Rule 497(c)
(Reg. No. 33-70590;
811-8088)
STATEMENT OF ADDITIONAL INFORMATION
Oak Ridge Growth Fund
a series of
Oak Ridge Funds, Inc.
sponsored by
Oak Ridge Investments, LLC
P. O. Box 701
Milwaukee, Wisconsin 53201-0701
1-800-407-7298
This Statement of Additional Information is not a
prospectus and should be read in conjunction with the
Prospectus of the Oak Ridge Growth Fund (the "Fund"), a
series of Oak Ridge Funds, Inc. (the "Corporation"),
dated March 31, 1998. The Fund and the Corporation
were formerly known as the O.R.I. Growth Fund and
O.R.I. Funds, Inc., respectively. Requests for copies
of the Prospectus should be made by writing to the Fund
at the address listed above or by calling 1-800-407-
7298.
This Statement of Additional Information is dated March 31, 1998.
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OAK RIDGE GROWTH FUND
TABLE OF CONTENTS
Page No.
INVESTMENT RESTRICTIONS 3
INVESTMENT POLICIES AND TECHNIQUES 4
DIRECTORS AND OFFICERS OF THE CORPORATION 13
PRINCIPAL SHAREHOLDERS 14
INVESTMENT ADVISOR AND DISTRIBUTOR 15
DISTRIBUTION PLANS 16
PORTFOLIO TRANSACTIONS AND BROKERAGE 17
CUSTODIAN 19
TRANSFER AGENT 19
TAXES 19
DETERMINATION OF NET ASSET VALUE 19
SHAREHOLDER MEETINGS 20
PERFORMANCE INFORMATION 20
INDEPENDENT ACCOUNTANTS 22
FINANCIAL STATEMENTS 22
APPENDIX A-1
No person has been authorized to give any
information or to make any representations other than
those contained in this Statement of Additional
Information and the Prospectus dated March 31, 1998,
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.
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INVESTMENT RESTRICTIONS
The investment objective of the Oak Ridge Growth
Fund (the "Fund") is to seek capital appreciation. The
Fund's investment objective and policies are described
in detail in the Prospectus under the caption
"INVESTMENT OBJECTIVE AND POLICIES." The following is
a complete list of the Fund's fundamental investment
restrictions which cannot be changed without
shareholder approval.
The Fund may not:
1. With respect to 75% of its total assets,
purchase securities of any issuer (except
securities of the U.S. government or any agency or
instrumentality thereof) if such action would
cause more than 5% of the Fund's total assets to
be invested in securities of any one issuer, or
purchase more than 10% of the outstanding voting
securities of any one issuer.
2. Borrow money except from banks for
temporary or emergency purposes (but not for the
purpose of purchase of investments) and then, only
in an amount not to exceed 33 1/3% of the value of
the Fund's net assets at the time the borrowing is
incurred; provided however, the Fund may engage in
transactions in options, futures contracts and
options on futures contracts. The Fund may not
purchase securities when borrowings exceed 5% of
its total assets.
3. Act as an underwriter of another issuer's
securities except for the sale of restricted
securities.
4. Pledge, mortgage, hypothecate or
otherwise encumber any of its assets, except to
secure permitted borrowings and except that the
Fund may invest in options, futures contracts and
options on futures contracts.
5. Make loans, except through (i) the
purchase of investments permissible under the
Fund's investment policies, or (ii) the lending of
portfolio securities provided that no such loan of
portfolio securities may be made by it if, as a
result, the aggregate of such loans would exceed
5% of the value of the Fund's total assets.
6. Purchase any securities on margin, except
for the use of short-term credit necessary for
clearance of purchases of portfolio securities,
the payment of initial and variation margin
deposits in connection with futures contracts and
options thereon, and the purchase and sale of
options.
7. Purchase, hold or deal in commodities or
commodity contracts (except that the Fund may
engage in futures and options on futures), or
purchase or sell real estate including real estate
limited partnerships, other than, to the extent
permitted under the Fund's investment policies,
instruments secured by real estate or interests
therein or instruments issued by entities that
invest in real estate or interests therein.
8. Issue senior securities. For purposes of
this investment restriction, the futures, options
and borrowing actions permitted under the Fund's
investment policies are not deemed to be the
issuance of senior securities.
9. Concentrate more than 25% of the value of
its total assets (taken at market value at the
time of each investment) in securities of issuers
whose principal business activities are in the
same industry or group of industries.
With the exception of the investment restriction
set out in item 2 above, if a percentage restriction is
adhered to at the time of investment, a later increase
in percentage resulting from a change in market value
of the investment or the total assets will not
constitute a violation of that restriction.
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The following investment limitations may be
changed by the Corporation's Board of Directors without
shareholder approval.
The Fund may not:
1. Invest in illiquid securities (i.e.,
securities that are not readily marketable) if, as
a result of such investments, more than 5% of the
Fund's net assets (taken at market value at the
time of each investment) would be invested in
illiquid securities.
2. Invest in any investment company, except
to the extent permitted under the Investment
Company Act of 1940, as amended (the "1940 Act").
3. Enter into futures contracts or related
options if more than 5% of the Fund's net assets
would be represented by futures contracts or
related options, or more than 5% of the Fund's net
assets would be committed to initial margin and
premiums on futures contracts and related options.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the
discussion of the Fund's investment objective, policies
and techniques that are described in the Prospectus
under the captions "INVESTMENT OBJECTIVE AND POLICIES"
and "INVESTMENT TECHNIQUES AND RISKS."
Illiquid Securities
The Fund may invest up to 5% of its net assets in
illiquid securities (i.e., securities that are not
readily marketable). For purposes of this restriction,
illiquid securities include, but are not limited to,
restricted securities (i.e., securities the disposition
of which is restricted under the federal securities
laws), securities which may only be resold pursuant to
Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act"), repurchase agreements with
maturities in excess of seven days and other securities
that are not readily marketable. The Board of
Directors or its delegate has the ultimate authority to
determine, to the extent permissible under the federal
securities laws, which securities are liquid or
illiquid for purposes of this 5% limitation. Certain
securities exempt from registration or issued in
transactions exempt from registration under the
Securities Act, including securities that may be resold
to institutional investors pursuant to Rule 144A under
the Securities Act, may be considered liquid under
guidelines adopted by the Board.
The Board of Directors of the Corporation has
delegated to Oak Ridge Investments, LLC ( the
"Advisor"), the Fund's investment advisor, the day-to-
day determination of the liquidity of any security,
although it has retained oversight and ultimate
responsibility for such determinations. Although no
definitive liquidity criteria are used, the Board of
Directors has directed the Advisor to look to such
factors as (i) the nature of the market for a security
(including the institutional private resale market),
(ii) the terms of certain securities or other
instruments allowing for the disposition to a third
party or the issuer thereof (e.g., certain repurchase
obligations and demand instruments), (iii) the
availability of market quotations (e.g., for securities
quoted in the PORTAL system) and (iv) other permissible
relevant factors.
Restricted securities may be sold only in
privately negotiated transactions or in a public
offering with respect to which a registration statement
is in effect under the Securities Act. Where
registration is required, the Fund may be obligated to
pay all or part of the registration expenses and a
considerable period may elapse between the time of the
decision to sell and the time the Fund may be permitted
to sell a security under an effective registration
statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a
less favorable price than prevailed when it decided to
sell. Restricted securities will be priced at fair
value as determined in good faith by the Board of
Directors of the Corporation. If, through the
appreciation of restricted securities or the
depreciation of unrestricted securities, the Fund
should be in a position where more than 5% of the value
of its net assets are invested in illiquid securities,
including restricted securities which are not readily
marketable, the Fund will take such steps as is deemed
advisable, if any, to protect liquidity.
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Short-Term Fixed Income Securities
The Fund may invest, for temporary defensive
purposes, pending investment or reinvestment of funds
and to meet anticipated redemption requests, up to 35%
of its total assets in short-term fixed income
securities, including without limitation, the
following:
1. U.S. government securities, including
bills, notes and bonds differing as to maturity
and rate of interest, which are either issued or
guaranteed by the U.S. Treasury or by U.S.
government agencies or instrumentalities. U.S.
government agency securities include securities
issued by (a) the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of
the United States, Small Business Administration
and the Government National Mortgage Association,
whose securities are supported by the full faith
and credit of the United States; (b) the Federal
Home Loan Banks, Federal Intermediate Credit Banks
and the Tennessee Valley Authority, whose
securities are supported by the right of the
agency to borrow from the U.S. Treasury; (c) the
Federal National Mortgage Association, whose
securities are supported by the discretionary
authority of the U.S. government to purchase
certain obligations of the agency or
instrumentality; and (d) the Student Loan
Marketing Association, the Interamerican
Development Bank and the International Bank for
Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
While the U.S. government provides financial
support to such U.S. government-sponsored agencies
or instrumentalities, no assurance can be given
that it always will do so since it is not so
obligated by law. The U.S. government, its
agencies and instrumentalities do not guarantee
the market value of their securities, and
consequently, the value of such securities may
fluctuate.
2. Certificates of deposit issued against
funds deposited in a U.S. bank or savings and loan
association. Such certificates are for a definite
period of time, earn a specified rate of return
and are normally negotiable. If such certificates
of deposit are non-negotiable, they will be
considered illiquid securities and be subject to
the Fund's 5% restriction on investments in
illiquid securities. Pursuant to a certificate of
deposit, the issuer agrees to pay the amount
deposited plus interest to the bearer of the
certificate on the date specified thereon. Under
current FDIC regulations, the maximum insurance
payable as to any one certificate of deposit is
$100,000; therefore, certificates of deposit
purchased by the Fund will not generally be fully
insured.
3. Bank time deposits, which are monies kept
on deposit with U.S. banks or savings and loan
associations for a stated period of time at a
fixed rate of interest. There may be penalties
for the early withdrawal of such time deposits, in
which case the yields of these investments will be
reduced.
4. Bankers' acceptances which are short-term
credit instruments used to finance commercial
transactions. Generally, an acceptance is a time
draft drawn on a bank by an exporter or an
importer to obtain a stated amount of funds to pay
for specific merchandise. The draft is then
"accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value
of the instrument on its maturity date. The
acceptance may then be held by the accepting bank
as an asset or it may be sold in the secondary
market at the going rate of interest for a
specific maturity.
5. Repurchase agreements entered into only
with respect to obligations of the U.S.
government, its agencies or instrumentalities. In
such a transaction, at the time the Fund purchases
the security, it simultaneously agrees to resell
and redeliver the security to the seller, who also
simultaneously agrees to buy back the security at
a fixed price and time. This assures a
predetermined yield for the Fund during its
holding period since the resale price is always
greater than the purchase price and reflects an
agreed-upon market rate. Such transactions afford
an opportunity for the Fund to invest temporarily
available cash. Repurchase agreements may be
considered loans to the seller, collateralized by
the underlying securities. The risk to the Fund is
limited to the ability of the seller to pay the
agreed-upon sum on the repurchase date; in the
event of default, the repurchase agreement
provides that the Fund is entitled to sell the
underlying collateral. If the value of the
collateral declines after the agreement is entered
into, however, and if the seller defaults under a
repurchase agreement when the value of the
underlying collateral is less than the repurchase
price, the Fund could incur a loss of both
principal and interest. The Advisor monitors the
value of the collateral at the time the
transaction is entered into and at all times
during the term of the repurchase agreement. The
Advisor does so in an effort to determine that the
value of the collateral always equals or exceeds
the agreed-upon
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repurchase price to be paid to the
Fund. If the seller were to be subject to a
federal bankruptcy proceeding, the ability of the
Fund to liquidate the collateral could be delayed
or impaired because of certain provisions of the
bankruptcy laws.
6. Commercial paper and commercial paper
master notes (which are demand instruments without
a fixed maturity bearing interest at rates which
are fixed to known lending rates and automatically
adjusted when such lending rates change) rated A-1
or higher by Standard & Poor's Corporation, Prime-
1 or higher by Moody's Investors Service, D-2 or
higher by Duff & Phelps, Inc. or F-2 or higher by
Fitch IBCA Information, Inc. Master demand notes
are direct lending arrangements between the Fund
and a corporation. There is no secondary market
for such notes; however, they are redeemable by
the Fund at any time. The Advisor will consider
the financial condition of the corporation (e.g.,
earning power, cash flow and other liquidity
ratios) and will continuously monitor the
corporation's ability to meet all of its financial
obligations, because the Fund's liquidity might be
impaired if the corporation were unable to pay
principal and interest on demand.
Derivative Instruments
In General. The Fund may invest up to 5% of its
net assets in derivative instruments. The Fund may use
derivative instruments for any lawful purpose
consistent with the Fund's investment objective such as
hedging or managing risk, but not for speculation.
Derivative instruments are commonly defined to include
securities or contracts whose value depend on (or
"derive" from) the value of one or more other assets,
such as securities, currencies or commodities. These
"other assets" are commonly referred to as "underlying
assets."
A derivative instrument generally consists of, is
based upon or exhibits characteristics similar to
options or forward contracts. Options and forward
contracts are considered to be the basic "building
blocks" of derivatives. For example, forward-based
derivatives include forward contracts, swap contracts
and exchange-traded futures. Option-based derivatives
include privately negotiated, over-the-counter ("OTC")
options (including caps, floors, collars and options on
forward and swap contracts) and exchange-traded options
on futures. Diverse types of derivatives may be
created by combining options or forward contracts in
different ways, and by applying these structures to a
wide range of underlying assets.
An option is a contract in which the "holder" (the
buyer) pays a certain amount (the "premium") to the
"writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or
sell to the writer (in a "put") a specific asset at an
agreed upon price at or before a certain time. The
holder pays the premium at inception and has no further
financial obligation. The holder of an option-based
derivative generally will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to
losses due to changes in the value of the underlying
asset.
A forward is a sales contract between a buyer
(holding the "long" position) and a seller (holding the
"short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed
price at the agreed future date and the seller agrees
to deliver the asset. The seller hopes that the market
price on the delivery date is less than the agreed upon
price, while the buyer hopes for the contrary. The
change in value of a forward-based derivative generally
is roughly proportional to the change in value of the
underlying asset.
Hedging. The Fund may use derivative instruments
to protect against possible adverse changes in the
market value of securities held in, or anticipated to
be held in, the Fund's portfolio. Derivatives may also
be used by the Fund to "lock-in" its realized but
unrecognized gains in the value of its portfolio
securities. Hedging strategies, if successful, can
reduce the risk of loss by wholly or partially
offsetting the negative effect of unfavorable price
movements in the investments being hedged. However,
hedging strategies can also reduce the opportunity for
gain by offsetting the positive effect of favorable
price movements in the hedged investments.
Managing Risk. The Fund may also use derivative
instruments to manage the risks of the Fund's
portfolio. Risk management strategies include, but are
not limited to, facilitating the sale of portfolio
securities, managing the effective maturity or duration
of debt obligations in the Fund's portfolio,
establishing a position in the derivatives markets as a
substitute for buying or selling certain securities or
creating or altering exposure to certain asset classes,
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such as equity, debt and foreign securities. The use
of derivative instruments may provide a less expensive,
more expedient or more specifically focused way for the
Fund to invest than "traditional" securities (i.e.,
stocks or bonds) would.
Exchange or OTC Derivatives. Derivative
instruments may be exchange-traded or traded in OTC
transactions between private parties. Exchange-traded
derivatives are standardized options and futures
contracts traded in an auction on the floor of a
regulated exchange. Exchange contracts are generally
liquid. The exchange clearinghouse is the counterparty
of every contract. Thus, each holder of an exchange
contract bears the credit risk of the clearinghouse
(and has the benefit of its financial strength) rather
than that of a particular counterparty. Over-the-
counter transactions are subject to additional risks,
such as the credit risk of the counterparty to the
instrument, and are less liquid than exchange-traded
derivatives since they often can only be closed out
with the other party to the transaction.
Risks and Special Considerations. The use of
derivative instruments involves risks and special
considerations as described below. Risks pertaining to
particular derivative instruments are described in the
sections that follow.
(1) Market Risk. The primary risk of derivatives
is the same as the risk of the underlying assets;
namely, that the value of the underlying asset may go
up or down. Adverse movements in the value of an
underlying asset can expose the Fund to losses.
Derivative instruments may include elements of leverage
and, accordingly, the fluctuation of the value of the
derivative instrument in relation to the underlying
asset may be magnified. The successful use of
derivative instruments depends upon a variety of
factors, particularly the Advisor's ability to predict
movements of the securities, currencies and commodities
markets, which requires different skills than
predicting changes in the prices of individual
securities. There can be no assurance that any
particular strategy adopted will succeed. A decision
to engage in a derivative transaction will reflect the
Advisor's judgment that the derivative transaction will
provide value to the Fund and its shareholders and is
consistent with the Fund's objectives, investment
limitations and operating policies. In making such a
judgment, the Advisor will analyze the benefits and
risks of the derivative transaction and weigh them in
the context of the Fund's entire portfolio and
investment objective.
(2) Credit Risk. The Fund will be subject to the
risk that a loss may be sustained as a result of the
failure of a counterparty to comply with the terms of a
derivative instrument. The counterparty risk for
exchange-traded derivative instruments is generally
less than for privately-negotiated or OTC derivative
instruments, since generally a clearing agency, which
is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For
privately-negotiated instruments, there is no similar
clearing agency guarantee. In all transactions, the
Fund will bear the risk that the counterparty will
default, and this could result in a loss of the
expected benefit of the derivative transaction and
possibly other losses to the Fund. The Fund will enter
into transactions in derivative instruments only with
counterparties that the Advisor reasonably believes are
capable of performing under the contract.
(3) Correlation Risk. When a derivative
transaction is used to completely hedge another
position, changes in the market value of the combined
position (the derivative instrument plus the position
being hedged) result from an imperfect correlation
between the price movements of the two instruments.
With a perfect hedge, the value of the combined
position remains unchanged for any change in the price
of the underlying asset. With an imperfect hedge, the
value of the derivative instrument and its hedge are
not perfectly correlated. Correlation risk is the risk
that there might be imperfect correlation, or even no
correlation, between price movements of an instrument
and price movements of investments being hedged. For
example, if the value of a derivative instrument used
in a short hedge (such as writing a call option, buying
a put option or selling a futures contract) increased
by less than the decline in value of the hedged
investments, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due
to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on
the markets in which these instruments are traded. The
effectiveness of hedges using instruments on indices
will depend, in part, on the degree of correlation
between price movements in the index and price
movements in the investments being hedged.
(4) Liquidity Risk. Derivatives are also subject
to liquidity risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out or
replaced quickly at or very close to its fundamental
value.
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Generally, exchange contracts are very liquid
because the exchange clearinghouse is the counterparty
of every contract. OTC transactions are less liquid
than exchange-traded derivatives since they often can
only be closed out with the other party to the
transaction. The Fund might be required by applicable
regulatory requirements to maintain assets as "cover,"
maintain segregated accounts and/or make margin
payments when it takes positions in derivative
instruments involving obligations to third parties
(i.e., instruments other than purchased options). If
the Fund is unable to close out its positions in such
instruments, it might be required to continue to
maintain such assets or accounts or make such payments
until the position expired, matured or is closed out.
The requirements might impair the Fund's ability to
sell a portfolio security or make an investment at a
time when it would otherwise be favorable to do so, or
require that the Fund sell a portfolio security at a
disadvantageous time. The Fund's ability to sell or
close out a position in an instrument prior to
expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a
market, the ability and willingness of the counterparty
to enter into a transaction closing out the position.
Therefore, there is no assurance that any derivatives
position can be sold or closed out at a time and price
that is favorable to the Fund.
(5) Legal Risk. Legal risk is the risk of loss
caused by the legal unenforceability of a party's
obligations under the derivative. While a party
seeking price certainty agrees to surrender the
potential upside in exchange for downside protection,
the party taking the risk is looking for a positive
payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting
various legal uncertainties about certain derivative
products.
(6) Systemic or "Interconnection" Risk.
Interconnection risk is the risk that a disruption in
the financial markets will cause difficulties for all
market participants. In other words, a disruption in
one market will spill over into other markets, perhaps
creating a chain reaction. Much of the OTC derivatives
market takes place among the OTC dealers themselves,
thus creating a large interconnected web of financial
obligations. This interconnectedness raises the
possibility that a default by one large dealer could
create losses for other dealers and destabilize the
entire market for OTC derivative instruments.
General Limitations. The use of derivative
instruments is subject to applicable regulations of the
Securities and Exchange Commission (the "SEC"), the
several options and futures exchanges upon which they
may be traded, the Commodity Futures Trading Commission
(the "CFTC") and various state regulatory authorities.
The Corporation has filed a notice of eligibility
for exclusion from the definition of the term
"commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in
the futures markets. In accordance with Rule 4.5 of
the regulations under the Commodities Exchange Act (the
"CEA"), the notice of eligibility for the Fund includes
representations that the Fund will use futures
contracts and related options solely for bona fide
hedging purposes within the meaning of CFTC
regulations, provided that the Fund may hold other
positions in futures contracts and related options that
do not qualify as a bona fide hedging position if the
aggregate initial margin deposits and premiums required
to establish these positions, less the amount by which
any such futures contracts and related options
positions are "in the money," do not exceed 5% of the
Fund's net assets. Adherence to these guidelines does
not, however, limit the Fund's risk to 5% of the Fund's
assets.
The SEC has identified certain trading practices
involving derivative instruments that involve the
potential for leveraging the Fund's assets in a manner
that raises issues under the 1940 Act. In order to
limit the potential for the leveraging of the Fund's
assets, as defined under the 1940 Act, the SEC has
stated that the Fund may use coverage or the
segregation of the Fund's assets. The Fund will also
set aside permissible liquid assets in a segregated
custodial account if required to do so by SEC and CFTC
regulations. Assets used as cover or held in a
segregated account cannot be sold while the derivative
position is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion
of the Fund's assets to segregated accounts could
impede portfolio management or the Fund's ability to
meet redemption requests or other current obligations.
In some cases the Fund may be required to maintain
or limit exposure to a specified percentage of its
assets to a particular asset class. In such cases,
when the Fund uses a derivative instrument to increase
or decrease exposure to an asset class and is required
by applicable SEC guidelines to set aside liquid assets
in a segregated account to secure its obligations under
the derivative instruments, the Advisor may, where
reasonable in light of the circumstances, measure
compliance with the applicable percentage by reference
to the nature of the economic exposure created through
the use
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of the derivative instrument and by reference
to the nature of the exposure arising from the assets
set aside in the segregated account.
Options. The Fund may use options for any lawful
purpose consistent with the Fund's investment objective
such as hedging or managing risk but not for
speculation. An option is a contract in which the
"holder" (the buyer) pays a certain amount (the
"premium") to the "writer" (the seller) to obtain the
right, but not the obligation, to buy from the writer
(in a "call") or sell to the writer (in a "put") a
specific asset at an agreed upon price (the "strike
price" or "exercise price") at or before a certain time
(the "expiration date"). The holder pays the premium
at inception and has no further financial obligation.
The holder of an option will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option will receive fees or premiums but
is exposed to losses due to changes in the value of the
underlying asset. The Fund may purchase (buy) or write
(sell) put and call options on assets, such as
securities, currencies, commodities and indices of debt
and equity securities ("underlying assets") and enter
into closing transactions with respect to such options
to terminate an existing position. Options used by the
Fund may include European, American and Bermuda style
options. If an option is exercisable only at maturity,
it is a "European" option; if it is also exercisable
prior to maturity, it is an "American" option. If it
is exercisable only at certain times, it is a "Bermuda"
option.
The Fund may purchase (buy) and write (sell) put
and call options and enter into closing transactions
with respect to such options to terminate an existing
position. The purchase of call options serves as a
long hedge, and the purchase of put options serves as a
short hedge. Writing put or call options can enable
the Fund to enhance income by reason of the premiums
paid by the purchaser of such options. Writing call
options serves as a limited short hedge because
declines in the value of the hedged investment would be
offset to the extent of the premium received for
writing the option. However, if the security
appreciates to a price higher than the exercise price
of the call option, it can be expected that the option
will be exercised and the Fund will be obligated to
sell the security at less than its market value or will
be obligated to purchase the security at a price
greater than that at which the security must be sold
under the option. All or a portion of any assets used
as cover for OTC options written by the Fund would be
considered illiquid to the extent described under
"INVESTMENT POLICIES AND TECHNIQUES _ Illiquid
Securities." Writing put options serves as a limited
long hedge because increases in the value of the hedged
investment would be offset to the extent of the premium
received for writing the option. However, if the
security depreciates to a price lower than the exercise
price of the put option, it can be expected that the
put option will be exercised and the Fund will be
obligated to purchase the security at more than its
market value.
The value of an option position will reflect,
among other things, the historical price volatility of
the underlying investment, the current market value of
the underlying investment, the time remaining until
expiration, the relationship of the exercise price to
the market price of the underlying investment and
general market conditions.
The Fund may effectively terminate its right or
obligation under an option by entering into a closing
transaction. For example, the Fund may terminate its
obligation under a call or put option that it had
written by purchasing an identical call or put option;
this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put
or call option it had purchased by writing an identical
put or call option; this is known as a closing sale
transaction. Closing transactions permit the Fund to
realize the profit or limit the loss on an option
position prior to its exercise or expiration.
The Fund may purchase or write both exchange-
traded and OTC options. Exchange-traded options are
issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect,
guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts
between the Fund and the other party to the transaction
("counterparty") (usually a securities dealer or a
bank) with no clearing organization guarantee. Thus,
when the Fund purchases or writes an OTC option, it
relies on the counterparty to make or take delivery of
the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in
the loss of any premium paid by the Fund as well as the
loss of any expected benefit of the transaction.
The Fund's ability to establish and close out
positions in exchange-listed options depends on the
existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options
for which there appears to be a liquid secondary
market. However, there can be no assurance that such a
market will exist at any particular time.
<PAGE>
Closing
transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market
exists. Although the Fund will enter into OTC options
only with counterparties that are expected to be
capable of entering into closing transactions with the
Fund, there is no assurance that the Fund will in fact
be able to close out an OTC option at a favorable price
prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an
OTC option position at any time prior to its
expiration. If the Fund were unable to effect a
closing transaction for an option it had purchased, it
would have to exercise the option to realize any
profit.
The Fund may engage in options transactions on
indices in much the same manner as the options on
securities discussed above, except the index options
may serve as a hedge against overall fluctuations in
the securities market in general.
The writing and purchasing of options is a highly
specialized activity that involves investment
techniques and risks different from those associated
with ordinary portfolio securities transactions.
Imperfect correlation between the options and
securities markets may detract from the effectiveness
of attempted hedging.
Spread Transactions. The Fund may use spread
transactions for any lawful purpose consistent with the
Fund's investment objective such as hedging or managing
risk, but not for speculation. The Fund may purchase
covered spread options from securities dealers. Such
covered spread options are not presently exchange-
listed or exchange-traded. The purchase of a spread
option gives the Fund the right to put, or sell, a
security that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that
the Fund does not own, but which is used as a
benchmark. The risk to the Fund in purchasing covered
spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition,
there is no assurance that closing transactions will be
available. The purchase of spread options will be used
to protect the Fund against adverse changes in
prevailing credit quality spreads (i.e., the yield
spread between high quality and lower quality
securities). Such protection is only provided during
the life of the spread option.
Futures Contracts. The Fund may use futures
contracts for any lawful purpose consistent with the
Fund's investment objective such as hedging and
managing risk but not for speculation. The Fund may
enter into futures contracts, including interest rate
and index futures. The Fund may also purchase put and
call options, and write covered put and call options,
on futures in which it is allowed to invest. The
purchase of futures or call options thereon can serve
as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures
contracts can serve as a limited short hedge, and
writing covered put options on futures contracts can
serve as a limited long hedge, using a strategy similar
to that used for writing covered options in securities.
The Fund's hedging may include purchases of futures as
an offset against the effect of expected increases in
currency exchange rates and securities prices and sales
of futures as an offset against the effect of expected
declines in currency exchange rates and securities
prices. The Fund may also write put options on futures
contracts while at the same time purchasing call
options on the same futures contracts in order to
create synthetically a long futures contract position.
Such options would have the same strike prices and
expiration dates. The Fund will engage in this
strategy only when the Advisor believes it is more
advantageous to the Fund than purchasing the futures
contract.
To the extent required by regulatory authorities,
the Fund may enter into futures contracts that are
traded on national futures exchanges and are
standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading
are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures
contracts could be used to reduce the Fund's exposure
to market, currency or interest rate fluctuations, the
Fund may be able to hedge its exposure more effectively
and perhaps at a lower cost through using futures
contracts.
An interest rate futures contract provides for the
future sale by one party and purchase by another party
of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a
specified price at a designated date, time and place.
An index futures contract is an agreement pursuant to
which the parties agree to take or make delivery of an
amount of cash equal to the difference between the
value of the index at the close of the last trading day
of the contract and the price at which the index
futures contract was originally written. Transaction
costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as
the case may be, of the instrument or the currency or
by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out
prior to delivery by entering into an offsetting
<PAGE>
transaction in a matching futures contract. Although
the value of an index might be a function of the value
of certain specified securities, no physical delivery
of those securities is made. If the offsetting
purchase price is less than the original sale price,
the Fund realizes a gain; if it is more, the Fund
realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, the
Fund realizes a gain; if it is less, the Fund realizes
a loss. The transaction costs must also be included in
these calculations. There can be no assurance,
however, that the Fund will be able to enter into an
offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is
not able to enter into an offsetting transaction, the
Fund will continue to be required to maintain the
margin deposits on the futures contract.
No price is paid by the Fund upon entering into a
futures contract. Instead, at the inception of a
futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of
the futures broker through whom the transaction was
effected, "initial margin," consisting of cash, U.S.
government securities or other liquid debt obligations,
in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in
accordance with applicable exchange rules. Unlike
margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but
rather is in the nature of a performance bond or good-
faith deposit that is returned to the Fund at the
termination of the transaction if all contractual
obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the
level of its initial margin payment, and initial margin
requirements might be increased generally in the future
by regulatory action.
Subsequent "variation margin" payments are made to
and from the futures broker daily as the value of the
futures position varies, a process known as "marking to
market." Variation margin does not involve borrowing,
but rather represents a daily settlement of the Fund's
obligations to or from a futures broker. When the Fund
purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast,
when the Fund purchases or sells a futures contract or
writes a call or put option thereon, it is subject to
daily variation margin calls that could be substantial
in the event of adverse price movements. If the Fund
has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a
time when such sales are disadvantageous. Purchasers
and sellers of futures positions and options on futures
can enter into offsetting closing transactions by
selling or purchasing, respectively, an instrument
identical to the instrument held or written. Positions
in futures and options on futures may be closed only on
an exchange or board of trade that provides a secondary
market. The Fund intends to enter into futures
transactions only on exchanges or boards of trade where
there appears to be a liquid secondary market.
However, there can be no assurance that such a market
will exist for a particular contract at a particular
time.
Under certain circumstances, futures exchanges may
establish daily limits on the amount that the price of
a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price
beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily
limit for several consecutive days with little or no
trading, thereby preventing liquidation of unfavorable
positions.
If the Fund were unable to liquidate a futures or
option on a futures contract position due to the
absence of a liquid secondary market or the imposition
of price limits, it could incur substantial losses.
The Fund would continue to be subject to market risk
with respect to the position. In addition, except in
the case of purchased options, the Fund would continue
to be required to make daily variation margin payments
and might be required to maintain the position being
hedged by the future or option or to maintain certain
liquid securities in a segregated account.
Certain characteristics of the futures market
might increase the risk that movements in the prices of
futures contracts or options on futures contracts might
not correlate perfectly with movements in the prices of
the investments being hedged. For example, all
participants in the futures and options on futures
contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or
options on futures contracts positions whose prices are
moving unfavorably to avoid being subject to further
calls. These liquidations could increase the price
volatility of the instruments and distort the normal
price relationship between the futures or options and
the investments being hedged. Also, because initial
margin deposit requirements in the futures markets are
less onerous than margin requirements in the securities
markets, there might be increased participation by
speculators in the future markets. This participation
also might cause temporary price distortions. In
addition, activities of large traders in both the
futures and
<PAGE>
securities markets involving arbitrage,
"program trading" and other investment strategies might
result in temporary price distortions.
Warrants
The Fund may invest in warrants, valued at the
lower of cost or market, if, after giving effect
thereto, not more than 5% of its net assets will be
invested in warrants, other than warrants acquired in
units or attached to other securities. Warrants are
options to purchase equity securities at a specific
price for a specific period of time. They do not
represent ownership of the securities but only the
right to buy them. Investing in warrants is purely
speculative in that they have no voting rights, pay no
dividends and have no rights with respect to the assets
of the corporation issuing them. In addition, the
value of the warrant does not necessarily change with
the value of the underlying security, and a warrant
ceases to have value if it is not exercised prior to
its expiration date.
When-Issued Securities
The Fund may from time to time invest up to 5% of
its net assets in securities issued on a "when-issued"
basis. The price of securities purchased on a when-
issued basis is fixed at the time the commitment to
purchase is made, with delivery and payment for the
securities occurring at a later date. Normally, the
settlement date occurs within 45 days of the purchase.
During the period between the purchase and settlement,
no payment is made by the Fund to the issuer, and no
interest is accrued on debt securities or dividend
income is earned on equity securities. Forward
commitments involve a risk of loss if the value of the
security to be purchased declines prior to the
settlement date, which risk is in addition to the risk
of decline in value of the Fund's other assets. While
when-issued securities may be sold prior to the
settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them.
At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the
transaction and reflect the value of the security in
determining its net asset value.
The Fund will maintain liquid securities equal in
value to commitments for when-issued securities. Such
segregated securities either will mature or, if
necessary, be sold on or before the settlement date.
When the time comes to pay for when-issued securities,
the Fund will meet its obligations from then available
cash flow, sale of the securities held in the separate
account described above, sale of other securities or,
although it would not normally expect to do so, from
the sale of the when-issued securities themselves
(which may have a market value greater or less than the
Fund's payment obligation).
Repurchase Obligations
The Fund may enter into repurchase agreements with
respect to no more than 5% of its net assets with
certain banks and certain non-bank dealers. In a
repurchase agreement, the Fund buys a security at one
price and, at the time of the sale, the seller agrees
to repurchase the obligation at a mutually agreed upon
time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield
during the purchaser's holding period, while the
seller's obligation to repurchase is secured by the
value of the underlying security. The Advisor will
monitor, on an ongoing basis, the value of the
underlying securities to ensure that the value always
equals or exceeds the repurchase price plus accrued
interest. Repurchase agreements could involve certain
risks in the event of a default or insolvency of the
other party to the agreement, including possible delays
or restrictions upon the Fund's ability to dispose of
the underlying securities. Although no definitive
creditworthiness criteria are used, the Advisor reviews
the creditworthiness of the banks and non-bank dealers
with which the Fund enters into repurchase agreements
to evaluate those risks.
Lending of Portfolio Securities
The Fund may lend its portfolio securities, up to
5% of its total assets, to broker-dealers or
institutional investors. The loans will be secured
continuously by collateral equal at least to the value
of the securities lent by "marking to market" daily.
The collateral may consist of cash, government
securities, letters of credit or other collateral
permitted by regulatory agencies. The Fund will
continue to receive the equivalent of the interest or
dividends paid by the issuer of the securities lent.
The Fund may also receive interest on the investment of
the collateral or a fee from the borrower as
compensation for the loan. The Fund may pay reasonable
custodial and
<PAGE>
administrative fees in connection with a
loan. The Fund will retain the right to call, upon
notice, the lent securities. While there may be delays
in recovery or even loss of rights in the collateral
should the borrower fail financially, the Advisor will
review the creditworthiness of the entities to which
loans are made to evaluate those risks.
DIRECTORS AND OFFICERS OF THE CORPORATION
Directors and officers of the Corporation,
together with information as to their principal
business occupations during at least the last five
years, and other information, are shown below. Each
director who is deemed an "interested person," as
defined in the 1940 Act, is indicated by an asterisk.
*David M. Klaskin, President and a Director of the
Corporation (DOB 8/6/60).
Mr. Klaskin has been the President, Treasurer,
Chief Investment Officer and a Managing Member of
the Advisor since it began operations in July
1997. Mr. Klaskin has also been the President,
Treasurer, Chief Investment Officer and a Director
of the Advisor's predecessor and the Fund's
principal distributor, Oak Ridge Investments, Inc.
(the "Distributor"), since its founding in
September 1989. For the eight years prior to
that, Mr. Klaskin was a Financial Consultant with
Shearson/Lehman Brothers responsible for managing
funds for both individual and institutional
clients. Mr. Klaskin graduated from Indiana
University with a B.S. in Finance.
*Samuel Wegbreit, Chairman of the Board, Treasurer,
Assistant Secretary and a Director of the Corporation
(DOB 9/28/57).
Mr. Wegbreit has been the Chairman, Secretary and
a Managing Member of the Advisor since July 1997.
Mr. Wegbreit has also been the Chairman, Secretary
and a Director of the Distributor since September
1989. From April 1988 until September 1989, Mr.
Wegbreit was a self-employed Securities Trader.
From 1983 until 1988, Mr. Wegbreit was a
Securities Trader and Vice-President with Morgan
Stanley & Co. Mr. Wegbreit graduated from Brown
University with a B.S. in Applied Mathematics.
Daniel A. Kaplan, a Director of the Corporation (DOB
4/5/60).
Mr. Kaplan is a Certified Public Accountant and
the President of Loft Development Corporation.
Mr. Kaplan has been employed by Loft Development
Corporation since 1986.
Mark C. Pappas, Secretary of the Corporation (DOB
5/16/68).
Mr. Pappas has been Senior Vice President of the
Advisor since July 1997, and has held the same
position with the Distributor since 1993. From
1992 until 1993, Mr. Pappas was the Senior
Portfolio Analyst for the General Board of
Pensions of the United Methodist Church. From
1990 until 1992, Mr. Pappas was a Consultant with
the Distributor. Mr. Pappas graduated from Purdue
University with a B.S. in Economics/Finance.
A. Charlene Sullivan, Ph.D., a Director of the
Corporation (DOB 1/21/49).
Dr. Sullivan has been an Associate Professor of
Finance at Purdue University since 1978.
Martin Z. Craig, a Director of the Corporation (DOB
9/5/54).
Mr. Craig has been the principal of Craig Capital
Investments since January 1991. From 1988 until
1990, Mr. Craig was the Executive Vice President
and a Director of HHL Financial Services, Inc.
Except for Mr. Kaplan, Dr. Sullivan and Mr. Craig,
the address of all of the above persons is Oak Ridge
Investments, LLC, 10 South LaSalle Street, Suite 1050,
Chicago, Illinois 60603. Mr. Kaplan's address is 641
West Lake Street, Suite 401, Chicago, Illinois 60661;
Dr. Sullivan's address is Purdue University, Krannert
Center, #217, West Lafayette, Indiana 47907; and Mr.
Craig's address is 854 Bluff Street, Glencoe, Illinois
60022.
<PAGE>
As of February 28, 1997, officers and directors of
the Corporation beneficially owned 24,989 shares of the
Fund's Class A shares, which was 3.81% of the class'
then outstanding shares, and none of the Fund's Class C
shares. Directors and officers of the Corporation who
are officers, directors, employees or shareholders of
the Advisor do not receive any remuneration from the
Corporation or the Fund for serving as directors or
officers.
The following table provides information relating
to compensation paid to directors of the Corporation
for their services as such for the fiscal year ended
November 30, 1997:
Name Cash Other Total
Compensation(1) Compensation
David M. Klaskin $ 0 $ 0 $ 0
Samuel Wegbreit $ 0 $ 0 $ 0
Daniel A. Kaplan $1,000 $ 0 $1,000
A. Charlene $1,000 $ 0 $1,000
Sullivan
Martin Z. Craig $250 $ 0 $250
All directors $2,250 $ 0 $2,250
as a group (5
persons)
___________________
(1) Each director who is not deemed an "interested
person," as defined in the 1940 Act, receives $250
for each Board of Directors meeting attended by
such person. The Board held four meetings during
fiscal 1997.
PRINCIPAL SHAREHOLDERS
As of February 28, 1998, the following persons
owned of record or are known by the Corporation to own
of record or beneficially 5% or more of the outstanding
shares of one or both classes of shares of the Fund:
Name and Address of
Beneficial Owner Number of Percent of Percent of
Shares Class Total Fund
Firstar Trust Company 3,527.917 19.26% 0.57%
- - Custodian for Class C shares
Margaret P. McGuire -
IRA Rollover
545 N. Eagle Island
Road Kankakee, IL 60901-
7551
Rauscher Pierce 2,529.933 13.81% 0.41%
Refsnes Class C shares
George Sokulski - IRA
928 N. Crestview
Drive Palatine, IL 60067-
3414
Firstar Trust Company 1,367.605 7.46% 0.22%
- - Custodian for Kerry Class C shares
S. Fisher - IRA
Rollover
688 Wortham Circle
Mundelein, IL 60060
David M. Togliatti & 1,326.040 7.24% 0.21%
Donna L. Togliatti - Class C shares
Joint Tenants
1115 E. 3rd Street
Coal City, IL 60416-
1324
<PAGE>
Rauscher Pierce 1,163.511 6.35% 0.19%
Refsnes Class C shares
John L. Kelliber
c/o R.R. Donnelly
2512 N. Bosworth
Avenue, Apt. 407
Chicago, IL 60614-
2085
Gary Nickander 1,132.781 6.18% 0.18%
112 Park 32 Drive Class C shares
West Noblesville, IN
46060-9252
Rauscher Pierce 1,074.505 5.87% 0.17%
Refsnes Class C shares
Lance Laconi - IRA
698 Mayfair Lane
Carmel, IN 46032-
8650
As of February 28, 1998 no person owned a
controlling interest in the Fund.
INVESTMENT ADVISOR AND DISTRIBUTOR
Prior to July 1997, Oak Ridge Investments, Inc.,
the Fund's principal distributor, also served as the
Fund's investment advisor. In July 1997, Oak Ridge
Investments, LLC succeeded to Oak Ridge Investments,
Inc.'s investment advisory business. Accordingly, at
that time, Oak Ridge Investments, LLC became the
investment advisor to the Fund. Oak Ridge Investments,
Inc. continues to serve as the Fund's principal
distributor.
Oak Ridge Investments, LLC (the "Advisor") is
managed and owned by the same persons who manage and
own Oak Ridge Investments, Inc. (the "Distributor").
Specifically, Mr. Klaskin is the President, Treasurer,
Chief Investment Officer and a Managing Member of the
Advisor; Mr. Wegbreit is the Chairman, Secretary and a
Managing Member of the Advisor; and each such person
owns shares representing more than 35% but less than
51% of the Advisor. Mr. Klaskin also serves as the
President, Treasurer, Chief Investment Officer and a
Director of the Distributor; Mr. Wegbreit also serves
as the Chairman, Secretary and a Director of the
Distributor; and each such person owns shares
representing more than 35% but less than 51% of the
Distributor. Mr. Pappas is the Senior Vice President
of both the Advisor and the Distributor.
The Fund's amended and restated investment
advisory agreement is dated as of March 31, 1998 (the
"Advisory Agreement"). The term of the Advisory
Agreement begins on March 31, 1998 and will continue in
effect for successive periods of one year if such
continuation is approved annually by the Board of
Directors of the Corporation or by vote of a majority
of the Fund's outstanding voting securities (as defined
in the 1940 Act). Each annual renewal must also be
approved by the vote of a majority of the Corporation's
directors who are not parties to the Advisory Agreement
or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such
approval. The Advisory Agreement was approved by the
directors, including a majority of the disinterested
directors, on January 22, 1998. The Advisory Agreement
is terminable without penalty, on 60 days' written
notice by the Board of Directors of the Corporation, by
vote of a majority of the Corporation's outstanding
voting securities or by the Advisor, and will terminate
automatically in the event of its assignment.
Under the terms of the Advisory Agreement, the
Advisor manages the Fund's investments subject to the
supervision of the Corporation's Board of Directors.
The Advisor is responsible for investment decisions and
supplies investment research and portfolio management.
At its expense, the Advisor provides office space and
all necessary office facilities, equipment and
personnel for servicing the investments of the Fund.
As compensation for its services, the Corporation, on
behalf of the Fund, pays to the Advisor a monthly
advisory fee at the annual rate of 1.00% of the average
daily net assets of the Fund. From time to time, the
Advisor may voluntarily waive all or a portion of its
management fee and/or absorb expenses for one or both
classes of shares of the Fund. For the fiscal years
ended November 30, 1995 and 1996, the Fund did not pay
an advisory fee to the Advisor because the Advisor
waived its
<PAGE>
entire advisory fee. If the Advisor had not
agreed to waive the advisory fee, the Advisor would
have received $33,642 and $62,131 in 1995 and 1996,
respectively, for its investment advisory services.
For the fiscal year ended November 30, 1997, the Fund
paid the Advisor $12,006 for its investment advisory
services. The Advisor would have received $97,117 had
it not waived $85,111 of its fee in 1997. A brief
description of the Fund's Advisory Agreement is set
forth in the Prospectus under "MANAGEMENT." The
organizational expenses of the Fund were advanced by
the Advisor and will be reimbursed by the Fund over a
period of not more than 60 months. The organizational
expenses for the Fund were approximately $44,002.
Under a Distribution Agreement dated January 3,
1994 (the "Distribution Agreement"), the Distributor
acts as the principal distributor of the Fund's shares.
The Distribution Agreement provides that the
Distributor will use its best efforts to distribute the
Fund's shares. The Fund's Class A shares are offered
for sale by the Fund continuously at net asset value
per share plus a maximum initial sales charge of 4.25%
of the offering price. The Fund's Class C shares are
offered continuously at net asset value. Existing
shareholders of the Fund's Class A shares as of
December 31, 1995 are not subject to the sales charge
on additional purchases of Fund shares. In addition,
no sales charge is imposed on the reinvestment of
dividends or capital gains. Certain other exceptions
to the imposition of the sales charge apply, as
discussed more fully in the Prospectus under the
caption "HOW TO PURCHASE SHARES _ Purchases at Net
Asset Value _ Class A Shares." These exceptions are
made available because minimal or no sales effort is
required with respect to the categories of investors so
excepted. Pursuant to the terms of the Distribution
Agreement, the Distributor bears the costs of printing
prospectuses and shareholder reports which are used for
selling purposes, as well as advertising and any other
costs attributable to the distribution of Fund shares.
For the fiscal years ended November 30, 1995, 1996 and
1997, the Distributor did not receive any compensation
for its services under the Distribution Agreement. The
Distribution Agreement is subject to the same
termination and renewal provisions as are described
above with respect to the Advisory Agreement, except
that the Distribution Agreement need not be approved by
the Fund's shareholders.
DISTRIBUTION PLANS
Description of Plans
The Fund has adopted a plan of distribution for
each class of shares (the "Class A Plan" and the "Class
C Plan") pursuant to Rule 12b-1 under the 1940 Act,
which requires it to pay the Distributor certain
distribution and/or service fees. Under the Class A
Plan, the Fund is required to pay the Distributor a
distribution fee for the promotion and distribution of
the Class A shares of up to 0.25% per annum of the
average daily net assets of the Fund attributable to
the Class A shares. The Class C Plan requires the Fund
to pay the Distributor (i) a distribution fee of up to
0.75% per annum of the average daily net assets of the
Fund attributable to the Class C shares, and (ii) a
service fee for personal services provided to
shareholders and/or the maintenance of shareholder
accounts of up to 0.25% per annum of the average daily
net assets of the Fund attributable to the Class C
shares. Under both plans, the Distributor is
authorized to, in turn, pay all or a portion of the fee
it receives from the Fund to any securities dealer,
financial institution or any other person (the
"Recipient") who renders assistance in distributing or
promoting the sale of Fund shares or, with respect to
the Class C shares only, who provide certain
shareholder services to the holders of such class of
shares, pursuant to a written agreement (the "Rule
12b-1 Related Agreement"). To the extent such fee is
not paid to such persons, the Distributor may use the
fee for its own distribution expenses incurred in
connection with the sale of the Fund's shares and, with
respect to the Class C shares only, for any of its
shareholder servicing expenses incurred in connection
with servicing the holders of such class of shares,
although it is the Distributor's current intention to
pay out all or most of the fee under both plans. A
form of the 12b-1 Related Agreement referred to above
has been approved by a majority of the Board of
Directors, and of the members of the Board who are not
"interested persons" of the Fund as defined in the 1940
Act and who have no direct or indirect financial
interest in the operation of the plans or any related
agreements (the "Disinterested Directors") voting
separately. Accordingly, the Distributor may enter
into 12b-1 Related Agreements with securities dealers,
financial institutions or other persons without further
Board approval.
Payment of the distribution and/or service fee is
to be made quarterly, within 30 days after the close of
the quarter for which the fee is payable, upon the
Distributor forwarding to the Board of Directors a
written report of all amounts expensed pursuant to the
applicable plan; provided, however, that the aggregate
payments by the Fund under the Class A Plan to the
Distributor and all Recipients may not exceed 0.25% (on
an annualized basis) of the Fund's average net assets
attributable to the Class A shares for that quarter,
and the aggregate payments by the Fund under the Class
C Plan to the Distributor and all Recipients may not
exceed 1.00% (on an annualized basis) of the Fund's
<PAGE>
average net assets attributable to the Class C shares
for that quarter; and provided further that no fee may
be paid in excess of the expenses as set forth in the
quarterly written report. Thus, neither the Class A
Plan nor the Class C Plan provide for the payment of
distribution and/or service fees in subsequent periods
that relate to expenses incurred in prior periods.
Each plan, and any Rule 12b-1 Related Agreement
which is entered into, will continue in effect for a
period of more than one year only so long as its
continuance is specifically approved at least annually
by a vote of a majority of the Fund's Board of
Directors, and of the Disinterested Directors, cast in
person at a meeting called for the purpose of voting on
the plan, or the Rule 12b-1 Related Agreement, as
applicable. In addition, both plans, and any Rule
12b-1 Related Agreement, may be terminated at any time,
without penalty, by vote of a majority of the
outstanding voting securities of the applicable class
of shares to which the plan relates, or by vote of a
majority of Disinterested Directors (on not more than
sixty (60) days' written notice in the case of the Rule
12b-1 Related Agreement only).
Amounts Expensed Under the Plans
For the fiscal year ended November 30, 1997, the
Fund paid out $4,375 under the Class A Plan and $581
under the Class C Plan. The Class C Plan became
effective on March 1, 1997. With respect to the Class
A Plan, of the $4,375 expensed, $2,339 was spent on
printing and mailing prospectuses to other than current
shareholders, $1,093 was spent on advertising and $943
was spent on dealer compensation. With respect to the
Class C Plan, of the $581 expensed, $44 was spent on
printing and mailing prospectuses to other than current
shareholders, $0 was spent on advertising and $537 was
spent on dealer compensation. The Distributor did not
retain any of the amounts expensed under the Class A or
Class C Plan.
Interests of Certain Persons
With the exception of the Advisor, in its capacity
as the Fund's investment advisor, and the Distributor,
in its capacity as principal distributor of Fund
shares, no "interested person" of the Fund, as defined
in the 1940 Act, and no director of the Fund who is not
an "interested person" has or had a direct or indirect
financial interest in either the Class A or the Class C
Plan or any Rule 12b-1 Related Agreement.
Benefits to the Fund
Class A Plan. The Class A Plan has been in effect
since January 1, 1996. The benefits to the holders of
the Fund's Class A shares resulting from the
implementation of the Class A Plan include providing
Recipients with incentives to promote the sale of such
shares, which in turn has resulted in an increase in
assets under management with respect to the Class A
shares. This increase has benefited the holders of the
Class A shares by providing the class with a larger
asset base over which to spread expenses.
Class C Plan. The Class C Plan has been in effect
since March 1, 1997. Accordingly, as of November 30,
1997, the plan had been in place for only eight months.
Nevertheless, the Board of Directors believes that the
Class C Plan has already provided the holders of Class
C shares with certain benefits, including an enhanced
level of personal service from Recipients who receive
service fees from the Fund under the Class C Plan. The
Board also believes that over time, the Class C Plan
will help to increase the size of the class, thereby
providing the class with a larger asset base over which
to spread expenses. Should the Class C Plan not
provide the benefits the Board anticipates, the Board
will re-evaluate whether to continue the plan.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As investment advisor to the Fund, the Advisor is
responsible for decisions to buy and sell securities
for the Fund and for the placement of the Fund's
portfolio business, the negotiation of the commissions
to be paid on such transactions and the allocation of
portfolio brokerage and principal business. It is the
policy of the Advisor to seek the best execution at the
best security price available with respect to each
transaction, in light of the overall quality of
brokerage and research services provided to the Advisor
or the Fund. The best price to the Fund means the best
net price without regard to the mix between purchase or
sale price and commission, if any. Purchases may be
made from
<PAGE>
underwriters, dealers and, on occasion, the
issuers. Commissions will be paid on the Fund's
futures and options transactions, if any. The purchase
price of portfolio securities purchased from an
underwriter or dealer may include underwriting
commissions and dealer spreads. The Fund may pay
mark-ups on principal transactions. In selecting
broker-dealers and in negotiating commissions, the
Advisor considers the firm's reliability, the quality
of its execution services on a continuing basis and its
financial condition. Brokerage will not be allocated
based on the sale of the Fund's shares. As noted in
the Prospectus under the caption "PORTFOLIO
TRANSACTIONS," pursuant to guidelines adopted by the
Corporation's Board of Directors and in accordance with
the rules of the SEC, the Distributor, which is an
affiliate of the Advisor, may serve as a broker to the
Fund; however, in order for the Distributor to effect
any portfolio transactions for the Fund on an exchange,
the commissions, fees or other remuneration received by
the Distributor must be reasonable and fair compared to
the commissions, fees or other remuneration paid to
other brokers in connection with comparable
transactions involving similar securities being
purchased or sold on any exchange during a comparable
period of time. This standard allows the Distributor
to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a
commensurate arm's-length transaction.
The aggregate amount of brokerage commissions paid
by the Fund for the fiscal years ended November 30,
1995, 1996 and 1997 was $4,635, $14,333 and $8,501,
respectively. Of these total brokerage commissions,
the Distributor received $2,058, $6,352 and $8,021 in
1995, 1996 and 1997, respectively. Accordingly, for
the year ended November 30, 1997, 94% of the aggregate
brokerage commissions paid by the Fund were paid to the
Distributor, and 95% of the aggregate dollar amount of
Fund transactions involving the payment of commissions
were effected through the Distributor.
Section 28(e) of the Securities Exchange Act of
1934, as amended ("Section 28(e)"), permits an
investment advisor, under certain circumstances, to
cause an account to pay a broker or dealer who supplies
brokerage and research services a commission for
effecting a transaction in excess of the amount of
commission another broker or dealer would have charged
for effecting the transaction. Brokerage and research
services include (a) furnishing advice as to the value
of securities, the advisability of investing,
purchasing or selling securities and the availability
of securities or purchasers or sellers of securities;
(b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and
(c) effecting securities transactions and performing
functions incidental thereto (such as clearance,
settlement and custody).
The Advisor is responsible for selecting brokers
in connection with securities transactions. In
selecting such brokers, the Advisor considers
investment and market information and other research,
such as economic, securities and performance
measurement research provided by such brokers and the
quality and reliability of brokerage services,
including execution capability, performance and
financial responsibility. Accordingly, the commissions
charged by any such broker may be greater than the
amount another firm might charge if the Advisor
determines in good faith that the amount of such
commissions is reasonable in relation to the value of
the research information and brokerage services
provided by such broker to the Fund. The Advisor
believes that the research information received in this
manner provides the Fund with benefits by supplementing
the research otherwise available to the Fund. The
Advisory Agreement provides that such higher
commissions will not be paid by the Fund unless (a) the
Advisor determines in good faith that the amount is
reasonable in relation to the services in terms of the
particular transaction or in terms of the Advisor's
overall responsibilities; and (b) such payment is made
in compliance with the provisions of Section 28(e) and
other applicable state and federal laws. In addition,
such higher commissions will not be paid by the Fund
with respect to portfolio transactions in which the
Distributor is serving as broker to the Fund. The
investment advisory fees paid by the Fund under the
Advisory Agreement are not reduced as a result of the
Advisor's receipt of research services. The Fund did
not pay brokerage commissions for the fiscal years
ended November 30, 1995, 1996 and 1997 for transactions
for which research services were provided.
The Advisor places portfolio transactions for
other advisory accounts managed by the Advisor.
Research services furnished by firms through which the
Fund effects its securities transactions may be used by
the Advisor in servicing all of its accounts; not all
of such services may be used by the Advisor in
connection with the Fund. The Advisor believes it is
not possible to measure separately the benefits from
research services to each of the accounts (including
the Fund) managed by it. Because the volume and nature
of the trading activities of the accounts are not
uniform, the amount of commissions in excess of those
charged by another broker paid by each account for
brokerage and research services will vary. However,
the Advisor believes such costs to the Fund will not be
disproportionate to
<PAGE>
the benefits received by the Fund
on a continuing basis. The Advisor seeks to allocate
portfolio transactions equitably whenever concurrent
decisions are made to purchase or sell securities by
the Fund and another advisory account. In some cases,
this procedure could have an adverse effect on the
price or the amount of securities available to the
Fund. In making such allocations between the Fund and
other advisory accounts, the main factors considered by
the Advisor are the respective investment objectives,
the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for
investment and the size of investment commitments
generally held.
The Fund's portfolio turnover rate for the fiscal
years ended November 30, 1995, 1996 and 1997 was 109%,
71% and 55%, respectively. The Fund anticipates that
its portfolio turnover rate may continue to exceed 50%,
although such rate is not expected to exceed 100%. The
annual portfolio turnover rate indicates changes in the
Fund's portfolio; for instance, a rate of 100% would
result if all the securities in the portfolio
(excluding securities whose maturities at acquisition
were one year or less) at the beginning of an annual
period had been replaced by the end of the period. The
turnover rate may vary from year to year, as well as
within a year, and may be affected by portfolio sales
necessary to meet cash requirements for redemptions of
the Fund's shares.
CUSTODIAN
As custodian of the Fund's assets, Firstar Trust
Company ("Firstar") has custody of all securities and
cash of the Fund, delivers and receives payment for
securities sold, receives and pays for securities
purchased, collects income from investments and
performs other duties, all as directed by the officers
of the Corporation. The custodian is in no way
responsible for any of the investment policies or
decisions of the Fund. The principal business address
of Firstar is 615 East Michigan Street, Milwaukee,
Wisconsin 53202.
TRANSFER AGENT
Firstar also acts as transfer agent for the Fund.
Firstar is compensated based on an annual fee per open
account of $16 for Class A shares and $14 for Class C
shares, plus out-of-pocket expenses such as postage and
printing expenses in connection with shareholder
communications. Firstar also receives an annual fee
per closed account of $16 for Class A shares and $14
for Class C shares.
TAXES
As indicated under "INCOME DIVIDENDS, CAPITAL
GAINS DISTRIBUTIONS AND TAX TREATMENT" in the
Prospectus, it is the Fund's intent to continue to
qualify annually as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended.
This qualification does not involve government
supervision of the Fund's management practices or
policies.
A dividend or capital gains distribution received
shortly after the purchase of shares reduces the net
asset value of shares by the amount of the dividend or
distribution and, although in effect a return of
capital, will be subject to income taxes. Net gains on
sales of securities when realized and distributed are
taxable as capital gains. If the net asset value of
shares were reduced below a shareholder's cost by
distribution of gains realized on sales of securities,
such distribution would be a return of investment
although taxable as stated above.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the same
caption, the net asset value of each class of shares of
the Fund will be determined as of the close of trading
on each day the New York Stock Exchange (the "NYSE") is
open for trading. The Fund does not determine net
asset value on days the NYSE is closed and at other
times described in the Prospectus. The NYSE is closed
on New Year's Day, Martin Luther King Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Additionally,
if any of the aforementioned holidays falls on a
Saturday, the NYSE will not be open for trading on the
preceding Friday and when such holiday falls on a
Sunday, the NYSE will not be open for trading on the
succeeding Monday, unless unusual business conditions
exist, such as the ending of a monthly or the yearly
accounting period.
<PAGE>
SHAREHOLDER MEETINGS
Maryland law permits registered investment
companies, such as the Corporation, to operate without
an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by
the 1940 Act. The Corporation has adopted the
appropriate provisions in its Bylaws and may, at its
discretion, not hold an annual meeting in any year in
which the election of directors is not required to be
acted on by shareholders under the 1940 Act.
The Corporation's Bylaws also contain procedures
for the removal of directors by shareholders. At any
meeting of shareholders, duly called and at which a
quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the
votes entitled to be cast thereon, remove any director
or directors from office and may elect a successor or
successors to fill any resulting vacancies for the
unexpired terms of removed directors.
PERFORMANCE INFORMATION
As described under the heading "COMPARISON OF
INVESTMENT RESULTS" in the Fund's Prospectus, the
historical performance or return of both classes of
shares of the Fund may be shown in the form of various
performance figures. The Fund may occasionally cite
statistics to reflect the volatility or risk of one or
both classes of shares. These performance figures are
based upon historical results and are not necessarily
representative of future performance. Factors
affecting performance include general market
conditions, operating expenses, the imposition of sales
charges and investment management. Any additional fees
charged by a dealer or other financial services firm
would reduce the returns described in this section.
Total Return
The average annual total return of each class of
shares of the Fund is computed by finding the average
annual compounded rates of return over the periods that
would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)n = ERV
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the stated periods
at the end of the stated periods.
Calculation of total return is not subject to a
standardized formula. Total return performance for a
specific period is calculated by first taking an
investment (assumed to be $1,000) ("initial
investment") in a class of shares on the first day of
the period and computing the "ending value" of that
investment at the end of the period. The total return
percentage is then determined by subtracting the
initial investment from the ending value and dividing
the remainder by the initial investment and expressing
the result as a percentage. With respect to the Class
A shares only, this calculation reflects the deduction
of the maximum initial sales charge. In addition, the
calculation assumes that all income and capital gains
dividends paid by the Fund have been reinvested at the
net asset value of the applicable class of shares on
the reinvestment dates during the period. Total return
may also be shown as the increased dollar value of the
hypothetical investment over the period.
Cumulative total return represents the simple
change in value of an investment over a stated period
and may be quoted as a percentage or as a dollar
amount. Total returns may be broken down into their
components of income and capital (including capital
gains and changes in share price) in order to
illustrate the relationship between these factors and
their contributions to total return.
Performance figures for the Class A shares for the
fiscal years ended November 30, 1995, 1996 and 1997 and
for the Class C shares for the period ended November
30, 1997 may be found in the Fund's 1997 Annual Report,
which may be obtained free of charge by calling or
writing to the Fund.
<PAGE>
Volatility
Occasionally statistics may be used to specify
volatility or risk of one or both classes of shares of
the Fund. Measures of volatility or risk are generally
used to compare the net asset value or performance of a
class of shares relative to a market index. One
measure of volatility is beta. Beta is the volatility
of a fund relative to the total market as represented
by the Standard & Poor's 500 Stock Index. A beta of
more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates
volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset
value or total return around an average, over a
specified period of time. The premise is that greater
volatility connotes greater risk undertaken in
achieving performance.
Comparisons
The Fund may compare the performance of one or
both classes of shares to that of United States
treasury bills, notes or bonds. Treasury obligations
are issued in selected denominations. Rates of
treasury obligations are fixed at the time of issuance
and payment of principal and interest is backed by the
full faith and credit of the United States Treasury.
The market value of such instruments will generally
fluctuate inversely with interest rates prior to
maturity and will equal par value at maturity.
Generally, the values of obligations with shorter
maturities will fluctuate less than those with longer
maturities.
From time to time, in marketing and other fund
literature, the performance of one or both classes of
shares of the Fund may be compared to the performance
of other mutual funds in general or to the performance
of particular types of mutual funds with similar
investment goals, as tracked by independent
organizations. Among these organizations, Lipper
Analytical Services, Inc. ("Lipper"), a widely used
independent research firm which ranks mutual funds by
overall performance, investment objectives and assets,
may be cited. Lipper performance figures are based on
changes in net asset value, with all income and capital
gains dividends reinvested. Such calculations do not
include the effect of any sales charges. Each class of
shares of the Fund will be compared to Lipper's
appropriate fund category, that is, by fund objective
and portfolio holdings.
The performance of the Fund's classes of shares
may also be compared to the performance of other mutual
funds by Morningstar, Inc. ("Morningstar"), which rates
funds on the basis of historical risk and total return.
Morningstar's ratings range from five stars (highest)
to one star (lowest) and represent Morningstar's
assessment of the historical risk level and total
return of a fund as a weighted average for three, five
and ten year periods. Ratings are not absolute or
necessarily predictive of future performance.
Evaluations of performance of the Fund's classes
of shares made by independent sources may also be used
in advertisements concerning the Fund, including
reprints of or selections from, editorials or articles
about the Fund. Sources for Fund performance and
articles about the Fund may include publications such
as Money, Forbes, Kiplinger's, Financial World,
Business Week, U.S. News and World Report, the Wall
Street Journal, Barron's and a variety of investment
newsletters.
The Fund may compare the performance of one or
both classes of shares to a wide variety of indices and
measures of inflation including the Russell 2000 Stock
Index. There are differences and similarities between
the investments that the Fund may purchase and the
investments measured by these indices.
Investors may want to compare the performance of
one or both classes of shares of the Fund to that of
certificates of deposit offered by banks and other
depository institutions. Certificates of deposit may
offer fixed or variable interest rates and principal is
guaranteed and may be insured. Withdrawal of the
deposits prior to maturity normally will be subject to
a penalty. Rates offered by banks and other depository
institutions are subject to change at any time
specified by the issuing institution.
Investors may also want to compare performance of
one or both classes of shares of the Fund to that of
money market funds. Money market fund yields will
fluctuate and shares are not insured, but share values
usually remain stable.
<PAGE>
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 100 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202, have been selected as the
independent accountants for the Fund.
FINANCIAL STATEMENTS
The following audited financial statements of the
Fund are incorporated herein by reference to the Fund's
Annual Report for the year ended November 30, 1997 as
filed with the SEC on January 29, 1998:
(a) Schedule of Investments as of November
30, 1997.
(b) Statement of Assets and Liabilities as
of November 30, 1997.
(c) Statement of Operations for the year
ended November 30, 1997.
(d) Statement of Changes in Net Assets for
the years ended November 30, 1996 and
November 30, 1997.
(e) Financial Highlights for the Class A
shares for the period January 3, 1994
(commencement of operations) to November
30, 1994, and for the years ended
November 30, 1995, 1996 and 1997; and
Financial Highlights for the Class C
shares for the period March 1, 1997
(commencement of operations) to November
30, 1997.
(f) Notes to Financial Statements.
(g) Report of Independent Accountants dated
December 18, 1997.
The Annual Report may be obtained without charge by
calling or writing to the Fund.
<PAGE>
APPENDIX
SHORT-TERM RATINGS
Standard & Poor's Short-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
Short-term ratings are generally assigned to those
obligations considered short-term in the relevant
market. In the U.S., for example, that means
obligations with an original maturity of no more than
365 days_including commercial paper. Short-term
ratings are also used to indicate the creditworthiness
of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the
short-term rating addresses the put feature, in
addition to the usual long-term rating.
Ratings are graded into several categories,
ranging from `A-1' for the highest quality obligations
to `D' for the lowest. These categories are as
follows:
A-1 A short-term obligation rated `A-1' is
rated in the highest category by Standard &
Poor's. The obligor's capacity to meet its
financial commitment on the obligation is
strong. Within this category, certain
obligations are designated with a plus sign
(+). This indicates that the obligor's
capacity to meet its financial commitment on
these obligations is extremely strong.
A-2 A short-term obligation rated `A-2' is
somewhat more susceptible to the adverse
effects of changes in circumstances and
economic conditions than obligations in
higher rating categories. However, the
obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
A-3 A short-term obligation rated `A-3'
exhibits adequate protection parameters.
However, adverse economic conditions or
changing circumstances are more likely to
lead to a weakened capacity of the obligor to
meet its financial commitment on the
obligation.
B A short-term obligation rated `B' is
regarded as having significant speculative
characteristics. The obligor currently has
the capacity to meet its financial commitment
on the obligation; however, it faces major
ongoing uncertainties which could lead to the
obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated `C' is
currently vulnerable to nonpayment and is
dependent upon favorable business, financial
and economic conditions for the obligor to
meet its financial commitment on the
obligation.
D A short-term obligation rated `D' is in
payment default. The `D' rating category is
used when payments on an obligation are not
made on the date due even if the applicable
grace period has not expired, unless Standard
& Poor's believes that such payments will be
made during such grace
<PAGE>
period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
Moody's Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of
the ability of issuers to repay punctually senior debt
obligations. These obligations have an original
maturity not exceeding one year, unless explicitly
noted. Moody's ratings are opinions, not
recommendations to buy or sell, and their accuracy is
not guaranteed.
Moody's employs the following three designations,
all judged to be investment grade, to indicate the
relative repayment ability of rated issuers:
PRIME-1 Issuers rated `Prime-1' (or supporting
institutions) have a superior ability for
repayment of senior short-term debt
obligations. Prime-1 repaying ability will
often be evidenced by many of the following
characteristics:
Leading market positions in well-established
industries.
High rates of return on funds employed.
Conservative capitalization structure with
moderate reliance on debt and ample asset protection.
Broad margins in earnings coverage of fixed
financial charges and high internal cash generation.
Well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2 Issuers rated `Prime-2' (or supporting
institutions) have a strong ability for
repayment of senior short-term debt
obligations. This will normally be evidenced
by many of the characteristics cited above,
but to a lesser degree. Earnings trends and
coverage ratios, while sound, may be more
subject to variation. Capitalization
characteristics, while still appropriate, may
be more affected by external conditions.
Ample alternate liquidity is maintained.
PRIME-3 Issuers rated `Prime-3' (or supporting
institutions) have an acceptable ability for
repayment of senior short-term obligations.
The effect of industry characteristics and
market compositions may be more pronounced.
Variability in earnings and profitability may
result in changes in the level of debt
protection measurements and may require
relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME Issuers rated `Not Prime' do not fall within
any of the Prime rating categories.
Fitch IBCA International Short-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these short-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
<PAGE>
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
A short-term rating has a time horizon of less
than 12 months for most obligations, or up to three
years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to
meet financial commitments in a timely manner.
F-1 Highest credit quality. Indicates the
strongest capacity for timely payment of
financial commitments; may have an added "+"
to denote any exceptionally strong credit
feature.
F-2 Good credit quality. A satisfactory
capacity for timely payment of financial
commitments, but the margin of safety is not
as great as in the case of the higher
ratings.
F-3 Fair credit quality. The capacity for
timely payment of financial commitments is
adequate; however, near term adverse changes
could result in a reduction to non-investment
grade.
B Speculative. Minimal capacity for
timely payment of financial commitments, plus
vulnerability to near term adverse changes in
financial and economic conditions.
C High default risk. Default is a real
possibility. Capacity for meeting financial
commitments is solely reliant upon a
sustained, favorable business and economic
environment.
D Default. Denotes actual or imminent
payment default.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps Credit Ratings' short-term debt
ratings are consistent with the rating criteria used by
money market participants. The ratings apply to all
obligations with maturities of under one year,
including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of
credit and current maturities of long-term debt. Asset-
backed commercial paper is also rated according to this
scale.
Emphasis is placed on liquidity which is defined
as not only cash from operations, but also access to
alternative sources of funds including trade credit,
bank lines and the capital markets. An important
consideration is the level of an obligor's reliance on
short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps Credit
Ratings' short-term debt ratings is the refinement of
the traditional `1' category. The majority of short-
term debt issuers carry the highest rating, yet quality
differences exist within that tier. As a consequence,
Duff & Phelps Credit Rating has incorporated gradations
of `1+' (one plus) and `1-` (one minus) to assist
investors in recognizing those differences.
These ratings are recognized by the SEC for broker-
dealer requirements, specifically capital computation
guidelines. These ratings meet Department of Labor
ERISA guidelines governing pension and profit sharing
investments. State regulators also recognize the
ratings of Duff & Phelps Credit Rating for insurance
company investment portfolios.
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Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely
payment. Short-term liquidity,
including internal operating factors
and/or access to alternative sources of
funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-
term obligations.
D-1 Very high certainty of timely
payment. Liquidity factors are
excellent and supported by good
fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment.
Liquidity factors are strong and
supported by good fundamental protection
factors. Risk factors are very small.
Good Grade
D-2 Good certainty of timely payment.
Liquidity factors and company
fundamentals are sound. Although ongoing
funding needs may enlarge total
financing requirements, access to
capital markets is good. Risk factors
are small.
Satisfactory Grade
D-3 Satisfactory liquidity and other
protection factors qualify issue as to
investment grade. Risk factors are
larger and subject to more variation.
Nevertheless, timely payment is
expected.
Non-investment Grade
D-4 Speculative investment
characteristics. Liquidity is not
sufficient to insure against disruption
in debt service. Operating factors and
market access may be subject to a high
degree of variation.
Default
D-5 Issuer failed to meet scheduled
principal and/or interest payments.
LONG-TERM RATINGS
Standard & Poor's Long-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
<PAGE>
Credit ratings are based, in varying degrees, on
the following considerations: (1) likelihood of
payment_capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance
with the terms of the obligation; (2) nature of and
provisions of the obligation; and (3) protection
afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
The rating definitions are expressed in terms of
default risk. As such, they pertain to senior
obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy. (Such
differentiation applies when an entity has both senior
and subordinated obligations, secured and unsecured
obligations, or operating company and holding company
obligations.) Accordingly, in the case of junior debt,
the rating may not conform exactly with the category
definition.
AAA An obligation rated `AAA' has the
highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial
commitment on the obligation is EXTREMELY
STRONG.
AA An obligation rated `AA' differs from
the highest rated obligations only in small
degree. The obligor's capacity to meet its
financial commitment on the obligation is
VERY STRONG.
A An obligation rated `A' is somewhat more
susceptible to the adverse effects of changes
in circumstances and economic conditions than
obligations in higher rated categories.
However, the obligor's capacity to meet its
financial commitment on the obligation is
still STRONG.
BBB An obligation rated `BBB' exhibits
ADEQUATE protection parameters. However,
adverse economic conditions or changing
circumstances are more likely to lead to a
weakened capacity of the obligor to meet its
financial commitment on the obligation.
Obligations rated `BB', `B', `CCC, `CC', and `C'
are regarded as having significant speculative
characteristics. `BB' indicates the least degree of
speculation and `C' the highest. While such
obligations will likely have some quality and
protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse
conditions.
BB An obligation rated `BB' is LESS
VULNERABLE to nonpayment than other
speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse
business, financial or economic conditions
which could lead to the obligor's inadequate
capacity to meet its financial commitment on
the obligation.
B An obligation rated `B' is MORE
VULNERABLE to nonpayment than obligations
rated `BB', but the obligor currently has the
capacity to meet its financial commitment on
the obligation. Adverse business, financial
or economic conditions will likely impair the
obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated `CCC' is CURRENTLY
VULNERABLE to nonpayment, and is dependent
upon favorable business, financial and
economic conditions for the obligor to meet
its financial commitment on the obligation.
In the event of adverse business, financial
or economic conditions, the obligor is not
likely to have the capacity to meet its
financial commitment on the obligation.
CC An obligation rated `CC' is CURRENTLY
HIGHLY VULNERABLE to nonpayment.
C The `C' rating may be used to cover a
situation where a bankruptcy petition has
been filed or similar action has been taken,
but payments on this obligation are being
continued.
<PAGE>
D An obligation rated `D' is in payment
default. The `D' rating category is used
when payments on an obligation are not made
on the date due even if the applicable grace
period has not expired, unless Standard &
Poor's believes that such payments will be
made during such grace period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
Plus (+) or minus (_): The ratings from `AA'
to `CCC' may be modified by the addition of a
plus or minus sign to show relative standing
within the major rating categories.
Moody's Long-Term Debt Ratings
Aaa Bonds which are rated `Aaa' are judged to be of
the best quality. They carry the smallest degree
of investment risk and are generally referred to
as "gilt edged." Interest payments are protected
by a large or by an exceptionally stable margin
and principal is secure. While the various
protective elements are likely to change, such
changes as can be visualized are most unlikely to
impair the fundamentally strong position of such
issues.
Aa Bonds which are rated `Aa' are judged to be of
high quality by all standards. Together with the
Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than
the best bonds because margins of protection may
not be as large as in Aaa securities or
fluctuation of protective elements may be of
greater amplitude or there may be other elements
present which make the long-term risk appear
somewhat larger than Aaa securities.
A Bonds which are rated `A' possess many favorable
investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving
security to principal and interest are considered
adequate, but elements may be present which
suggest a susceptibility to impairment some time
in the future.
Baa Bonds which are rated `Baa' are considered as
medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest
payments and principal security appear adequate
for the present but certain protective elements
may be lacking or may be characteristically
unreliable over any great length of time. Such
bonds lack outstanding investment characteristics
and in fact have speculative characteristics as
well.
Ba Bonds which are rated `Ba' are judged to have
speculative elements; their future cannot be
considered as well-assured. Often the protection
of interest and principal payments may be very
moderate, and thereby not well safeguarded during
both good and bad times over the future.
Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated `B' generally lack
characteristics of the desirable investment.
Assurance of interest and principal payments or of
maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated `Caa' are of poor standing.
Such issues may be in default or there may be
present elements of danger with respect to
principal or interest.
Ca Bonds which are rated `Ca' represent obligations
which are speculative in a high degree. Such
issues are often in default or have other marked
shortcomings.
C Bonds which are rated `C' are the lowest rated
class of bonds, and issues so rated can be
regarded as having extremely poor prospects of
ever attaining any real investment standing.
<PAGE>
Moody's applies numerical modifiers 1, 2 and 3 in
each generic rating classification from `Aa' through
`B.' The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that
generic rating category.
Fitch IBCA International Long-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these long-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
Investment Grade
AAA Highest credit quality. `AAA' ratings
denote the lowest expectation of credit risk.
They are assigned only in case of
exceptionally strong capacity for timely
payment of financial commitments. This
capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. `AA' ratings
denote a very low expectation of credit risk.
They indicate very strong capacity for timely
payment of financial commitments. This
capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. `A' ratings denote
a low expectation of credit risk. The
capacity for timely payment of financial
commitments is considered strong. This
capacity may, nevertheless, be more
vulnerable to changes in circumstances or in
economic conditions than is the case for
higher ratings.
BBB Good credit quality. `BBB' ratings
indicate that there is currently a low
expectation of credit risk. The capacity for
timely payment of financial commitments is
considered adequate, but adverse changes in
circumstances and in economic conditions are
more likely to impair this capacity. This is
the lowest investment grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that
there is a possibility of credit risk
developing, particularly as the result of
adverse economic change over time; however,
business or financial alternatives may be
available to allow financial commitments to
be met.
B Highly speculative. `B' ratings
indicate that significant credit risk is
present, but a limited margin of safety
remains. Financial commitments are currently
being met; however, capacity for continued
payment is contingent upon a sustained,
favorable business and economic environment.
<PAGE>
CCC,
CC, C High default risk. Default is a
real possibility. Capacity for meeting
financial commitments is solely reliant upon
sustained, favorable business or economic
developments. A `CC' rating indicates that
default of some kind appears probable. `C'
ratings signal imminent default.
DDD,
DD
and D Default. Securities are not
meeting current obligations and are extremely
speculative. `DDD' designates the highest
potential for recovery of amounts outstanding
on any securities involved. For U.S.
corporates, for example, `DD' indicates
expected recovery of 50% - 90% of such
outstandings, and `D' the lowest recovery
potential, i.e. below 50%.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the
issuer's long-term fundamental quality. Rating
determination is based on qualitative and quantitative
factors which may vary according to the basic economic
and financial characteristics of each industry and each
issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such
factors as competition, government action, regulation,
technological obsolescence, demand shifts, cost
structure and management depth and expertise. The
projected viability of the obligor at the trough of the
cycle is a critical determination.
Each rating also takes into account the legal form
of the security (e.g., first mortgage bonds,
subordinated debt, preferred stock, etc.). The extent
of rating dispersion among the various classes of
securities is determined by several factors including
relative weightings of the different security classes
in the capital structure, the overall credit strength
of the issuer and the nature of covenant protection.
The Credit Rating Committee formally reviews all
ratings once per quarter (more frequently, if
necessary). Ratings of `BBB-` and higher fall within
the definition of investment grade securities, as
defined by bank and insurance supervisory authorities.
Structured finance issues, including real estate, asset-
backed and mortgage-backed financings, use this same
rating scale. Duff & Phelps Credit Rating claims
paying ability ratings of insurance companies use the
same scale with minor modification in the definitions.
Thus, an investor can compare the credit quality of
investment alternatives across industries and
structural types. A "Cash Flow Rating" (as noted for
specific ratings) addresses the likelihood that
aggregate principal and interest will equal or exceed
the rated amount under appropriate stress conditions.
Rating Scale Definition
AAA Highest credit quality. The risk
factors are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors
are strong. Risk is modest but may
AA vary slightly from time to time because
of economic conditions.
AA-
A+ Protection factors are average but
adequate. However, risk factors are more
A variable and greater in periods of
economic stress.
A-
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BBB+ Below-average protection factors but
still considered sufficient for prudent
BBB investment. Considerable variability in
risk during economic cycles.
BBB-
BB+ Below investment grade but deemed likely
to meet obligations when due.
BB Present or prospective financial
protection factors fluctuate according to
BB- industry conditions or company fortunes.
Overall quality may move up or
down frequently within this category.
B+ Below investment grade and possessing
risk that obligations will not be met
B when due. Financial protection factors
will fluctuate widely according to
B- economic cycles, industry conditions
and/or company fortunes. Potential
exists for frequent changes in the
rating within this category or into a higher
or lower rating grade.
CCC Well below investment grade securities.
Considerable uncertainty exists as to
timely payment of principal, interest or
preferred dividends.
Protection factors are narrow and risk
can be substantial with unfavorable
economic/industry conditions, and/or
with unfavorable company developments.
DD Defaulted debt obligations. Issuer
failed to meet scheduled principal and/or
interest payments.
DP Preferred stock with dividend
arrearages.
