advice to the Fund
and is responsible for making and initiating the execution of investment
decisions by the Fund. However, the Board of Directors of the Fund recognizes
that it is important for the Adviser, in performing its responsibilities to the
Fund, to continue to receive the broad spectrum of economic and financial
information that many securities brokers have customarily furnished in
connection with brokerage transactions, and that in compensating brokers for
their services, it is in the interest of the Fund to take into account the value
of the information received for use in advising the Fund. The extent, if any, to
which the obtaining of such information may reduce the expenses of the Adviser
in providing management services to the Fund is not determinable. In addition,
the Board of Directors understands that other clients of the Adviser might also
benefit from the information obtained for the Fund, in the same manner that the
Fund might also benefit from the information obtained by the Adviser in
performing services for others.
Although investment decisions for the Fund are made independently from those
for other investment advisory clients of the Adviser, the same investment
decision may be made for both the Fund and one or more other advisory clients.
If both the Fund and other clients purchase or sell the same class of securities
on the same day, the transactions will be allocated as to amount and price in a
manner considered equitable to each.
For the years ended September 30, 1998 and 1996, the Fund paid to brokers,
other than the Distributor, brokerage commissions totaling $2,210 and $860,
respectively, on transactions having a total market value of $690,750 and
$275,750, respectively. All of such brokers provided research services. No such
fees were paid by the Fund for the year ended September 30, 1997. For the years
ended September 30, 1998, 1997 and 1996 the Fund paid the Distributor brokerage
commissions of $92,801, $29,580 and $25,755, respectively, on transactions
involving the payment of commissions having a total market value of $29,236,359,
$9,278,125 and $8,491,525, respectively. Of the brokerage commissions paid by
the Fund for the years ended September 30, 1998, 1997 and 1996, 98%, 100% and
97%, respectively, were paid to the Distributor and such commissions paid to the
Distributor were paid in connection with transactions involving securities
having a market value equal to 98%, 100% and 97%, respectively, of the total
market value of securities on which the Fund paid commissions. The above does
not include principal transactions when the Fund purchases securities directly
from NASD marketmakers on a principal basis. During the fiscal year ended
September 30, 1998, the Fund did not acquire securities of its regular brokers
or dealers or their parents.
ADDITIONAL INFORMATION
SHAREHOLDER MEETINGS
The Articles of Incorporation do not require that the Fund hold annual or
regular shareholder meetings. Meetings of the shareholders may be called by the
Board of Directors and held at such times the Directors,
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from time to time determine, for the purpose of the election of Directors or
such other purposes as may be specified by the Directors.
REMOVAL OF DIRECTORS BY SHAREHOLDERS
The Fund's By-Laws contain procedures for the removal of Directors by its
shareholders. At any meeting of shareholders, duly called and at which a quorum
is present, the shareholders may, by the affirmative vote of the holders of a
majority of the votes then entitled to vote at an election of Directors, 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 of the votes entitled to be cast at such meeting, the
Secretary of the Fund shall promptly call a special meeting of shareholders for
the purpose of voting upon the question of removal of any Director. Whenever ten
or more shareholders of record who have been such for at least six months
preceding the date of application, and who hold in the aggregate either shares
having a net asset value of at least $25,000 or at least one percent (1%) of the
total outstanding shares, whichever is less, shall apply to the Fund's Secretary
in writing, stating that they wish to communicate with other shareholders with a
view to obtaining signatures to a request for a meeting as described above and
accompanied by a form of communication and request which they wish to transmit,
the Secretary shall within five business days after such application either; (i)
afford to such applicants access to a list of the names and addresses of all
shareholders as recorded on the books of the Fund; or (ii) inform such
applicants as to the approximate number of shareholders of record and the
approximate cost of mailing to them the proposed communication and form of
request.
If the Secretary elects to follow the course specified in clause (ii) of the
last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
shall mail to such applicants and file with the Securities and Exchange
Commission (the "SEC"), 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 SEC 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 SEC 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 SEC shall find, after notice and
opportunity for hearing, that all objections so sustained have been met, and
shall enter an order so declaring, the Secretary shall mail copies of such
material to all shareholders with reasonable promptness after the entry of such
order and the renewal of such tender.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, Milwaukee, Wisconsin, audits and reports on the
Fund's annual financial statements, reviews certain regulatory reports, reviews
the Fund's income tax returns, and performs other professional accounting,
auditing, tax and advisory services when engaged to do so by the Fund.
FINANCIAL STATEMENTS AND REPORTS
The audited Financial Statements and accompanying Report of Independent
Accountants, PricewaterhouseCoopers LLP, Milwaukee, Wisconsin, as of the
fiscal-year ended September 30, 1998, are incorporated herein by reference to
the Funds' Annual Report to Shareholders filed with the U.S. Securities and
Exchange Commission on November 23, 1998. No other portion of the Annual Report
is so incorporated. Please call 1-888-933-5391 to obtain a copy of the most
recent Annual Report of the Fund at no charge.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
Ratings of a rating service represent the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Adviser believes that the quality of debt securities
in which the Fund invests should be continuously reviewed and that individual
analysts give different weightings to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell or hold a security.
It does not take into account market value or suitability for a particular
investor. When a security has received a rating from more than one service, each
rating should be evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the ratings services from
other sources which they consider reliable. Ratings may be changed, suspended or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons.
The following is a description of the rating characteristics used by Moody's
Investors Services, Inc. ("Moody's") and Standard and Poor's Ratings Group
("Standard and Poors").
RATINGS BY MOODY'S
Aaa - Bonds rated Aaa are judged to be the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt-edge". Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. Although 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 bonds.
Aa - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group they compose what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long-
term risk appear somewhat larger than in Aaa bonds.
A - Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds 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 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 rated Caa are of poor standing. Such bonds may be in default or
there may be present elements of danger with respect to principal or interest.
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Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such bonds are often in default or have other marked shortcomings.
RATINGS BY STANDARD AND POORS
AAA - Bonds rated AAA have the highest rating. Capacity to pay principal and
interest is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay principal and interest
and differ from AAA bonds only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in higher rated categories.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation among such bonds and CC the highest degree of
speculation. Although such bonds 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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